**Table of Contents**

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 20-F**

** **

| **o**      | **REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                   |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                      |
| **OR**     |
| ** ** | ** **                                                                                                                                                                                                                                                                                      |
| **x**      | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934   For the fiscal year ended December 31, 2008**                                                                                                                                         |
| ** ** | ** **                                                                                                                                                                                                                                                                                      |
| **OR**     |
| ** ** |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934   for the transition period from               to             ** |
| ** ** | ** **                                                                                                                                                                                                                                                                                      |
| **OR**     |
| ** ** |
| **o**      | **SHELL  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                     |

 

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

 

**For thetransition 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, 407 Ote.  Colonia del Valle  San Pedro Garza García, Nuevo León  66220, México** |
| (Address of  principal executive offices)                                                                             |

 

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

 

| Title of each  class:                                                                                |   | Name of exchange  on which registered: |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------------|
| Series B  Common Shares, without par value                                                      |   | New York Stock  Exchange*              |
| American  Depositary Shares, each  representing four Series B Common  Shares, without par value |   | New York Stock  Exchange               |

** **

**Securities registered or to beregistered pursuant to Section 12(g) of the Act:**

** **

**None**

** **

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** **

**Securities for which there is areporting obligation pursuant to Section 15(d) of the Act:**

** **

**None**

** **

**Indicate the number of outstanding shares of each of theissuer’s classes of capital or common stock as of the close of the periodcovered by the annual report:**

** **
|   | 563,650,709 Series B  Common Shares, without par value |
|--------|-------------------------------------------------------------|

 

**Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined in Rule 405 of the Securities Act.**

**o** Yes  x No

** **

**If this report is an annual or transition report, indicateby check mark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934.**

**o** Yes  x No

** **

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

**x** Yes  o No

** **

**Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated file.**

** **

| Large  accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|----------------------------|--------|----------------------|--------|--------------------------|

** **

**Indicate by check mark which basis of accounting theregistrant has used to prepare the financial statements included in thisfiling:**

 

| U.S. GAAP o |   | IFRS o |   | Other x |
|-------------|--------|--------|--------|---------|

** **

**If “Other” has been checked in response to the previousquestion, indicate by check mark which financial statement item the registranthas elected to follow.**

** **

**Indicate by check mark which financial statement item theregistrant has elected to follow:**

**o** Item 17  x Item 18

 

**If this is an annual report,indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).**

**o** Yes  x No

** **

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*      Not fortrading but only in connection with the registration of American DepositaryShares, pursuant to the requirements of the Securities and Exchange Commission.

 

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**TABLE OFCONTENTS**

 
| ** **         | ** **                                                                    | **Page** |
|--------------------|-------------------------------------------------------------------------------|----------|
|               |                                                                          |     |
| **PART I**    |                                                                          | 7        |
| **ITEM 1.**        | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                         | 7        |
| **ITEM 2.**        | OFFER STATISTICS AND EXPECTED TIMETABLE                                       | 7        |
| **ITEM  3.**       | KEY  INFORMATION                                                              | 7        |
| **ITEM 4.**        | INFORMATION ON  THE COMPANY                                                   | 26       |
| **ITEM 4A.**  | UNRESOLVED STAFF COMMENTS                                                     | 45       |
| **ITEM 5.**        | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 | 45       |
| **ITEM 6.**        | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   | 68       |
| **ITEM 7.**        | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 76       |
| **ITEM 8.**        | FINANCIAL  INFORMATION                                                        | 78       |
| **ITEM 9.**        | THE OFFER AND  LISTING                                                        | 81       |
| **ITEM 10.**       | ADDITIONAL  INFORMATION                                                       | 82       |
| **ITEM 11.**       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 100      |
| **ITEM 12.**       | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 105      |
| **PART II**   |                                                                          | 105      |
| **ITEM 13.**       | DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES                              | 105      |
| **ITEM 14.**       | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 105      |
| **ITEM 15.**       | CONTROLS AND  PROCEDURES                                                      | 105      |
| **ITEM 16A.** | AUDIT  COMMITTEE FINANCIAL EXPERT                                             | 106      |
| **ITEM 16B.** | CODE OF ETHICS                                                                | 106      |
| **ITEM 16C.** | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       | 107      |
| **ITEM 16D.** | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 107      |
| **ITEM 16E.** | PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 108      |
| **ITEM 16F.** | CHANGE OF  CERTIFYING ACCOUNTANT                                              | 108      |
| **ITEM 16G.** | CORPORATE  GOVERNANCE                                                         | 108      |
| **PART III**  |                                                                          | 110      |
| **ITEM 17.**       | FINANCIAL  STATEMENTS                                                         | 110      |
| **ITEM 18.**       | FINANCIAL  STATEMENTS                                                         | 110      |
| **ITEM 19.**       | EXHIBITS                                                                      | 110      |

 

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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 refer to Gruma, S.A.B. deC.V. and its consolidated subsidiaries, except when the reference is specificallyto Gruma, S.A.B. de C.V. (parent company only) or the context otherwiserequires.

 

This Annual Report contains our audited consolidated financialstatements as of December 31, 2007 and 2008 and for the years ended December 31,2006, 2007 and 2008, which have been prepared assuming that we will continue asa going concern. As discussed in Notes 2 and 20 to the consolidated financialstatements, significant liabilities arising from foreign exchange derivativefinancial instruments, together with the uncertainty as to whether we will beable to consummate our planned Financing and the Credit Agreement Amendments toresolve our liquidity issues, raise substantial doubt about our ability tocontinue as a going concern. Management’s plans concerning these matters arealso discussed in Note 2 to the consolidated financial statements. Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty. The financial statements have beenaudited by PricewaterhouseCoopers, an independent registered public accountingfirm.

 

We publish our financial statements in pesos and prepare ourconsolidated financial statements in accordance with the *Normas deInformación Financiera*(Mexican Financial Reporting Standards or “MFRS”),which are accounting principles generally accepted in Mexico, issued by theMexican Financial Reporting Standards Board (“CINIF”), and are commonlyreferred to as “Mexican FRS.”  MexicanFRS differs in certain significant respects from accounting principlesgenerally accepted in the United States of America, commonly referred to as “U.S.GAAP.”  See Note 21 to our auditedconsolidated financial statements for information relating to the nature andeffect of such differences and for a quantitative reconciliation of ourconsolidated net income and stockholders’ equity to U.S. GAAP.

 

As the Mexican economy experienced significant levels of inflationprior to 2000, we were required under Mexican accounting Bulletin B-10 “Accountingrecognition of the effects of inflation on financial information”, in effectuntil December 31, 2007 to recognize the effects of inflation in ourfinancial statements presenting our financial information in inflation adjustedmonetary units to allow for more accurate comparisons of financial line itemsover time and to mitigate the distortive effects of inflation on our financialstatements.  Unless otherwise indicated,all financial information in this Annual Report as of December 31, 2007,2006, 2005 and 2004 has been restated in pesos of constant purchasing power asof December 31, 2007.

 

Until December 31, 2007 we were required to determine our monetaryposition gain/loss to reflect the effect of inflation on our monetary assetsand liabilities.  We determined our netmonetary position by subtracting our monetary liabilities from our monetaryassets and then the resulting net monetary position was multiplied by theappropriate inflation rate for the period with the resulting monetary gain orloss reflected in earnings.  In so doing,we could reflect the effect inflation was having on our monetary items.

 

Starting January 1,2008, we adopted the provisions contained in the new MFRS B-10 “Effects ofInflation,” which replaced Mexican accounting Bulletin B-10. This standardestablishes the guidelines for recognizing the effects of inflation based onthe inflationary environment of the country. According to the provisions ofMFRS B-10, an inflationary environment is present when cumulative inflation ofthe three preceding years is 26 percent or more, in which case, the effects ofinflation must be recognized in the financial statements.  Based on MFRS B-10, the economicenvironment in Mexico in 2008 has been qualified as non-inflationary due to acumulative inflation in the preceding three fiscal years of 11.56%.  In addition, MFRS B-10 eliminates thereplacement cost and specific indexation methods for inventories and fixedassets, respectively, and requires that the cumulative gain or loss fromholding non-monetary assets be reclassified to retained earnings, if such gainor loss is realized; the gain or loss that is not realized will be maintainedin stockholders’ equity and charged to current

 

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earnings of the period in which the originating itemis realized. Accordingly, the financial statements as of December 31, 2008have been prepared based on the modified historical cost model, as described inNote 2-E to our financial statements, while prior periods are expressed inconstant Mexican pesos, as of December 31, 2007 (that is, effects oftransactions recognized as of December 31, 2007 are expressed in Mexicanpesos of constant purchasing power at that date, and the effects oftransactions that occurred after that date are expressed in nominal Mexicanpesos).

 

The accumulated inflation of the last three years in the countrieswhere we and our subsidiaries operate did not exceed the 26% mentioned above,with the exception of Venezuela and Central America.

 

Pursuant to MFRS B-15 issued by CINIF, we translate the financialstatements of each non-Mexican subsidiary depending on the economic environmentin which the subsidiary operates, which can be:

 

·                  Inflationary — when the accumulated inflation of the three prior yearsis equal to or greater than 26%, or

 

·                  Noninflationary — when the accumulated inflation of the three prioryears is less than 26%.

 

When a non-Mexican subsidiary operates in an inflationary environment,we apply the actual inflation rate in the relevant country of each non-Mexicansubsidiary and then translate the inflation-adjusted financial statements intopesos.  The figures for subsidiaries inCentral America and Venezuela are restated to period-end constant localcurrencies following the provisions of MFRS B-10 and B-15, applying the generalconsumer price index from the country in which the subsidiary operates.  Once figures are restated, they are convertedto Mexican Pesos by applying the exchange rate in effect at the end of theperiod. When a non-Mexican subsidiary operates in a noninflationaryenvironment, the assets and liabilities are translated to Mexican pesos usingthe year-end exchange rate.  Thestockholders’ equity as of December 31, 2007 were translated to Mexicanpesos using the exchange rate at that date, whereas the transactions during2008 for our non-Mexican subsidiaries other than subsidiaries in CentralAmerica and Venezuela were translated by applying the exchange rate in effectat the dates on which the stockholders’ contributions were made and income wasgenerated.

 

For the purposes of the quantitative reconciliation to U.S. GAAP, wehave restated the data as of December 31, 2007 and for years ended December 31,2006 and 2007 in pesos of constant purchasing power as of December 31,2007 using the Mexican National Consumer Price Index, or NCPI, rather than theinternational restatement factor in MFRS B-15 of CINIF.  For a more detailed discussion of Mexican FRSinflation accounting methodologies, see “Item 5.  Operating and Financial Review andProspects—Management’s Discussion and Analysis of Results ofOperations—Overview of Accounting Presentation.”

 

Starting January 1, 2008, the Companypresents the statement of cash flows for the year ended December 31, 2008,as part of the basic financial statements. This financial statement presentscash inflows and outflows that show how cash is provided by, or used in, thebusiness during the year, classified as operating, investing and financingactivities. The Company used the indirect method for the presentation of thestatement of cash-flows, which presents earnings or losses before taxes,adjusted for the effects of operations of prior periods received or paid in thecurrent period, and for operations in the current period that will be receivedor paid in the future. For the years ended December 31, 2006 and 2007, thestatement of changes in financial position is presented separately as a basicfinancial statement, which classifies changes in financial position foroperating, financing, and investing activities. Pursuant to Mexican accountingBulletin B-10, the latter financial statement was expressed in Mexican pesos ofconstant purchasing power of December 31, 2007

 

In connection with most of its obligations under its foreign exchangederivative instruments, the Company entered into a term sheet on March 19,2009 (the “Term Sheet”) that provides for the financing of the obligations thatwould result from the termination of all of its foreign exchange derivativeinstruments that it had entered into with Credit Suisse, Deutsche Bank and JPMorgan Chase as counterparties (the “Derivative Counterparties”).  On March 23, 2009, Gruma and the DerivativeCounterparties agreed to terminate all of these derivative instruments andfixed the total amount of obligations payable by Gruma to the DerivativeCounterparties at U.S. $668.3 million (the “Termination Amounts”). Inconnection with the Term Sheet, Gruma and the Derivative Counterparties haveagreed

 

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to negotiate in good faith to convert the TerminationAmounts into a secured term loan within 120 days following March 23, 2009(the “Financing”).  Pursuant to the TermSheet, we are required to pay interest on the Termination Amount at the rate of1 month LIBOR + 1% for the first six weeks following March 23, 2009, andLIBOR + 2.875% thereafter. Following the expiration of the 120-day periodcontemplated by the Term Sheet, we will be required to pay default interest onthe Termination Amount at the rate of 2% + LIBOR + 2.875%.  As a condition of the Financing, the Companyintends to terminate its other outstanding foreign exchange derivativeinstruments (the “Remaining Derivatives”) and also intends to enter intoagreements to amend and restate its existing debt obligations under its 5-yearrevolving credit facility (the “2005 Facility”) and its 2008 Peso Facility(together, the “Credit Agreement Amendments”). See “Item 3.  KeyInformation—Risk Factors—Risks Related to our Company, Item 5.  Operating and Financial Review and Prospects—Liquidityand Capital Resources—Indebtedness, and Item 11.  Quantitative and Qualitative DisclosuresAbout Market Risk.”

 

OnJune 18, 2009, Gruma and BNP Paribas (“BNP”) entered into a Term Sheet (the“BNP Term Sheet”) that provides for the financing of the obligations that wouldresult from scheduled settlement of the foreign exchange derivative instrumentsentered into with BNP. Pursuant to the BNP Term Sheet, Gruma and BNP agreed tonegotiate in good faith to convert the amount of such obligations payable byGruma under such derivative instruments into an unsecured loan on or beforeSeptember 8, 2009, the date on which such derivative instruments expire. IfGruma and BNP fail to reach an agreement to convert the obligations payable byGruma under such derivative instruments into a loan, such obligations willbecome due and payable immediately following September 8, 2009.On June 26, 2009, Gruma and Barclays BankPLC (“Barclays”) entered into a Term Sheet (the “Barclays Term Sheet”) thatprovides for the financing of the obligations that would result from the terminationof all of its foreign exchange derivative instruments that it had entered intowith Barclays. Pursuant to the Barclays Term Sheet, Gruma and Barclays agreedto terminate all of Gruma’s derivative instruments owing to Barclays and fixedthe total amount of obligations payable by Gruma to Barclays at $21.5 million(the “Barclays Termination Amount”). In connection with the Barclays TermSheet, Gruma and Barclays have agreed to negotiate in good faith to convert theBarclays Termination Amount into an unsecured loan by July 21, 2009. Pursuantto the Barclays Term Sheet, we are required to pay interest on the BarclaysTermination Amount at the rate of 1 month LIBOR + 1% for the period betweenJune 26, 2009 and July 21, 2009. Following July 21, 2009, we will be requiredto pay default interest on the Termination Amount at the rate of 2% + LIBOR +2.875%. If Gruma fails to convert the Barclays Termination Amount into a loanby July 21, 2009, the aggregate amount of U.S.$21.5 million together withinterest will become due and payable immediately. Gruma is in the process ofreaching an agreement to unwind its Remaining Derivatives with its othercounterparties.

 

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**MARKETSHARE AND OTHER INFORMATION**

** **

The information contained in this Annual Report regarding our marketpositions is based primarily on our own estimates and internal analysis.  Market position information for the UnitedStates is also based on data from the Tortilla Industry Association andACNielsen.  While we believe our internalresearch and estimates are reliable, they have not been verified by anyindependent source and we cannot assure you as to their accuracy.

 

All references to “tons” in this Annual Report refer to metrictons.  One metric ton equals 2,204pounds.  Estimates of production capacitycontained herein assume operation of the relevant facilities on the basis of360 days a year on three shifts and assume only regular intervals for requiredmaintenance.

 

**FORWARDLOOKING STATEMENTS**

** **

This Annual Report includes “forward-looking statements” within themeaning of Section 27A of the U.S. Securities Act of 1933, as amended, or the Securities Act, and Section 21Eof the Securities Exchange Act of 1934, as amended, or the Exchange Act,including the statements about our plans, strategies and prospects under “Item 4.  Information on the Company” and “Item 5.  Operating and Financial Review and Prospects.” Some of these statements contain wordssuch as “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:  the success of the negotiations with theDerivative Counterparties and other creditors and Gruma’s ability of continuingas a going concern, general economic and business conditions, including changesin exchange rates, and conditions that affect the price and availability ofcorn, wheat and edible oils; potential changes in demand for our products;price and product competition; and other factors discussed herein.

 

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# **PART I**

# ** **

## **ITEM 1.**                                                     Identity of Directors, Senior Managementand Advisors.

## ** **

Not applicable.

 

## **ITEM 2.**                                                     Offer Statistics and Expected Timetable.

## ** **

Not applicable.

 

## **ITEM 3.**                                                     Key Information.

## ** **

**SELECTED FINANCIAL DATA**

** **

The following tables present our selected consolidated financial dataas of and for each of the years indicated. The data as of December 31, 2007 and 2008 and for the years ended December 31,2006, 2007 and 2008 are derived from and should be read together with ourfinancial statements included herein and “Item 5.  Operating and Financial Review and Prospects.”

 

Our consolidated financial statements are prepared in accordance withMexican FRS, which differ in certain significant respects from U.S. GAAP.  Note 21 to our audited consolidated financialstatements provides information relating to the nature and effect of suchdifferences, as they relate to us, and provides a reconciliation to U.S. GAAPof majority net income and total stockholders’ equity.

 

Pursuant to Mexican FRS, starting January 1, 2008, the provisionsof MFRS B-10 “Effects of inflation” establishes the guidelines for recognizingthe effects of inflation based on the economic environment of the country,which can be:

 

·                  Inflationary — when the accumulated inflation of the three prior yearsis equal to or greater than 26%, or

 

·                  Noninflationary — when the accumulated inflation of the three prioryears is less than 26%.

 

Since the accumulated inflation in Mexico for the three years ended December 31,2007, 2006 and 2005 did not exceed 26%, the consolidated financial statementsand the selected consolidated financial data as of December 31, 2008 setforth below have been prepared based on the modified historical cost model, asdescribed in Note 2-E to our financial statements. The consolidated financialstatements and the selected consolidated financial data as of December 31,2007, 2006, 2005 and 2004 set forth below are expressed in constant Mexicanpesos of December 31, 2007, based on factors derived from the NCPI factorsfor domestic companies and General Consumer Price Index, or GCPI, factors forforeign subsidiaries. See Note 2 to our consolidated financial statements.  Accordingly, the financial statements andinformation as of December 31, 2008 have been prepared based on themodified historical cost model and may not be directly comparable to theinformation presented for prior periods.

 

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| ** **                                                                                                   | ** ** | **2004**                                                   | ** ** | **2005**    | ** ** | **2006**    | ** ** | **2007**    | ** ** | **2008**        | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------------|------------|
| ** **                                                                                                   | ** ** | **(thousands of Mexican pesos, except per share amounts)** | ** ** |
| **Income Statement Data:**                                                                              |       |                                                       |       |        |       |        |       |        |       |            |       |
| ***Mexican FRS*****:**                                                                                       |       |                                                       |       |        |       |        |       |        |       |            |       |
| Net  sales                                                                                                   |       | Ps.                                                        | 27,366,769 |        | Ps.        | 29,346,074  |       | Ps.         | 32,189,955 |            | Ps.        | 35,816,046 |   | Ps. | 44,792,572 |   |
| Cost  of sales                                                                                               |       | (17,558,113                                                | )          | (19,166,333 | )          | (20,975,201 | )          | (24,192,290 | )          | (30,236,597     | )          |
| Gross  profit                                                                                                |       | 9,808,656                                                  |       | 10,179,741  |       | 11,214,754  |       | 11,623,756  |       | 14,555,975      |       |
| Selling,  general and administrative expenses                                                                |       | (7,684,441                                                 | )          | (8,459,679  | )          | (9,342,921  | )          | (9,749,888  | )          | (11,288,995     | )          |
| Operating  income                                                                                            |       | 2,124,215                                                  |       | 1,720,062   |       | 1,871,833   |       | 1,873,868   |       | 3,266,980       |       |
| Other  (expenses) income, net                                                                                |       | (324,188                                                   | )          | (176,755    | )          | (49,112     | )          | 555,743     |       | (181,368        | )          |
| Comprehensive  financing result:                                                                             |       |                                                       |       |        |       |        |       |        |       |            |       |
| Interest  expense                                                                                            |       | (532,951                                                   | )          | (628,345    | )          | (602,315    | )          | (683,578    | )          | (823,702        | )          |
| (Loss)  gain in derivative financial instruments                                                             |       | —                                                     |       | —      |       | (146,693    | )          | 155,456     |       | (15,056,799     | )          |
| Interest  income                                                                                             |       | 250,094                                                    |       | 58,706      |       | 82,012      |       | 64,357      |       | 90,399          |       |
| Monetary  position gain, net                                                                                 |       | 265,891                                                    |       | 331,120     |       | 336,552     |       | 558,509     |       | 446,720         |       |
| Foreign  exchange gain (loss), net                                                                           |       | (56,223                                                    | )          | (56,323     | )          | (19,363     | )          | 72,129      |       | 255,530         |       |
| Total  comprehensive financing result                                                                        |       | (73,189                                                    | )          | (294,842    | )          | (349,807    | )          | 166,873     | ** ** | **(15,087,852** | **)**      |
| Equity  in earnings of associated companies                                                                  |       | 309,005                                                    |       | 684,844     |       | 643,318     |       | 707,835     |       | 618,476         |       |
| Income  (loss) before income tax, cumulative effect of change in accounting principle  and minority interest |       | 2,035,843                                                  |       | 1,933,309   |       | 2,116,232   |       | 3,304,319   |       | (11,383,764     | )          |
| Income  tax (current and deferred)                                                                           |       | (835,901                                                   | )          | (406,995    | )          | (432,170    | )          | (925,710    | )          | (434,695        | )          |
| Cumulative  effect of change in accounting principle                                                         |       | —                                                     |       | (59,545     | )          | —      |       | —      |       | —          |       |
| Minority  interest                                                                                           |       | (189,059                                                   | )          | (162,076    | )          | (82,937     | )          | (145,288    | )          | (521,299        | )          |
| Majority  net income (loss)                                                                                  |       | 1,010,883                                                  |       | 1,304,693   |       | 1,601,125   |       | 2,233,321   | ** ** | **(12,339,758** | **)**      |
| Per  share data(1):                                                                                          |       |                                                       |       |        |       |        |       |        |       |            |       |
| Income  (loss) before cumulative effect of change in accounting principle                                    |       | 2.24                                                       |       | 3.02        |       | 3.34        |       | 4.63        |       | (21.85          | )          |
| Cumulative  effect of change in accounting principle                                                         |       | —                                                     |       | (0.13       | )          | —      |       | —      |       | —          |       |
| Majority  net income (loss) per share                                                                        |       | 2.24                                                       |       | 2.89        |       | 3.34        |       | 4.63        |       | (21.85          | )          |
| ***U.S. GAAP:***                                                                                             | ** ** | ** **                                                 | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **      | ** ** |
| Net  sales                                                                                                   |       | 27,652,314                                                 |       | 28,578,636  |       | 31,530,165  |       | 35,427,207  |       | 44,381,012      |       |
| Operating  income                                                                                            |       | 2,112,069                                                  |       | 1,548,550   |       | 1,753,111   |       | 1,824,882   |       | 3,222,739       |       |
| Net  income (loss)                                                                                           |       | 867,110                                                    |       | 1,285,503   |       | 1,502,867   |       | 2,107,762   |       | (11,778,940     | )          |
| Per  share data(1):                                                                                          |       |                                                       |       |        |       |        |       |        |       |            |       |
| Net  income (loss) per share                                                                                 |       | 1.93                                                       |       | 2.85        |       | 3.13        |       | 4.37        |       | (20.85          | )          |
|                                                                                                              |            |                                                            |            |             |            |             |            |             |            |                 |            |  |  |  |  |  |

 

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| ** **                                              | ** ** | **2004**                                                                          | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | **(thousands of Mexican pesos, except per share amounts****and  operating data)** | ** ** |
| **Balance Sheet Data (at period  end):**                |       |                                                                              |       |       |       |       |       |       |       |       |       |
| ***Mexican FRS:***                                      |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Property, plant and equipment, net                      |       | 14,466,732                                                                        |       | 15,119,019 |       | 15,563,733 |       | 16,274,447 |       | 20,653,274 |       |
| Total assets                                            |       | 27,603,669                                                                        |       | 29,455,279 |       | 31,752,401 |       | 33,910,702 |       | 44,434,677 |       |
| Short-term debt(2)                                      |       | 570,917                                                                           |       | 565,685    |       | 926,920    |       | 941,073    |       | 2,418,560  |       |
| Long-term debt(2)                                       |       | 6,587,385                                                                         |       | 7,035,856  |       | 5,886,297  |       | 6,913,173  |       | 11,728,068 |       |
| Derivative financial instruments                        |       | —                                                                            |       | —     |       | —     |       | 25,557     |       | 11,472,292 |       |
| Total liabilities                                       |       | 12,535,457                                                                        |       | 13,946,499 |       | 13,850,150 |       | 15,333,503 |       | 35,153,127 |       |
| Capital stock                                           |       | 16,937,177                                                                        |       | 16,965,083 |       | 18,158,922 |       | 18,120,976 |       | 9,116,663  |       |
| Total stockholders’ equity(3)                      |       | 15,068,209                                                                        |       | 15,508,778 |       | 17,902,251 |       | 18,577,199 |       | 9,281,550  |       |
| ***U.S. GAAP:***                                        | ** ** | ** **                                                                        |       |       |       |       |       |       |       |       |       |
| Total assets                                            |       | 27,179,476                                                                        |       | 28,373,924 |       | 31,038,108 |       | 33,880,390 |       | 44,324,382 |       |
| Long-term debt                                          |       | 6,888,792                                                                         |       | 7,043,108  |       | 5,924,119  |       | 6,913,173  |       | 11,728,068 |       |
| Capital stock                                           |       | 16,836,936                                                                        |       | 16,864,840 |       | 18,058,698 |       | 18,020,752 |       | 9,016,439  |       |
| Total stockholders’ equity                         |       | 10,900,539                                                                        |       | 11,302,627 |       | 13,929,767 |       | 15,116,749 |       | 5,916,800  |       |
|                                                    |       |                                                                              |       |       |       |       |       |       |       |       |       |
| **Other Financial Information:**                        |       |                                                                              |       |       |       |       |       |       |       |       |       |
| ***Mexican FRS:***                                      |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Capital expenditures                                    |       | 1,401,042                                                                         |       | 2,259,276  |       | 2,144,056  |       | 2,222,903  |       | 2,696,744  |       |
| Depreciation and amortization                           |       | 1,155,703                                                                         |       | 1,221,689  |       | 1,262,299  |       | 1,178,797  |       | 1,410,420  |       |
| Resources provided by (used in) (4):                    |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Operating activities                                    |       | 2,149,488                                                                         |       | 1,988,563  |       | 1,973,611  |       | 267,347    |       | 2,212,996  |       |
| Financing activities                                    |       | (435,244                                                                          | )          | 232,304    |       | (168,189   | )          | 208,003    |       | 1,410,811  |       |
| Investing activities                                    |       | (1,588,853                                                                        | )          | (2,389,109 | )          | (1,564,747 | )          | (593,808   | )          | (2,958,202 | )          |
| ***U.S. GAAP:***                                        |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Depreciation and amortization                           |       | 1,168,943                                                                         |       | 1,174,020  |       | 1,241,875  |       | 1,158,976  |       | 1,405,704  |       |
| Net cash provided by (used in):                         |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Operating activities                                    |       | 1,670,982                                                                         |       | 1,519,036  |       | 1,661,269  |       | (177,314   | )          | 1,655,480  |       |
| Investing activities                                    |       | (1,333,834                                                                        | )          | (1,875,175 | )          | (1,465,231 | )          | (514,608   | )          | (3,002,030 | )          |
| Financing activities                                    |       | (166,637                                                                          | )          | 217,354    |       | 82,273     |       | 627,108    |       | 2,143,425  |       |
|                                                    |       |                                                                              |       |       |       |       |       |       |       |       |       |
| **Operating Data:**                                     |       |                                                                              |       |       |       |       |       |       |       |       |       |
| ***Sales volume (thousands of tons****):*               |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Gruma Corporation (corn flour, tortillas and  other)(4) |       | 1,088                                                                             |       | 1,275      |       | 1,327      |       | 1,329      |       | 1,337      |       |
| GIMSA (corn flour, tortillas and other)(5)              |       | 1,448                                                                             |       | 1,582      |       | 1,734      |       | 1,753      |       | 1,818      |       |
| Gruma Venezuela (corn flour, wheat flour and other)     |       | 504                                                                               |       | 480        |       | 486        |       | 480        |       | 465        |       |
| Molinera de México  (wheat flour)                  |       | 460                                                                               |       | 474        |       | 477        |       | 488        |       | 494        |       |
| Gruma Centroamérica (corn flour and other)(6)      |       | 154                                                                               |       | 178        |       | 212        |       | 220        |       | 213        |       |
| ***Production capacity (thousands  of tons):***         |       |                                                                              |       |       |       |       |       |       |       |       |       |
| Gruma Corporation (corn flour and tortillas)            |       | 1,548                                                                             |       | 1,661      |       | 2,021      |       | 2,063      |       | 2,093      |       |
| GIMSA (corn flour, tortillas and other)(6)              |       | 2,408                                                                             |       | 2,801      |       | 2,797      |       | 2,954      |       | 2,954      |       |
| Gruma Venezuela (corn flour, wheat flour and  other)(7) |       | 786                                                                               |       | 764        |       | 764        |       | 808        |       | 823        |       |
| Molinera de México  (wheat flour)                  |       | 717                                                                               |       | 801        |       | 801        |       | 894        |       | 894        |       |
| Gruma Centroamérica (corn flour and other)         |       | 220                                                                               |       | 264        |       | 266        |       | 319        |       | 307        |       |
| Number of employees                                     |       | 15,727                                                                            |       | 16,582     |       | 18,124     |       | 18,767     |       | 19,060     |       |

 

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(1)                                  Based upon weighted average ofoutstanding shares of our common stock (in thousands), as follows:  450,306 shares for the year ended December 31,2004;  451,446 shares for the year ended December 31,2005; 480,007 shares for the year ended December 31, 2006; and 482,506shares for the year ended December 31, 2007; and 564,853 for the yearended December 31, 2008.

(2)                                  Short-term debt consists of bank loansand the current portion of long-term debt. Long-term debt consists of debentures and bank loans.

(3)                                  Total stockholders’ equity includesminority interests as follows:  Ps.3,194million at December 31, 2004; Ps.3,148 million at December 31, 2005;  Ps.3,069 million at December 31, 2006;and Ps.2,882 million at December 31, 2007; and Ps.3,642 million at December 31,2008.

(4)                                  As a result of MFRS B-2 “Statement ofCash Flows”, effective starting January 1, 2008, the Company has includedthe statement of cash flows for the year ending December 31, 2008 and forthe years ended December 31, 2004, 2005, 2006 and 2007, the Company hasincluded the statement of changes in financial position. As a result, the CashFlow figures for 2008 may not be directly comparable to those presented for theprevious four years, which are derived from the statement of changes infinancial position.

(5)                                  Net of intercompany transactions.

(6)                                  Includes 194 thousand tons of temporarily idled production capacity at December 31,2008.

(7)                                  Includes 94 thousand tons of temporarily idled production capacity at December 31,2008.

 

**Dividends**

** **

Our ability to pay dividends is limited by Mexican law, our *estatutos sociales,* or bylaws, and by financial covenantscontained in some of our credit agreements. As a result of the Financing and the Credit Agreement Amendments, we maybe subject to further restrictions on our ability to pay dividends. Because weare a holding company with no significant operations of our own, we havedistributable profits to pay dividends to the extent that we receive dividendsfrom our subsidiaries.  Accordingly,there can be no assurance that we will pay dividends or of the amount of anysuch dividends.  See “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources—Indebtedness.”

 

Pursuant to Mexican law and our bylaws, the declaration, amount andpayment of dividends are determined by a majority vote of the holders of theoutstanding shares represented at a duly convened shareholders’ meeting.  The amount of any future dividend woulddepend on, among other things, operating results, financial condition, cashrequirements, losses for prior fiscal years, future prospects, the extent towhich debt obligations impose restrictions on dividends and other factorsdeemed relevant by the board of directors and the shareholders.

 

In addition, under Mexican law, companies may only pay dividends:

 

·                  from earnings included in year-end financial statements that areapproved by shareholders at a duly convened meeting;

 

·                  after any existing losses applicable to prior years have been made upor absorbed into capital;

 

·                  after at least 5% of net profits for the relevant fiscal year have beenallocated to a legal reserve until the amount of the reserve equals 20% of acompany’s paid-in capital stock; and

 

·                  after shareholders have approved the payment of the relevant dividendsat a duly convened meeting.

 

Holders of our American Depositary Receipts, or ADRs, on the applicablerecord date are entitled to receive dividends declared on the sharesrepresented 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 distributions to us is limitedby the laws of each country in which they were incorporated and by theirconstitutive documents.  For example, ourability to repatriate dividends from Gruma Venezuela may be adversely affectedby exchange controls and other recent events. See “Item 3.  Key Information—RiskFactors—Risks Related to Venezuela—Venezuela Presents Significant EconomicUncertainty and Political Risk.”  In thecase of Gruma Corporation, our principal U.S. subsidiary, its ability to paydividends is subject to financial

 

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covenants contained in some of its debt agreements,including covenants which limit the amount of dividend payments.  Upon the occurrence of any default or eventof default under these credit agreements, Gruma Corporation generally isprohibited from making any dividend or other payments.  See “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources—Indebtedness.”

 

During 2008 we did not pay any dividends toshareholders. During 2007, 2006 and 2005, we paid dividends to shareholders, innominal terms, Ps.410 million, Ps.410 million, and Ps.359 million,respectively. In pesos of constant purchasing power as of December 31,2007, the dividends paid or payable to shareholders in 2007, 2006 and 2005amounted to Ps.424 million, Ps.440 million and Ps.396 million, respectively.

 

**Exchange Rate Information**

** **

Mexico has had a free market for foreign exchange since 1991.  Prior to December 1994, the *Banco de México,* or Mexican Central Bank, kept the peso-U.S.dollar exchange rate within a range prescribed by the government throughintervention in the foreign exchange market. In December 1994, the government suspended intervention by theMexican Central Bank**and allowedthe 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 August 2008,the Mexican peso was relatively stable, ranging from 9.92 to 11.63.  Commencing on October 1, 2008 to June 12,2009, the Mexican peso depreciated in value from 10.97 to 13.40.  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. See “—Risk Factors—RisksRelating to Mexico—Devaluations of the Mexican Peso Affect our FinancialPerformance.”

 

The following table sets forth, for the periods indicated, the high,low, average and period-end noon buying rate in New York City for cabletransfers in pesos published by the Federal Reserve Bank of New York, expressedin pesos per U.S. dollar.  The rates havenot been restated in constant currency units.

** **
| ** **         | ** ** | **Noon Buying Rate (Ps. Per U.S.$)** | ** ** |
|--------------------|------------|--------------------------------------|------------|
| **Year**           | ** ** | **High (1)**                         | ** ** | **Low (1)** | ** ** | **Average (2)** | ** ** | **Period End** | ** ** |
| 2004               |       | 11.6350                              |       | 10.8050 |   | 11.2900 |   | 11.1540 |   |
| 2005               |       | 11.4110                              |       | 10.4135 |   | 10.8940 |   | 10.6275 |   |
| 2006               |       | 11.4600                              |       | 10.4315 |   | 10.9056 |   | 10.7995 |   |
| 2007               |       | 11.2692                              |       | 10.6670 |   | 10.9277 |   | 10.9169 |   |
| 2008               |       | 13.9350                              |       | 9.9166 |   | 11.1415 |   | 13.8320 |   |
| December 2008 |       | 13.8320                              |       | 13.0910 |   | 13.4171 |   | 13.8320 |   |
| January 2009  |       | 14.3330                              |       | 13.3300 |   | 13.8893 |   | 14.3330 |   |
| February 2009 |       | 15.0880                              |       | 14.1340 |   | 14.6066 |   | 15.0880 |   |
| March 2009    |       | 15.4060                              |       | 14.0240 |   | 14.6466 |   | 14.2100 |   |
| April 2009    |       | 13.8882                              |       | 13.0470 |   | 13.3944 |   | 13.8010 |   |
| May 2009      |       | 13.8230                              |       | 12.8845 |   | 13.1895 |   | 13.1820 |   |
| June 2009(3)  |       | 13.6360                              |       | 13.0350 |   | 13.3459 |   | 13.4010 |   |

 

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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 12, 2009.

 

On June 12, 2009, the noon buying rate for pesoswas Ps. 13.4010****to U.S.$1.00.

 

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**RISKFACTORS**

** **

**Risks Relating to OurCompany**

** **

***If WeAre Unable to Successfully Consummate the Financing and the Credit AgreementAmendments, We Will Not Have Sufficient Liquidity to Repay Our ExistingObligations***

 

We are currently in the process of obtaining financing in order toconvert the Termination Amounts owing to Credit Suisse, Deutsche Bank and JPMorgan Chase under the foreign exchange derivative instruments into a securedterm loan. Pursuant to a Term Sheet we entered into on March 19, 2009,Gruma and the aforementioned Derivative Counterparties have agreed to negotiatein good faith to convert U.S. $668.3 million owing to the DerivativeCounterparties into a secured term loan within 120 days following March 23,2009.  As a condition of the Financing,the Company intends to terminate its Remaining Derivatives and also intends toenter into the Credit Agreement Amendments. Pursuant to the Term Sheet, we are required to pay interest on theTermination Amount at the rate of 1 month LIBOR + 1% for the first six weeksfollowing March 23, 2009, and LIBOR + 2.875% thereafter. Following the expiration of the 120-dayperiod contemplated by the Term Sheet, we will be required to pay defaultinterest on the Termination Amount at the rate of 2% + LIBOR + 2.875%.  If Gruma, the Derivative Counterparties, theRemaining Derivative Counterparties, and its creditors under the 2005 Facilityand the 2008 Peso Facility fail to enter into an agreement within theaforementioned 120-day period, the Termination Amount of U.S. $668.3 milliontogether with interest accrued will become immediately due and payable.  See “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources” and “Item 11.  Quantitative and Qualitative DisclosuresAbout Market Risk.”

 

We do notcurrently have sufficient liquidity to repay the U.S. $668.3 million obligationowing to the Derivative Counterparties. Due to our lack of liquidity, our ability to repay or service ourexisting financial obligations could depend upon our ability to enter into anagreement with the aforementioned creditors and counterparties within the120-day period.  If we are unable toenter into the Financing and the Credit Agreement Amendments within thedesignated period, we could attempt to restructure or refinance our existingfinancial obligations, seek additional equity capital or sell assets.  We cannot assure you that we will be able toaccomplish those actions on satisfactory terms, if at all.

 

***OurBusiness May Be Adversely Impacted by Risks Related to Our CurrencyDerivatives Trading Activities***

 

From time to time, weenter into currency derivative transactions pursuant to the Company’s riskmanagement policy that cover varying periods of time and have varying pricingprovisions. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—ForeignExchange Rate Risk.”

 

We are exposed to potential changes in the value of our derivativeinstruments primarily caused by fluctuations in currency exchange rates.  These fluctuations may result from changes ineconomic conditions, investor sentiment, monetary and fiscal policies, theliquidity of global markets, international and regional political events, andacts of war or terrorism.  We account forthese derivative transactions using the mark-to-market accounting method.  The mark-to-market value of these derivativesinstruments may increase or decrease prior to the settlement date of theinstruments.  We may incur unrealizedlosses as a result of the factors described above.  See “Item 11. Quantitative and Qualitative Disclosures About Market Risk, andItem 5.  Operating and FinancialReview and Prospects—Liquidity and Capital Resources.”

 

***If******We Are************Unable to Successfully Consummate the******Financing and the CreditAgreement Amendments******, We Face a Risk of Reorganization-RelatedProceedings***

 

If we are unableto enter into the Financing and the Credit Agreement Amendments within the120-day period following March 23, 2009, we may be unable to meet ourpayment obligations owing to the Derivative Counterparties and our paymentobligations owing to some or all of our existing creditors as these becomedue.  A default under any of our existingdebt obligations for borrowed money could result in acceleration of the amountsowing thereunder and in a cross-default under the indenture governing ourperpetual bonds.  As a result of suchacceleration or cross-default, one or more of our creditors could take legalaction against us, including filing an

 

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involuntary *concurso mercantil* proceeding in Mexico,and an involuntary proceeding against us in the United States under the U.S.Bankruptcy Code.  Further, we may chooseto institute a voluntary reorganization proceeding. For additional informationconcerning our liquidity position, see “—If We Are Able to SuccessfullyConsummate the Financing and the Credit Agreement Amendments, our SubstantialIndebtedness could Adversely Affect our Business and, Consequently, our Abilityto Pay Interest and Repay our Indebtedness.”

 

If anyreorganization proceedings were to be instituted in Mexico and the UnitedStates, we could not predict the duration thereof or the ability of holders ofexisting notes to influence the outcome of such proceedings.  A reorganization proceeding is likely toresult in significant changes to our existing obligations, including thePerpetual Bond, which could include the cancellation or rescheduling of all orpart of those obligations. During the pendency of any such proceeding, ourability to operate or manage our business, to retain employees, to maintainexisting or create new client relationships, to continue to collect paymentsfor our services or to obtain any type of funding or financing would likely bematerially adversely affected.

 

***Uncertainties Relating to the Successful Consummation of the******Financing and the Credit Agreement Amendments******RaiseSubstantial Doubt About our Ability to Continue as a Going Concern***

 

Our consolidatedfinancial statements have been prepared assuming that we will continue as agoing concern. However, our independent auditors have stated in their mostrecent report that substantial doubt exists about our ability to continue as agoing concern. Our consolidated financial statements do not include anyadjustments that might result from the outcome of that uncertainty. Our abilityto continue as a going concern will be dependent upon the successfulnegotiation of the Financing and the Credit Agreement Amendments, our abilityto extend or refinance our existing financial obligations, and/or our abilityto sell additional assets or obtain additional financing to meet our financialobligations, if necessary.  There can beno assurance that the Financing and the Credit Agreement Amendments will besuccessfully consummated. These conditions raise substantial doubt about ourability to continue as a going concern.

 

***If WeAre Able to Successfully Consummate the Financing and the Credit AgreementAmendments, our Substantial Indebtedness could Adversely Affect our Businessand, Consequently, our Ability to Pay Interest and Repay our Indebtedness***

 

If we are able to successfully enter into theFinancing and the Credit Agreement Amendments within the 120-day periodfollowing March 23, 2009, we anticipate having a significant amount ofindebtedness, which will require significant debt service.  We do not anticipate that the aggregateamount of our interest expense and other costs associated with our debt mayexceed our operating income in 2009.  Oursignificant debt service requirements may adversely affect our ability tofinance future operations, make acquisitions and capital expenditures, competeeffectively against better-capitalized competitors and withstand downturns inour business.  Our level of indebtednesscould increase our vulnerability to adverse general economic and industryconditions, including increases in interest rates, increases in prices of rawmaterials, foreign currency exchange rate fluctuations and marketvolatility.  Our ability to makescheduled payments on and refinance our indebtedness when due depends on, andis subject to, several factors, including our financial and operatingperformance, which is subject to prevailing economic conditions and financial,business and other factors, the availability of financing in the Mexican andinternational banking and capital markets, and our ability to sell assets andoperating improvements.

 

The expected significant increase in our level of debt could adverselyaffect our business in a number of ways, including but not limited to, thefollowing:

 

·                  because we would have to dedicate a substantialportion of our cash flow from operations to the payment of interest andprincipal on our debt, we would have less cash available for other purposesincluding the payment of dividends;

 

·                  our ability to obtain additional debt financing couldbe limited and the terms on which such financing is obtained could benegatively affected; and

 

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·                  we could be placed at a competitive disadvantage byour limited flexibility to react to changes in the industry and economicconditions since our financial resources would be dedicated to paying interestand principal on our debt instead of expanding or improving our business. As aresult, we could lose market share and experience lower sales, which could havea material adverse effect on our financial condition, results of operations andliquidity.

 

We anticipate that, pursuant to the documentationregarding the Financing and the Credit Agreement Amendments, we may not be ableto borrow additional indebtedness unless, at the time of incurrence, we satisfycertain financial covenants or other conditions.  As of June 12, 2009, based upon ourfinancial condition, we anticipate that the Financing and the Credit AgreementAmendments would prohibit us from incurring any additional debt, other than torefinance any existing indebtedness, and certain other limited permitted debtexceptions.  See also “—If we Are Able toSuccessfully Consummate the Financing and the Credit Agreement Amendments, We May NotBe Able to Comply with Covenants in the Debt Instruments Governing a SubstantialPortion of our Indebtedness”, “—If We Are Able to Successfully Consummate theFinancing and the Credit Agreement Amendments, We Expect to Pay Interest andPrincipal on our Dollar-Denominated Debt with Revenues Generated in Pesos orother Currencies, as We Will Not Generate Sufficient Revenue in Dollars from ourOperations” and “If We Are Able to Successfully Amend the Terms of ourIndebtedness, We May Be Adversely Affected by Increases in Interest Rates.”

 

***If We Are Able toSuccessfully Consummate the******Financing and the CreditAgreement Amendments******, We May NotBe Able to Comply with Covenants in the Debt Instruments Governing aSubstantial Portion of our Indebtedness***

 

We anticipate that, pursuant to the documentationregarding the Financing and the Credit Agreement Amendments, we would berequired to comply with certain financial covenants and other covenants includinglimitations on our ability to pay dividends, make certain investments, merge orconsolidate with other companies, sell or pledge assets and incur additionalindebtedness.  The restrictions on ourdebt instruments could:

 

·                  limit our flexibility to adjust to changes in ourbusiness and the industries in which we operate;

 

·                  limit our ability to access cash from our subsidiariesand, thus, repay our debt or satisfy other holding company obligations; and

 

·                  limit our ability to fund future operations, acquisitionsor meet extraordinary capital needs.

 

***If We Are Able toSuccessfully Consummate the******Financing and the CreditAgreement Amendments******, we Expect to PayInterest and Principal on our Dollar-Denominated Debt with Revenues Generatedin Pesos or other Currencies, as We Will Not Generate Sufficient Revenue inDollars******from******our Operations***

 

If we are able to successfully enter into theFinancing and the Credit Agreement Amendments within the 120-day periodfollowing March 23, 2009, we anticipate having approximately 81% of ouroutstanding debt denominated in dollars as of such date.  This debt will have to be serviced by fundsgenerated from sales by our subsidiaries. We do not generate sufficient revenues in dollars from our operations toservice the entire amount of our expected dollar denominated debt.  Consequently, we anticipate having to userevenues generated in pesos or other currencies to service our dollardenominated debt.  A devaluation of thepeso against the dollar could adversely affect our ability to service ourdebt.  Even though we intend to mitigatethis risk with foreign currency hedges, we are exposed to such foreign currencyexchange fluctuations and we cannot assure you that market hedges will be availableat favorable terms to us, if at all.  Fluctuationsin exchange rates may result from changes in economic conditions, investorsentiment, monetary and fiscal policies, the liquidity of global markets,international and regional political events, and acts of war or terrorism.  Extreme exchange rate volatility in the financialmarkets during the last two quarters of 2008 and the first quarter of 2009resulted in significant fluctuations in the value of Gruma’s foreign currencyderivative instruments.

 

***If We Are Able toSuccessfully Amend the Terms of our Indebtedness, We May be AdverselyAffected by Increases in Interest Rates***

 

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Interest rate risk exists primarily with respect toour floating-rate peso denominated debt, which generally bears interest basedon the Mexican equilibrium interbank interest rate, which we refer to as the “TIIE.”  In addition, if we are able to successfullyenter into the Financing and the Credit Agreement Amendments, we anticipatehaving additional interest rate risk with respect to floating-ratedollar-denominated debt, which would generally bear interest based on theLondon interbank offered rate, which we refer to as “LIBOR.”  If we are able to successfully enter into theFinancing and the Credit Agreement Amendments, we anticipate having significantexposure to exchange rate fluctuation owing to our floating-rate peso anddollar-denominated debt.  As a result, ifthe TIIE or LIBOR rates increase significantly, our ability to service our debtmay be adversely affected.

 

***Downgrades of Our Debt May Increase Our FinancingCosts or Otherwise Adversely Affect Us or Our Stock Price***

*** ***

Our long-term corporate credit rating and our senior unsecuredperpetual bond are rated “B+”  withnegative implication by Standard & Poor’s Ratings Services (“Standard &Poor’s”). Our Foreign Currency Long-Term Issuer Default Rating and our LocalCurrency Long-Term Issuer Default Rating are rated “B+” by Fitch Ratings (“Fitch”).Our U.S.$300 million perpetual bond is rated “BB-” by Fitch Ratings.  These ratings reflect the leveraging impacton Gruma’s capital structure from the termination of Gruma’s foreign exchangederivative positions and the subsequent conversion of the realized losses intodebt.

 

On February 1, 2008, Standard & Poor’s placed ourlong-term corporate credit rating and our senior unsecured perpetual bond onCredit Watch with negative implication. On March 12, 2008, Standard &Poor’s removed the Credit Watch with negative implication based on the company’sintention to use part of the proceeds of the proposed May 2008 rightsoffering to repay debt,  which improvedour debt ratios. On October 13, 2008, Standard and Poor’s reduced the creditrating from “BBB-” to “BB”, and placed them on Credit Watch with negativeimplications. On November 11, 2008 Standard and Poor’s reduced the ratingagain from “BB” to “B+” continuing the Credit Watch with negative implications.We continue to have a B+ rating with negative implications.  See “Item 5. Operating and Financial Review and Prospects—Liquidity and CapitalResources—Indebtedness.”

 

On October 13, 2008 Fitch reduced the ratings to “BB+” from “BBB-”while placing Gruma on Rating Watch Negative. On April 2, 2009 Fitchreduced its ratings again and removed all ratings from Rating Watch Negative toStable.** **Ifour financial condition deteriorates, we may experience future declines in ourcredit ratings, with attendant consequences. Our access to external sources offinancing, as well as the cost of that financing, could be adversely affectedby a deterioration of our long-term debt ratings.  A downgrade in our credit ratings couldincrease the cost of and/or limit the availability of unsecured financing,which may make it more difficult for us to raise capital when necessary.  If we cannot obtain adequate capital onfavorable terms or at all, our business, operating results and financialcondition would be adversely affected.

 

***Fluctuations in the Cost and Availability of Corn,Wheat and Wheat Flour May Affect Our Financial Performance***

*** ***

Our financial performance may be affected by the priceand availability of corn, wheat and wheat flour as each raw materialrepresented 29%, 18% and 8%, respectively, of our cost of sales in 2008.  Mexican and world markets have experiencedperiods of either over-supply or shortage of corn and wheat, some of which havecaused adverse effects on our results of operations.  In recent years, there has been substantialvolatility and increases in the price of corn, partly due to the demand forcorn-based ethanol in the U.S., which increased our cost of corn and negativelyaffected our financial condition and results of operation.  However, during 2008 prices of corn and wheatdeclined significantly from their peak in 2007. We believe that the demand forcorn will increase over the long term in connection with the manufacture ofcorn-based ethanol.  Also, there havebeen dramatic increases in the price of wheat driven by negative weatherconditions in certain regions of the world and increased demand worldwide,especially from emerging countries.

 

To manage these price risks, we regularly monitor ourrisk tolerance and evaluate the possibility of using derivative instruments tohedge our exposure to commodity prices. We currently hedge against fluctuationsin the costs of corn and wheat using futures and options contracts, but remainexposed to credit-related losses in the event of non-performance bycounterparties to the financial instruments. In addition, if corn or wheatprices decrease below the levels specified in our various hedging agreements,we would lose the value of a decline in these prices.

 

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Additionally, because of this volatility and pricevariations, we may not always be able to pass along our increased costs to ourcustomers in the form of price increases. We cannot always predict whether or when shortages or over-supply ofcorn and wheat will occur. In addition, future Mexican or other countries’governmental actions could affect the price and availability of corn andwheat.  Any adverse developments indomestic and international corn and wheat markets could have a material adverseeffect upon our business, financial condition, results of operations andprospects.

 

***Increasesin the Cost of Energy Could Affect Our Profitability***

 

We use a significant amount of electricity, naturalgas and other energy sources to operate our corn and wheat flour mills andprocessing ovens for the manufacture of tortillas and related products at ourmajor domestic and international facilities. In addition, considerable amounts of diesel fuel are used in connectionwith the distribution of our products. The cost of energy sources may fluctuate widely due to economic andpolitical conditions, government policy and regulation, war, or otherunforeseen circumstances. An increase in the price of fuel and other energysources would increase our operating costs and, therefore, could affect ourprofitability.

 

***The Presence of Genetically Modified Corn in OurProducts, Which is Not Approved for Human Consumption, May Have a NegativeImpact on Our Results of Operations***

*** ***

As we do not grow our own corn, we are required to buy it from variousproducers 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 in all our operations with the exception of Venezuelato test and monitor our corn for certain strains of bacteria and chemicals thathave not been approved for human consumption, we may unwittingly buygenetically modified corn that is not approved for human consumption, and usesuch raw materials in the manufacture of our products.  This may result in costly recalls and subjectus to lawsuits which may have a negative impact on our results of operations.

 

In the past, various claims have been alleged, mostly in the UnitedStates and the European Union, that genetically modified foods are unsafe forhuman consumption, pose risks of damage to the environment and create legal,social and ethical dilemmas.  Somecountries, particularly in the European Union, as well as Australia and somecountries in Asia, have instituted a partial limitation on the import of grainproduced from genetically modified seeds. Some countries have imposed labeling requirements and traceability obligationson genetically modified agricultural and food products, which may affect theacceptance of these products.  To theextent that we may unknowingly buy or may be perceived to be a seller ofproducts manufactured with genetically modified corn not approved for humanconsumption, this may have a significant negative impact on our financialcondition and results of operation.

 

***RegulatoryDevelopments May Adversely Affect Our Business***

 

We are subject to regulation in each of theterritories in which we operate.  Theprincipal areas in which we are subject to regulation are health,environmental, labor, taxation and antitrust. The adoption of new laws or regulations in the countries in which weoperate may increase our operating costs or impose restrictions on ouroperations which, in turn, may adversely affect our financial condition,business and results of operations. Further changes in current regulations may result in an increase incompliance costs, which may have an adverse effect on our financial conditionand results of operations.  See “Item4.  Information on theCompany—Regulation.”

 

***Economicand Legal Risks Associated with a Global Business May Affect OurInternational Operations***

 

We conduct our businessin many countries and anticipate that revenues from our internationaloperations will account for a significant portion of our future revenues.  There are risks inherent in conducting ourbusiness internationally, including:

 

·                  general political and economicinstability in international markets;

·                  limitations in the repatriation of ourassets, including cash;

·                  expropriation of our internationalassets;

 

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·                  varying prices and availability of corn,wheat and wheat flour and the cost and practicality of hedging suchfluctuations under current market conditions;

·                  different liability standards and legalsystems;

·                  recent developments in the internationalcredit markets, which could affect capital availability or cost, and couldrestrict our ability to obtain financing or refinance our existing indebtednessat favorable terms, if at all; and

·                  intellectual property laws of countriesthat do not protect our international rights to the same extent as the laws ofMexico.

 

In addition, we haverecently expanded our operations to China, Malaysia, Australia andEngland.  Our presence in these and othermarkets could present us with new and unanticipated operational challenges.  For example, we may encounter laborrestrictions or shortages and currency conversion obstacles, or be required tocomply with stringent local governmental and environmental regulations.  Any of these factors could increase ouroperating expenses and decrease our profitability.

 

***We Face Risks Related to Health Epidemicsand Other Outbreaks***

 

Our business could beadversely affected by the effects of avian flu, severe acute respiratorysyndrome (SARS), Influenza A(H1N1) or another pandemic or outbreak. In April 2009,an outbreak of Influenza A(H1N1) occurred in Mexico, United States and Canadaspreading to over 74 countries worldwide, including the countries where weoperate our business. Any prolonged occurrence or recurrence of avian flu,SARS, Influenza A(H1N1) or other adverse public health developments in thecountries where we operate may have an adverse effect on our businessoperations. Our operations may be impacted by a number of health-relatedfactors, including, among other things, quarantines or closures of ourfacilities, which could disrupt our operations, and a general economicslowdown. Any of the foregoing events or other unforeseen consequences ofpublic health problems could adversely affect our business and results of operations.

 

**Risks Relating toMexico**

** **

***Our Business and Operations May BeAdversely Affected by the Current G******lobal Economic************Crisis***

 

The recent global economic crisis isadversely affecting the economy in the United States and many other parts ofthe world, including Mexico. The Mexican economy has recently experienced aslowing of its growth rate, and the slow-down has been exacerbated by therecent global crisis in the financial services and credit markets, which hasresulted in significant volatility and dislocation in the global capitalmarkets. It is uncertain how long the global economic crisis will continue andhow much of an impact it will have on the global economy in general, or theMexican economy in particular, and whether slowing economic growth in Mexico couldresult in our customers’ reducing their spending. As a result, we may need tolower the prices of certain of our products and services in order to maintainthe attractiveness of our products and services, which could lead to reducedturnover and profit. If economic conditions do not improve, our business,results of operations and financial condition could be materially adverselyaffected. The adverse impact of this downturn on some of our customers may leadto a further decline in demand for our products.  If this were to occur, it could harm ourbusiness, results of operations and financial condition and lead to a drop inthe trading price of our shares.

 

***Our Results of Operations Could Be Affected byEconomic Conditions in Mexico***

*** ***

We are a Mexican company with 38% of our consolidated assets located inMexico and 29% of our consolidated net sales derived from our Mexicanoperations as of December 31, 2008. As a result, Mexican economic conditions could impact our results ofoperations.

 

In the past, Mexico has experienced exchange rateinstability and devaluation as well as high levels of inflation, domesticinterest rates, unemployment, negative economic growth and reduced consumerpurchasing power.  These events resultedin limited liquidity for the Mexican government and local corporations.  Civil and political unrest in Venezuela orelsewhere could also negatively impact the Mexican economy.  See “—

 

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Developments in OtherCountries Could Adversely Affect the Mexican Economy, the Market Value of ourSecurities and Our Results of Operations.”

 

Mexico has experienced a prolonged period of slowgrowth since 2001, primarily as a result of the downturn in the U.S.economy.  The Mexican economy grew by 4.4% in 2004, by 3.0% in 2005, by 4.8% in 2006 and by 3.3% in2007.  For 2008, the Mexican economy grewby 1.3%.  In the first quarter of 2009,the Mexican economy contracted 8.2% .

 

Developments and trends in the world economy affectingMexico may have a material adverse effect on our financial condition andresults of operations. In recent months there has been a downturn in economicconditions worldwide, including Mexico. The Mexican economy istightly connected to the U.S. economy through international trade(approximately 85 percent of Mexican exports go to the United States),international remittances (billions of dollars from Mexican workers in theUnited States are the country’s second-largest source of foreign exchange),foreign direct investment (approximately 50 percent of Mexican foreign directinvestment comes from U.S.-based investors), and financial markets (the U.S.and Mexican financial systems are highly integrated). As the U.S. economycontracts, U.S. citizens consume fewer Mexican imports, Mexican workers in theUnited States send less money to Mexico, U.S. firms with businesses in Mexicomake fewer investments, U.S.-owned banks in Mexico make fewer loans, and thequality of U.S. financial assets held in Mexico deteriorates. Moreover, thecollapse in confidence in the U.S. economy may spread to other economiesclosely connected to it, including Mexico’s. The result may be a potentiallydeep and protracted recession in Mexico. If the Mexican economy falls into a deep andprotracted recession, or if inflation and interest rates increase, consumerpurchasing power may decrease and, as a result, demand for our products maydecrease.  In addition, a recession couldaffect our operations to the extent we are unable to reduce our costs andexpenses in response to falling demand.

 

***Our Business Operations Could Be Affected byGovernment Policies in Mexico***

*** ***

The Mexican government has exerted, and continues to exert, significantinfluence over the Mexican economy. Mexican governmental actions concerning the economy could have asignificant effect on Mexican private sector entities, as well as on marketconditions, prices and returns on securities of Mexican issuers, including oursecurities.  Governmental policies havenegatively affected our sales of corn flour in the past and may continue to doso in the future.

 

Mexican congressional elections are scheduled for July 5,2009.  No political party in Mexico has amajority in the Congress or Senate. The lack of a majority party in thelegislature, the potential lack of alignment between the legislature and thePresident and any changes that result from the congressional elections couldresult in instability or deadlock, and prevent the timely implementation ofpolitical and economic reforms, which in turn could have a material adverseeffect on Mexican economic policy and on our business.

 

Until 2007 we depended on cornimport permits to ensure an adequate supply of corn in low-corn producingregions of Mexico.  Commencing on January 1,2008 pursuant to the NAFTA agreement, the import of grains, including corn, nolonger requires import permits. Nevertheless, we cannot assure that the Mexican government will continueto comply with the terms of the NAFTA agreement, nor take actions that couldadversely affect us.  See “Item 4.  Information on the Company—Regulation.”

 

The Mexican government supports the commercialization of corn forMexican corn growers through the Agricultural Incentives and Services Agency (*Apoyos y Servicios a la Comercialización Agropecuaria*, orASERCA).  To the extent that this orother similar programs are cancelled by the Mexican government, we may berequired to incur additional costs in purchasing corn for our operations, andtherefore we may need to increase the prices of our products to reflect suchadditional costs.  See “Item 4.  Information on the Company—Regulation.”

 

The Mexican government created a program to support the corn flourindustry (*Programa de Apoyo a la Industria de la Harina deMaíz*or PROHARINA). This program aims to mitigate the impact of therise in international corn prices through price supports designed to aid theconsumer and provided through the corn flour industry. To the extent that thisor other similar programs are cancelled by the Mexican government, we may berequired to increase the prices of our products to reflect such additionalcosts. There can be no assurance that we will maintain our eligibility forPROHARINA subsidies, or that the Mexican government will not institute pricecontrols

 

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or other actions on the products we sell, which couldadversely affect our financial condition and results of operations. See “Item 4.  Information on the Company—Regulation—CornFlour Consumer Aid Program.”

 

The level of environmental regulations and enforcement in Mexico hasincreased in recent years.  In the past,the *Comisión Nacional del Agua,* or NationalWater Commission or CNA, has brought enforcement proceedings against us forfees arising from alleged water discharges from five of our facilities inMexico.  As of December 31, 2008,all of the proceedings brought against us by the CNA have been resolved in ourfavor. We cannot assure you that further actions of this type will not bebrought against us. We expect the trend toward greater environmental regulationand enforcement 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 Information—Legal Proceedings” and “Item4.  Information on theCompany—Regulation.”

 

***Devaluations of the Mexican Peso May Affectour Financial Performance***

 

Ifwe do not generate sufficient revenue in dollars from our operations, we mayhave to pay interest and principal on our dollar-denominated debt with revenuesgenerated in pesos or other currencies, as we do not generate sufficientrevenue in dollars from ouroperations.  However, because we have significantinternational operations, we remain exposed to foreign exchange risks thatcould affect our ability to meet our obligations and result in foreign exchangelosses on our dollar-denominated obligations. We posted net foreign exchange losses of Ps.19 million in 2006, gain ofPs.72 million in 2007, and gain of Ps.256 million in 2008.  Major devaluation or depreciation of theMexican peso may limit our ability to transfer or to convert such currency intoU.S. dollars for the purpose of making timely payments of interest and principalon our indebtedness. The Mexican government does not currently restrict, andfor many years has not restricted, the right or ability of Mexican or foreignpersons or entities to convert pesos into U.S. dollars or to transfer othercurrencies out of Mexico. The government could, however, institute restrictiveexchange rate policies in the future.

*** ***

***High Levels of Inflation and High Interest Rates inMexico Could Adversely Affect the Business Climate in Mexico and our FinancialCondition and Results of Operations***

*** ***

Mexico has experienced high levels of inflation in thepast.  The annual rate of inflation, asmeasured by changes in the National Consumer Price Index, was 4.05% for 2006, 3.76% for 2007 and 6.53% for2008.  From January through May 2009,the inflation rate was 1.09%.  On June 9,2009, the 28-day CETES rate was 5.10%. While the substantial part of our debt is dollar-denominated at thistime, high interest rates in Mexico may adversely affect the business climatein Mexico generally and our financing costs in the future and thus our financialcondition and results 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.  Accordingly, the slowing economyin the United States, and the uncertainty of the impact it could have on thegeneral economic conditions in Mexico and the United States could have asignificant adverse effect on our businesses and results of operations.  See—“Our Results of Operations Could beAffected by Economic Conditions in Mexico”, and “Risks Relating to the UnitedStates—Unfavorable General Economic Conditions in the United States CouldNegatively Impact Our Financial Performance” In addition, economic crises in Asia, Russia, Brazil, Argentina andother emerging market countries have adversely affected the Mexican economy inthe past.

 

Our financial performancemay also be significantly affected by general economic, political and socialconditions in the emerging markets where we operate, particularly Mexico,Venezuela and Asia. Many countries in Latin America, including Mexico andVenezuela, have suffered significant economic, political and social crises inthe past, and these events may occur again in the future. See also “— RisksRelating to Venezuela —Venezuela

 

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Presents Significant Economic Uncertainty andPolitical Risk, Which May in the Future Have an Adverse Impact on OurOperations and Financial Performance.”  Instability in Latin America has been caused by many different factors,including:

 

·      significantgovernmental influence over local economies;

 

·      substantialfluctuations in economic growth;

 

·      highlevels of inflation;

 

·      changesin currency values;

 

·      exchangecontrols or restrictions on expatriation of earnings;

 

·      highdomestic interest rates;

 

·      wageand price controls;

 

·      changesin governmental economic or tax policies;

 

·      impositionof trade barriers;

 

·      unexpectedchanges in regulation; and

 

·      overallpolitical, social and economic instability.

 

Adverse economic,political and social conditions in Latin America may create uncertainty regardingour operating environment, which could have a material adverse effect on ourcompany.

 

We cannot assure you that the events in other emergingmarket countries, in the United States or elsewhere will not adversely affectour business, financial condition and results of operations.

 

***You May Be Unable to Enforce Judgments Against Usin Mexican Courts***

*** ***

We are a Mexican publicly held corporation (*Sociedad Anónima Bursátil de Capital Variable*).  Most of our directors and executive officersare residents of Mexico, and a significant portion of the assets of ourdirectors and executive officers, and a significant portion of our assets, arelocated in Mexico.  You may experiencedifficulty in effecting service of process upon our company or our directorsand executive officers in the United States, or, more generally, outside ofMexico and in enforcing civil judgments of non-Mexican courts in Mexico,including judgments predicated on civil liability under U.S. federal securitieslaws, against us, or our directors and executive officers.  We have been advised by our General Counsel,that there is doubt as to the enforceability in original actions in Mexicancourts of liabilities predicated solely on the U.S. federal securities laws.

 

**Risks Relating toVenezuela**

** **

***Venezuela Presents Significant Economic Uncertaintyand Political Risk, Which May in the Future Have an Adverse Impact on OurOperations and Financial Performance***

*** ***

Our operations in Venezuela accounted for approximately 19% of our netsales in 2008.  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 took place from early December 2002 to February 2003,and in an effort to shore up the economy and control inflation, Venezuelanauthorities imposed foreign exchange and price controls in early 2003.

 

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These price controls apply to products such as corn flour and wheatflour, which limit our ability to increase our prices in order to compensatefor higher costs in raw materials. However, in February 2008, the Venezuelan government liberalizedprice controls on retail wheat flour.  Wecannot predict whether the Venezuelan government will reinstate price controlson wheat flour in the future. Additionally, the foreign exchange controls imposed by the Venezuelangovernment limit our ability to convert bolívares (the Venezuelan currency)into other currencies and transfer funds out of Venezuela.  In February 2003, the Venezuelangovernment established a single fixed exchange rate for the bolívar of 1,600.00bolívares per U.S.$1.00, which has been increased on several occasions to thecurrent fixed exchange rate of 2,150.00 bolívares per U.S.$1.00 in effect sinceMarch 2005. Pursuant to a March 2007 decree, commencing on January 1,2008 the bolívar was renamed “bolívar fuerte” and revalued at a ratio of 1,000bolívares to 1 bolívar fuerte and 2.15 bolívares fuertes per U.S$1.00.

 

Hugo Chávez, the current president of Venezuela was reelected to asecond term in December 2006. On February 2009, a constitutionalreferendum was held in Venezuela to decide on the possibility for thePresident, State Governors, Mayors, and National Assembly Congressmen to bereelected for indefinite terms. Such proposal was approved by the majority ofVenezuela’s voters. The permanent reelection of key government officials couldresult in social or economic instability, which in turn could have a materialadverse effect on Venezuela and our business.

 

The Government of Venezuela has undertaken to nationalize foreign-ownedcompanies in key industries such as steel, telecommunications and cement.  We cannotassure you that the government of Venezuela will not continue to nationalizeother foreign-owned companies, including our operations.  The Venezuelan government’s continuednationalization of foreign owned companiescould adversely affect our financialcondition and results of operation.

 

Additionally, our financial condition and results of operations couldbe adversely affected since, among other reasons:  (i) a portion of our sales aredenominated in bolívares; (ii) Gruma Venezuela produces products that aresubject to price controls; (iii) part of our sales depend on centralizedgovernment procurement policies for its social welfare programs; (iv) wemay have difficulties repatriating dividends from Gruma Venezuela, as well asimporting some of its requirements for raw materials as a result of theexchange controls, and; (v) we may face increasing costs in some of ourraw materials due to the implementation of import tariffs.

 

**Risks Relating to theUnited States**

** **

***Unfavorable General EconomicConditions in the United States Could Negatively Impact Our FinancialPerformance***

** **

Net sales in the U.S. constituted approximately 41% ofour total sales in 2008.  Unfavorablegeneral economic conditions, such as the current recession and economicslowdown in the United States could negatively affect the affordability of andconsumer demand for some of our products. Under difficult economic conditions, consumers may seek to foregopurchases of our products or, if available, shift to lower-priced productsoffered by other companies.  Softerconsumer demand for our products in the United States or in other major marketscould reduce our profitability and could negatively affect our financialperformance.

 

Additionally, as the retail grocery trade continues toconsolidate and our retail customers grow larger, they could demand lowerpricing and increased promotional programs. Also, our dependence on sales to certain retail customers couldincrease.  There is a risk that we willnot be able to maintain our U.S. profit margin in this environment.

 

Demand for our products in Mexico may also bedisproportionately affected by the performance of the United States economy.See also “— Risks Relating to Mexico — Our Results of Operations Could beAffected by Economic Conditions in Mexico.”

 

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**Risks Related to OurControlling Shareholders and Capital Structure**

 

***Holders of ADSs May Not Be Able to Vote at ourShareholders’ Meetings***

 

Our shares are traded on the New York Stock Exchange in the form ofADSs.  There can be no assurance thatholders of our shares through ADSs will receive notices of shareholder meetingsfrom our ADS depositary with sufficient time to enable such holders to returnvoting instructions to our ADS depositary in a timely manner.  Under certain circumstances, a persondesignated by us may receive a proxy to vote the shares underlying the ADSs atour discretion at a shareholder meeting.

 

***Holders of ADSs Are Not Entitled to Attend ShareholderMeetings, and They May Only Vote Through the Depositary***

 

Under Mexican law, a shareholder is required to deposit its shares witha Mexican custodian in order to attend a shareholders’ meeting.  A holder of ADSs will not be able to meetthis requirement, and accordingly is not entitled to attend shareholders’meetings.  A holder of ADSs is entitledto instruct the depositary as to how to vote the shares represented by ADSs, inaccordance with procedures provided for in the deposit agreement, but a holderof ADSs will not be able to vote its shares directly at a shareholders’ meetingor to appoint a proxy to do so.  Inaddition, such voting instructions may be limited to matters enumerated in theagenda contained in the notice to shareholders and with respect to whichinformation is available prior to the shareholders’ meeting.

 

***Holders of ADSs May Not Be Able to Participate inAny Future Preemptive Rights Offering and as a Result May Be Subject to aDilution of Equity Interest***

*** ***

Under Mexican law, if we issue new shares for cash as a part of acapital increase, other than in connection with a public offering of newlyissued shares or treasury stock, we must generally grant our shareholders theright to purchase a sufficient number of shares to maintain their existingownership percentage.  Rights to purchaseshares in these circumstances are known as preemptive rights.  We may not legally be permitted to allowholders of our shares through ADSs in the United States to exercise anypreemptive rights in any future capital increases unless (i) we file aregistration statement with the U.S. Securities and Exchange Commission, orSEC, with respect to that future issuance of shares or (ii) the offeringqualifies for an exemption from the registration requirements of the SecuritiesAct.  At the time of any future capitalincrease, we will evaluate the costs and potential liabilities associated withfiling a registration 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 no obligation to, and there can be noassurance that we will, file a registration statement with the SEC to allowholders of our shares through ADSs in the United States to participate in apreemptive rights offering.  In addition,under current Mexican law, sales by the ADS depositary of preemptive rights anddistribution of the proceeds from such sales to the holders of our sharesthrough ADSs is not possible.  As aresult, the equity interest of holders of our shares through ADSs would bediluted proportionately and such holders may not receive any economic compensation.  See “Item 10. Additional Information—Bylaws—Preemptive Rights.”

 

***The Protections Afforded to Minority Shareholders inMexico Are Different From Those in the United States***

*** ***

Under Mexican law, the protections afforded tominority shareholders are different from those in the United States.  In particular, the law concerning fiduciaryduties of directors, executive officers and controlling shareholders has beenrecently developed and there is no legal precedent to predict the outcome ofany such action.  Additionally, classactions are not available under Mexican law and there are different proceduralrequirements for bringing shareholder derivative lawsuits.  As a result, in practice it may be moredifficult for our minority shareholders to enforce their rights against us, ourdirectors, our executive officers or our controlling shareholders than it wouldbe for shareholders of a U.S. company.

 

***We Have Significant Transactions With Affiliates ThatCould Create Potential Conflicts of Interest***

*** ***

As of December 31, 2008, we held approximately8.8% of the capital stock of Grupo Financiero Banorte, S.A.B. de C.V. orGFNorte, a Mexican financial institution. In the normal course of business, wemay obtain financing from GFNorte’s subsidiaries at market rates andterms.  For the past six and a half years,the highest

 

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outstanding loan amountwas Ps.162 million (in nominal terms) with an interest rate of 8.9% in December 2003.As of December 31, 2008 there were no outstanding loan amounts withGFNorte’s subsidiaries.

 

We purchase some of our inventory ingredients from ourshareholder and associate Archer-Daniels-Midland Company, orArcher-Daniels-Midland, at market rates and terms.  During 2006, 2007 and 2008, we purchasedU.S.$115 million, U.S.$133 million andU.S.$183 million of inventory ingredients, respectively, fromArcher-Daniels-Midland.  Transactionswith affiliates may create the potential for conflicts of interest.  See “Item 7. Major Shareholders and Related Party Transactions—Related PartyTransactions.”

 

***Exchange Rate Fluctuations May Affect the Valueof Our Shares***

*** ***

Fluctuations in the exchange rate between the Peso and the U.S. Dollarwill affect the U.S. Dollar value of an investment in our shares and ofdividend and other distribution payments on those shares.  See “Item 3. Key Information—Exchange Rate Information” and “Item 11.  Quantitative and Qualitative DisclosuresAbout Market Risk—Foreign Exchange Rate Risk.”

 

***Mexican Law Restricts the Ability of Non-MexicanShareholders to Invoke the Protection of Their Governments With Respect toTheir Rights as Shareholders***

*** ***

As required by Mexican law, our bylaws provide thatnon-Mexican shareholders shall be treated as Mexican shareholders in respect totheir ownership interests in us, and shall be deemed to have agreed not toinvoke the protection of their governments under any circumstance, underpenalty to forfeit, in favor of the Mexican government, any participation orinterest held in us.

 

Under this provision, a non-Mexican shareholder isdeemed to have agreed not to invoke the protection of its own government byrequesting the initiation of a diplomatic claim against the Mexican governmentwith respect to its shareholder’s rights. However, this provision shall not deem non-Mexican shareholders to havewaived any other rights they may have, including any rights under the U.S.securities laws, with respect to their investment in us.

 

***Our Controlling Shareholder Exerts Substantial ControlOver Our Company***

*** ***

As of April 30, 2009, Roberto González Barrera and his familycontrolled approximately 51.68% of our outstanding shares.  See “Item 10.  Additional Information—Changes in CapitalStock.”  Consequently, Mr. GonzálezBarrera and his family have the power to elect the majority of our directorsand to determine the outcome of most actions requiring approval of ourstockholders, 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 has pledged and may berequired to further pledge part of his shares in our company to secure some ofhis borrowings.  If there is a defaultand the lenders enforce their rights against any or all of these shares, Mr. GonzálezBarrera and his family could lose control over us and a change of control couldresult.  In addition, this could triggera default in some of our credit agreements and have a material adverse effectupon 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, HasInfluence Over Some Corporate Decisions; Our Relationship WithArcher-Daniels-Midland Could Become Adverse and Hurt Our Performance***

*** ***

Archer-Daniels-Midland owns, directly or indirectly,approximately 23.22% of our outstanding shares. However, a portion of such interest is held through a Mexicancorporation jointly owned with Mr. González Barrera, who has the soleauthority to determine how those shares are voted.  Thus, Archer-Daniels-Midland only has theright to vote 18.87% of our outstanding shares. In addition, Archer-Daniels-Midland has the right to nominate 2 of the15 members of our board of directors and their corresponding alternates.  As a result, Archer-Daniels-Midland mayinfluence the outcome of actions requiring the approval of our shareholders orour board of directors.  Mr. GonzálezBarrera and Archer-Daniels-Midland have also granted each other rights of firstrefusal in respect of their shares in our company, subject to specifiedconditions.

 

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Additionally, subject to certain requirements underthe *Ley del Mercado de Valores, or*MexicanSecurities Law, Archer-Daniels-Midland may also:  (i) request the Chairman of the board orthe Chairman of the audit and corporate governance committees to convene ageneral shareholders’ meeting; (ii) initiate civil lawsuits againstmembers of the board of directors, members of the audit and corporategovernance committees, and the chief executive officer for breach of duty; (iii) judiciallyoppose resolutions adopted at shareholder meetings; and (iv) request thedeferral of any vote regarding an issue about which it does not believe it hasbeen sufficiently informed.

 

Archer-Daniels-Midland owns, directly or indirectly, a40% interest in our subsidiary, Molinera de México, S.A. de C.V., or Molinerade México, and a 20% interest in our subsidiary, Azteca Milling, L.P., orAzteca Milling.  Additionally,Archer-Daniels-Midland owns a 3% indirect interest in Molinos Nacionales, C.A.,or MONACA and a 3% indirect interest in Derivados de Maíz Seleccionado, C.A. orDEMASECA.  For more information, pleasesee “Item 4.  Information on theCompany—Business Overview— Gruma Venezuela.” These subsidiaries account for 39% of our revenue.  Although we own a majority ownership interestin each of Azteca Milling and Molinera de México, we are required to obtain theconsent and cooperation of Archer-Daniels-Midland with respect to certainmatters in order to increase our capital expenditures and to implement andexpand upon our business strategies in respect of such subsidiaries.

 

We cannot assure you that our relationships withArcher-Daniels-Midland will be harmonious and successful.  Disagreements with Archer-Daniels-Midlandcould affect the execution of our strategy and, as a result, we may be placedat a competitive disadvantage.

 

***Our Antitakeover Protections May Deter PotentialAcquirors***

*** ***

Certain provisions of our bylaws could make it substantially moredifficult 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 “Item 10.  Additional Information—Bylaws—AntitakeoverProtections.”

 

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

*** ***

We are a holding company with no significant assets other than theshares of our subsidiaries.  As a result,our ability to meet our debt service obligations depends primarily upon ourreceiving sufficient funds from our subsidiaries.  Under Mexican law, companies may only paydividends:

 

·                 from earnings included in year-end financialstatements that are approved by shareholders at a duly convened meeting;

 

·                 after any existing losses applicable to prior yearshave been made up or absorbed into capital;

 

·                 after at least 5% of net profits for the relevantfiscal year have been allocated to a legal reserve until the amount of thereserve equals 20% of a company’s paid-in capital stock; and

 

·                 after shareholders have approved the payment of therelevant dividends at a duly convened meeting.

 

In addition, Gruma Corporation is subject to covenantsin some of its debt agreements which require the maintenance of specifiedfinancial ratios and balances and, upon an event of default, prohibit thepayment of cash dividends.  Foradditional information concerning these restrictions on inter-companytransfers, see “Item 3.  KeyInformation—Dividends” and “Item 5. Operating and Financial Review and Prospects—Liquidity and CapitalResources.”

 

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We own approximately 83% of the outstanding shares ofGrupo Industrial Maseca, S.A.B. de C.V., or GIMSA, 73% of MONACA, 57% ofDEMASECA, 80% of Azteca Milling, L.P. (through Gruma Corporation), 60% ofMolinera de México, S.A. de C.V. and, as of December 31, 2008, 8.8% ofGFNorte. Accordingly, we are entitled to receive only our *pro rata*share of any of these subsidiaries’ dividends.

 

Furthermore, our ability to repatriate dividends fromGruma Venezuela may be adversely affected by exchange controls and other recentevents.  See “Item 3.  Key Information—Risk Factors—Risks Related toVenezuela—Venezuela Presents Significant Economic Uncertainty and PoliticalRisk.”

 

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## **ITEM 4.**                  Information on 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 ourcommercial names:  GRUMA and Maseca.  The address of our principal executive officeis Calzada del Valle. 407 Ote, Colonia del Valle, SanPedro Garza García, Nuevo León, 66220 México and ourtelephone number is (52 81) 8399-3300.  Our legaldomicile is Monterrey, Nuevo León, México.

 

We were founded in 1949, when Roberto González Barrera, the Chairman ofour board of directors started producing and selling corn flour in NortheasternMexico as an alternative raw material in producing tortillas.  Prior to our founding, all corn tortillaswere made using a rudimentary process. We believe that the preparation of tortillas using the corn flour methodpresents advantages, including greater efficiency and higher quality, whichmakes 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 is our proprietarystate-of-the art technology for the manufacturing of corn flour and tortillas andother related products.  We have beendeveloping and advancing our own technology since the founding of ourcompany.  Throughout the years we havebeen able to achieve vertical integration which is an important part of ourcompetitive advantage.

 

The following are some significant historical highlights:

 

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

 

·                 **In 1972**, we entered the Central American marketwith our first operation in Costa Rica.  Today,we have operations in Costa Rica, Guatemala, Honduras, El Salvador, Nicaraguaand Ecuador.

 

·                 **In 1977**,we entered the U.S. market.  Ouroperations have grown to include products such as tortillas, corn flour andother tortilla related products.

 

·                 **From 1989 to 1995**, we significantly increased our installed manufacturing capacity inthe United States and in Mexico.

 

·                 **In 1993**, we entered the Venezuelan corn flourmarket through an investment in DEMASECA, a Venezuelan corporation producingcorn flour.

 

·                 **In 1994**, we began our packaged tortillaoperations in Mexico as part of our strategy to broaden our product lines inMexico, achieve vertical integration of our corn flour operations andcapitalize upon our experience in producing and distributing packaged tortillasin the United States. We were focused only on the northern part of Mexico. Inaddition, in 1994 Gruma became a publicly listed company in both Mexico and theU.S.

 

·                 **In 1996**, we strengthened our position in theU.S. corn flour market through an association with Archer-Daniels-Midland,which currently owns approximately 23.22% of our outstanding shares.  Through this association we combined ourexisting U.S. corn flour operations and strengthened our position in the U.S.corn flour market.  This association alsoallowed us to 

 

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enter the Mexicanwheat flour market by acquiring a 60% ownership interest inArcher-Daniels-Midland’s Mexican 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 (acquisitionof MONACA) and Europe.

 

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

 

·                 **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 our U.S.operations, the most relevant of which was the expansion of a corn mill inIndiana.  This expansion was completedduring the second half of 2005.

 

·                 **In 2005**, we began the construction of a tortillaplant in Pennsylvania, which has been operational since July 2005.  We continued to expand capacity at existingplants.  In addition, Gruma Corporationacquired part of the manufacturing assets of the Mexican food division of CenexHarvest States or CHS, which consisted of three tortilla plants located in NewBrighton, Minnesota; Forth Worth, Texas; and Phoenix, Arizona.  Gruma Corporation also acquired a smalltortilla plant near San Francisco, California. In August, GIMSA acquired 100% of the capital stock of AgroindustriasIntegradas del Norte and Agroinsa de México (together, and with theirsubsidiaries, Agroinsa), a group of companies based in Monterrey, Mexico engagedprimarily in the production of corn flour and, to a lesser extent, wheat flourand other products.

 

·                 **In 2006**, during the first quarter, we concludedthe acquisitions of two small tortilla plants in Australia (Rositas Investmentsand Oz-Mex Foods), which strengthened our presence in the Asian and Oceaniamarkets.  In April of 2007, weentered into a contract to sell a 40% stake in MONACA to our partners inDEMASECA.  In conjunction with thistransaction, we also agreed to purchase an additional 10% ownership interest inDEMASECA from our partners.  We alsopurchased the remaining 49% ownership interest in Nuova De Franceschi &Figli, a corn flour company based in Italy, in which we previously held a 51%ownership interest.  In September 2006,we opened our first tortilla plant in Asia, located in Shanghai, China.  We believe the plant has allowed us tostrengthen our presence in the Asian markets by improving our service tocustomers and consumers, allowing us to introduce new products to the Asian marketand offer fresher products.  In October 2006,we concluded the acquisition of Pride Valley Foods, a company based inNewcastle, 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**, we made major investments in capacityexpansions and upgrades in Gruma Corporation, started the construction of atortilla plant for Gruma Asia and Oceania, and expanded two of GIMSA’s plants.

 

·                 **In 2008**, most of our capital expenditures wereapplied to Gruma Corporation for the construction of a tortilla plant insouthern California and capacity expansions at existing facilities, and toGruma Asia and Oceania for the construction of a tortilla plant in Australia.

 

·                 **In 2009,**major capital expenditures have beenapplied to the construction of tortilla plants in California and Australia, awheat flour mill in Venezuela, and general manufacturing upgrades especially inGruma Corporation.

 

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**ORGANIZATIONAL STRUCTURE**

** **

We are a holding company and conduct our operations throughsubsidiaries.  The table below sets forthour principal subsidiaries as of December 31, 2008.

 
| **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,  Wheat flour; Other                                         |
|                                                                                                                                      |       |                                                                   |       |                               | ** ** | ** **               |       |                                                                    |
| Molinera de México, S.A. de C.V.(“Molinera de México”) (2)                                                            |       | Mexico                                                                 |       | Mexico                             | ** ** | **60%**                  |       | Wheat flour,  Other                                                     |
|                                                                                                                                      |       |                                                                   |       |                               |       |                     |       |                                                                    |
| **U.S. and Europe Operations**(3)                                                                                                         |       |                                                                   |       |                               |       |                     |       |                                                                    |
| ** **                                                                                                                                |       |                                                                   |       |                               |       |                     |       |                                                                    |
| Gruma Corporation                                                                                                                         |       | United States,  Europe                                                 |       | Nevada                             |       | 100%                     |       | Packaged  tortillas, Other tortilla related products, Corn flour, Other |
|                                                                                                                                      |       |                                                                   |       |                               |       |                     |       |                                                                    |
| Azteca Milling(4)                                                                                                                         |       | United States                                                          |       | Texas                              |       | 80%                      |       | Corn flour                                                              |
|                                                                                                                                      |       |                                                                   |       |                               |       |                     |       |                                                                    |
| **Central American Operations**                                                                                                           |       |                                                                   |       |                               |       |                     |       |                                                                    |
| ** **                                                                                                                                |       |                                                                   |       |                               |       |                     |       |                                                                    |
| Gruma Centroamérica,  LLC(5)                                                                                                         |       | Costa Rica, Honduras, Guatemala, El Salvador,  Nicaragua, Ecuador |       | Nevada                             |       | 100%                     |       | Corn flour,  Packaged tortillas, Snacks, Hearts of palm, Rice           |
| ** **                                                                                                                                |       |                                                                   |       |                               |       |                     |       |                                                                    |
| **Venezuelan Operations**(6)                                                                                                              |       |                                                                   |       |                               |       |                     |       |                                                                    |
| ** **                                                                                                                                |       |                                                                   |       |                               |       |                     |       |                                                                    |
| Molinos Nacionales, C.A. (“MONACA”)** **(7)                                                                                |       | Venezuela                                                              |       | Venezuela                          |       | 73%                      |       | Corn flour,  Wheat flour, Other products                                |
|                                                                                                                                      |       |                                                                   |       |                               |       |                     |       |                                                                    |
| Derivados de Maíz Seleccionado, C.A. (“DEMASECA”)** **(7)                                                             |       | Venezuela                                                              |       | Venezuela                          |       | 57%                      |       | Corn flour                                                              |
|                                                                                                                                      |       |                                                                   |       |                               |       |                     |       |                                                                    |
| **Other Subsidiaries**                                                                                                                    |       |                                                                   |       |                               |       |                     |       |                                                                    |
| ** **                                                                                                                                |       |                                                                   |       |                               |       |                     |       |                                                                    |
| Mission  Foods (Shanghai) Co. Ltd., Gruma Oceania Pty. Ltd., and Mission Foods  (Malaysia) Sdn. Bhd. (“Gruma Asia and Oceania”) |       | Asia and Oceania                                                       |       | China, Malaysia and Australia      |       | 100%                     |       | Packaged tortillas, Chips, Other products                               |
|                                                                                                                                      |       |                                                                   |       |                               |       |                     |       |                                                                    |
| Productos y Distribuidora Azteca, S.A. deC.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)   Percentageof equity capital owned by us directly or indirectly through subsidiaries.

(2)   Archer-Daniels-Midland indirectly holds the remaining 40%interest.

(3)   Since 2007, the Asia and Oceania operations have been presented asa separate business unit from Gruma Corporation.

(4)         Archer-Daniels-Midland indirectly holds the remaining20% interest.

(5)         As part of a corporate restructuring of our CentralAmerican operations, on January 1, 2009 all subsidiaries of GrumaCentroamérica, LLC were transferred to Gruma International Foods, S.L., acorporation  organized under the laws ofthe Kingdom of Spain.

(6)   Together these subsidiaries are referred to as “Gruma Venezuela.”

(7)         Archer-Daniels-Midland holds a 3% indirect interestin both companies and Mr. Ricardo Fernández, our Venezuelan partner, holdsa 24.14% indirect interest in MONACA and 40% in DEMASECA through RFB Holdingsde Mexico, S.A. de C.V.

 

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Our subsidiaries accounted for the following percentages and amount ofour net sales in millions of pesos for the years ended December 31, 2006,2007 and 2008.

 
| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **2006**                    | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **               | ** ** | **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.                         | 16,170     |   | 50 | % | Ps. | 17,406 |   | 49 | % | Ps. | 19,356 |   | 43 | % |
| GIMSA                    |       | 7,666                       |       | 24 |   | 9,012 |   | 25 |   | 9,142 |   | 20 |   |
| Gruma Venezuela          |       | 3,874                       |       | 12 |   | 3,862 |   | 11 |   | 8,727 |   | 19 |   |
| Molinera de México  |       | 2,212                       |       | 7 |   | 2,694 |   | 8 |   | 3,598 |   | 8 |   |
| Gruma Centroamérica |       | 1,863                       |       | 6 |   | 2,076 |   | 6 |   | 2,949 |   | 7 |   |
| Others  and eliminations |       | 405                         |       | 1 |   | 766 |   | 1 |   | 1,021 |   | 3 |   |
|                          |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

**Association withArcher-Daniels-Midland**

** **

We entered into an association with Archer-Daniels-Midland in September 1996.  Archer-Daniels-Midland is one of the world’slargest agricultural processors and traders. Through our partnership we have improved our position in the U.S. cornflour market and gained an immediate presence in the Mexican wheat flourmarket.

 

As a result of this association, we andArcher-Daniels-Midland combined our U.S. corn flour operations to form AztecaMilling, L.P., a limited partnership in which we hold indirectly, 80% andArcher-Daniels-Midland holds indirectly, 20%. We and Archer-Daniels-Midland agreed to produce and distribute cornflour in the United States through Azteca Milling.  In addition, we acquired 60% of the capitalstock of Archer-Daniels-Midland’s wholly-owned Mexican wheat millingoperations, Molinera de México, S.A. de C.V. Archer-Daniels-Midland retained the remaining 40%.  We and Archer-Daniels-Midland agreed toproduce and distribute wheat flour in Mexico through Molinera de México.  As part of this agreement, we also received U.S.$258.0million in cash and gained exclusivity rights from Archer-Daniels-Midland inspecified corn flour and wheat flour markets. In return, Archer-Daniels-Midland received 74,696,314 of our then newlyissued shares, which represented at that time approximately 22% of our totaloutstanding shares and the right to designate two of the 15 members of ourboard of directors and their corresponding alternates.  Currently, Archer-Daniels-Midland owns,directly and indirectly, approximately 23.22% 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—Material Contracts—Archer-Daniels-Midland.”

 

**Capital Expenditures**

** **

Our capital expenditure program continues to be primarily focused onour core businesses and markets.  Capitalexpenditures for 2006, 2007 and 2008 were U.S.$189 million, U.S.$204 millionand U.S.$235 million, respectively.  Ourcapital expenditures include investments in property, plant and equipment,acquisitions of new plants and brands and capital investments. Capitalexpenditures in 2006 were mainly applied to: (i) the expansion of tortilla capacity and upgrades in existing andnew plants within Gruma Corporation; (ii) the acquisition of Pride ValleyFoods, a company based in Newcastle, England, that manufactures tortillas, pitabread, chapatti, and naan, for an acquisition cost of approximately U.S.$33million; (iii) the construction of a tortilla plant in Shanghai, China,for a total investment of approximately U.S.$7 million; (iv) theacquisition of Rositas Investments, a tortilla company based in Australia, forapproximately U.S.$13 million; (v) the acquisition of Oz-Mex Foods, atortilla company based in Australia, for approximately U.S.$4 million; and (vi) thepurchase of the remaining 49% ownership interest in Nuova De Francesch &Figli, a corn flour company based in Italy, in which we previously held a 51%ownership interest, for approximately U.S.$8.2 million.  To a lesser extent, investments were alsomade to expand capacity in GIMSA and Gruma Centroamérica.  Major capital expenditures in 2007 werefocused on 

 

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expanding and upgrading capacity at Gruma Corporation,capacity expansions at GIMSA and Gruma Centroamérica, and the construction of atortilla plant in Australia.  During 2008GRUMA’s capital expenditures totaled U.S.$235 million, most of which wasapplied to the construction of tortilla plants in California and Australia,capacity expansions and upgrades in Gruma Corporation. In light of the increasein our debt resulting from losses on derivative instruments, our capitalexpenditures will be oriented exclusively to the most material projects andtherefore will be lower than what we have invested in recent years. We havebudgeted approximately U.S.$80.0 million for capital expenditures in 2009,which we intend to use mainly for additional capacity at existing plants inGruma Corporation, to finalize the construction of a tortilla plant inCalifornia and  a tortilla plant inAustralia.  We anticipate financing theseexpenditures throughout the year through our own cash flows.  This capital expenditures budget does notinclude any potential acquisitions. During the first quarter of 2009, we spent approximately U.S.$14 millionon capital expenditures which were applied to the construction of tortillaplants in California and Australia and a wheat flour mill in Venezuela.

 

The following table sets forth the aggregate amount of our capitalexpenditures during the periods indicated.

 
| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2006(1)**                      | ** ** | **2007(1)** | ** ** | **2008(2)** | ** ** |
| ** **                | ** ** | **(in millions of U.S. dollars** | ** ** |
| Gruma  Corporation        |       | $                                | 121.3      |   | $ | 96.1 |   | 120.7 |   |
| GIMSA                     |       | 31.3                             |       | 23.6 |   | 12.2 |   |
| Gruma  Venezuela          |       | 7.6                              |       | 6.7 |   | 22.0 |   |
| Molinera  de México  |       | 5.1                              |       | 3.6 |   | 3.4 |   |
| Gruma  Centroamérica |       | 11.8                             |       | 13.1 |   | 23.6 |   |
| Others  and eliminations  |       | 11.8                             |       | 60.5 |   | 53.4 |   |
| Total  consolidated       |       | $                                | 188.9      |   | $ | 203.6 |   | 235.3 |   |

 

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(1)         Amounts in respect of some of the capitalexpenditures were 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.

(2)         These amounts were translated into U.S.dollars at the exchange rate in effect at the end of each month on which agiven capital expenditure was made. As a result, U.S. dollar amounts presentedin the table above may not be comparable to data contained elsewhere in this AnnualReport.

 

In light of the increase in our debt resulting from losses onderivative instruments, we anticipate that our capital expenditures during 2009will be oriented exclusively to the most material projects and therefore willbe less than what we have invested in recent years.

 

For more information on capital expenditures for eachsubsidiary, please see the sections entitled “Operation and CapitalExpenditures” under the relevant sections below.

 

**BUSINESS OVERVIEW**

** **

We believe we are one of the largest corn flour and tortilla producersand distributors in the world based upon revenue and sales volume.  We also believe we are one of the leadingproducers and distributors of corn flour and tortillas in the United States,one of the leading producers of corn flour and wheat flour in Mexico, and oneof the leading producers of corn flour and wheat flour in Venezuela based uponrevenue and sales volumes.  We believethat we are also one of the largest producers of corn flour and tortillas inCentral America, and one of the largest tortilla producers in Europe, Asia andOceania, based upon revenue and sales volume.

 

Our focus has been and continues to be the efficient and profitableexpansion of our core business—corn flour, tortilla, and wheat flour production.  We pioneered the dry corn flour method oftortilla production, which offers several advantages over the centuries-oldtraditional wet corn dough method.  Theseadvantages include higher production yields, reduced production costs, moreuniform quality and longer shelf life. The corn flour method of production offers significant opportunities forgrowth.  Using our technology andknow-how, we expect

 

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to encourage tortilla and tortilla chip producers inthe United States, Mexico, Central America, and elsewhere to convert to thecorn flour method of tortilla and tortilla chip production.  Additionally, we expect to increase thepresence of our other core businesses, including packaged tortillas in theUnited States, Mexico, Central America, Europe, Asia and Oceania, and wheatflour in Mexico and Venezuela.

 

The following table sets forth our revenues by geographic market foryears ended December 31, 2006, 2007 and 2008.

 
| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                | ** ** | **(in millions of pesos)**       | ** ** |
| United  States and Europe |       | Ps.                              | 16,168     |   | Ps. | 17,403 |   | Ps. | 19,332 |   |
| Mexico                    |       | 9,977                            |       | 11,652 |   | 12,784 |   |
| Venezuela                 |       | 3,874                            |       | 3,862 |   | 8,727 |   |
| Central America           |       | 1,862                            |       | 2,076 |   | 2,949 |   |
| Asia and Oceania          |       | 309                              |       | 823 |   | 1,001 |   |
| Total                     |       | Ps.                              | 32,190     |   | Ps. | 35,816 |   | Ps. | 44,793 |   |

** **

**Strategy**

** **

Our strategy for growth is to focus on our core business—themanufacturing of tortillas, corn flour and wheat flour—and to capitalize uponour 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.  Our strategy includes the following keyelements:

 

*Expand inthe Growing Retail and Food Service Tortilla Markets in New Regions in theUnited States*:   Webelieve that the size and growth of the U.S. retail and food service tortillamarkets offer significant opportunities for expansion.

 

*Enter andExpand in the Tortilla Markets in Other Regions of the World:*   We believe that newmarkets in other continents such as Europe, Asia and Oceania offer ussignificant opportunities.  We believeour current operations in Europe will enable us to better serve markets inEurope and in the Middle East through stronger vertical integration,improvements in logistical efficiencies, and enhanced knowledge of our localmarkets.  Our presence in China andOceania will enable us to offer our customers fresh products and respond morequickly to their needs.  We will continueto evaluate ways to profitably expand into these rapidly growing markets.

 

*Continuethe Process of Establishing Gruma Corporation’s MISSION**®** and GUERRERO**®** Tortilla Brands as the First and SecondNational Brands in the United States*:   Weintend to achieve this by increasing our efforts at building brand namerecognition and by further expanding and utilizing Gruma Corporation’s distribution network, first in Gruma Corporation’s existing markets,where we believe there is potential for further growth, and second, in regionswhere Gruma Corporation currently does not have a significant presence butwhere we believe strong demand for tortillas already exists.

 

*Encourage Transition in All Our Markets fromTraditional Cooked-Corn Method to Corn Flour Method as Well as New Uses forCorn Flour, and Continue to Establish MASECA as a Leading Brand*: We pioneered the dry corn flour method of tortilla production, whichoffers several advantages over the centuries-old traditional wet corn doughmethod.  We continue to view thetransition from the traditional method to the corn flour method of makingtortillas and tortilla chips as the primary opportunity for increased cornflour sales.  We will continue toencourage this transition through improving customer service, advertising andpromoting principally our MASECA® brand corn flour, as well as leveraging off ofour manufacturing capacity and distribution networks.  We also see an opportunity for furtherpotential growth in the fact that the dry corn flour method is moreenvironmentally friendly

 

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than the traditional method.  We also are working to expand the use of cornflour in the manufacture of different types of products besides tortillas andtortilla chips.

 

*ContinuallyImprove Service and Quality 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.

 

*LeverageOur Existing Available Production Capacity and Focus on Optimizing OperationalMatters*: Ourinvestment program during recent years in plants and operations has resulted insufficient existing capacity to meet current and foreseeable demand. We believethat we have the capacity to operate at optimal levels and that our economiesof scale and existing operating synergies permit us to remain competitivewithout additional capital expenditures.

 

**U.S. and EuropeanOperations**

** **

***Overview***

*** ***

We conduct our United States and European operations principallythrough our subsidiary, Gruma Corporation, which manufactures and distributescorn flour, packaged tortillas, corn chips and related products.  The Asia and Oceania operations were reportedin our financial statements under Gruma Corporation through December 2006,but since 2007 the Asia and Oceania operations have been reported under theline item “Other and eliminations.” 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) expandingdistribution networks for corn flour and tortilla products, and; (v) usingour technology to design and build proprietary corn flour, tortilla andtortilla chip manufacturing machinery.

 

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

 

During 2000, Gruma Corporation opened its firstEuropean tortilla plant in England, initiating our entry into the Europeanmarket.  During 2004 Gruma Corporationconcluded two small acquisitions in Europe, a tortilla plant in Holland and a51% ownership of a corn flour plant in Italy in an effort to strengthen ourpresence in that region.  During 2006,Gruma Corporation acquired a company in England, which we believe will allow usto expand our 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 its Mission Foodsdivision, which produces tortillas and related products, and Azteca Milling,L.P., a limited partnership between Gruma Corporation (80%) andArcher-Daniels-Midland (20%) which produces corn flour.  We believe Gruma Corporation is one of theleading manufacturers and distributors of packaged tortillas and relatedproducts throughout the United States and Europe through its Mission Foodsdivision.  We believe Gruma Corporationis also one of the leading producers of corn flour in the United States throughits Azteca Milling division.

 

*Principal Products*.  Mission Foodsmanufactures and distributes packaged corn and wheat tortillas and relatedproducts (which include tortilla chips) under the MISSION® and GUERRERO® brand names inthe United States, as well as other minor regional brands.  By continuing to build MISSION® into a strongnational brand for

 

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the general consumer market and GUERRERO® into a strongHispanic consumer focused brand, Mission Foods expects to increase marketpenetration, brand awareness and profitability. Azteca Milling manufactures and distributes corn flour in the UnitedStates under the MASECA® brand.

 

*Sales and Marketing*.  Mission Foodsserves both retail and food service customers. Retail customers, which represent most of our business, includesupermarkets, mass merchandisers and smaller independent stores.  Our food service customers include majorchain restaurants, food service distributors, schools, hospitals and themilitary.

 

In the tortilla market, Mission Foods’ current marketing strategy is toincrease market penetration by increasing consumer awareness of tortilla productsin general, to expand into new regions and to focus on product innovation andcustomer needs.  Mission Foods promotesits products primarily through cooperative advertising programs withsupermarkets as well as radio and television advertising, targeting bothHispanic and non-Hispanic populations. We believe these efforts have contributed to greater consumerawareness.  Mission Foods also targetsfood service companies and works with restaurants, institutions anddistributors to address their individual needs and provide them with a fullline of products.  Mission Foodscontinuously attempts to identify new customers and markets for its tortillasand related products in the United States and, more recently, in Europe.

 

Azteca Milling distributes approximately 35% of the corn flour itproduces to Mission 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 for corn flour,tortillas, and related products.  Webelieve that the growing consumption of Mexican-style foods by non-Hispanicswill continue to increase demand for tortillas and tortilla related products,particularly flour tortillas.  Alsoinfluential is the fact that tortillas are no longer solely used as Mexicanfood, for example, the use of tortillas for wraps, which will continue toincrease demand for tortillas.  Growth inrecent years in the corn flour market is attributable to this increase of corntortilla 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 highly fragmented, regional in natureand extremely competitive.  Mission Foods’main competitors are hundreds of tortilla producers who manufacture locally orregionally and tend to be sole proprietorships. However, a few competitors 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, Olé Mexican Foodsand General Mills.  We believe MissionFoods is one of the leading manufacturers and distributors of packagedtortillas and related products throughout the United States and Europe.

 

Competitors within the corn flour milling industry include Minsa and thecorn flour milling divisions of Cargill.  Azteca Milling competeswith these corn flour manufacturers in the United States primarily on the basisof superior quality, technical support, customer service and brandrecognition.  However, we believe there isgreat 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 a significant growthpotential for tortillas in Europe, both in the retail and food servicesegments.  Approximately two-thirds ofour production is allocated to food service providers and food processors, whilethe remaining one-third is for retail sales. We believe we are one of the largest tortilla producers in Europe, andour main competitors in Europe are General Mills and Santa Maria. Two or threenew smaller players have entered tortilla production in Europe, operating inGermany, Benelux and the United Kingdom.

 

*Operation and Capital Expenditures*. Annual total production capacity for Gruma Corporation is estimated at2.1 million metric tons as of December 31,2008, with an average utilization of 76% in 2008.  The average size of our plants measured insquare meters is approximately 9,500 (about 103,000 square feet) as of December 31,2008.  Capital expenditures for the pastthree years were U.S.$338 million,mostly for expansion and upgrades of existing

 

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facilities and the construction of a new tortillaplant in southern California.  GrumaCorporation also 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 capital expenditures projected for 2009 will beapproximately U.S.$28 million for maintenance of existing facilities and thecompletion of a tortilla plant in southern California and manufacturing andtechnology upgrades.  These budgetedcapital expenditures do not include any potential acquisitions.  Mission Foods produces its packaged tortillasand other related products at 21 manufacturing facilities worldwide.  Nineteen of these facilities are located inlarge population centers throughout the United States.  During the first quarter of 2009, MissionFoods temporarily closed three manufacturing facilities located in Las Vegas,Ft. Worth and El Paso.  Mission Foods hastemporarily shifted production to other plants to achieve savings in overheadcosts.  Mission Foods will consider reopening these plants shouldmarket demands require additional capacity. Outside the United States,Mission Foods has one plant in England and one plant in The Netherlands.

 

Mission Foods is committed to offering the best quality products to itscustomers and uses the American Institute of Baking (AIB) food safety standardsto measure and ensure food compliance with this commitment.  AIB is a corporation founded in 1919 by theNorth American wholesale and retail baking industries that is dedicated toprotecting the safety of the food supply chain. All of the Mission Foods manufacturing facilities worldwide have earnedeither a superior or excellent category rating from the AIB.  Many of Mission Foods’ U.S. plants haveearned the AIB’s highest award, the combined AIB-HAACP certification, with theexception of the recently acquired plants in Arizona, Minnesota andCalifornia.  We anticipate these plantswill complete their HAACP certification during the next two years.  Besides the AIB, Mission Foods plants are regularlyevaluated by other third party organizations, including the British RetailConsortium as well as customers.  Ourplants in England and The Netherlands are also evaluated by other third partyorganizations such as International Food Standards and British RetailConsortium.

 

Azteca Milling produces corn flour at six plants located in Amarillo,Edinburg and Plainview, Texas; Evansville, Indiana; Henderson, Kentucky; andMadera, California.  Gruma Corporationalso 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 believethere is no significant seasonality in our products, however part of ourproducts tend to experience a slight volume increase during the summermonths.  Tortillas and tortilla chipssell year round, with special peaks during the summer, when we increase ourpromotion and advertising taking advantage of several holidays and majorsporting events.  Tortilla and tortillachip sales decrease slightly towards the end of the year when many Mexicans goback to Mexico for the holidays.  Salesof corn flour fluctuate seasonally as demand is higher in the fourth quarterduring the holidays because of the preparation of Mexican food recipes that arevery popular during this time of the year.

 

*Raw Materials*.  Corn is theprincipal raw material used in the production of corn flour, which is purchasedfrom local producers.  Azteca Millingbuys corn only from farmers and grain elevators that agree to supply varietiesof corn approved for human consumption. Azteca Milling tests and monitors for corn not approved for humanconsumption, for certain strains of bacteria, fungi metabolites and chemicals.  In addition, Azteca Milling applies certaintesting protocols to incoming raw materials to identify genetically modifiedproducts not approved for human consumption.

 

Because corn prices tend to be somewhat volatile, Azteca Millingengages in a variety of hedging activities in connection with the purchase ofits corn supplies, including the purchase of corn futures contracts.  In so doing, Azteca Milling attempts toassure corn availability approximately 12 months in advance of harvest time andguard against price volatility approximately 6 months in advance.  The Texas Panhandle currently is the singlelargest source of food-grade corn. Azteca Milling is also involved in short-term contracts for corn procurementwith many corn suppliers.  Wheresuppliers fail to deliver, Azteca Milling can easily access the spotmarkets.  Azteca Milling does notanticipate any difficulties in securing adequate corn supplies in the future.

 

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Corn flour for Mission Foods’ products is supplied by Azteca Millingand, to a much lesser extent, by GIMSA and our corn flour operations in Italy.

 

Wheat flour for the production of wheat tortillas and other types ofwheat flat breads is purchased from third party producers at prices prevailingin the commodities markets.  MissionFoods believes the market for wheat flour is sufficiently large and competitiveto ensure that wheat flour will be available at competitive prices to supplyour needs.  Contracts for wheat floursupply are made on a short-term basis.

 

*Distribution*.  An importantelement of Mission Foods’ sales growth has been the expansion and improvementof its tortilla distribution network, including a direct-store-delivery systemto distribute most of its products. Tortillas and other freshly made products are generally delivered dailyto customers, especially in retail sales and in regions where we have plants.  In regions where we do not have plants, thereis no daily distribution and tortillas are sometimes sold refrigerated.  In keeping with industry practice, MissionFoods generally does not have written sales agreements with its customers.  Nevertheless,from time to time, Mission Foods enters into consumer marketing agreements withretailers, in which 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 corn flour produced by AztecaMilling is sold to tortilla and tortilla chip manufacturers and is delivereddirectly from the plants to the customer. Azteca Milling’s retail customers are primarily serviced by a network ofdistributors, although a few large retail customers have their corn flourdelivered directly to them from the plants.

 

**Mexican Operations**

** **

***Overview***

*** ***

Our largest business in Mexico is the manufacture andsale of corn flour, which we conduct through our subsidiary GIMSA.  Through our association withArcher-Daniels-Midland, we have also entered the wheat milling business inMexico through Molinera de México.  Ourother subsidiaries engage in the manufacturing and distribution of packagedtortillas and other related products in northern Mexico, conduct research anddevelopment regarding corn flour and tortilla manufacturing equipment, producemachinery for corn flour and tortilla production and construct our corn flourmanufacturing facilities.

 

***GIMSA—Corn Flour Operation***

*** ***

*Principal Products. *GIMSAproduces, distributes and sells corn flour in Mexico, which is then used in thepreparation of tortillas and other related products.  Since the acquisition of Agroinsa in 2005,GIMSA also produces wheat flour and other related products.

 

In 2008, GIMSA had net sales of Ps.9,142 million.  We believe GIMSA is one of the largest cornflour producers in Mexico.  GIMSAestimates that its corn flour is used in one third of the corn tortillasconsumed in Mexico.  It sells corn flourin Mexico mainly under the brand name MASECA®.  MASECA® flour is a ready-mixed corn flour that becomesa dough when water is added.  This corndough can then be pressed to an appropriate thickness, cut to shape and cookedto produce tortillas and similar food products.

 

GIMSA produces over 40 varieties of corn flour for the manufacture ofdifferent food products which are developed to meet the requirements of ourdifferent types of customers according to the kind of tortillas they produceand markets they serve.  It sells cornflour to tortilla and tortilla chip manufacturers as well as in the retailmarket.  GIMSA’s principal corn flourproduct is MASECA®, a standard fine-textured, white cornflour used to manufacture tortillas.

 

In 2007, GIMSA decided to divest its small tortilla shops and sold thisbusiness to third parties.  GIMSA’stortilla sales in 2007 represented less than 1% of its total sales volume andless than 2% of its net sales for the year.

 

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*Sales and Marketing*.  GIMSA sellspackaged corn flour in bulk principally to thousands of small tortilla andtortilla chip manufacturers, or *tortillerías,*which purchase in 20-kilogram sacks and produce tortillas on their premises forsale to local markets.  Additionally,GIMSA sells packaged corn flour in the retail market, which purchases inone-kilogram packages.

 

The following table sets forth GIMSA’s bulk and retail sales volumes ofcorn flour, tortilla sales volume and other products for the periods indicated.

 
| ** **  | ** ** | **Year Ended December 31,** | ** ** |
|-------------|------------|----------------------------------|------------|
| ** **  | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **  | ** ** | **Tons**                         | ** ** | **%** | ** ** | **Tons** | ** ** | **%** | ** ** | **Tons** | ** ** | **%** | ** ** |
| Corn  Flour |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Bulk        |       | 1,330,123                        |       | 77 |   | 1,352,109 |   | 77 |   | 1,417,550 |   | 78 |   |
| Retail      |       | 262,551                          |       | 15 |   | 265,825 |   | 15 |   | 268,091 |   | 15 |   |
| Tortillas   |       | 15,069                           |       | 1 |   | 3,710 |   | — |   | — |   | — |   |
| Other       |       | 126,398                          |       | 7 |   | 131,716 |   | 8 |   | 131,930 |   | 7 |   |
| Total       |       | 1,734,141                        |       | 100 |   | 1,753,360 |   | 100 |   | 1,817,571 |   | 100 |   |

 

Retail sales of corn flour are channeled to two distinct markets:  urban centers and rural areas.  Sales to urban consumers are made mostlythrough supermarket chains that use their own distribution networks todistribute MASECA® flour or through wholesalers who sell theproduct to smaller grocery stores throughout Mexico.  Sales to rural consumers are made principallythrough the Mexican government’s social and distribution program *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 inour opinion, the relatively inefficient wet corn dough method of tortillaproduction.  We estimate that thetraditional wet corn dough method accounts for approximately half of alltortillas produced in Mexico.  Tortillaproducers that do not utilize corn flour buy the wet dough from dough producersor buy and mill their own corn and produce tortillas themselves.

 

This traditional method is a rudimentary practice requiring moreenergy, time and labor because it involves cooking the corn in water and withlime, milling the cooked corn, creating and shaping the dough, and then makingtortillas from that dough.  We pioneeredthe dry corn flour method in which we mill the raw corn in our facilities intocorn flour.  Tortilla producers andconsumers, once they acquire the corn flour, may then simply add water totransform 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 andlabor.  We estimate that one kilogram ofcorn processed through the corn flour method yields more tortillas on averagethan a similar amount of corn processed using the traditional method.  Corn flour is also transported more easily andunder 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 flour method and, thus also,believe that we have substantial opportunities for growth by encouraging atransition to our method.  Corn flour isprimarily used to produce corn tortillas, a principal staple of the Mexicandiet.  The tortilla industry is one ofthe largest industries in Mexico as tortillas constitute the single largestcomponent of Mexico’s food industry. However, there is still reluctance to abandon traditional practice,particularly in central and southern Mexico, because corn dough producersand/or tortilla producers using the traditional method incur lower expenses byworking in an informal economy. Additionally, such producers are generally not required to comply withenvironmental regulations, which also represent savings for them.  To the extent regulations in Mexico areenforced and we and our competitors are on the same footing, we expect tobenefit from these developments.

 

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GIMSA has embarked on several programs to promote corn flour 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 inmaking the transition to corn flour, GIMSA also sells specially designed mixersmade by Tecnomaíz, S.A. de C.V., or Tecnomaíz, one of our research anddevelopment subsidiaries.  For moreinformation about our research and development department, see “—Miscellaneous—INTASA—Technologyand Equipment Operations.”  GIMSA also helps its *tortillería*customers to improve sales by directing consumer promotions to heighten thedesirability of their products and increase consumption, which, in turn, shouldincrease corn flour sales and our brand equity.  These efforts to improve sales and strengthenour brand equity by better positioning us among consumers, include prime timeadvertising on television as well as radio, magazine and billboardadvertising.  From time to time, thecompany undertakes the following ongoing initiatives in an effort to improveoperational efficiency, increase consumption of corn flour, and improve on itssuccessful business model to attract new customers:

 

·                  design of individualized support regarding the type of machineryrequired for their business, financial advisory and training;

 

·                  assistance to customers in the development of new profitabledistribution methods to increase their market penetration and sales;

 

·                  development of tailored marketing promotions to increase consumption incertain customer segments; and

 

·                  assistance to customers in the development of new higher marginproducts such as tortilla chips, taco shells and enchilada tortillas,reflecting current consumption trends.

 

GIMSA engages in anongoing national marketing campaign in Mexico to emphasize the benefits andnutritional value of tortillas made with 100% MASECA® corn flour.  This campaign targets 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 productwhich can 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.

 

*Competition and Market Position*. GIMSA faces competition on three levels—from other corn flour producers,from sellers of wet corn dough and fromthe many *tortillerías* that produce their own wet corn dough on their premises.  Our estimates indicate that about half oftortilla producers continue to use the traditional wet corn dough method.

 

GIMSA’s biggest challenge in increasing its market share is theprevalence of the traditional method.  Inthe corn flour industry, GIMSA’s principal competitors are Grupo Minsa, S.A. deC.V. and a few regional corn flour producers. OPTIMASA, a subsidiary of Cargill de México, built a corn flour plantand began to offer corn flour in the central region of Mexico, thereforebecoming a new competitor for GIMSA since 2005. We compete against other corn flour manufacturers on the basis ofquality, brand recognition, technology, customer service and nationwidecoverage.  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, all of which are locatedthroughout Mexico, typically within corn growing regions and those of largetortilla consumption.  Two of theseplants resulted from GIMSA’s acquisition of 100% of the capital stock ofAgroinsa, a company based in Monterrey,

 

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Mexico, in August 2005.  Even though the two plants operated during2005, GIMSA decided to relocate their production to other GIMSA plants toincrease production efficiency.  TheCelaya plant permanently ceased operations on December 1, 2005 and theMonterrey plant permanently ceased corn flour operations on April 1, 2006,but still produces wheat flour and other products.  In 2007, GIMSA decided to divest its smalltortilla operations and sold it to third parties.  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’scapital expenditures were primarily used to update technology and corn flourproduction process and to a lesser extent for acquisitions.  In 2006, GIMSA began capacity expansions atits Mérida and Mexicali plants.  GIMSAspent U.S.$67 million, for these purposes from 2006 to 2008.  GIMSA currently projects total capitalexpenditures during 2009 of approximately U.S.$21 million, which will be usedprimarily for upgrading production equipment and acquiring transportationequipment.  As of December 31, 2008,on average, the size of our plants measured in square meters was approximately20,315 (approximately 218,700 square feet).

 

Pursuant to an agreement between GIMSA and *Investigaciónde Tecnología Avanzada*, or INTASA, our wholly-owned subsidiary,INTASA provides technical assistance to each of GIMSA’s operating subsidiariesfor which each pays to INTASA a fee equal to 0.5% of its consolidated netsales.  Each of GIMSA’s corn flourfacilities uses proprietary technology developed by our technology andequipment operations.  For moreinformation about our in-house technology and design initiatives, see “—Miscellaneous—INTASA—Technologyand Equipment Operations.”

 

*Seasonality. *The demandfor corn flour varies slightly with the seasons.  After the May/June and December harvests,when corn is more abundant and thus less expensive, tortilla producers are moreinclined to purchase corn and use the traditional method.  In the months immediately preceding suchharvests, corn is more costly and in shorter supply and more tortilla producersthen employ the corn flour method of production.

 

*Raw Materials*.  Corn is theprincipal raw material required for the production of corn flour, andconstituted approximately 56% of GIMSA’s cost of sales for 2008.  We purchase corn primarily from Mexicangrowers and grain elevators, and from world markets at international pricesunder 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.  Compañía Nacional Almacenadora,S.A. de C.V., a subsidiary of GIMSA, contracts for and purchases the corn, andalso monitors, selects, handles and ships the corn.

 

We believe that the diverse geographic locations of GIMSA’s productionfacilities in Mexico enables GIMSA to achieve savings in raw materialtransportation 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 to be higher thanthose abroad, and typically follow trends in the international market only whencorn prices are increasing.  During mostperiods, the price at which GIMSA purchases corn depends on the internationalcorn market.  As a result, corn pricesare sometimes unstable and volatile. ** **For more information regarding thegovernment’s effect on corn prices, see “Item 4.  Information on the Company—Regulation.”

 

Since the end of 2006, the price of corn set by the Chicago Board ofTrade and the average price of Mexican corn increased dramatically due to anumber of factors, including the increased use of corn in the manufacture ofethanol, a substitute for gasoline, as well as other bio-fuels.  Consequently, the price of corn flour andcorn tortillas, the main food staple in Mexico, increased due to such increasesin the international and domestic prices of corn.  In order to stabilize the price of tortillasand provide Mexican families with a consistent supply of corn, corn flour andtortillas at a reasonable price, the Mexican government promoted two agreementsamong the various parties involved in the corn-corn flour-tortilla productionchain.  The first agreement was effectivefrom

 

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January 15, 2007 through April 30,2007.  On April 25, 2007, theMexican government announced a second agreement that extended the provisions ofthe first agreement through August 15, 2007.  The term of the second agreement was extendedsubsequently through December 31, 2007. Although the second agreement expired at the end of 2007, the parties tothat agreement voluntarily continued to operate under its terms until October 2008.

 

Upon the expiration of the abovementioned agreements, the Mexicangovernment created a program to support the corn flour industry (*Programa de Apoyo a la Industria de la Harina de Maíz*orPROHARINA). This program aims to mitigate the impact of the rise ininternational corn prices through price supports designed to aid the consumerand provided through the corn flour industry. The total amount of subsidizedfunds allotted to the Company by the Mexican government under this program in2008 totaled Ps.1,271 million. To the extent that this or other similarprograms are cancelled by the Mexican government, we may be required toincrease the prices of our products to reflect such additional costs. There canbe no assurance that we will maintain our eligibility for PROHARINA subsidies,or that the Mexican government will not institute price controls or otheractions on the products we sell, which could adversely affect our financialcondition and results of operations. See “Item 4.  Information on the Company - Regulation -Corn Flour Consumer Aid Program.”

 

In addition to corn, the other principal materials andresources used in the production of corn flour are packaging materials, water,lime, additives and energy.  GIMSAbelieves that its sources of supply for these materials and resources areadequate, although energy, additives and packaging costs tend to be volatile.

 

*Distribution*.  GIMSA’sproducts are distributed through independent transport firms contracted byGIMSA.  Most of GIMSA’s sales are madefree-on-board at 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—Wheat Flour Operation***

*** ***

*Principal Products*.  In 1996, inconnection with our association with Archer-Daniels-Midland, we entered thewheat milling market in Mexico by acquiring a 60% ownership interest inArcher-Daniels-Midland’s wheat flour operation, Molinera de México.  Molinera’s main product is wheat flour,although it also sells wheat bran and other byproducts.  Our wheat flour brands are REPOSADA®, PODEROSA® and SELECTA®,among others.

 

*Sales and Marketing*.  In 2008,approximately 89% of Molinera’s wheat flour production was sold in bulk and 11%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 customer and region.  Overall, our aim is to offer productsaccording to customers’ specifications as well as technical support.  We are trying to increase our market share inbakeries 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’s largest wheat flour producers basedon revenues and sales volume.  Molinerade México competes with many small wheat flour producers.  We believe the wheat flour industry is highlyfragmented and estimate that there are about 90 participants.  Our main competitors are Altex, Trimex, Tablex,La Espiga , Elizondo, and Anáhuac.

 

*Operations and Capital Expenditures.* We own and operate 9 wheat flour plants, including one of which we holdonly a 40% ownership interest.  Thefacilities’ average extent of utilization is estimated at 77% for 2008.  On average, the size of our plants measuredin square meters is approximately 11,300 (approximately 121,200 square feet) asof December 31, 2008.

 

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Capital expenditures from 2006 through 2008 amounted to U.S.$12million.  Molinera de México’s capitalexpenditures in 2009 are projected to be U.S.$4 million, which will be usedprimarily for general upgrades.

 

*Seasonality.*  Molinera’s sales are seasonal in that highersales volumes are achieved in the fourth and first quarters during the winter,when we believe per capita consumption of wheat-based products, especiallybread and cookies, increases due in part to the celebration of holidaysoccurring during these quarters.

 

*Raw Materials. *Wheat isthe principal raw material required for the production of wheat flour.  Molinera de México purchases approximately45% of its wheat from Mexican growers, and 55% 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 madeapproximately two months in advance of the beginning of the harvest.  In the case of imported wheat, which weimport from the United States and Canada through several trading companies,purchases are made based on short-term requirements, with the aim ofmaintaining low levels of inventories.

 

In recent years the price of wheat domestically andabroad has been volatile.  Volatility isdue to the availability of wheat, which depends on various factors includingthe size of the harvest (which depends in large part on the weather).

 

**Central AmericanOperations**

** **

***Overview***

*** ***

In 1972, we entered the Costa Rican market.  Our operations since then have expanded intoGuatemala, Honduras, El Salvador, Nicaragua, and Ecuador.

 

***Gruma Centroamérica***

*** ***

*Principal Products*.  GrumaCentroamérica produces corn flour, and to a lesser extent tortillas andsnacks.  We also cultivate and sellhearts of palm and process and sell rice. We believe we are one of the largest corn flour producers in theregion.  We sell corn flour under theMASECA®, TORTIMASA®,MASARICA® and MINSA® brands. In Costa Rica, we sell packaged tortillas under the TORTI RICA® and MISIÓN®brands.  We operate a Costa Rican snackoperation which manufactures tortilla chips, potato chips and similar productsunder the TOSTY® and RUMBA®  brand. Hearts of palm are exported to numerous European countries as well asthe United States, Canada, Chile and México.

 

*Sales and Marketing*.  The largestportion, 174,155 tons or 82%, of Gruma Centroamérica’s salesvolume in 2008 derived from the sale of corn flour.

 

Gruma Centroamérica corn flour bulk sales are oriented predominantly tosmall tortilla manufacturers through direct delivery and wholesalers.  Supermarkets make up the customer base forretail corn flour.  Bulk sales volumerepresented approximately 68% and retail sales represented approximately 32% of Gruma Centroamérica’s cornflour sales volume during 2008.

 

*Competition and Market Position*. We believe that we are one the largest corn flour producers in CentralAmerica based on revenues and sales volume. We believe that there is significant potential for growth in CentralAmerica as corn flour is used in only approximately 16% of all tortillaproduction; the majority of tortilla manufacturers use the wet corn doughmethod.  Additionally, we believe we areone of the largest producers of tortillas, and snacks in Costa Rica.

 

Within the corn flour industry, our main competitors are Del Comal,Gumersal, Bachazo and Instamasa. However, one of our main growth potentials is to convert tortillamanufacturers that still use the traditional method to our corn flour method.

 

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*Operations and Capital Expenditures. *We had an annual installed production capacity of307,000****tons for corn flour and other productsas of December 31, 2008, with an average utilization of approximately 57%during 2008.  We operate one corn flourplant in Costa Rica, Honduras, El Salvador, and two plants in Guatemala for atotal of five plants throughout the region. In Costa Rica, we also have one plant producing tortillas, one plantproducing snacks, one plant processing hearts of palm and one plant processingrice.  In Nicaragua we have one smalltortilla plant and in Ecuador we lease a facility which processes hearts ofpalm.  On average, the size of our plantsmeasured in square meters is approximately 73,900****(approximately243,000 square feet) as of December 31, 2008.

 

During 2006, 2007 and 2008 most of ourcapital expenditures were oriented to technology upgrades, the expansion of acorn flour plant in Honduras, the acquisition of a corn flour plant inGuatemala and administrative offices in Costa Rica.  Total capital expenditures for the past three yearswas approximately U.S.$49****million.  Capital expenditures for 2009 are projectedto be U.S.$5 million, which will be used primarily for the conclusion of theexpansion of the corn flour plant in Honduras, the construction of silos inGuatemala and Costa Rica.

 

*Seasonality.*  Typically, corn flour sales volume is lowerduring the second quarter of the year due to higher availability and lowerprices of corn.  Most of our productssales increase during the fourth quarter as demand is higher during theholidays.

 

*Raw Materials*.  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 do not restrict corn import permits granted by the United States.  Price fluctuation and volatility are subjectto domestic conditions, such as annual crop results and internationalconditions.

 

**Gruma Venezuela**

** **

***Overview***

*** ***

In 1993, we entered the Venezuelan corn flour industrythrough a participation in DEMASECA, a corn flour company in Venezuela.  In August 1999, we acquired 95% of DAMCAInternational Corporation, a Delaware corporation which owned 100% of MONACA,Venezuela’s second largest corn and wheat flour producer at that time, forapproximately U.S.$94 million. Additionally, Archer-Daniels-Midland acquired the remaining 5% interestin MONACA.

 

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 12, 2009, we hadreceived U.S.$39.6 million dollars of this amount, delivering an indirectinterest of 24.14% of MONACA. The total payment of the sale price and the respectivedelivery of our interests in MONACA is expected to be completed in December 2009.Notwithstanding the foregoing, the purchaser will not have voting or othercorporate rights with respect to any unpaid interests until the correspondingpurchase price is paid. In addition to such transaction, we agreed to: (i) purchasean additional 10% ownership interest in DEMASECA at a price of U.S.$2.6million; (ii) purchase from Archer-Daniels-Midland a 2% stake in MONACA ata price of U.S.$3.28 million, and; (iii) sell to Archer-Daniels-Midland a3% interest in DEMASECA at a price of U.S.$0.78 million. Upon completion ofthese transactions, we will indirectly own a 57% interest, our partner will owna 40% interest and Archer-Daniels-Midland will own a 3% interest in each ofDEMASECA and MONACA. DEMASECA and MONACA are collectively referred to as “GrumaVenezuela.”

 

***DEMASECA and MONACA***

*** ***

*Principal Products*.  GrumaVenezuela produces and distributes corn flour as well as wheat flour, rice,oats and other products.  We sell cornflour under the brand names JUANA®,TIA BERTA®, DECASA®,LIGERINA® and DEMASA®.  We sell wheat flour under the ROBIN HOOD®, FLOR DE TRIGO® and POLAR® brand, rice under the MONICA® brand and oatsunder the LASSIE® brand.

 

*Sales and Marketing. *Venezuelans use corn flour to produce and consume *arepas*, which are made at home or in restaurants forhousehold consumption rather than manufactured by specialty shops or otherlarge manufacturers.  In 2008, we soldcorn flour only in the retail market in one kilogram bags to independentdistributors, supermarkets, wholesalers, and governmental social welfare anddistribution programs.  We also sell

 

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wheat flour both in bulk and retailer, distributing itin 45 kilogram bags and in one kilogram bags, respectively.  Bulk sales to customers such as bakeries madeup approximately 76.6% of our total wheat flour sales volume in 2008.  The remaining 23.4% of sales in 2008 were inthe retail market, which includes independent distributors, supermarkets andwholesalers.

 

*Competition and Market Position*. With the MONACA acquisition in 1999, we significantly increased our shareof the corn flour market and entered the wheat flour market.  We believe we are one of the largest cornflour and wheat flour producers in Venezuela.

 

In corn flour, our main competitor is Alimentos Polar, and, to a lesserextent, Industria Venezolana Maizera PROAREPA, Asoportuguesa and La Lucha.  In wheat flour, our principal competitor isCargill.

 

*Operation and Capital Expenditures*. We operate six corn flour plants, five wheat flour plants, three riceplants, one pasta plant, and two plants that produce oats and spices inVenezuela with a total annual production capacity of 823,485 tons as of December 31,2008 and an average utilization of approximately 62% during 2008.  The corn flour plant, which was considered astemporarily idle as of Decembre 31, 2007, was used for the construction of awheat flour mill. However, two rice plants, representing 93,620 tons, aretemporarily idle.  On average, the sizeof our plants measured in square meters is approximately 9,300****(approximately 100,500 square feet) as of December 31,2008.

 

Capital expenditures for the past three years were U.S.$36****million.  Capitalexpenditures for 2009 are expected to be U.S.$14 million and are expected to befocused on the construction of a wheat flour mill and upgrades for manufacturingand information technologies.

 

*Seasonality. *Sales fluctuate seasonally as demand for flour-based products is lowerduring those months 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.

 

*Raw Materials*.  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 93.4% of our wheat is purchased from the U.S. and Canada,5.2% from Argentina, and the remaining 1.4% from Germany, with its availabilityand price volatility dependent upon those markets.  We do not engage in any type of hedgingactivity for our supplies since exchange rate policies and country risk forVenezuela constrain our capacity to transfer funds abroad in order to fund anyhedging strategy.

 

**Miscellaneous—INTASA—Technologyand Equipment Operations**

 

We have had our own technology operations since our founding.  Since 1976 our technology and equipmentoperations have been conducted principally through INTASA, which has twosubsidiaries:  Tecnomaíz, S.A. de C.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® and BATITEC® 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 proprietary technological research anddevelopment for corn milling and tortilla production as well as allengineering, plant design and construction through INTASA and CIASA.  These companies administer and supervise thedesign and construction of our new plants and also provide advisory servicesand training to employees of our corn flour and tortilla manufacturingfacilities.  We manufacture corntortilla-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.

 

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***GFNorte Investment***

*** ***

As of December 31, 2008, we held approximately8.8% of the outstanding shares of GFNorte, a Mexican financial services holdingcompany and parent of Banco Mercantil del Norte, S.A., or Banorte, a Mexicanbank.  As of the same date, ourinvestment in GFNorte represented approximately 7.4% or Ps.3,299****million of our total assets. In accordance with MexicanFRS, GFNorte’s results of operations are accounted for in our consolidatedresults of operations using the equity method of accounting.

 

**REGULATION**

** **

**Mexican Regulation**

** **

***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 Incentives andServices Agency (*Apoyos y Servicios a la ComercializaciónAgropecuaria*, or ASERCA), has implemented a program designed topromote corn sales in certain regions of Mexico.  The program includes the following objectives:

 

***·***                              Support corn growers bysetting target prices and paying the difference versus market price.

*** ***

***·***                              Support corn growers byproviding economic support to reduce the cost of raw materials required forcorn crops.

*** ***

***·***                              Support a portion of thefreight expenses related to the distribution of corn surpluses to regions awayfrom the corn growing area in seasons when there is a surplus.  This support for freight expenses applies toany corn buyer that can prove that the purchased corn will be consumed inregions where there is no corn available and that are distant from the regionswhere corn is grown.

*** ***

***To theextent that this or other similar programs are cancelled by the Mexicangovernment, we may be required to incur additional costs in purchasing corn forour operations, and therefore we may need to increase the prices of ourproducts to reflect such additional costs.***

*** ***

***Corn Flour Consumer Aid Program***

*** ***

Since the end of 2006, the price of corn set by the Chicago Board ofTrade and the average price of Mexican corn increased dramatically due to anumber of factors, including the increased use of corn in the manufacture ofethanol, a substitute for gasoline, as well as other bio-fuels.  Consequently, the price of corn flour and corntortillas, the main food staple in Mexico, increased due to such increases inthe international and domestic prices of corn. In order to stabilize the price of tortillas and provide Mexicanfamilies with a consistent supply of corn, corn flour and tortillas at areasonable price, the Mexican government promoted two agreements among thevarious parties involved in the corn-corn flour-tortilla production chain.  The first agreement was effective from January 15,2007 through April 30, 2007.  On April 25,2007, the Mexican government announced a second agreement that extended theprovisions of the first agreement through August 15, 2007.  The term of the second agreement was extendedsubsequently through December 31, 2007. Although the second agreement expired at the end of 2007, the parties tothat agreement voluntarily continued to operate under its terms until October 2008.

 

Upon the expiration of the abovementioned agreements, the Mexicangovernment created a program to support the corn flour industry (*Programa de Apoyo a la Industria de la Harina de Maíz*orPROHARINA). This program aims to mitigate the impact of the rise ininternational corn prices through price supports designed to aid the consumerand provided through the corn flour industry. Flour manufacturers are entitledto receive a subsidy conditioned on selling the corn flour below a maximumprice set by the Mexican government. To the extent that this or other similarprograms are cancelled by the Mexican government, we may be required toincrease the prices of our products to reflect such additional costs.

 

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Since June 2008 the maximum price established to receive the priceaid was Ps.5.45 per kilogram of corn flour. The total amount of subsidizedfunds allotted to the Company by the Mexican government under this program in2008 totaled Ps.1,271 million. For 2009, the maximum price for corn flour underPROHARINA has been set at Ps.5.875 per kilogram.

 

There can be no assurance that there will be another extension of theaforementioned agreements, that we will continue selling our corn flour inMexico below Ps.5.875 per kilogram, maintaining our eligibility for PROHARINAsubsidies, or that the Mexican government will not institute price controls orother actions on the products we sell, which could adversely affect ourfinancial condition and results of operations.

 

***Environmental Regulations***

*** ***

Our Mexican operations are subject to Mexican federal, state andmunicipal 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 all material respects withall 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 new environmentalregulations are issued in Mexico, we may be required to incur additionalremedial capital expenditures to comply. Management is not aware of any pending regulatory changes that wouldrequire additional remedial capital expenditures in a significant amount.

*** ***

***Competition Regulations***

*** ***

The *Ley Federal de Competencia Económica* or**Mexican Competition Law, and the *Reglamentode la Ley Federal de Competencia Económica*or Regulations of theMexican Competition Law, regulate monopolies and monopolistic practices, andrequire the Mexican government approval for certain mergers andacquisitions.  The Mexican CompetitionLaw grants the government the authority to establish price controls forproducts and services of national interest qualified as such by Presidentialdecree, and established the *Comisión Federal deCompetencia*, or Federal Competition Commission, to enforce thelaw.  Mergers and acquisitions and othertransactions that may restrain trade or that may result in monopolistic oranti-competitive practices or combinations must be approved by the FederalCompetition Commission.  The MexicanCompetition Law may potentially limit our business combinations, mergers andacquisitions and may subject us to greater scrutiny in the future in light ofour market presence, although it has had little effect on our operations, andwe do not believe that this legislation will have a material adverse effect onour existing or developing business operations.

 

**U.S. Federal and StateRegulations**

** **

Gruma Corporation is subject to regulation by variousfederal and state agencies, including the Food and Drug Administration, theOccupational Safety and Health Administration, the Federal Trade Commission,the Environmental Protection Agency and the Texas Department of Agriculture.  We believe that we are in compliance in allmaterial respects with all environmental and other legal requirements.  Our food manufacturing and

 

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distribution facilitiesare subject to periodic inspection by various public health agencies, and theequipment utilized in these facilities must generally be governmentallyapproved prior to operation.

 

**European Regulation**

** **

We are subject to regulation in each country in whichwe operate in Europe.  We believe that weare currently in compliance with all applicable legal requirements in allmaterial respects.

 

**Central American andVenezuelan Regulation**

** **

Gruma Centroamérica and Gruma Venezuela are subject toregulation in each country in which they operate.  We believe that Gruma Centroamérica and GrumaVenezuela are currently in compliance with all applicable legal requirements inall material respects.

 

**Asia and OceaniaRegulation**

** **

We are subject to regulation in each country in whichwe operate in Asia and Oceania.  Webelieve that we are currently in compliance with all applicable legalrequirements in all material respects.

 

**ITEM 4A.****                                           ****Unresolved Staff Comments. **Not applicable.

 

## **ITEM 5.**                                                     Operating and Financial Review andProspects.

## ** **

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

** **

*You should read the following discussion inconjunction with our financial statements and the notes thereto containedelsewhere herein,**which have been prepared assuming that we willcontinue as a going concern. As discussed in Note 2 to the consolidatedfinancial statements, our significant liabilities arising from derivativefinancial instruments raise substantial doubt about our ability to continue asa going concern. Management’s plans concerning these matters are also discussedin Notes 2 and 20 to the consolidated financial statements. The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.  Ourfinancial statements have been prepared in accordance with Mexican FRS, whichdiffer in some significant respects from U.S. GAAP.  See Note 21 to our financial statements forinformation related to the nature and effect of such differences and aquantitative reconciliation to U.S. GAAP of our majority net income andstockholders’ equity.  For moreinformation about our financial statements in general, see “Presentation ofFinancial Information” and “—Liquidity and Capital Resources—Indebtedness.”*

 

**Overview ofAccounting Presentation**

** **

Mexican FRS requires that financial statements recognize the effects ofinflation based on theeconomic environment of the country in accordance with MFRS B-10 and B-15issued by CINIF.  Unless otherwise statedherein, the financial statements and other financial data in this Annual Reportas of December 31, 2008 have been prepared based on the modifiedhistorical cost model, as described in Note 2-E to our financial statements, whileprior periods have been restated in pesos of constant purchasing power as of December 31,2007.

 

***Effects of Inflation***

*** ***

As the Mexican economyexperienced significant levels of inflation prior to 2000, we were required underMexican accounting BulletinB-10 “Accounting recognition of the effects ofinflation on financial information”, in effect until December 31, 2007 torecognize the effects of inflation in our financial statements presenting ourfinancial information in inflation adjusted monetary units to allow for moreaccurate comparisons of financial line items over time and to mitigate thedistortive effects of inflation on our financial statements.

 

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Starting January 1,2008, we adopted the provisions contained in the new MFRS B-10 “Effects ofInflation,” which  replaced Mexicanaccounting Bulletin B-10. This standard establishes the guidelines for recognizing the effects ofinflation based on the inflationary environment of the country. According tothe provisions of MFRS B-10, an inflationary environment is present whencumulative inflation of the three preceding years is 26 percent or more, inwhich case, the effects of inflation must be recognized in the financialstatements.  Based on MFRS B-10, the economic environment in Mexico in 2008 has been qualifiedas non-inflationary due to a cumulative inflation in the preceding three fiscalyears of 11.56%.  In addition, MFRS B-10eliminates the replacement cost and specific indexation methods for inventoriesand fixed assets, respectively, and requires that the cumulative gain or lossfrom holding non-monetary assets be reclassified to retained earnings, if suchgain or loss is realized; the gain or loss that is not realized will bemaintained in stockholders’ equity and charged to current earnings of the  period in which the originating item isrealized. Accordingly, the financial statements as of December 31, 2008have been presented based on nominal Mexican pesos while prior periods areexpressed in constant Mexican pesos, as of December 31, 2007 (that is,effects of transactions recognized as of December 31, 2007 are expressedin Mexican pesos of constant purchasing power at that date, and the effects oftransactions that occurred after that date are expressed in nominal Mexicanpesos).

 

Starting January 1, 2008, the Company adopted theprovisions contained in the new MFRS B-15 “Foreign Currency Translation.” Basedon the new standard, the financial statements of the foreign subsidiaries aretranslated to Mexican pesos depending on the economic environment in which thesubsidiary operates, as follows:

 

Non-inflationary economic environment:

 

·                  As of December 31, 2008, assets and liabilitiesare translated to Mexican pesos using the year-end exchange rate of Ps.13.83 tothe U.S. dollar.

 

·                  As of December 31, 2007, stockholders’ equity wastranslated to Mexican pesos using the exchange rate at that date, whereas thetransactions of the year 2008 were translated by applying the exchange rate ineffect at the dates on which the stockholders’ contributions were made andincome was generated. The average exchange rate was Ps.11.21.

 

·                  Revenues, costs and expenses for the year 2008 aretranslated to Mexican pesos using the historical exchange rate. The averageexchange rate was Ps.11.21.

 

·                  The effects of translation are recognized as acomponent of stockholders’ equity entitled “Foreign currency translationadjustments”.

 

Inflationary economic environment:

 

Financial statements are restated following theprovisions of MFRS B-10, applying the price index of the foreign country whichreflects the change in purchasing power of the currency in which the subsidiaryreports. Afterwards, the financial statements are translated to Mexican pesosas follows:

 

·                  As of December 31, 2008, assets, liabilities andstockholders’ equity are translated to Mexican pesos using the year-endexchange rate of Ps.13.83.

 

·                  Revenues, costs and expenses for the year 2008 aretranslated to Mexican pesos using the year-end exchange rate of Ps.13.83.

 

·                  The changes are recognized by the Company as acomponent of stockholders’ equity entitled “Foreign currency translationadjustments”

 

***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

 

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depreciates against theU.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 peso appreciatesagainst the dollar, Gruma Corporation’s net sales in U.S. dollars represent asmaller portion of our net sales in peso terms than when the peso depreciatesagainst the dollar.  For a description ofthe 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 2006, we recorded a net foreignexchange loss of Ps.19 million.  During2007, we recorded a net foreign exchange gain of Ps.72 million.  During 2008, we recorded a net foreignexchange gain of Ps.256 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 FRS as issued by the Mexican Financial Reporting Standards Board.  A reconciliation from Mexican FRS to U.S.GAAP of majority net income and total stockholders’ equity is included in Note21****to our consolidated financialstatements.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements, aswell as the reported amounts of revenues and expenses during the reportingperiod.

 

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 ofoperations.  These policies are outlinedbelow.

 

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 our property, plant and equipment over their respectiveestimated useful lives.  Useful lives arebased on management’s estimates of the period that the assets will remain inservice and generate revenues.  Estimatesare based on independent appraisals and the experience of our technicalpersonnel.  To the extent that ourestimates are incorrect, our periodic depreciation expense or carrying value ofour assets may be impacted.

 

We evaluate any event orchange in circumstances that indicate that the book value of our property, plantand 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 are no longerdepreciated or amortized.

 

The estimates of cashflows take into consideration expectations of future macroeconomic conditionsas well as our internal strategic plans. Therefore, inherent to the estimated future cash flows is a certainlevel of uncertainty which we have considered in our valuation; nevertheless,actual future results may differ.

 

Primarily as a result of plant rationalization, certain facilities andequipment are not currently in use in operations.  We have recorded impairment losses related tocertain of those assets and additional losses may potentially occur in thefuture if our estimates are not accurate and/or future macroeconomic conditionsdiffer significantly from those considered in our analysis.

 

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***Goodwill and OtherIntangible Assets***

 

Intangible assets with definite lives are amortized on a straight-linebasis over estimated useful lives. Goodwill and indefinite-lived intangible assets are no longer amortized,but are subject to impairment tests either annually or earlier in the case of atriggering event.

 

A key component of the impairment test is the identification ofreporting units and the allocation of goodwill to such reporting unit.  A reporting unit is constituted by a group ofone or more cash generating units. Estimates of fair value are primarily determined using discounted cashflows.  Cash flows are discounted atpresent value and an impairment loss is recognized if such discounted cashflows are lower than the net book value of the reporting unit.

 

These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and also the magnitude of anysuch charge.  We perform internalvaluation analyses and consider relevant internal data as well as other marketinformation that is publicly available.

 

This approach uses significant estimates and assumptions includingprojected future cash flows (including timing), a discount rate reflecting therisk inherent in future cash flows and a perpetual growth rate.  Inherent in these estimates and assumptionsis a certain level of risk which we believe we have considered in ourvaluation.  Nevertheless, if futureactual results differ from estimates, a possible impairment charge may berecognized in future periods related to the write-down of the carrying value ofgoodwill and other intangible assets.

 

***Deferred Income Tax andFlat Rate Business Tax***

 

Under both Mexican FRSand U.S. GAAP, we record deferred income tax and flat rate business tax assetsand liabilities using enacted tax rates for the effect of temporary differencesbetween the book and tax basis of assets and liabilities.  If enacted tax rates change, we adjust thedeferred tax assets and liabilities through the provision for income tax andflat rate business tax in the period of change, to reflect the enacted tax rateexpected 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.

 

***DerivativeFinancial Instruments***

 

We use derivative financial instruments in the normal course of business,primarily to hedge certain operational and financial risks to which we areexposed, including without limitation:  (i) future and options contracts forcertain key production requirements like natural gas, heating oil and some rawmaterials such as corn and wheat, in order to minimize the cash flowvariability due to price fluctuations; (ii) interest rate swaps, with thepurpose of managing the interest rate risk related to our long-term debt; and (iii) exchangerate contracts (mainly Mexican peso — U.S. dollar and in other currencies).

 

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 notdesignated as an accounting hedge are recognized at fair value, with changes infair value recognized currently in income.

 

We measure the fair valueof the derivative financial instruments based on market prices, when available.When market prices are not available, we estimate the fair value of derivativefinancial instruments using the income approach. The income approach usesdiscounted cash flow projections. We use observable or market-corroborated inputssuch as exchange rates, volatility and interest rate yield curves. Alsoincluded in the determination of the fair value of the Company’s liabilitypositions is the Company’s own credit risk, which has been designated as anunobservable input.

 

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Many of the factors usedin measuring fair value are outside the control of management, and theseassumptions and estimates may change in future periods. Changes in assumptionsor estimates may materially affect the fair value measurement of derivativefinancial instruments.

 

**Factors Affecting Financial Condition and Results ofOperations**

** **

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

 

·                  the level of demand for tortillas, corn flour andwheat flour;

 

·                  the effects of government polices on imported anddomestic corn prices in Mexico;

 

·                  the cost and availability of corn and wheat;

 

·                  the cost of energy and other relatedproducts;

 

·                  our acquisitions, plant expansions anddivestitures;

 

·                  the effect of government initiatives andpolicies, in particular on price controls and cost of grains in Venezuela; and

 

·                  the effect from variations on interestrates and exchange rates.

 

**RESULTSOF OPERATIONS**

 

The following table sets forth our consolidated incomestatement data on a Mexican FRS basis for the years ended December 31,2006, 2007 and 2008, expressed as a percentage of net sales.  All financial information has been preparedunder the MFRS B-15 methodology.  For adescription of the method, see “Presentation of Financial Information” and “—Overviewof Accounting Presentation.”

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2008** | ** ** |
| **Income Statement Data**                    |       |                             |       |   |   |   |   |
| Net sales                                    |       | 100                              | %          | 100 | % | 100 | % |
| Cost of sales                                |       | 65.2                             |       | 67.5 |   | 67.5 |   |
| Gross profit                                 |       | 34.8                             |       | 32.5 |   | 32.5 |   |
| Selling, general and administrative expenses |       | 29.0                             |       | 27.2 |   | 25.2 |   |
| Operating income                             |       | 5.8                              |       | 5.2 |   | 7.3 |   |
| Net comprehensive financing cost             |       | (1.1                             | )          | 0.5 |   | (33.7 | ) |
| Other income (expenses), net                 |       | (0.2                             | )          | 1.6 |   | (0.4 | ) |
| Income taxes (current and deferred)          |       | 1.3                              |       | 2.6 |   | 1.0 |   |
| Other items                                  |       | 2.0                              |       | 2.0 |   | 1.4 |   |
| Minority interest                            |       | 0.3                              |       | 0.4 |   | 1.2 |   |
| Majority net (loss) income              |       | 5.0                              |       | 6.2 |   | (27.5 | ) |

 

The following table sets forth our net sales andoperating income as represented by our principal subsidiaries for 2006, 2007and 2008.  Net sales and operating incomeof our subsidiary PRODISA are part of “others and eliminations”.  Financial information with respect to GIMSAincludes sales of Ps.287 million,  Ps.404million and Ps.433 million in 2006, 2007 and 2008, respectively, in corn flourto Gruma Corporation, Gruma Centroamérica, Molinera de México and PRODISA.  Financial information with respect toMolinera de México includes sales of Ps.47million, Ps.55 million and Ps.72 million in 2006, 2007 and 2008,respectively, to GIMSA, Gruma Corporation and PRODISA; financial informationwith respect to PRODISA includes sales of Ps.66 million, Ps.65 million and Ps.77 in 2006, 2007 and 2008,respectively, in tortilla related products to Gruma Corporation.

 

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Financial informationwith respect to INTASA includes sales of Ps.945 million, Ps.794 million and Ps.869 million in 2006, 2007 and2008, respectively, in technological support to certain subsidiaries of Gruma,S.A.B. de C.V.  In the process ofconsolidation, all the aforementioned intercompany transactions are eliminatedfrom the financial statements.

 
| ** **                | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                | ** ** | **Net  Sales**                   | ** ** | **Operating  Income** | ** ** | **Net  Sales** | ** ** | **Operating  Income** | ** ** | **Net  Sales** | ** ** | **Operating  Income** | ** ** |
|                      | ** ** | **(in millions of pesos)**       | ** ** |
| Gruma Corporation         |       | Ps.                              | 16,170     |   | Ps. | 942 |   | Ps. | 17,406 |   | Ps. | 919 |   | Ps. |  19,356 |   | Ps. | 984 |   |
| GIMSA                     |       | 7,666                            |       | 854 |   | 9,012 |   | 786 |   | 9,142 |   | 1,318 |   |
| Gruma Venezuela           |       | 3,874                            |       | 119 |   | 3,862 |   | 58 |   | 8,727 |   | 830 |   |
| Molinera de  México  |       | 2,212                            |       | (87 | ) | 2,694 |   | 84 |   | 3,598 |   | 296 |   |
| Gruma  Centroamérica |       | 1,863                            |       | 65 |   | 2,076 |   | 91 |   | 2,949 |   | 59 |   |
| Asia and Oceanía     |       | 308                              |       | 6 |   | 823 |   | (33 | ) | 1,001 |   | (152 | ) |
| Others and eliminations   |       | 97                               |       | (27 | ) | (57 | ) | (31 | ) | 20 |   | (67 | ) |
| Total                     |       | Ps.                              | 32,190     |   | Ps. | 1,872 |   | Ps. | 35,816 |   | Ps. | 1,874 |   | Ps. |  44,793 |   | Ps. | 3,267 |   |

 

**Year Ended December 31, 2008 Compared with YearEnded December 31, 2007**

 

**(2007 figures are presented in pesos of constant purchasingpower as of December 31, 2007 and 2008 figures are based on modifiedhistorical cost model)**

 

***Consolidated Results***

 

GRUMA’ssales volume increased by 1% to 4,287 thousand metric tons in 2008 comparedwith 4,243 thousand metric tons in 2007. This increase was driven mainly byGIMSA and, to a lesser extent, Molinera de México. Net sales increased by 25%to Ps.44,793 million in 2008 compared with Ps.35,816 million in 2007. Theincrease was due primarily to Gruma Venezuela, Gruma Corporation, and, to alesser extent, Molinera de México and Gruma Centroamérica. Sales fromnon-Mexican operations constituted 71% of consolidated net sales in 2008compared to 67****% in 2007.

 

**Net Sales by Subsidiary:** By major subsidiary, the percentages of consolidatednet sales in 2008 and 2007 were as follows:

 
| ** **               | ** ** | **Percentage  of Consolidated Net Sales** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| **Subsidiary**           | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
| Gruma Corporation        |       | 43                                        | %          | 49 | % |
| GIMSA                    |       | 20                                        |       | 25 |   |
| Gruma Venezuela          |       | 19                                        |       | 11 |   |
| Molinera de México  |       | 8                                         |       | 7 |   |
| Gruma Centroamérica |       | 7                                         |       | 6 |   |
| Asia and Oceanía    |       | 3                                         |       | 2 |   |

 

Costof sales increased by 25% to Ps.30,237 million in 2008 compared with Ps.24,192million in 2007, due primarily to Gruma Venezuela, Gruma Corporation, and, to alesser extent, Molinera de México and Gruma Centroamérica. Cost of sales as apercentage of net sales remained flat at 67.5%.

 

Selling,general, and administrative expenses (SG&A) increased by 16% to Ps.11,289million in 2008 compared with Ps.9,750 million in 2007, due primarily to GrumaVenezuela, Gruma Corporation, and, to a lesser extent, Gruma Centroamérica.SG&A as a percentage of net sales improved to 25.2% in 2008 from 27.2% in2007, driven mainly by Gruma Venezuela, Gruma Corporation, and Molinera de México.

 

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GRUMA’soperating income increased by 74% to Ps.3,267 million in 2008 compared withPs.1,874 in  2007. Operating margin improvedto 7.3% in 2008 from 5.2% in 2007, due primarily to Gruma Venezuela, GIMSA,and, to a lesser extent, Molinera de México and Gruma Corporation.

 

Otherexpense, net, was Ps.181 million in 2008 compared with income of Ps.556 millionin 2007, which resulted primarily from a gain on the sale of Banorte sharesduring 2007.

 

Netcomprehensive financing cost was Ps.15,088 million in 2008 compared with incomeof Ps.167 million in 2007. The increase resulted mainly from losses on currencyderivative instruments of Ps.14,710 million. Out of this amount, Ps.3,480million was paid during 2008, and Ps.11,230 million is the non-cash loss thatrelates to the mark-to-market valuation of positions that were still open as ofDecember 31, 2008. Please also see “—Liquidity and CapitalResources—Indebtedness, and —Liquidity and Capital Resources—Market Risk.”

 

GRUMA’sequity in earnings of associated companies, net, primarily GFNorte, representedincome of Ps.618 million in 2008 compared with income of Ps.708 million in 2007.

 

Taxesdecreased 53% to Ps.435 million in 2008 compared with Ps.926 million in 2007.This decrease was due primarily to the aforementioned non-cash losses oncurrency derivative instruments.

 

GRUMA’snet loss was Ps.11,818 million in 2008 compared with income of Ps.2,379 millionin 2007. Majority net loss was Ps.12,340 million in 2008 compared with incomeof Ps.2,233 million in 2007. These results were attributable to theaforementioned losses on currency derivative instruments.

 

***Subsidiary Results***

 

***Gruma Corporation***

 

Salesvolume decreased 1% to 1,321 thousand metric tons in 2008 compared with 1,329thousand metric tons in 2007. This reduction was due to (i) lower cornflour sales volume in the United States resulting from price increasesimplemented during the year, and (ii) lower tortilla sales volume inEurope, mainly within the food service segment, as a result of the economicdownturn.

 

Netsales increased by 11% to Ps.19,356 million in 2008 compared with Ps.17,406million in 2007. The rise was due to price increases implemented during thelater part of 2007 in the U.S. corn flour and tortilla businesses and priceincreases implemented during all of 2008 in the U.S corn flour business.

 

Costof sales increased by 14% to Ps.11,875 million in 2008  compared with Ps.10,461 million in 2007. As apercentage of net sales, cost of sales increased to 61.4% from 60.1%. Theseincreases were due to the higher cost of raw materials, in particular wheatflour, corn, oil, and shortening and to a lesser extent, higher utility andmaintenance costs.

 

SG&Aincreased by 8% to Ps.6,497 million compared with Ps.6,026 million in 2007. Theincrease was due to higher commissions paid to distributors in connection withhigher prices, increased promotion and advertising expenses,  additional distribution routes, and higher fuel prices. SG&A as a percentage ofnet sales improved to 33.6% in 2008 from 34.6% in 2007 due to better expenseabsorption as a result of higher prices.

 

Operatingincome increased by 7% to Ps.984 million in 2008, and operating margindecreased to 5.1% from 5.3% in 2007 as a result of the foregoing factors.

 

***GIMSA***

 

Salesvolume increased by 4% to 1,818 thousand metric tons in 2008 compared with1,753 thousand metric tons in 2007. The increase in sales volume was a resultof the conversion by our clients from the traditional method to the corn flourmethod using our products, aided, in part, by several commercial initiatives,and increased bulk sales to supermarkets with in-store tortillerías.

 

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Netsales increased by 1% to Ps.9,142 million in 2008 compared with Ps.9,012million in 2007. The increase was due to the aforementioned sales volumegrowth.

 

Costof sales decreased by 7% to Ps.6,354 million in 2008 compared with Ps.6,839million in 2007. As a percentage of net sales, cost of sales improved to 69.5%from 75.9% due mainly to lower corn costs.

 

SG&Aincreased by 6% to Ps.1,470 million in 2008 compared with Ps.1,386 million in2007. The increase was due mainly to higher commissions from higher salesvolume, higher advertising expenses, and higher wages. SG&A as a percentageof net sales increased to 16.1% from 15.4% in 2007 due to the aforementionedexpense increases and lower average prices.

 

Operatingincome increased by 68% to Ps.1,318 million in 2008, and operating marginimproved to 14.4% from 8.7% as a result of the foregoing factors.

 

***Gruma Venezuela***

 

Salesvolume decreased 3% to 464 thousand metric tons compared with 480 thousandmetric tons in 2007 due mainly to lower sales volume in rice, in connectionwith a shortage of  input materials, andoil,****due to a temporary shutdown of thebusiness.

 

Netsales increased by 126% to Ps.8,727 million compared with Ps.3,862 million in2007. The increase was due mainly to higher prices implemented to compensatefor higher raw-material costs and the effects of inflation resulting fromcomparing constant currencies as of December 2008 versus constantcurrencies as of December 2007 as well as the devaluation of the Mexicanpeso during 2008. Approximately 36% of the increase in net sales wasattributable to the increase in prices and the remaining 90% of the increase innet sales was attributable to the effects of inflation in Venezuela and thedevaluation of the Mexican peso relative to the US dollar.

 

Costof sales increased by 114% to Ps.6,424 million in 2008 from Ps.3,007 million in2007. This increase was due to the aforementioned higher raw-material costs,higher packaging costs, general salary increases, and the effect of inflationresulting from the comparison of constant currencies as of December 2008versus constant currencies as of December 2007, together with the devaluationof the Mexican peso. As a percentage of net sales, cost of sales improved to73.6% from 77.9% due to higher prices, which helped to offset higherraw-material costs and improve cost absorption.

 

SG&Aincreased by 85% to Ps.1,474 million in 2008 compared with Ps.797 million in2007. The increase was due primarily to general salary increases, higherfreight tariffs, higher advertising expenses, and the devaluation of theMexican peso and the effect of inflation resulting from comparing constant currenciesas of December 2008 versus constant currencies as of December 2007.SG&A as a percentage of net sales improved to 16.9% from 20.6% in 2007 dueto better absorption.

 

Operatingincome increased by 1,329%****to Ps.830million, and operating margin improved to 9.5% from 1.5%.

 

***Molinera de México***

 

Salesvolume increased by 1% to 494 thousand metric tons in 2008 compared with 488thousand metric tons in 2007. This increase was driven by more competitivepricing and higher penetration in supermarket chains.

 

Netsales increased by 34% to Ps.3,598 million in 2008 compared with Ps.2,694million in 2007. The increase was due mainly to price increases implemented tooffset higher wheat costs.

 

Costof sales increased by 30% to Ps.2,840 million in 2008 compared with Ps.2,180million in 2007 in connection with higher wheat costs. As a percentage of netsales, cost of sales improved to 78.9% from 80.9% due mainly to higher prices,which more than offset the increase in wheat costs.

 

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SG&Aincreased by 7% to Ps.462 million in 2008 compared with Ps.430 million in 2007.The increase was due to higher freight expenses, increased expenses related tothe strengthening of our sales force, and higher advertising expenses. SG&Aas a percentage of net sales improved to 12.8% in 2008 from 16.0% in 2007 dueto better expense absorption as a result of higher prices.

 

Operatingincome increased by 254% to Ps.296 million, and operating margin improved to8.2% from  3.1% in 2007.

 

***Gruma Centroamérica***

 

Salesvolume decreased by 3% to 213 thousand metric tons in 2008 compared with 220thousand metric tons in 2007. The decrease was mainly due to lower corn floursales volume in connection with intensified  price aggressivenessfrom competitors, and changes in the distribution system towards company-ownedroutes, which should result in future benefits.

 

Netsales increased by 42% to Ps.2,949 million in 2008 from Ps.2,076 million in2007. The increase was due to higher prices of corn flour, snacks, rice, andtortillas, which were implemented to compensate partially for higherraw-material costs especially, corn, rice and hearts of palm. In addition, theeffects of inflation resulting from comparing constant currencies as of December 2008versus constant currencies as of December 2007, together with thedevaluation of the Mexican peso, contributed to the increase.

 

Costof sales as a percentage of net sales increased to 72.4% in 2008 from 71.5%,due to higher raw-material costs, which were not fully absorbed ** **through prices. Costof sales increased by 44% to Ps.2,134 million compared with Ps.1,484 million in2007, due to the aforementioned cost increases.

 

SG&Aincreased by 51% to Ps.756 million in 2008 compared with Ps.501 million in2007. As a percentage of net sales, SG&A rose to 25.6% from 24.1.% in 2007.The increase was due to ** **extraordinary administrativeexpenses, higher commissions in connection with higher prices, the effect ofinflation resulting from comparing constant currencies as of December 2008versus constant currencies as of December 2007, and the devaluation of theMexican peso.

 

Operatingincome was Ps.59 million compared with Ps.91 million in 2007, and operatingmargin decreased to 2.0% from 4.4%.

 

**Year Ended December 31, 2007 Compared with YearEnded December 31, 2006**

 

***Consolidated Results***

 

***GRUMA’s sales volume increased by 1% to 4,243 thousandmetric tons in 2007 compared with 4,200 thousand metric tons in 2006. Thisincrease was driven mainly by GIMSA and, to a lesser extent, by Molinera deMéxico, Gruma Centroamérica, and Gruma Corporation. Net sales increased by 11%to Ps.35,816 million in 2007 compared with Ps.32,190 million in 2006. Theincrease was due primarily to price increases and, to a lesser extent, theaforementioned sales volume growth. The main subsidiaries that drove theincrease in net sales were GIMSA, Gruma Corporation, and, to a lesser extent,Molinera de México and Gruma Centroamérica. Sales from non-Mexican operationsconstituted 67% of consolidated net sales in 2007 compared with 69% in 2006.***

 

**Net Sales by Subsidiary:**By major subsidiary, the percentages ofconsolidated net sales in 2007 and 2006 were as follows:

 

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| ** **               | ** ** | **Percentage of Consolidated Net  Sales** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| **Subsidiary**           | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
| Gruma Corporation        |       | 49                                        | %          | 50 | % |
| GIMSA                    |       | 25                                        |       | 24 |   |
| Gruma Venezuela          |       | 11                                        |       | 12 |   |
| Molinera de  México |       | 7                                         |       | 7 |   |
| Gruma Centroamérica |       | 6                                         |       | 6 |   |
| Asia and Oceanía    |       | 2                                         |       | 1 |   |
| Others and eliminations  |       | —                                    |       | — |   |

 

***Cost of sales increased by 15% to Ps.24,192 million in 2007compared with Ps.20,975 million in 2006, due primarily to GIMSA, GrumaCorporation, and, to a lesser extent, Molinera de México and GrumaCentroamérica. Cost of sales as a percentage of net sales increased to 67.5% in2007 from 65.2% in 2006, an increase driven mainly by GIMSA and, to a lesserextent, Gruma Corporation and Gruma Centroamérica.***

 

***Selling, general, and administrative expenses (SG&A)increased by 4% to Ps.9,750 million in 2007 compared with Ps.9,343 million in2006, due primarily to Gruma Corporation and, to a lesser extent, GrumaVenezuela. SG&A as a percentage of net sales improved, to 27.2% in 2007from 29.0% in 2006, driven mainly by GIMSA and, to a lesser extent, Molinera deMéxico, Gruma Centroamérica, and Gruma Corporation.***

 

***GRUMA’s operating income remained flat at Ps.1,874 millionin 2007 compared with Ps.1,872 in 2006. Operating margin decreased to 5.2% in2007 from 5.8% in 2006, due primarily to GIMSA and, to a lesser extent, GrumaCorporation and Gruma Venezuela.***

 

***Other income, net, was Ps.556 million in 2007 compared withan expense of Ps.49 million in 2006. The improvement was due primarily to again on the sale of Banorte shares and, to lesser extent, a write-down ofassets of Ps.489 million during 2006.***

 

***Net comprehensive financing income was Ps.167 million in2007 compared with a loss of Ps.350 million in 2006. This improvement resultedfrom extraordinary gains in connection with foreign exchange derivatives,higher monetary gains in Gruma Corporation and Gruma Venezuela, and lowermonetary losses in GIMSA.***

 

***GRUMA’s equity in earnings of associated companies, net,including primarily GFNorte, represented income of Ps.708 million in 2007compared with income of Ps.643 million in 2006. Our ownership of GFNortedecreased from 10.0% at the end of 2006 to 8.6% by the end of 2007.***

 

***Income taxes increased 114% to Ps.926 million in 2007compared with Ps.432 million in 2006. This increase was due primarily to higherpretax income.***

 

***GRUMA’s net income increased 41% to Ps.2,379 million in 2007compared with Ps.1,684 million in 2006. Majority net income was Ps.2,233million compared with Ps.1,601 million in 2006. The increase in total netincome and the 39% increase in majority net income were due mainly to theaforementioned gain on the sale of Banorte shares and the aforementionedcomprehensive financing income.***

 

***Subsidiary Results***

 

***Gruma Corporation***

 

***Sales volume remained relatively flat at 1,329 thousandmetric tons in 2007 compared with 1,327 thousand metric tons in 2006. Highersales volume in the tortilla business was offset by the elimination of the Asiaand Oceania operations, which are now reported under the other and eliminationsline, and, to a lesser extent, by lower sales volume in the corn flourbusiness.***

 

***Net sales increased 8% to Ps.17,406 million in 2007 comparedwith Ps.16,170 million in 2006. The increase was due mainly to theimplementation of price increases in the U.S. corn flour and tortillabusinesses during January, October, and November of 2007.***

 

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***Cost of sales increased 9% to Ps.10,461 million in 2007compared with Ps.9,581 million in 2006. As a percentage of net sales, cost ofsales increased to 60.1% in 2007 from 59.3% in 2006. These increases were dueto higher costs for raw materials, in particular wheat flour, corn, andshortening, which were not fully offset through price increases. To a lesserextent, the following also contributed to the increase: (1) higherdepreciation from increased fixed manufacturing costs related mainly toproduction capacity upgrades and the replacement of equipment at severaltortilla plants, (2) higher warehousing capacity, and (3) higherinsurance costs and wages.***

 

***SG&A increased 7% to Ps.6,026 million in 2007 comparedwith Ps.5,646 million in 2006, due to higher commissions to distributors inconnection with higher prices, additional distribution routes, conversion fromcompany-owned routes to independent distributors, and conversion from warehousedistribution to direct-store delivery. SG&A as a percentage of net salesimproved slightly, to 34.6% in 2007 from 34.9% in 2006, due to better expenseabsorption in connection with higher prices.***

 

***Operating income decreased by 2% to Ps.919 million in 2007compared with Ps.942 million in 2006, and operating margin decreased to 5.3% in2007 from 5.8% in 2006.***

 

***GIMSA***

 

***Sales volume increased 1% to 1,753 thousand metric tons in2007 compared with 1,734 thousand metric tons in 2006. The increase in salesvolume was a result of higher sales to supermarkets due to increased in-storetortillería sales, the result of supermarkets’ ability to attract consumers bypromoting tortillas at prices lower than tortillería prices. In addition,higher sales to DICONSA, the Mexican government’s rural welfare program, whichpromoted the sale of corn flour at low prices, contributed to the increase insales volume.***

 

***Net sales increased 18% to Ps.9,012 million in 2007 comparedwith Ps.7,666 million in 2006, due mainly to price increases implemented towardthe end of 2006 to partially offset higher corn costs. To a lesser extent, theincrease was due to the aforementioned higher sales volume.***

 

***Cost of sales increased 27% to Ps.6,839 million comparedwith Ps.5,385 million in 2006. As a percentage of net sales, cost of salesincreased to 75.9% in 2007 from 70.2% in 2006 due mainly to higher corn costs.***

 

***SG&A decreased 3% to Ps.1,386 million in 2007 comparedwith Ps.1,427 million in 2006 due to the discontinuation of the tortillabusiness and lower advertising expenses. SG&A as a percentage of net salesimproved to 15.4% in 2007 from 18.6% in 2006 due to better absorption resultingfrom higher corn flour prices and the aforementioned reductions.***

 

***Operating income decreased 8% to Ps.786 million in 2007compared with Ps.854 million in 2006, and operating margin decreased to 8.7%from 11.1%.***

 

***Gruma Venezuela***

 

***Sales volume decreased 1% to 480 thousand tons in 2007compared with 486 thousand tons in 2006 due mainly to lower wheat flour salesvolume in connection with production capacity constraints.***

 

***Net sales remained flat at Ps.3,862 million in 2007 comparedwith Ps.3,874 million in 2006 due to slight price increases.***

 

***Cost of sales decreased 1% to Ps.3,007 million in 2007 fromPs.3,038 million in 2006 due to lower sales volume. As a percentage of netsales, cost of sales improved to 77.9% in 2007 from 78.4% in 2006 in connectionwith increased prices, in particular prices of wheat products.***

 

***SG&A increased 11% to Ps.797 million in 2007 comparedwith Ps.718 million in 2006 due primarily to higher freight tariffs, generalsalary increases, and higher promotion and advertising expenses. SG&A as apercentage of net sales increased to 20.6% in 2007 from 18.5% in 2006 due to theaforementioned expense increases.***

 

***Operating income decreased by 51% to Ps.58 million comparedwith Ps.119 million in 2006, and operating margin decreased to 1.5% from 3.1%.***

 

***Molinera de México***

 

***Sales volume increased 2% to 488 thousand metric tons in 2007compared with 477 thousand metric tons in 2006. This increase was driven byhigher sales to supermarkets due to their increased coverage, and by sales tonew customers.***

 

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***Net sales increased 22% to Ps.2,694 million in 2007 comparedwith Ps.2,212 million in 2006. The increase was due to price increasesimplemented to offset higher wheat costs and, to a lesser extent, to highersales volume.***

 

***Cost of sales increased 16% to Ps.2,180 million in 2007compared with Ps.1,877 million in 2006 in connection with higher wheat costsand higher sales volume. As a percentage of net sales, cost of sales in 2007improved to 80.9%  in 2007 from 84.9% in2006 due mainly to higher prices, which more than offset the increase in wheatcosts, and, to a lesser extent, to lower depreciation resulting from awrite-down of assets during the third quarter of 2006 that generated a new bookvalue basis.***

 

***SG&A increased 2% to Ps.430 million in 2007 comparedwith Ps.422 million in 2006 due mostly to higher freight expenses in connectionwith higher sales volume. SG&A as a percentage of net sales improved to16.0% from 19.1% in 2006 due to better expense absorption.***

 

***Operating income increased 196% to Ps.84 million in 2007compared with an operating loss of Ps.87 million in 2006, and operating marginimproved to 3.1% from negative 3.9% in 2006.***

 

***Gruma Centroamérica***

 

***Sales volume increased 4% to 220 thousand tons in 2007compared with 212 thousand tons in 2006. The increase was due primarily tohigher corn flour sales volume in connection with the conversion oftortillerías to the corn-flour method, combined with market share gains throughflanker brands.***

 

***Net sales increased 11% to Ps.2,076 million in 2007 fromPs.1,863 million in 2006 due to higher corn flour and tortilla pricesimplemented to offset higher raw-material costs. The increase was alsoattributable to the increase in corn flour sales volume.***

 

***Cost of sales increased 14% to Ps.1,484 million in 2007compared with Ps.1,298 million in 2006, due to the aforementioned costincreases and higher sales volume.  Costof sales as a percentage of net sales increased to 71.5% in 2007 from 69.7% in2006, due mainly to higher corn costs and, to a lesser extent, higher rice,hearts-of-palm, and tortilla costs, which were not fully absorbed throughprices.***

 

***SG&A remained flat at Ps.501 million in 2007 and, as apercentage of net sales, improved to 24.1% in 2007 from 26.8% in 2006 due tobetter expense absorption.***

 

***Operating income increased 40% to Ps.91 million in 2007compared with Ps.65 million in 2006, and operating margin improved to 4.4% from3.5%.***

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

We fund our liquidity and capital resourcerequirements, in the ordinary course of business, through a variety of sources,including:

 

·                  cash generated from operations;

 

·                  uncommitted short-term and long-termlines of credit;

 

·                  offerings of medium- and long-term debt;and

 

·                  sales of our equity securities and thoseof our subsidiaries and affiliates from time to time.

 

If we are able to successfully consummate theFinancing and the Credit Agreement Amendments, our significant debt servicerequirements may adversely affect our ability to finance future operations,make acquisitions and capital expenditures, compete effectively againstbetter-capitalized competitors and withstand downturns in our business.  However, if we are unable to successfullyconsummate the Financing and the Credit Agreement Amendments, we do notcurrently have sufficient liquidity to repay the U.S.$668.3 million obligationowing to the Derivative Counterparties and other obligations that may come due.See “Item 3.  Key Information—RiskFactors.”

 

During 2008, our exposure under our foreign exchangederivative instruments caused Fitch Ratings and Standard & Poor’s tolower our credit rating.  Our long-termcorporate credit rating and our senior unsecured 

 

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perpetual bond are rated “B+”with negative implication by Standard & Poor’s Ratings Services.Our  Foreign Currency Long-Term IssuerDefault Rating and our Local Currency Long-Term Issuer Default Rating are rated“B+” by Fitch Ratings. Additionally, our U.S.$300 million perpetual bond israted “BB-” by Fitch Ratings. These ratings reflect the leveraging impact onGruma’s capital structure from the termination of Gruma’s foreign exchangederivative positions and the subsequent conversion of the realized losses intodebt. On February 1, 2008, Standard & Poor’s placed our long-termcorporate credit rating and our senior unsecured perpetual bond on Credit Watchwith negative implication. On March 12, 2008, Standard & Poor’sremoved the Credit Watch with negative implication based on the company’sintention to use part of the proceeds of the proposed May 2008 rightsoffering to repay debt, which improved our debt ratios. On October 13,2008, Standard and Poor’s reduced the credit rating from “BBB-” to “BB”, andplaced them on Credit Watch with negative implications.  On November 11,  2008 Standard and Poor’s reduced the ratingagain from “BB” to “B+” continuing the Credit Watch with negative implications.We continue to have a B+ rating with negative implications.  On October  13, 2008 Fitch reduced theratings to “BB+” from “BBB-” while placing Gruma on Rating Watch Negative. On April 2,2009 Fitch reduced  its ratings again to “BB-”and removed all ratings from Rating Watch Negative to Stable. ** **If our financialcondition deteriorates, we may experience future declines in our creditratings, with attendant consequences. Our access to external sources offinancing, as well as the cost of that financing, has been and may continue tobe adversely affected by a deterioration of our long-term debt ratings.  A downgrade in our credit ratings maycontinue to increase the cost of and/or limit the availability of unsecured financing,which may make it more difficult for us to raise capital when necessary.  If we cannot obtain adequate capital onfavorable terms or at all, our business, operating results and financialcondition would be adversely affected.

 

The reduction in the credit rating of our U.S.$300million perpetual bond and the liquidity scarcity experienced in the globalfinancial markets have resulted in the lack of availability of all of ouruncommitted short-term lines of credit and a reduction in our ability to issuenew debt. Additionally, it is becoming increasingly difficult for us to renewour short-term loans.  As a result, theCompany must pay these obligations with cash generated from operations. Webelieve this situation will continue and that our ability to obtain newfinancing will be limited until we finance our counterparty obligations andthereafter reduce our indebtedness.

 

The following is a summary of the principal sourcesand uses of cash for the three years ended December 31, 2008.

 
| ** **                            | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2008**   | ** ** |
|---------------------------------------|------------|----------------------------------|------------|----------|------------|------------|------------|
|                                  |       | **(thousands of Mexican pesos)** |       |
| Resources provided by (used  in) (1): |       |                             |       |     |       |       |       |
| Operating activities                  |       | 1,973,611                        |       | 267,347  |       | 2,212,996  |       |
| Financing activities                  |       | (168,189                         | )          | 208,003  |       | 1,410,811  |       |
| Investing activities                  |       | (1,564,747                       | )          | (593,808 | )          | (2,958,202 | )          |

 

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(1)                                  As a result of MFRS B-2 “Statement ofCash Flows”, effective starting January 1, 2008, the Company has includedthe statement of cash flows for the year ending December 31, 2008 and forthe years ended December 31, 2004, 2005, 2006 and 2007, the Company hasincluded the statement of changes in financial position. As a result, the CashFlow figures for 2008 may not be directly comparable to those presented for theprevious four years.

 

During2008, net cash generated from operations was Ps.2,213 million after changes inworking capital of Ps.3,288 million of which Ps.1,695 million was due to anincrease in accounts receivable, Ps.921 million reflected an increase ininventory and Ps. 55 million reflected a decrease in accounts payable. Net cashgenerated from financing activities during 2008 was Ps.1,411 million of whichPs. 3,706 million reflected proceeds from borrowings and Ps.2,111 million fromcapital contributions offset by Ps.781 million in cash interest payments, Ps.63million in dividend payments and Ps.3,539 million in cash payment in respect ofderivative instruments.  Cash used byinvestment activities during 2008 reflected cash expenditures for new plantsand capacity expansion as well as improvements of existing plants.

 

As of October 28, 2008, Gruma’s foreign exchangederivative instruments represented an aggregate negative mark-to-marketnon-cash unrealized loss of approximately U.S.$788 million. On November 12,2008 we entered into a loan agreement with Bancomext in the amount of Ps. 3,367million and applied the proceeds to 

 

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terminate our commitmentsarising under all the currency derivative instruments that we had entered intowith one of our derivative counterparties and to pay other commitments arisingunder the currency derivative instruments maturing from the date of such loanagreement with Bancomext and until December 31st,2008. In connection with most of its obligations under its foreign exchangederivative instruments, the Company entered into a Term Sheet that provides forthe financing of the obligations that would result from the termination of allof its foreign exchange derivative instruments that it had entered into withthe Derivative Counterparties.  On March 23,2009, Gruma and the Derivative Counterparties agreed  to terminate all of these derivativeinstruments and fixed the total amount of obligations payable by Gruma to theDerivative Counterparties at U.S.$668.3 million. In connection with the TermSheet, Gruma and the Derivative Counterparties have agreed to negotiate in goodfaith to convert the Termination Amounts into a secured term loan within 120days following March 23, 2009. Pursuant to the Term Sheet, we are requiredto pay interest on the Termination Amount at the rate of 1 month LIBOR + 1% forthe first six weeks following March 23, 2009, and LIBOR + 2.875% thereafter.Following the expiration of the 120-day period contemplated by the Term Sheet,we will be required to pay default interest on the Termination Amount at therate of 2% + LIBOR + 2.875%. As a result of the additional indebtednessexpected to be incurred in connection with the aforementioned agreement, we havebeen required to restructure some of our existing debt obligations.  See “—Indebtedness.”  If we successfully consummate the Financingand the Credit Agreement Amendments, we believe that our overall sources ofliquidity will continue to be sufficient to satisfy our foreseeable financialobligations and operational requirements during the next 12 months. If,however, we are unable to successfully consummate the Financing and the CreditAgreement Amendments, we will not have sufficient liquidity to meet ourfinancial obligations.

 

The principal factor affecting our sources ofliquidity is our ability to successfully consummate the Financing and theCredit Agreement Amendments. Additional factors that could decrease our sourcesof liquidity include a significant decrease in the demand for, or price of, ourproducts, 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.  See “—Indebtedness.”

 

On June 18, 2009, Gruma and BNP Paribas (“BNP”)entered into a Term Sheet (the “BNP Term Sheet”) that provides for thefinancing of the obligations that would result from scheduled settlement of theforeign exchange derivative instruments entered into with BNP. Pursuant to theBNP Term Sheet, Gruma and BNP agreed to negotiate in good faith to convert theamount of such obligations payable by Gruma under such derivative instrumentsinto an unsecured loan on or before September 8, 2009, the date on which suchderivative instruments expire. If Gruma and BNP fail to reach an agreement toconvert the obligations payable by Gruma under such derivative instruments intoa loan, such obligations will become due and payable immediately followingSeptember 8, 2009. On June 26, 2009, Gruma and Barclays Bank PLC (“Barclays”)entered into a Term Sheet (the “Barclays Term Sheet”) that provides for thefinancing of the obligations that would result from the termination of all ofits foreign exchange derivative instruments that it had entered into withBarclays. Pursuant to the Barclays Term Sheet, Gruma and Barclays agreed toterminate all of Gruma’s derivative instruments owing to Barclays and fixed thetotal amount of obligations payable by Gruma to Barclays at $21.5 million (the“Barclays Termination Amount”). In connection with the Barclays Term Sheet,Gruma and Barclays have agreed to negotiate in good faith to convert theBarclays Termination Amount into an unsecured loan by July 21, 2009. Pursuantto the Barclays Term Sheet, we are required to pay interest on the BarclaysTermination Amount at the rate of 1 month LIBOR + 1% for the period betweenJune 26, 2009 and July 21, 2009. Following July 21, 2009, we will be requiredto pay default interest on the Termination Amount at the rate of 2% + LIBOR +2.875%. If Gruma fails to convert the Barclays Termination Amount into a loanby July 21, 2009, the aggregate amount of U.S.$21.5 million together withinterest will become due and payable immediately. Gruma is in the process ofreaching an agreement to unwind its Remaining Derivatives with its othercounterparties.

 

As further described below, Gruma, S.A.B. de C.V. issubject to financial covenants contained in some of its debt agreements whichrequire it to maintain certain financial ratios and balances on a consolidatedbasis and Gruma Corporation is subject to financial covenants contained in someof its debt agreements which require it to maintain certain financial ratiosand balances on a consolidated basis.  A default under any of our existingdebt obligations for borrowed money could result in acceleration of the duedates for payment of the amounts owing thereunder and in a cross-default underthe indenture governing our perpetual bonds. The amount of interest that Gruma,S.A.B. de C.V. and Gruma Corporation pay on 25% and 84%, respectively, of theirdebt may increase if their overall leverage ratio increases above 2.5 x in bothfacilities. See “—Indebtedness.”  Asof March 31, 2009, Gruma, S.A.B. de C.V.’s leverage ratio reached 2.8 x,which represents the highest interest rate range under the U.S.$250 millionfacility at LIBOR + 45 bp.  An increase in the amount of interest thatGruma, S.A.B. de C.V. and Gruma Corporation pay on their debt could limit thesecompanies’ ability to help support our liquidity and capital resourcerequirements and have a material adverse effect upon our business, financialcondition, results of operations and prospects.

 

Mr. González Barrera has pledged part of hisshares in our company to secure some of his borrowings.  If there is a default and the lenders enforcetheir rights against any or all of these shares, Mr. González Barrera andhis family could lose control over us and a change of control couldresult.  This could trigger a default in oneof our credit agreements which have anaggregate principal amount outstanding as of December 31, 2008 of US$197million and have a material adverse effect upon our business, financialcondition, results of operations and prospects.  For more informationabout this pledge, see “Item 7. Major Shareholders and Related Party Transactions.”

 

**Adjusted WorkingCapital**

 

We define adjusted working capital as current assets,minus current liabilities, excluding short-term bank loans and current portionof long-term debt.  Our adjusted workingcapital as of the dates indicated was as follows:

 
| December 31, 2007 |   | Ps. 6,732 million |   |
|------------------------|--------|-------------------|--------|
| December 31, 2008 |   | Ps. 4,125 million |   |

 

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**Indebtedness**

 

Our indebtedness bears interest at fixed and floatingrates.  As of March 31, 2009,approximately 31% of our outstanding indebtedness bore interest at fixed ratesand approximately 69% bore interest at floating rates, with almost all USDollar and Mexican Peso floating-rate indebtedness bearing interest based onLIBOR and TIIE, respectively.  Wepartially hedge both our interest rate exposure and our foreign exchange rateexposure as discussed below.  For moreinformation about our interest rate and foreign exchange rate exposures, see “Item11.  Quantitative and QualitativeDisclosures About Market Risk.”

 

On October 4, 2004,we obtained a U.S.$250 million, five year syndicated senior credit facility,which we refer to as the 2004 Facility, from a syndicate of banks, whichconsists of a U.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 March 31, 2009, there was U.S.$150million outstanding under the 2005 Facility with U.S.$47 million of revolvingcredit available.

 

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 wefixed the 6-month LIBOR rate associated with the term portion of the 2004Facility 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 is required to payus unless 6-month LIBOR reaches 6%, in which case the parties have noobligation to pay any amount for the applicable period.   The 2005 Facility contains covenants thatrequire us to maintain: (1) a ratio of consolidated total funded debt toEBITDA of not more than 3.5:1; and (2) a ratio of consolidated EBITDA toconsolidated interest charges of not less than 2.5:1. The 2005 Facility alsolimits our, and any of our Material Subsidiaries’ ability, among other things,to: (1) create liens; (2) merge or consolidate with other companiesor sell substantially all of our assets; (3) make certain investments orother restricted payments; (4) engage in transactions with affiliates; and(5) guarantee additional indebtedness. In connection with consummation of the Financing and the CreditAgreement Amendments, as further described below, we expect to enter into anamended facility amending the terms of this 2005 Facility to, among otherthings, extend its term and provide our creditors with a security interest inshares of certain subsidiaries of the Company pursuant to the Financing and theCredit Agreement Amendments, as further described below.

 

However, on March 8, 2006, we increased the6-month LIBOR rate threshold under the interest rate swap for the 2005 Facilityfrom 6% 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. This transactionended on March 30, 2009 leaving the 2005 Facility with the floating rate.

 

On December 3, 2004, Gruma S.A.B. de C.V. issuedU.S.$300 million 7.75% senior unsecured perpetual bonds, which at the time weregraded BBB- 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 of May 15,2009 we have not hedged any  interestpayments on our U.S.$300 million 7.75% senior unsecured perpetual bonds.  In connection with our obligations under theFinancing and the Credit Agreement Amendments, as further described below, weanticipate entering into a supplemental indenture that provides the holders ofthe perpetual bonds with a lien on certain of Gruma’s assets.

 

In October 2006,Gruma Corporation entered into a U.S.$100 million 5-year revolving creditfacility with a syndicate of financial institutions.  The credit facility replaced the U.S.$70million revolving credit facility which 

 

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matured in June 2007 and was terminated upon theclosing of the new facility.  The newfacility has an interest rate based on LIBOR plus a spread of 0.35% to 0.45%that fluctuates in relation to Gruma Corporations’ leverage and contains lessrestrictive provisions than those in the facility replaced.  The terms of the new facility provide thatGruma Corporation may request that the commitments available under the facilitybe increased by up to an additional U.S.$50 million, subject to the banks’approval. This Facility contains covenants that limit Gruma Corporation’sability to merge or consolidate, and require it to maintain: (1) a ratioof total funded debt to consolidated EBITDA of not more than 3.0:1; and (2) aratio of consolidated EBITDA to consolidated interest charges of not less than2.0:1. In addition, this facility limits Gruma Corporation’s, and certain ofits subsidiaries’ ability, among other things, to: (1) create liens; (2) makecertain investments; (3) make certain restricted payments; (4) enterinto any agreements that prohibit the payment of dividends; (5) incuradditional debt; and (6) engage in transactions with affiliates.

 

On November 12, 2008, we obtained a Ps 3,367million peso-denominated two year bullet senior credit facility from Bancomext(*Banco Nacional de Comercio Exterior*)which we refer as the 2008 Peso Facility. This facility has an interest ratebased on the TIIE rate plus a spread of 2.0%. Bancomext entered into a separateguarantee agreement with the Mexican Government, pursuant to which Banco deMéxico guarantees this facility through a fund that specializes in guaranteeingthe debt of the Mexican agricultural sector (*FondoEspecial de Asistencia Técnica y Garantía para Créditos Agropecuarios*).  The 2008 Peso Facility limits our ability,among other things, to transfer or encumber our assets.  In connection with consummation of theFinancing and the Credit Agreement Amendments, as described below, weanticipate extending the term of the 2008 Peso Facility.

 

Both Gruma, S.A.B. de C.V. and Gruma Corporation arealso subject to covenants which limit the amounts that may be advanced to,loaned to, or invested in, us under certain circumstances. Upon the occurrenceof any default or event of default under its credit agreements, GrumaCorporation generally is prohibited from making any dividend payments tous.  The covenants described above andother covenants could limit our and Gruma Corporation’s ability to help supportour liquidity and capital resource requirements.

 

We believe that as of December 31, 2008 we werein compliance with all of the covenants and obligations under our existing debtagreements.  If we are able tosuccessfully consummate the Financing and the Credit Agreement Amendments, weexpect that our interest coverage ratio willdecrease and our debt ratio will increase as a result of converting ourobligations under our foreign exchange derivative instruments into long-termdebt. Accordingly, prior to consummating the Financing and the CreditAgreement Amendments, we expect toamend the required interest coverage and debt ratios under the 2005Facility. We will also besubject to additional covenants and restrictions as further discussed below.

 

In connection with most of its obligations under itsforeign exchange derivative instruments, the Company entered into a term sheeton March 19, 2009 (the “Term Sheet”) that provides for the financing ofthe obligations that would result from the termination of all of its foreignexchange derivative instruments that it had entered into with Credit Suisse,Deutsche Bank and JP Morgan Chase as counterparties (the “DerivativeCounterparties”). On March 23, 2009, Gruma and the DerivativeCounterparties agreed  to terminate allof these derivative instruments and fixed the total amount of obligationspayable by Gruma to the Derivative Counterparties at U.S.$668.3 million (the “TerminationAmounts”). In connection with the Term Sheet, Gruma and the DerivativeCounterparties have agreed to negotiate in good faith to convert theTermination Amounts into a secured term loan within 120 days following March 23,2009 (the “Financing”).  As a conditionof the Financing, the Company intends to terminate its other outstandingforeign exchange derivative instruments (the “Remaining Derivatives”) and alsointends to enter into agreements to amend and restate its existing debtobligations under its 5-year revolving credit facility (the “2005 Facility”)and its 2008 Peso Facility (together, the “Credit Agreement Amendments”).  Pursuant to the Term Sheet, we are requiredto pay interest on the Termination Amount at the rate of 1 month LIBOR + 1% forthe first six weeks following March 23, 2009, and LIBOR + 2.875% thereafter.Following the expiration of the 120-day period contemplated by the Term Sheet,we will be required to pay default interest on the Termination Amount at therate of 2% + LIBOR + 2.875%.  See “Item 3.Key Information—Risk Factors—Risks Related to our Company, —Liquidity andCapital Resources—Indebtedness, and Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

 

Pursuant to the TermSheet, we are negotiating the final terms of a Senior Secured Loan Agreement(the “Term Loan”) with the Derivative Counterparties in order to document theFinancing.  The Term Loan is expected 

 

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to contain financial covenants. The Term Loan is alsoexpected to limit Gruma’s ability to pay dividends or make other distributionsand make certain investments or other restricted payments. In addition, theTerm Loan is expected to limit Gruma’s, and any of its Material Subsidiaries’ability, among other things, to: (1) create liens; (2) merge orconsolidate with other companies or sell substantially all of our assets; (3) engagein transactions with affiliates; (4) guarantee additional indebtedness; (5) makecertain changes to corporate documents; (6) dispose of the collateral; (7) makecapital expenditures; and (8) incur additional debt.

 

If we consummate the Financing, we will have asignificant amount of indebtedness, which will require significant debtservice.  Our level of debt couldadversely affect our business in a number of ways.  See “Item 3. Risk Factors—Risks Relating to the Company— If We Are Unable toSuccessfully Consummate the Financing and the Credit Agreement Amendments, WeFace a Risk of Reorganization-Related Proceedings.”

 

However, if Gruma fails to consummate the Financingwithin the 120-day period following March 23, 2009, the aggregate amountof U.S.$668.3 million together with interest will become due and payable immediately.  We do not currently have sufficient liquidityto repay the U.S.$668.3 million obligation owing to the DerivativeCounterparties.  As a result, we couldattempt to restructure or refinance our existing financial obligations, seekadditional equity capital or sell assets. Additionally, we may be unable to meet our payment obligations owing tosome or all of our existing creditors for borrowed money.  For additional information concerning ourliquidity position, see  “Item 3.  Key Information—Risk Factors—Risks Relating tothe Company—If We Are Unable to Successfully Consummate the Financing and theCredit Agreement Amendments, We Face a Risk of Reorganization-RelatedProceedings.”

 

On June 18, 2009, Gruma and BNP Paribas (“BNP”)entered into a Term Sheet (the “BNP Term Sheet”) that provides for thefinancing of the obligations that would result from scheduled settlement of theforeign exchange derivative instruments entered into with BNP. Pursuant to theBNP Term Sheet, Gruma and BNP agreed to negotiate in good faith to convert theamount of such obligations payable by Gruma under such derivative instrumentsinto an unsecured loan on or before September 8, 2009, the date on which suchderivative instruments expire. If Gruma and BNP fail to reach an agreement toconvert the obligations payable by Gruma under such derivative instruments intoa loan, such obligations will become due and payable immediately followingSeptember 8, 2009. On June 26, 2009, Gruma and Barclays Bank PLC (“Barclays”)entered into a Term Sheet (the “Barclays Term Sheet”) that provides for thefinancing of the obligations that would result from the termination of all ofits foreign exchange derivative instruments that it had entered into withBarclays. Pursuant to the Barclays Term Sheet, Gruma and Barclays agreed toterminate all of Gruma’s derivative instruments owing to Barclays and fixed thetotal amount of obligations payable by Gruma to Barclays at $21.5 million (the“Barclays Termination Amount”). In connection with the Barclays Term Sheet,Gruma and Barclays have agreed to negotiate in good faith to convert theBarclays Termination Amount into an unsecured loan by July 21, 2009. Pursuantto the Barclays Term Sheet, we are required to pay interest on the BarclaysTermination Amount at the rate of 1 month LIBOR + 1% for the period betweenJune 26, 2009 and July 21, 2009. Following July 21, 2009, we will be requiredto pay default interest on the Termination Amount at the rate of 2% + LIBOR +2.875%. If Gruma fails to convert the Barclays Termination Amount into a loanby July 21, 2009, the aggregate amount of U.S.$21.5 million together withinterest will become due and payable immediately. Gruma is in the process ofreaching an agreement to unwind its Remaining Derivatives with its othercounterparties.

 

As of June 12, 2009, the Company has no committedlines of credit available from banks in Mexico.

 

At December 31, 2008, we had total outstandinglong-term debt aggregating approximately Ps.11,728****million(approximately U.S.$848 million). Approximately 71% of our long-term debt at such date wasdollar-denominated and the remaining 29% in Mexican Pesos.  Our long-term debt includes U.S.$197 millionor Ps.2,725 million of principal amount of the 2005 Facility which we issued inJuly 2005, Ps. 3,367 million or U.S.$244 million of principal amount ofthe 2008 Peso Facility which we obtained in November 2008 and U.S.$300million, or Ps.4,149****million, ofprincipal amount of the 7.75% senior unsecured perpetual bonds, which we issuedin December 2004.

 

As of December 31, 2008, we had total cash andcash equivalents of Ps.1,426 million.

 

The following table presents our amortizationrequirements with respect to our total indebtedness as of December 31,2009.

 
| **Year**            | ** ** | **In Millions of U.S. Dollars** | ** ** |
|---------------------|------------|---------------------------------|------------|
| 2009                |       | 174.9                           |       |
| 2010                |       | 452.1                           |       |
| 2011                |       | 95.3                            |       |
| 2012                |       | 0.5                             |       |
| 2013 and thereafter |       | 300.1                           |       |
| **Total**           |       | 1,022.9                         |       |

 

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’equity as of the dates indicated.  Forpurposes of 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, 2007 |       | 0.30                                                    |       | 0.83                                                                       |       |
| December 31, 2008 |       | 0.60                                                    |       | 3.77                                                                       |       |

 

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**CapitalExpenditures**

 

In 2006, we invested approximatelyU.S.$189 million, which were mainly applied to Gruma Corporation andGIMSA.  Gruma Corporation investedin:  (i) the expansion of tortillacapacity and upgrades 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 atortilla plant 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) theacquisition of Oz-Mex Foods Pty Ltd, a tortilla company based in Australia, forapproximately U.S.$4 million; and (vi) the purchase of the remaining49% ownership interest in Nuova De Franceschi & Figli, a corn flourcompany based in Italy, in which we previously held a 51% ownership interest,for approximately U.S.$8.2 million.  To alesser extent, investments were also applied to capacity expansions in GIMSAand Gruma Centroamérica.  In 2007, weinvested U.S.$204 million, which were mainly applied to Gruma Corporation.  Major capital expenditures were oriented to capacityexpansions and upgrades in Gruma Corporation, capacity expansions in GIMSA andGruma Centroamérica, and the construction of a tortilla plant inAustralia.  During 2008 GRUMA’sinvestments totaled U.S.$235 million, most of which was applied to GrumaCorporation. Major investments were applied to the construction of tortillaplants in California and Australia and capacity expansions and upgrades inGruma Corporation. We have budgeted approximately U.S.$80.0 million for capitalexpenditures in 2009.  This includesapproximately U.S.$14 million spent during the first quarter of 2009, whenmajor capital expenditures were oriented to the construction of tortilla plantsin California and Australia and a wheat flour mill in Venezuela.   The investments were made to accommodate thecontinuing growth of business.

 

In light of the increase in our debt resulting fromlosses on derivative instruments, we anticipate that our capital expenditureswill be oriented exclusively to the most material projects and therefore willbe less than what we have invested in recent years.

 

**Concentration ofCredit 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 mitigate this risk by enteringinto transactions with a diverse pool of counterparties.  However, we continue to remain subject tounexpected third party financial failures 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 still maintain reserves forpotential credit losses.  Our operationsin Venezuela represented approximately 19% of our sales in 2008.  The severe political and economic situationin Venezuela presents a risk to our business that we cannot control and thatcannot be accurately measured or estimated. Our financial condition and results of operations could be adverselyaffected due to the fact that (i) 100% of our sales are denominated inbolívares, (ii) Gruma Venezuela produces products that are subject toprice controls and (iii) we may have difficulties repatriating dividendsfrom Gruma Venezuela and importing some of our raw material requirementsbecause of the foreign exchange controls. In the case of some of our raw materials, we may also face increasingcosts due to the implementation of import tariffs.  See “Item 3.  Key Information — Risk Factors — Risks Relatedto Venezuela — Venezuela Presents Significant Economic Uncertainty andPolitical Risk, Which May in the Future Have an Adverse Impact on OurOperations and Financial Performance.”

 

From time to time, we enter into currency derivativetransactions that cover varying periods of time and have varying pricingprovisions. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—ForeignExchange Rate Risk.”

 

Our credit exposure on derivatives and foreignexchange contracts is primarily to professional counterparties in the financialsector, arising from transactions with banks, investment banks and otherfinancial institutions.

 

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**Market Risk**

 

Market risk is the risk of loss generated byfluctuations in market prices such as interest rates and foreign exchangerates.  The principal market risk towhich we are exposed is foreign exchange risk. This risk stems from activities relating to our world-wide operations aswell as to our currency derivative transactions.  We account for these currency derivativeinstruments using the mark-to-market accounting method.

 

In the first quarter of2008, we entered into foreign exchange derivative transactions involvingseveral currencies.  We account for thesecurrency derivative instruments using the mark-to-market accounting method.  As of March 31, 2008, these instrumentsrepresented a negative mark-to-market value of approximately U.S.$69million.  The mark-to-market lossrepresented a non-cash loss that was reflected in our financial results for thefirst quarter of 2008.  As of May 31,2008, these instruments represented a negative mark-to-market value ofapproximately U.S.$71 million.

 

Extreme exchange rate volatility in the financialmarkets during the last two quarters of 2008 and the first quarter of 2009resulted in significant fluctuations in the mark-to-market value of Gruma’sforeign exchange derivative instruments. As of October 28, 2008, theseinstruments represented an aggregate negative mark-to-market non-cashunrealized loss of approximately U.S.$788 million. On November 12, 2008 weentered into a loan agreement with Bancomext in the amount of Ps. 3,367 millionand applied the proceeds to terminate our commitments arising under all thecurrency derivative instruments that we had entered into with one of ourderivative counterparties and to pay other commitments arising under thecurrency derivative instruments maturing from the date of such loan agreementwith Bancomext and until December 31st,2008.  For additional informationconcerning the 2008 Peso Facility, the Financing and the Credit AgreementAmendments, see “—Indebtedness.”

 

**RESEARCHAND DEVELOPMENT**

 

We continuously engage in research and developmentactivities that focus on, among other things:  increasing the efficiencyof our proprietary corn flour and corn/wheat tortilla production technology;maintaining high product quality; developing new and improved products andmanufacturing equipment; improving the shelf life of certain corn and wheatproducts; improving and expanding our information technology system;engineering, plant design and construction; and compliance with environmentalregulations.  We have obtained 57 patents in the United States since 1968,3 of which were obtained during the last three years.  21 of these patentsare in force and effect in the United States as of the date hereof and theremaining 36 have expired.  We currently have 6 new patents in process, 4in the United Sates and 2 in other countries.  Additionally, 9 of ourregistered patents are currently in the process of being published in othercountries.

 

Our research and development is conducted through oursubsidiaries INTASA, Tecnomaíz and CIASA.  Through Tecnomaíz, we engage inthe design, manufacture and sale of machines for the production of corn/wheattortillas and tortilla chips.  We carry out proprietary technologicalresearch and development for corn milling and tortilla production as well asall engineering, plant design and construction through INTASA and CIASA. These companies 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.58 million,Ps.74 million and Ps.86 million on research and development in 2006, 2007 and2008, respectively.

 

**TRENDINFORMATION**

 

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 2009 to be influenced by:

 

·                  our ability to consummate the Financingand the Credit Agreement Amendments and effectively manage our liquidityrequirements in connection with our increased leverage;

 

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·                  volatility in corn and wheat prices;

 

·                  increased competition from tortillamanufacturers, especially in the U.S.;

 

·                  increases or decrease in the Hispanicpopulation in the United States;

 

·                  increases in Mexican food consumption bythe non-Hispanic population in the United States; as well as projectedincreases in Mexican food consumption and use of tortillas in non-Mexicancuisine as tortillas continue to be assimilated into mainstream cuisine in theU.S., Europe, Asia and Oceania, each of which could increase sales;

 

·                  volatility in energy costs;

 

·                  increased competition in the corn flourbusiness;

 

·                  exchange rate fluctuations, particularlyincreases and decreases in the value of the Mexican peso relative to theVenezuelan bolívar and U.S. dollar;

 

·                  civil and political unrest in Venezuelawhich may negatively affect the profitability of Gruma Venezuela; and

 

·                  unfavorable general economic conditionsin the United States, such as therecession or economic slowdown, which couldnegatively affect the affordability of and consumer demand for some of ourproducts.

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

As of December 31, 2008 we do not have anyoutstanding off-balance sheet arrangements.

 

**CONTRACTUALOBLIGATIONS AND COMMERCIAL COMMITMENTS**

 

We have commitments under certain firm contractualarrangements to make future payments for goods and services.  These firm commitments secure the futurerights to various assets to be used in the normal course of operations.  For example, we are contractually committedto make certain minimum lease payments for the use of property under operatinglease agreements.  In accordance withMexican FRS, the future rights and obligations pertaining to such firmcommitments are not reflected as assets and liabilities on the accompanyingconsolidated balance sheets.  The following table summarizes separately ourmaterial firm commitments at December 31, 2008 and the timing and effectthat such obligations are expected to have on our liquidity and cash flow inthe future periods.  In addition, thetable reflects the timing of principal and interest payments on outstandingdebt, which is discussed in “Item 5. Operating and Financial Review and Prospects—Liquidity and CapitalResources—Indebtedness.”  We expect tofund the firm commitments with operating cash flow generated in the normalcourse 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                               |       | 848.0                             |       | —                |       | 547.5                  |       | 0.5                    |       | 300.0             |       |
| Derivative financial  instruments                        |       | 829.5                             |       | 456.7                 |       | 372.8                  |       | —                 |       | —            |       |
| Operating lease  obligations(1)                          |       | 135.4                             |       | 43.9                  |       | 56.0                   |       | 24.8                   |       | 10.7              |       |
| Purchase obligations(2)                                  |       | 158.3                             |       | 158.3                 |       | —                 |       | —                 |       | —            |       |
| Interest payments on our  indebtedness (3)               |       | 213.3                             |       | 68.6                  |       | 74.9                   |       | 46.5                   |       | 23.3              |       |
| Other liabilities(4)                                     |       | 182.9                             |       | 182.9                 |       | —                 |       | —                 |       | —            |       |
| Total                                                    |       | 2,367.4                           |       | 910.4                 |       | 1,051.2                |       | 71.8                   |       | 334.0             |       |
| Total in millions of peso equivalent amounts             |       | Ps.                               | 32,741.1   |                  | Ps.        | 12,590.8               |       | Ps.                    | 14,538.1   |              | Ps.        | 993.0 |   | Ps. | 4,619.2 |   |
|                                                          |            |                                   |            |                       |            |                        |            |                        |            |                   |            |  |  |  |  |  |

 

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| (1) |   | Operating lease obligations primarily relate to  minimum lease rental obligations for our real estate and operating equipment  in various locations.                        |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Purchase  obligations relate to our minimum commitments to purchase commodities, raw  materials, machinery and equipment.                                                   |
| (3) |   | In the  determination of our future estimated interest payments on our floating rate  denominated debt, we used the interest rates in effect as of  December 31, 2008. |
| (4) |   | Other relate to liabilities for uncertain tax  positions, short-term bank loans and the current portion of long-term debt.                                                  |

 

**U.S.GAAP RECONCILIATION**

 

Our consolidated financial statements are prepared inaccordance with Mexican FRS, which differ in certain significant respects from U.S.GAAP.  See Note 21 to our auditedconsolidated financial statements for information relating to the nature andeffect of such differences.

 

Net income (loss) under U.S. GAAP amounted to Ps.1,502.9 million****in2006. Ps.2,107.7 million in 2007 and Ps.(11,778.9) million in 2008, comparedwith majority net income under Mexican FRS of 1,601.1 million in 2006,Ps.2,233.3 million in 2007 and loss of Ps.12,339.8 million in 2008.

 

Stockholders’ equityunder U.S. GAAP amounted to Ps.13,929.7 million in 2006,  Ps.15,116.7 million in 2007 and Ps.5,916.8million in 2008, compared with stockholders’ equity under Mexican FRS ofPs.17,902.3 million in 2006, Ps.18,577.2 million in 2007 and Ps.9,269.4 millionin 2008.  See Note 21 to our auditedconsolidated financial statements for a further discussion of the adjustmentsunder U.S. GAAP.

 

**New AccountingStandards**

 

***New AccountingPronouncements under Mexican FRS***

 

The CINIF issued a seriesof Financial Reporting Standards (MFRS) and their interpretations (INIF) duringthe last months of the year 2008. These standards will become effectivestarting January 1, 2009, and for INIF 14, January 1, 2010.  These MFRS and their interpretations will nothave a significant effect in the financial information of the Company, asexplained bellow:

 

MFRS B-7 “Businessacquisitions” — Establishes the general standards for valuation and disclosureof the initial recognition of the net assets at acquisition date, as well asthe ownership of minority stockholders and other items that may arise, such asgoodwill and purchase gain. This standard supersedes Bulletin B-7 “Businessacquisitions”, which was effective until December 31, 2008.

 

MFRS B-8 “Consolidatedand combined financial statements” — Establishes the general standards for thepreparation and presentation of consolidated and combined financial statementsas well as the disclosures required for such financial statements. This FRSsupersedes Statement B-8 “Consolidated and combined financial statements andvaluation of investments in common stock”, which was effective until December 31,2008.

 

MFRS C-7 “Investment inassociates and other permanent investments” — Establishes the standards for theaccounting recognition of the investments in associated companies, as well asother permanent investments where no control, joint control or significantinfluence is present.

 

MFRS C-8 “IntangibleAssets” — Establishes the valuation, presentation and disclosure rules forboth the initial and subsequent recognition of intangible assets acquired individuallyor through a business acquisition, or internally generated during the normalcourse of the entity’s operations. This MFRS supersedes Bulletin C-8 “IntangibleAssets”, which was effective until December 31, 2008.

 

MFRS D-8 “Share-basedpayments” — Establishes the standards for the recognition of share-basedpayments in the financial information. This MFRS supersedes the supplementalapplication in Mexico of the IFRS-2 

 

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Shared-based payments issued by the InternationalAccounting Standards Board.

 

Also, the CINIF hasissued the following interpretation to the Financial Reporting Standards(INIF):

 

INIF 14 “Contracts onconstruction, sale and rendering of services related to real estate”,complements the standards contained in Statement D-7 “Contracts on constructionand manufacturing of some capital assets”. This interpretation will becomeeffective starting January 1, 2010 for all the entities celebratingcontracts on construction, sale and rendering of services related to realestate. Early adoption is allowed.

 

***Recently Issued U.S.Accounting Standards***

 

*Businesscombinations (FASB Statement No. 141(R)):*

 

In December 2007,the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 141(revised 2007), “Business Combinations” (“FAS 141(R)”) which replaces FASNo.141, “Business Combination”. FAS 141(R) retains the underlying conceptsof FAS 141 in that all business combinations are still required to be accountedfor at fair value under the acquisition method of accounting but FAS 141(R) changedthe method of applying the acquisition method in a number of significantaspects.  FAS 141(R) is effective ona prospective basis for all business combinations for which the acquisitiondate is on or after the beginning of the first annual period subsequent to December 15,2008, with the exception of the accounting for valuation allowances on deferredtaxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuationallowances on deferred taxes and acquired tax contingencies associated withacquisitions that closed prior to the effective date of FAS 141(R) wouldalso apply the provisions of FAS 141(R). Early adoption is not allowed. The Company does not expect the adoptionof this statement to have a material impact on its financial position orresults of operations.

 

*Non-controllingInterests in Consolidated Financial Statements (FASB Statement No. 160):*

 

In December 2007,the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 160,“Non-controlling Interests in Consolidated Financial Statements, an Amendmentof ARB 51” (“FAS 160”). FAS 160 amends ARB 51 to establish new standards thatwill govern the accounting for and reporting of (1) non-controllinginterest in partially-owned consolidated subsidiaries and (2) the loss ofcontrol of subsidiaries. FAS 160 is effective on a prospective basis for allfiscal years, and interim periods within those fiscal years beginning on orafter December 15, 2008, except for the presentation and disclosurerequirements, which will be applied retrospectively. Early adoption is notallowed. The Company does not expect the adoption of this statement to have amaterial impact on its financial statements. The most significant effect of SFAS No. 160, at adoption, will beto reclassify retrospectively our minority interest to a separate component ofstockholders’ deficit, and to reclassify retrospectively income attributable tominority interest from an adjustment before net income to an allocation afternet income to the non-controlling interest.

 

*Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASB StatementNo. 133 (FASB Statement No. 161):*

 

On March 19,2008, the FASB issued Statement No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of FASB Statement No. 133”(“FAS 161”).  This new standard requiresenhanced disclosures for derivative instruments, including those used inhedging activities. FAS 161 requires qualitative disclosures about objectivesand strategies for using derivatives, quantitative disclosures about fair valueamounts of gains and losses on derivative instruments, and disclosures aboutcredit-risk-related contingent features in derivative agreements. It iseffective for fiscal years and interim periods beginning after November 15,2008, with early adoption encouraged. This standard only requires enhanceddisclosures and will not have any impact on the financial condition and resultsof operations of the Company.

 

*Determinationof the useful life of intangible assets (FSP FAS 142-3):*

 

In April 2008,the FASB issued FASB Staff Position FSP FAS 142-3, “Determination of the usefullife of intangible assets”, which amends FASB Statement No. 142, “Goodwilland Other Intangible Assets”, to provide guidance on the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,“Goodwill and Other Intangible Assets”. The intent of this FSP is to improvethe consistency between the useful life of a recognized intangible asset underStatement No. 142 and the period of expected cash flows used to measurethe fair value of the asset under

 

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FASB Statement No. 141(revised 2007), “Business Combinations”, and other U.S. generally acceptedaccounting principles (GAAP).

 

ThisFSP shall be effective for financial statements issued for fiscal yearsbeginning after December 15, 2008, and interim periods within those fiscalyears. Early adoption is prohibited. The guidance for determining the usefullife of a recognized intangible asset of this FSP shall be appliedprospectively to intangible assets acquired after the effective date. Thedisclosure requirements shall be applied prospectively to all intangible assetsrecognized as of, and subsequent to, the effective date. The Company does notexpect the adoption of this statement to have a material impact on itsfinancial position or results of operations.

 

*Employer’s Disclosures about Postretirement Benefit PlanAssets**(FSP FAS132 R-1):*

 

In December 2008,the FASB issued FSP FAS 132(R)-1.”Employer’sDisclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). The   FSP requires enhanced disclosures about plan assetscurrently required by FAS No. 132 (revised 2003), “Employer’s Disclosures about Pensions and Other PostretirementBenefits”.  FSP FAS 132(R)-1 requires more detaileddisclosures about employers’ plan assets, including employers’ investment strategies,major categories of plan assets, concentrations of risk within plan assets, andvaluation techniques used to measure the fair value of plan assets. FSP FAS132(R)-1 is effective for fiscal years ending after December 15, 2009,and early adoption is permitted. The Company does not expect the adoption ofthis statement to have a material impact on its financial statementsdisclosures.

 

*Effective Date of FASB Statement No. 157**(FSP FAS 157-2):*

 

In February 2008,the FASB issued Staff Position (FSP) FAS 157-2, “Effective Date of FASBStatement No. 157,” which delays by one year the effective date ofSFAS No. 157 for all non-financial assets and non-financialliabilities, except for those that are recognized or disclosed at fair value inthe financial statements at least annually. Assets and liabilities subject tothis deferral include goodwill, intangible assets, long-lived assets measuredat fair value for impairment assessments, and nonfinancial assets andliabilities initially measured at fair value in a business combination. For theCompany, FSP FAS 157-2 will be effective at the beginning of its 2009fiscal year. The Company does not expect the adoption of the remainingprovisions to have a material impact on the measurement of the Company’snon-financial assets and liabilities.

 

*Determiningfair value when the volume and level of activity for the asset or liabilityhave significantly decreased and identifying transactions that are not orderly(FSP FAS 157-4):*

 

In April 2009,the FASB issued FSP FAS 157-4, “Determining fair value when the volume andlevel of activity for the asset or liability have significantly decreased andidentifying transactions that are not orderly”, with an effective date forperiods ending after June 15, 2009. FSP FAS 157-4 provides additionalguidance in determining when observable transaction prices or quoted prices inmarkets that have become less active require significant adjustment to estimatefair value. FSP FAS 157-4 also includes guidance on identifying circumstances thatindicate a transaction is not orderly. The Company does not expect the adoptionof this statement to have a material impact on its financial position orresults of operation.

 

*Subsequentevents (FAS Statement No. 165):*

 

In May 2009,the FASB issued Statement of Financial Accounting Standards No. 165, “SubsequentEvents” (SFAS No.165).  SFAS No. 165 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued.Specifically, SFAS No. 165 provides (i) the period after the balancesheet date during which management of a reporting entity should evaluate eventsor transactions that may occur for potential recognition or disclosure in the financialstatements; (ii) the circumstances under which an entity should recognizeevents or transactions occurring after the balance sheet date in its financialstatements; and (iii) the disclosures that an entity should make aboutevents or transactions that occurred after the balance sheet date. SFAS No. 165is effective for interim or annual financial periods ending after June 15,2009 and shall be applied prospectively. The Company is currently analyzing theeffect that SFAS No.165 will have on its U.S.GAAP disclosures and financialinformation.

 

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*Accountingfor transfers of financial assets, an amendment of FASB Statement 140 (FASStatement No. 166):*

 

In June 2009the FASB issued FASB No. 166 “Accounting for transfers of financialassets, an amendment of FASB Statement 140” (SFAS No. 166). SFAS No. 166improve the relevance, representational faithfulness, and comparability of theinformation that a reporting entity provides in its financial statements abouta transfer of financial assets; the effects of a transfer on its financialposition, financial performance, and cash flows; and a transferor’s continuinginvolvement, if any, in transferred financial assets. The Board undertook thisproject to address (1) practices that have developed since the issuance ofFASB Statement No. 140, Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities, that are not consistentwith the original intent and key requirements of that Statement and (2) concernsof financial statement users that many of the financial assets (and relatedobligations) that have been derecognized should continue to be reported in thefinancial statements of transferors. This Statement must be applied as of thebeginning of each reporting entity’s first annual reporting period that beginsafter November 15, 2009, for interim periods within that first annualreporting period and for interim and annual reporting periods thereafter.Earlier application is prohibited. This Statement must be applied to transfersoccurring on or after the effective date.

 

Additionally,on and after the effective date, the concept of a qualifying special purposeentity is no longer relevant for accounting purposes. Therefore, formerlyqualifying special-purpose entities (as defined under previous accountingstandards) should be evaluated for consolidation by reporting entities on andafter the effective date in accordance with the applicable consolidationguidance. If the evaluation on the effective date results in consolidation, thereporting entity should apply the transition guidance provided in thepronouncement that requires consolidation. Additionally, the disclosureprovisions of this Statement should be applied to transfers that occurred bothbefore and after the effective date of this Statement. The Company is currentlyanalyzing the effect that SFAS No.166 will have on its U.S.GAAP disclosures andfinancial information.

 

*Amendmentsto FASB interpretation No. 46(R) (FAS Statement No. 167):*

 

In June 2009,the FASB issued FAS No. 167 “Amendments to FASB interpretation No. 46(R)”(SFAS No. 167). This Standard improves financial reporting by enterprisesinvolved with variable interest entities. The FASB undertook this project toaddress (1) the effects on certain provisions of FASB Interpretation No. 46(revised December 2003), Consolidation of Variable Interest Entities, as aresult of the elimination of the qualifying special-purpose entity concept inFASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituentconcerns about the application of certain key provisions of Interpretation46(R), including those in which the accounting and disclosures under theInterpretation do not always provide timely and useful information about anenterprise’s involvement in a variable interest entity. This Statement shall beeffective as of the beginning of each reporting entity’s first annual reportingperiod that begins after November 15, 2009, for interim periods withinthat first annual reporting period, and for interim and annual reportingperiods thereafter. Earlier application is prohibited. The Company does notexpect the adoption of this statement to have a material impact on itsfinancial position or results of operation.

 

## **ITEM6.          Directors, Senior Managementand Employees.**

 

**MANAGEMENTSTRUCTURE**

 

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

 

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 correspondingalternates.  Archer-Daniels-Midland hasdesignated Federico Gorbea, President and Chief Operating Officer ofArcher-Daniels-Midland’s operations in México, and Ismael Roig, Vice Presidentof Planning and Business Development, as members of our board ofdirectors.  Archer-Daniels-Midland haselected David J. Smith, its Senior Vice President, Secretary and GeneralCounsel, and Steve Mills its Group Vice President and Controller, to serve asalternates for Mr. Gorbea and Mr.

 

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Roig, respectively.  In addition, under Mexican law, any holder orgroup of holders representing 10% or more of our capital stock may elect onedirector and its corresponding alternate.

 

The board of directors, which was elected at theOrdinary General Shareholders’ Meeting held on April 30, 2009, currentlyconsists of 15 directors, with each director having a corresponding alternatedirector.  The following table sets forththe current 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:                                                                                                                                         |   | 78                                                                                                                                                                                                                                                                                                                                |
|--------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |   | Years as  Director:                                                                                                                          |   | 27                                                                                                                                                                                                                                                                                                                                |
|                                 |   | Principal  Occupation:                                                                                                                       |   | Chairman of the  Board of GRUMA and GIMSA and Chief Executive Officer of GRUMA                                                                                                                                                                                                                                                    |
|                                 |   | Outside  Directorships:                                                                                                                      |   | Chairman of the boards of Grupo Financiero Banorte, Banco Mercantil del Norte, Fundación GRUMA,  Fundación Banorte and Patronato de Cerralvo, Director of Patronato del  Hospital Infantil de México and Fondo Chiapas.                                                                                            |
|                                 |   | Directorship  Type:                                                                                                                          |   | Shareholder,  related                                                                                                                                                                                                                                                                                                             |
|                                 |   | Alternate:                                                                                                                                   |   | Roberto González  Moreno                                                                                                                                                                                                                                                                                                     |
|                                 |   |                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                              |
| Juan Diez-Canedo  Ruiz               |   | Age:                                                                                                                                         |   | 58                                                                                                                                                                                                                                                                                                                                |
|                                 |   | Years as  Director:                                                                                                                          |   | 4                                                                                                                                                                                                                                                                                                                                 |
|                                 |   | Principal  Occupation:                                                                                                                       |   | Chief Executive  Officer of Fomento y Desarrollo Comercial                                                                                                                                                                                                                                                                        |
|                                 |   | Outside  Directorships:                                                                                                                      |   | Director of  GIMSA, member of the audit and corporate governance committees of GRUMA and  GIMSA.                                                                                                                                                                                                                                  |
|                                 |   | Business  Experience:                                                                                                                        |   | Alternate  director of Grupo Financiero Banorte and Banco Mercantil del Norte, Chief Executive Officer of Cintra, Executive  Vice President of GRUMA 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                                                                                                                                                                                                                                                                                                          |
|                                 |   |                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                              |
| José de la Peña y Angelini |   | Age:  Years as Director:  Principal Occupation:  Outside Directorships:  Business Experience:

 

 

Directorship  Type:Alternate: |   | 60  Since April 2009  Chief Executive Officer of OBAMA Corporation  None  President of the Mexico office of FCB Worldwide, senior positions at Chrysler  de México, Executive Vice President Sales and Marketing of GRUMA, Chief  Operating Officer of Gruma Latin America.IndependentMario Ernesto Medina Ramírez |
|                                 |   |                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                              |
| Juan Antonio  González Moreno   |   | Age:                                                                                                                                         |   | 51                                                                                                                                                                                                                                                                                                                                |
|                                 |   | Years as  Director:                                                                                                                          |   | 15                                                                                                                                                                                                                                                                                                                                |
|                                 |   | Principal  Occupation:                                                                                                                       |   | Chief Executive  Officer of Gruma Asia and Oceania                                                                                                                                                                                                                                                                                |
|                                 |   | Outside  Directorships:                                                                                                                      |   | Alternate director of Grupo Financiero Banorte and Banco Mercantil del  Norte, Chairman of the Board and Chief Executive Officer 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                                                                                                                                                                                                                                                                                                |

 

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| Bertha Alicia  González Moreno |   | Age:                                                                                                                           |   | 55                                                                                                                                                                                                                                                          |
|-------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |   | Years as  Director:                                                                                                            |   | 1                                                                                                                                                                                                                                                           |
|                                |   | Principal  Occupation:                                                                                                         |   | Honorary Life President of Patronato para el Fomento  Educativo y Asistencial de Cerralvo                                                                                                                                                                   |
|                                |   | Other  Directorships:                                                                                                          |   | Director of Grupo Financiero Banorte, Centro  Educativo Universitario Panamericano, Adanec, Grafo Industrial, and IGNIX.                                                                                                                                    |
|                                |   | Business  Experience:                                                                                                          |   | Owner and Chief  Executive Officer of Uniformes Profesionales de Monterrey and  Comercializadora B.A.G.M.                                                                                                                                                   |
|                                |   | Directorship  Type:                                                                                                            |   | Shareholder,  related                                                                                                                                                                                                                                       |
|                                |   | Alternate:                                                                                                                     |   | Ricardo González Valdés                                                                                                                                                                                                                           |
|                                |   |                                                                                                                           |   |                                                                                                                                                                                                                                                        |
| Federico Gorbea Quintero            |   | Age:                                                                                                                           |   | 46                                                                                                                                                                                                                                                          |
|                                |   | Years as  Director:                                                                                                            |   | 2                                                                                                                                                                                                                                                           |
|                                |   | Principal  Occupation:                                                                                                         |   | President and  Chief Operating Officer of Archer Daniels Midland México                                                                                                                                                                                |
|                                |   | Other  Directorships:                                                                                                          |   | Chairman of the Board of Terminales de Carga  Especializadas, director of Asociación de Proveedores de Productos  Agropecuarios de México.                                                                                                        |
|                                |   | Business  Experience:                                                                                                          |   | President and  General Manager of Compañía Continental de México.                                                                                                                                                                            |
|                                |   | Directorship  Type:                                                                                                            |   | Shareholder, independent                                                                                                                                                                                                                                    |
|                                |   | Alternate:                                                                                                                     |   | Steve Mills                                                                                                                                                                                                                                                 |
|                                |   |                                                                                                                           |   |                                                                                                                                                                                                                                                        |
| Carlos Hank Rhon                    |   | Age:                                                                                                                           |   | 61                                                                                                                                                                                                                                                          |
|                                |   | Years as  Director:                                                                                                            |   | 15                                                                                                                                                                                                                                                          |
|                                |   | Principal  Occupation:                                                                                                         |   | Chairman of the  Board of Grupo Financiero Interacciones                                                                                                                                                                                                    |
|                                |   | Outside Directorships:                                                                                                         |   | Chairman of the  Board of Grupo Hermes and Grupo Coin/La Nacional                                                                                                                                                                                           |
|                                |   | 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                                                                                                                                                                                                                                  |
|                                |   |                                                                                                                           |   |                                                                                                                                                                                                                                                        |
| Mario Laborín  Gómez      |   | Age:  Years as Director:  Principal Occupation:  Outside Directorships:  Business Experience:

Directorship  Type:  Alternate: |   | 57  Since April 2009  N/A  Director of CYDSA, XIGNUX, and Megacable.  Chief Executive Officer of Bancomext (Exim-bank), Nacional Financiera,  Bancomer and Grupo Vector.IndependentAlan Castellanos Carmona                                            |
|                                |   |                                                                                                                           |   |                                                                                                                                                                                                                                                        |
| Juan Manuel Ley  López         |   | Age:                                                                                                                           |   | 76                                                                                                                                                                                                                                                          |
|                                |   | Years as  Director:                                                                                                            |   | 15                                                                                                                                                                                                                                                          |
|                                |   | Principal  Occupation:                                                                                                         |   | Chairman of the  Board of Casa Ley and Chief Executive Officer of Grupo Ley                                                                                                                                                                                 |
|                                |   | Outside  Directorships:                                                                                                        |   | 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:                                                                                                            |   | Independent                                                                                                                                                                                                                                                 |
|                                |   | Alternate:                                                                                                                     |   | Fernando Aguilar  Rosas                                                                                                                                                                                                                                     |
|                                |   |                                                                                                                           |   |                                                                                                                                                                                                                                                        |
| Bernardo  Quintana Isaac            |   | Age:                                                                                                                           |   | 67                                                                                                                                                                                                                                                          |
|                                |   | Years  as Director:                                                                                                            |   | 14                                                                                                                                                                                                                                                          |
|                                |   | Principal  Occupation:                                                                                                         |   | Chairman of the  Board of Empresas ICA.                                                                                                                                                                                                                     |
|                                |   | Outside  Directorships:                                                                                                        |   | Director of  BANAMEX and CEMEX, among others.                                                                                                                                                                                                               |
|                                |   | Business  Experience:                                                                                                          |   | Chief Executive  Officer of Empresas ICA.                                                                                                                                                                                                                   |
|                                |   | Directorship  Type:                                                                                                            |   | Independent                                                                                                                                                                                                                                                 |
|                                |   | Alternate:                                                                                                                     |   | Diego Quintana  Kawage                                                                                                                                                                                                                                      |

 

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| Juan A. Quiroga  García    |   | Age:                    |   | 59                                                                                                                                                                                                                                                |
|---------------------------------|--------|-------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |   | Years  as Director:     |   | 3                                                                                                                                                                                                                                                 |
|                            |   | 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:     |   | Shareholder,  related                                                                                                                                                                                                                             |
|                            |   | Alternate:              |   | Raúl A. Peláez  Cano                                                                                                                                                                                                                    |
|                            |   |                    |   |                                                                                                                                                                                                                                              |
| Ismael Roig                     |   | Age:                    |   | 41                                                                                                                                                                                                                                                |
|                            |   | Years  as Director:     |   | 2                                                                                                                                                                                                                                                 |
|                            |   | Principal  Occupation:  |   | Vice President  Strategic 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:                    |   | 58                                                                                                                                                                                                                                                |
|                            |   | Years  as Director:     |   | 15                                                                                                                                                                                                                                                |
|                            |   | Principal  Occupation:  |   | Chairman of the  Board and Chief Executive Officer of Plenus                                                                                                                                                                                      |
|                            |   | Outside  Directorships: |   | Director of  CEMEX, Synthetic Genomics and Donald Danforth Plant Science Center.                                                                                                                                                                  |
|                            |   | Business  Experience:   |   | Investor in  different industries and companies.  He  has been involved in the food and beverage, telecommunications, information  technology, insurance and financial services, agro-biotechnology, agriculture  and real estate industries |
|                            |   | Directorship  Type:     |   | Independent                                                                                                                                                                                                                                       |
|                            |   | Alternate:              |   | Adrián Rodríguez  Macedo                                                                                                                                                                                                                |
|                            |   |                    |   |                                                                                                                                                                                                                                              |
| Adrián Sada  González |   | Age:                    |   | 64                                                                                                                                                                                                                                                |
|                            |   | Years  as Director:     |   | 15                                                                                                                                                                                                                                                |
|                            |   | 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:     |   | Shareholder,  independent                                                                                                                                                                                                                         |
|                            |   | Alternate:              |   | Manuel Güemes de la Vega                                                                                                                                                                                                                     |
|                            |   |                    |   |                                                                                                                                                                                                                                              |
| Javier Vélez  Bautista     |   | Age:                    |   | 52                                                                                                                                                                                                                                                |
|                            |   | Years  as Director:     |   | 7                                                                                                                                                                                                                                                 |
|                            |   | Principal  Occupation:  |   | Chief Executive  Officer of ValueLink and Chiapas Organic Holdings                                                                                                                                                                                |
|                            |   | Outside  Directorships: |   | Director of  GIMSA, Chiapas Organic Holdings and Financiamiento Progresemos, member of the  audit and corporate governance committees of GRUMA and GIMSA.                                                                                         |
|                            |   | 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                                                                                                                                                                                                                         |

 

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Mr. Roberto GonzálezMoreno, Ms. Bertha Alicia González Moreno, and Mr. Juan AntonioGonzález Moreno, members of our board of directors are children of Mr. RobertoGonzález Barrera, the Chairman of our board of directors and our ChiefExecutive Officer. Mr. Carlos Hank Rhon, a member of our board ofdirectors, is the son-in-law of Mr. Roberto González Barrera.  Mr. Carlos Hank González, an alternatemember of our board of directors, is the son of Carlos Hank Rhon and thegrandson of Mr. Roberto González Barrera. Furthermore, Mr. Roberto González Valdez, an alternate member ofour board of directors, is the son of Mr. Roberto González Moreno and thegrandson of Mr. Roberto González Barrera.

 

**Secretary**

 

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

 

**Senior Management**

 

The following table setsforth our executive officers, their ages, years of service, current positions,and prior business experience:

 
| Roberto González  Barrera    |   | Age:                         |   | 78                                                                                                                                                                                                                                                                             |
|-----------------------------------|--------|------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              |   | Years as  Executive Officer: |   | 60                                                                                                                                                                                                                                                                             |
|                              |   | Years at GRUMA:              |   | 60                                                                                                                                                                                                                                                                             |
|                              |   | Current  Position:           |   | Chief Executive  Officer                                                                                                                                                                                                                                                       |
|                              |   | Business  Experience:        |   | Founder and  Chairman of the Board of GRUMA and Chairman of the board of Grupo Financiero  Banorte.                                                                                                                                                                            |
|                              |   |                         |   |                                                                                                                                                                                                                                                                           |
| Nicolás  Constantino Coppola |   | Age:                         |   | 61                                                                                                                                                                                                                                                                             |
|                              |   | Years as  Executive Officer: |   | 3                                                                                                                                                                                                                                                                              |
|                              |   | Years at GRUMA:              |   | 9                                                                                                                                                                                                                                                                              |
|                              |   | 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). |
|                              |   |                         |   |                                                                                                                                                                                                                                                                           |
| Leonel Garza Ramírez         |   | Age:                         |   | 59                                                                                                                                                                                                                                                                             |
|                              |   | Years as  Executive Officer: |   | 10                                                                                                                                                                                                                                                                             |
|                              |   | Years at GRUMA:              |   | 23                                                                                                                                                                                                                                                                             |
|                              |   | 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:                         |   | 45                                                                                                                                                                                                                                                                             |
|                              |   | Years as  Executive Officer: |   | 7                                                                                                                                                                                                                                                                              |
|                              |   | Years at GRUMA:              |   | 14                                                                                                                                                                                                                                                                             |
|                              |   | Current  Position:           |   | President, Gruma México and Latin America                                                                                                                                                                                                                                 |
|                              |   | Business  Experience:        |   | Managing  Director of GIMSA.  Several positions  within GRUMA’s Central American operations, including Chief Operating  Officer, President of the Tortilla Division in Costa Rica.  President of the Corn Division in Central  America.                         |

 

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| Juan Antonio  González Moreno |     | Age:                         |   | 51                                                                                                                                                                                                                                                                                                                                                                                       |
|------------------------------------|----------|------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |     | Years as  Executive Officer: |   | 5                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | Years at GRUMA:              |   | 29                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | 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:                         |   | 33                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | Years as  Executive Officer: |   | 2                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | Years at GRUMA:              |   | 4                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | Current  Position:           |   | Managing  Director, Gruma Centroamérica                                                                                                                                                                                                                                                                                                                                             |
|                               |     | Business  Experience:        |   | 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:                         |   | 44                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | Years as  Executive Officer: |   | 6                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | Years at GRUMA:              |   | 6                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | Current  Position:           |   | Chief Marketing  Officer                                                                                                                                                                                                                                                                                                                                                                 |
|                               |     | Business  Experience:        |   | 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:                         |   | 46                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | Years as  Executive Officer: |   | 7                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | Years at GRUMA:              |   | 24                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | Current  Position:           |   | Chief  Administrative Officer                                                                                                                                                                                                                                                                                                                                                            |
|                               |     | Business  Experience:        |   | Various  positions within GRUMA including Finance and Administrative Vice President of  Gruma Venezuela.                                                                                                                                                                                                                                                                                 |
|                               |     |                         |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| Heinz Kollmann                     |     | Age:                         |   | 39                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | Years as  Executive Officer: |   | 3                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | Years at GRUMA:              |   | 3                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | 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:                         |   | 48                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | Years as  Executive Officer: |   | 4                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | Years at GRUMA:              |   | 4                                                                                                                                                                                                                                                                                                                                                                                        |
|                               |     | 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:                         |   | 59                                                                                                                                                                                                                                                                                                                                                                                       |
| * *                           | * * | Years as  Executive Officer: |   | 11                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | Years at GRUMA:              |   | 36                                                                                                                                                                                                                                                                                                                                                                                       |
|                               |     | 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.                                                                                                                                                                                                        |

 

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| Juan Fernando Roche                                  |     | Age:                                                                                        |   | 54                                                                                                                                                                                                                                                                                                                                     |
|------------------------------------------------------|----------|---------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |     | Years as  Executive Officer:                                                                |   | 3                                                                                                                                                                                                                                                                                                                                      |
|                                                 |     | Years at GRUMA:                                                                             |   | 3                                                                                                                                                                                                                                                                                                                                      |
|                                                 |     | Current  Position:                                                                          |   | President 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:                                                                                        |   | 51                                                                                                                                                                                                                                                                                                                                     |
|                                                 |     | Years as  Executive Officer:                                                                |   | 7                                                                                                                                                                                                                                                                                                                                      |
|                                                 |     | Years at GRUMA:                                                                             |   | 26                                                                                                                                                                                                                                                                                                                                     |
|                                                 |     | 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.                                                                                                                                                                    |
|                                                 |     |                                                                                        |   |                                                                                                                                                                                                                                                                                                                                   |
| Fernando Solís Cámara y Jiménez Canet |     | Age:  Years as Executive Officer:  Years at GRUMA:  Current Position:  Business Experience: |   | 50  Since September 2008  Since September 2008  Director of Corporate Communication and Image  Chief Financial Officer of Sare Holding and Alta Consultoría, several  positions in Mexican Federal Government, including Undersecretary at the  Ministry of Political Affairs and National Commissioner of Immigration. |
|                                                 |     |                                                                                        |   |                                                                                                                                                                                                                                                                                                                                   |
| Salvador Vargas Guajardo                             |     | Age:                                                                                        |   | 56                                                                                                                                                                                                                                                                                                                                     |
| * *                                             | * * | Years as  Executive Officer:                                                                |   | 12                                                                                                                                                                                                                                                                                                                                     |
|                                                 |     | Years at GRUMA:                                                                             |   | 12                                                                                                                                                                                                                                                                                                                                     |
|                                                 |     | 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. Roberto GonzálezAlcalá, President of Gruma México and Latin America, and Mr. Juan AntonioGonzález Moreno, Chief Executive Officer of Gruma Asia and Oceania, are sons ofMr. Roberto González Barrera, the Chairman of our board of directors andour Chief Executive Officer. Mr. Roberto González Valdés, ManagingDirector of Gruma Centroamérica, is the son of Mr. Roberto GonzálezMoreno, alternate member of our board of directors, and the grandson of Mr. RobertoGonzález Barrera. Mr. Homero Huerta Moreno, our Chief AdministrativeOfficer, is the cousin of Mr. Juan Antonio González Moreno, Mr. RobertoGonzález Moreno, and Ms. Bertha Alicia González Moreno, members of ourboard of directors.

 

**Audit andCorporate 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 28, 2009.  Members ofthe audit and corporate governance committees were selected from members of the

 

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board of directors.  Consequently, as required by the MexicanSecurities Law and our bylaws, a chairman for each committee was elected by theGeneral Ordinary Shareholders’ Meeting held on April 30, 2009, among themembers appointed by the board.

 

The current audit and corporate governance committeesare comprised of three members, all of whom are independent directors.  Set forth below are the names of our auditand corporate governance committees members, their positions within thecommittees, and their directorship type:

 
| 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                                                         |
|                                 |   |                |   |                                                                |
| José de la Peña y Angelini |   | Position:           |   | Member of the  audit and corporate governance committees.           |
|                                 |   | Directorship  Type: |   | Independent                                                         |

 

**COMPENSATIONOF DIRECTORS AND SENIOR MANAGEMENT**

 

Members of the board of directors are paid a fee ofPs.30,000 for each board meeting they attend. Additionally, members of the audit and corporate governance committeesare paid a fee of Ps.33,000 for each committee meeting they attend.

 

For 2008, the aggregate amount of compensation paid toall directors, alternate directors, executive officers and audit and corporategovernance committees members was approximately Ps.122.2 million (in nominalterms).   The contingent or deferredcompensation reserved as of December 31, 2008 was Ps.33.4 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 20% 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, 2008, we had a total of 19,060employees, including 5,220 unionized and 13,840 non-unionized full- andpart-time employees.  Of this total, weemployed 7,268****persons in Mexico, 6,610****in the United States, 1,987 in Central America, 1,901 inVenezuela, 716 in China and Australia, and 578 in Europe.  Total employees for 2006 and 2007 were18,124, and 18,767, respectively.  Of ourtotal employees as of December 31, 2008, approximately 35% werewhite-collar and 65% were blue collar.

 

In Mexico, workers at each of our plants are covered bya 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 unionsthat represent our workers in 2008.

 

In the United States, Gruma Corporation has fourcollective bargaining agreements that represent a total of 414 workers at fourseparate facilities (Pueblo, Tempe, Madera, Henderson).  We renewed one agreement in January 2008.  A new collective bargaining agreement wasratified in November 2008 following the October 2006 NLRB (NationalLabor Relations Board) certification of the right to bargain for a locationthat had been involved in a challenge to the initial election in 2001.Additionally, the number of our U.S. employees covered under our collectivebargaining agreements was reduced effective February 2007, following adisclaimer of interest by one collective bargaining unit. The employees coveredby this bargaining unit have been paid severance pay and have separated fromthe company.

 

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In England, we have one collective bargainingagreement covering 25 employees at a facility, which will expire during 2009.

 

In the Netherlands, we are covered by a national laboragreement for bakery workers. This agreement is reviewed every 18 months.

 

Wages are reviewed during the negotiations and wageincreases processed according to the terms of each agreement as well asnon-monetary provisions of the agreement. Wage reviews for non-union employees are conducted once each year,typically in March for Mission Foods and in May for Azteca Milling,L.P.  We believe our current laborrelations are good.

 

**SHAREOWNERSHIP**

 

The following Directorsand Senior Managers have GRUMA shares which in each case represent less than 1%of our capital stock:  Mr. RobertoGonzález Moreno, Ms. Bertha Alicia González Moreno, Mr. RicardoGonzález Valdez, Mr. Adrián Sada González, Mr. Juan Antonio QuirogaGarcía, Mr. Leonel Garza Ramírez, and Mr. Juan Fernando Roche.  In addition, Mr. Roberto GonzálezBarrera owns directly and indirectly 279,301,152 shares representingapproximately 49.6% of our outstanding shares and Mr. Juan AntonioGonzález Moreno owns 6,748,294 shares representing approximately 1.2% of ouroutstanding shares.

 

**CORPORATEGOVERNANCE PRACTICES**

 

## **ITEM7.          Major Shareholders And RelatedParty Transactions.**

 

**MAJORSHAREHOLDERS**

 

The following table sets forth certain informationregarding the beneficial ownership of our capital stock as of April 30,2009 (which consists entirely of Series B Shares) with respect to Mr. GonzálezBarrera and Archer-Daniels-Midland and its affiliates, the only shareholders weknow to own beneficially more than 5% of our capital stock, as well as ourdirectors and executive officers as a group and other shareholders.  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 30,2009, our Series B shares were held by 562 record holders in Mexico.

 
| **Name**                                      | ** ** | **Number of   Series B Shares** | ** ** | **Percentage of  Outstanding Shares** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|
| Roberto González  Barrera and family (1) |       | 291,271,230                          |       | 51.68                                 | %          |
| Archer-Daniels-Midland (2)                    |       | 130,901,630                          |       | 23.22                                 | %          |
| Directors and Officers as a Group (3)         |       | 102,795                              |       | 00.02                                 | %          |
| Other shareholders                            |       | 141,375,054                          |       | 25.08                                 | %          |
|                                          |       |                                 |       |                                  |       |
| Total                                         |       | 563,650,709                          | (4)        | 100                                   | %          |

 

----

| (1) |   | The shares  beneficially owned by Mr. González Barrera and his family include:  185,823,216 shares held directly by Mr. González Barrera; 63,452,140  shares held indirectly by Mr. González Barrera through a trust  controlled by him; 30,025,796 shares held by him through a Mexican  corporation jointly owned with Archer-Daniels-Midland and controlled by him;  3,683,084 shares held by Ms. Graciela González Moreno; 1,282,900 shares  held by Ms. Bertha Alicia González Moreno; 150,000 shares held by  Mr. Roberto González Moreno; 105,800 shares held by Mr. Ricardo  González Valdes and 6,748,294 shares held by Mr. Juan Antonio González  Moreno. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Of the shares  beneficially owned by Archer-Daniels-Midland, a portion are held through its  Mexican subsidiary, and 24,566,561 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 to  determine how these shares are voted, and the shares cannot be transferred  without the consent of both Archer-Daniels-Midland and Mr. González  Barrera.                                                                                                                                                                                                                                        |
| (3) |   | This group does  not include the shares beneficially owned by Mr. Roberto González  Barrera, Ms. Bertha Alicia González Moreno, Mr. Roberto González  Moreno, Mr. Ricardo González Valdes, and Mr. Juan Antonio González  Moreno, members of our board of directors.                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (4) |   | As of April 30, 2009, our capital stock was  represented by 565,174,609 issued Series “B”, class I, no par value  shares, of which 563,650,709 shares were outstanding, fully subscribed and  paid, and 1,523,900 shares were held in our treasury.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

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Mr. González Barrera and his family controlapproximately 56.03% of our outstanding shares and therefore have the power toelect a 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. RobertoGonzález Barrera, the Chairman of our board of directors, acquire additionalshares of us.

 

On May 20, 2008, we completed a preemptive rightsoffering in Mexico to our non-U.S. shareholders, pursuant to which we issued82,624,657 of our series B common stock, class I, no par value shares.  Company shareholders exercising theirpreemptive rights paid for and acquired the shares at a price of Ps.25.55 pershare for a combined offering total of Ps.2,111,060,000.  Rights to acquire the shares were not offeredto U.S. persons, nor in any other jurisdiction outside of Mexico.  Prior to the preemptive rights offering, Mr. GonzálezBarrera and his family controlled, directly and indirectly, approximately 50.9%of our outstanding shares, and Archer-Daniels-Midland, directly and indirectly,owned approximately 27.1% of our outstanding shares and controlled the right tovote approximately 22% of our outstanding shares.  Archer-Daniels-Midland did not participate inthe rights offering.  As of April 30,2009, Archer-Daniels-Midland, directly and indirectly, owned approximately23.22% of our outstanding shares and controlled the right to vote approximately18.87% of our outstanding shares.

 

We have been informed that Mr. González Barrerahas pledged or has been required to pledge part of his shares in our company ascollateral for loans made to him. In the event of a default, should the lendersenforce their rights with respect to these shares, Mr. González Barreraand his family could lose their controlling interest in us.  In addition, Mr. González Barrera mustgive Archer-Daniels-Midland a right of first refusal on any sale of his GRUMAshares if at the time of the sale, he owns, or as a result of the sale willown, less than 30% of our outstanding shares. Should Archer-Daniels-Midland exercise its right, then it could controlus.  Archer-Daniels-Midland must alsogive Mr. González Barrera a right of first refusal on any sale of ourshares.

 

We are not aware of anysignificant changes in the percentage of ownership of any shareholders whichheld 5% or more of our outstanding shares during the past three years.

 

**RELATED PARTY TRANSACTIONS**

 

**Transactionswith Subsidiaries**

 

The transactions set forth below were made in theordinary course of business since we operate as a central treasurer for our subsidiaries.  We periodically enter into short-term creditarrangements with our subsidiaries, where we provide them with funds forworking capital at market interest rates.

 

At their peak on May 17,****2005,the outstanding balance of loans from GIMSA to GRUMA were Ps.1,530.8 million innominal terms.  As of June 12, 2009,we owed GIMSA Ps.1,085.3 million in nominal terms.  The average interest rate for this year up toJune 12, 2009 has been 9% for loans in pesos.

 

In September 2001,Gruma Corporation started to make loans to us which, at their peak on June 24,2004, reached the amount of U.S.$64.0** **million.We have borrowed money from GrumaCorporation at an average rate of 1%during 2009, having an outstanding amount of U.S.$55 million as of June 12, 2009.

 

**Transactionswith Archer-Daniels-Midland**

 

We entered into an association withArcher-Daniels-Midland in September 1996. As a result of this association, (i) we received U.S.$258.0 millionin cash, (ii) Gruma and Archer-Daniels-Midland combined their U.S. cornflour operations under Azteca Milling, our wholly-owned U.S. corn flouroperations, and, as a result, Archer-Daniels-Midland received a 20% partnershipinterest in Azteca Milling, and (iii) we received 60% of the capital stockof Molinera de México, Archer-Daniels-Midland’s wholly-owned Mexican wheatmilling operations.  We also

 

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gained exclusivity rightsfrom Archer-Daniels-Midland in specified corn flour and wheat flourmarkets.  In return,Archer-Daniels-Midland received 74,696,314 of our then newly issued shares,which represented approximately 22% of our total outstanding shares at thattime, and 20% partnership interest in Azteca Milling, and retained 40% of thecapital stock of Molinera de México. Archer-Daniels-Midland also obtained the right to designate two of our15 directors and their corresponding alternates.  In addition, Archer-Daniels-Midland acquired5% of MONACA.  Archer-Daniels-Midland hasdesignated Federico Gorbea, President and Chief Operating Officer ofArcher-Daniels-Midland’s operations in México, and Ismael Roig, Vice Presidentof Planning and Business Development, as members of our board ofdirectors.  Archer-Daniels-Midland haselected David J. Smith, its Senior Vice President, Secretary and GeneralCounsel, and Steve Mills its Group Vice President and Controller, to serve asalternates for Mr. Gorbea and Mr. Roig, respectively.  As of April 30, 2009,Archer-Daniels-Midland, directly and indirectly, owned approximately 23.22% ofour outstanding shares and controlled the right to vote approximately 18.87% ofour outstanding shares.

 

During 2006, 2007 and2008, we purchased U.S.$115 million, U.S.$133 million and U.S.$183 million,respectively, of inventory from Archer-Daniels-Midland Corporation, ashareholder, at market rates and terms. Additionally, in 2006, we purchased a 2% stake in MONACA from Archer-Daniels-Midlandand sold a 3% stake in DEMASECA to Archer-Daniels-Midland.  For more information regarding thesetransactions, please see “Item 4. Information on the Company—Business Overview—Gruma Venezuela.”

 

**OtherTransactions**

 

As of December 31, 2008 we hold approximately8.8% of the capital stock of GFNorte, a Mexican financial institution.  In the normal course of business, we mayobtain financing from GFNorte’s subsidiaries at market rates and terms.  For the past six years, the highestoutstanding loan amount has been Ps.162 million (in nominal terms) with anaverage interest rate of 8.9% in December 2003.

 

## **ITEM8.          Financial Information.**

 

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.

 

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**Distributor Arbitrations and Litigations**

 

**In November 2001,one of GRUMA’s distributors filed a putative class action lawsuit against GrumaCorporation (Dennis Johnson and Arnold Rosenfeld et al v. GrumaCorporation).  The case was removed fromCalifornia state court to federal court. In April 2005, the United States District Court, based upon arecent U.S. Supreme Court decision, ordered that the claims be referred toarbitration in Los Angeles and that the arbitrator decide whether the mattershould proceed as a class action.  Anadditional distributor subsequently joined the arbitration as a claimant.  The arbitrator has made a preliminary rulingthat a class of approximately 1,120 California distributors will be certified,but a final certification order has not yet been entered.  The claims, as amended, allege that:  (i) Gruma Corporation breached itsagreements with its distributors; (ii) Gruma Corporation’s distributorsare actually employees; (iii) Gruma Corporation has failed to make wageand other payments required for employees; (iv) Gruma Corporation hasviolated California’s labor, antitrust, and unfair competition statutes; and (v) GrumaCorporation has otherwise committed fraud and negligentmisrepresentations.  The arbitratorsubsequently dismissed the antitrust claims. The plaintiffs seek damages and equitable relief, but have not yetspecified the total amount of damages sought. The arbitrator has indicated that trial will be held in two phases.  The first phase to determine the existence ofany liability began on April 28, 2008 and finished on May 21,2008.  On August 12, 2008, thearbitrator issued his final award in writing finding that the distributors areproperly classified as independent contractors and denying all relief.  In November 2008, the District Courtaffirmed the award on all grounds and plaintiffs have appealed the confirmationto the Court of Appeals for the Ninth Circuit. The appeal is currently pending.**

 

**On July 28,2006, another of GRUMA’s distributors sought to join the Los Angelesarbitration but was referred to arbitration in the State of Washington (MistyBrunner and Kyle Ruby et al v.  GrumaCorporation).  An additional distributorsubsequently sought arbitration in the State of Washington and the twoproceedings have been consolidated before an arbitrator in Seattle.  The two distributors on behalf of allegedclasses of current and former distributors assert that:  (i) Gruma Corporation breached itsagreements with its distributors; (ii) Gruma Corporation’s distributorsare actually employees; (iii) Gruma Corporation has failed to make wageand other payments required for employees; (iv) Gruma Corporation hasviolated California and Washington labor statues, among others; and (v) GrumaCorporation has failed to pay federal excise payments on sales made by thedistributors.  Following the arbitrationaward in the Johnson case in Gruma Corporation’s favor, plaintiffs dropped theircase.**

 

**In April 2007,GRUMA was named in a class action suit, Enrique Garza, et al. v. GrumaCorporation doing business as Mission Foods, filed in the United StatesDistrict Court for the Northern District of California, San Jose Division.  The plaintiffs assert that they were inducedto enter into distributor agreements and to pay for routes by false statementsand that GRUMA breached the distributor agreements by arbitrarily taking theirroutes, shuffling around the routes, reselling the routes to others, andfailing to adequately compensate the plaintiffs.  The plaintiffs also asserted a RacketeerInfluenced and Corrupt Organizations (RICO) violation under 18 U.S. Code §§1962 et seq.  Plaintiffs seek anunspecified amount of damages and injunctive relief.  On July 24, 2008, the Court dismissedthe RICO claims with prejudice.  Theparties are scheduled for mediation on the remaining claims on March 18,2009.  We intend to vigorously defendagainst this action.**

 

**Drivers’ Class Action**

** **

**In October 2005,our company was named as a defendant in a class action suit, Ramon Moreno etal. v. Guerrero Mexico Food Products, Inc. and Gruma Corporation, filed inthe United States District Court for the Central District of California, LosAngeles County.  This suit was a punitiveclass action alleging a misclassification of sales drivers who deliver some ofour products to retail stores under the Guerrero brand, as exempt from certainovertime wage and other mandatory work hour requirements under the CaliforniaLabor Code.  The plaintiffs are membersof the International Brotherhood of Teamsters. In March 2008, our company reached a definitive settlementagreement with the plaintiffs for an amount of U.S.$2.9 million.  The Court agreed to the terms of thesettlement on April 21, 2008.  Thesettlement amount, as well as a portion of the costs we incurred in defendingthe case are being paid out of proceeds we received under an existing laborliability insurance policy.**

 

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**Product Class Action**

 

**In December 2008,Gruma Corporation was named as a defendant in a class action suit, Catherine M.Herzog et al. v. Gruma Corporation dba Mission Foods, filed in the UnitedStates District Court for the Southern District of California.  This suit was a class action allegingviolations of sections of the California Bus. & Prof. Code,intentional misrepresentation, breach of implied warranty, and violations ofCalifornia’s Consumer Legal Remedies Act in connection with the company’s  guacamole dip product.  The company put the vendor of the product onnotice of Gruma’s claim for indemnity under the vendor’s supply contract.  A tentative settlement has been reachedpending court approval.**

 

**Water Discharge Assessments**

 

**Certainsubsidiaries of GIMSA were notified by the National Water Commission of feeassessments due from various prior years. These assessments mainly arose from the National Water Commission’sdetermination that sewage water had been discharged on public property that wasbeing used for receiver facilities. Nevertheless, the subsidiaries used the water derived from theproduction process, previously treated, to irrigate certain of our company’sproperty through a sprinkler system.  Theaffected subsidiaries subsequently challenged these assessments and as of December 5,2007, all of the assessments the National Water Commission brought againstGIMSA’s subsidiaries were definitively resolved in favor of our company.**

 

**Mexican Tax Claim**

** **

**TheSecretaría de Hacienda y Crédito Público, or Ministry of Finance and PublicCredit, has lodged tax assessments against our Company for an amount ofPs.340.7 million in connection with our asset tax returns for the years 1994,1996, 1997, 1999 and 2000. The Company has filed several appeals to obtain anannulment of these assessments. The 1999 claim was recently definitivelyresolved by the Mexican Supreme Court against our Company.  The 1999 claim represents a debt owed by theCompany for asset taxes (*Impuesto al Activo*)of approximately Ps.47.5 million. We expect a similar result regarding the 2000claim against the Company. The 2000 claim represents an alleged debt of aboutPs.21.6 million. Additionally, the Ministry of Finance and Public Credit haslodged various tax assessments against our Company for an amount of Ps.93.5million regarding withholdings of interest payments to our foreign creditorsfor years 2000, 2001 and 2002.  TheCompany has set aside Ps.67 million to resolve these proceedings, which isreflected in accrued liabilities and other accounts payable.**

 

**Weintend to vigorously defend against these actions. We believe the resolution ofthese proceedings, if determined adversely against the Company, will not have amaterial effect on our financial position and results of operations.**

 

**Furthermore,the Ministry of Finance and Public Credit has made tax assessments againstMolinera de México for an amount of Ps.101.8 million for wheat imports madeduring the year 2003, which according to the Mexican tax authorities wereincorrectly classified under the harmonized system.  Our Company has filed a total of 14 appealsto obtain an annulment of all of these assessments, all of which have been definitelyand satisfactorily resolved in our favor.**

 

**Venezuelan Tax Claim**

 

The Venezuelan tax authorities have lodged certain assessments againstMolinos Nacionales, C.A. (MONACA) one of our Venezuelan subsidiaries, relatedto income tax returns for the years 1998 and 1999, which amounted to U.S.$1.4million plus tax debts presumably omitted in the amount of U.S.$66,344. The case has been appealed and is pending a final decision. Any taxliability arising from the resolution of these claims will be assumed by theprevious shareholder, International Multifoods Corporation, in accordance withthe purchase agreement by which it was acquired by our subsidiary in Venezuela,MONACA.

 

**Venezuelan Labor Lawsuits**

 

**Currently, our subsidiary MolinosNacionales, C.A. (MONACA)  is named in one labor lawsuit and twoextrajudicial claims alleging damages in the amount of U.S.$631,200.69. Thelawsuits and claims are related to issues and rights such as profit sharing,social security, vacation, seniority and indemnity payment issues.  The**

 

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**“caleteros” who brought the claims are workers who helpfreighters unload goods. Our subsidiary MONACA has been negotiating the paymentof the above-mentioned labor lawsuit and the extrajudicial claims, trying toreach agreements for the lawsuit and claims in an amount of U.S.$324,617.91.**

 

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

 

**TRADING HISTORY**

** **

Our Series B Shareshave been traded on the *Bolsa Mexicana de Valores,S.A. de C.V.*, or Mexican Stock Exchange, since 1994.  The ADSs, each representing four Series BShares, commenced trading on the New York Stock Exchange in November 1998.  As of April 30, 2009, our capital stockwas represented by 565,174,609issued Series “B”, class I, no par value shares, of which 563,650,709shares were outstanding, fully subscribed and paid, and 1,523,900 shares wereheld in our treasury.  As of December 31,2008, 104,800,672****Series B shares of ourcommon stock were represented by 26,200,168****ADSs held by13 record holders in the United States.

 

In May 2008, we issued 82,624,657 of our series B common stock,class I, no par value shares pursuant to a preemptive rights offering in Mexicoto our non-U.S. shareholders.  Companyshareholders exercising their preemptive rights paid for and acquired theshares at a price of Ps.25.55 per share, resulting in aggregate net proceeds tous from the offering of Ps.2,111 million. We did not offer any rights to acquire the shares to U.S. persons, norin any other jurisdiction outside of Mexico. The proceeds of the offering were used to reduce our level of debt andimprove our debt ratios in order to maintain our investment-grade rating.

 

On October 13, 2008 our Series B Shares were suspended asrequired by the Mexican Stock Exchange in connection with pending informationregarding the publication of events related to the company’s currencyderivative instruments.  Accordingly, ourADSs were also suspended on the New York Stock Exchange on October 20,2009. On October 29, 2008 our Series B Shares and our ADSs begantrading again as the aforementioned information was released.

 

**PRICE HISTORY**

 

The following table sets forth, for the periods indicated, the annualhigh and low closing sale prices for the Series B Shares and the ADSs asreported by the Mexican Stock Exchange and the New York Stock Exchange,respectively.

 
| ** **                  | ** ** | **Mexican  Stock Exchange** | ** ** | **NYSE**                 | ** ** |
|-----------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                  | ** ** | **Common  Stock**           | ** ** | **ADS(2)**               | ** ** |
| ** **                  | ** ** | **High**                    | ** ** | **Low**                  | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **                  | ** ** | **(Ps.  per share(1))**     | ** ** | **(U.S.$ per ADS)** | ** ** |
| **Annual Price History**    |       |                        |       |                     |       |   |   |   |   |
| 2004                        |       | 26.48                       |       | 15.70                    |       | 9.50 |   | 5.40 |   |
| 2005                        |       | 36.00                       |       | 20.64                    |       | 13.35 |   | 7.63 |   |
| 2006                        |       | 41.16                       |       | 26.53                    |       | 15.26 |   | 9.41 |   |
| 2007                        |       | 41.43                       |       | 32.32                    |       | 15.71 |   | 11.94 |   |
| 2008                        |       | 35.01                       |       | 5.85                     |       | 13.03 |   | 1.76 |   |
| **Quarterly Price History** |       |                        |       |                     |       |   |   |   |   |
| 2007                        |       |                        |       |                     |       |   |   |   |   |
| 1st Quarter            |       | 39.12                       |       | 32.73                    |       | 13.75 |   | 11.94 |   |
| 2nd Quarter            |       | 39.02                       |       | 34.61                    |       | 14.60 |   | 12.66 |   |
| 3rd Quarter            |       | 41.96                       |       | 35.49                    |       | 15.71 |   | 13.11 |   |
| 4th Quarter            |       | 40.00                       |       | 32.96                    |       | 14.53 |   | 12.17 |   |
| 2008                        |       |                        |       |                     |       |   |   |   |   |
| 1st Quarter            |       | 35.46                       |       | 25.10                    |       | 13.03 |   | 9.35 |   |
| 2nd Quarter            |       | 31.02                       |       | 25.24                    |       | 11.99 |   | 9.64 |   |
| 3rd Quarter            |       | 31.00                       |       | 22.10                    |       | 12.19 |   | 8.00 |   |
| 4th Quarter            |       | 22.13                       |       | 5.85                     |       | 8.14 |   | 1.76 |   |

 

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| ** **                | ** ** | **Mexican  Stock Exchange** | ** ** | **NYSE**                 | ** ** |
|---------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                | ** ** | **Common  Stock**           | ** ** | **ADS(2)**               | ** ** |
| ** **                | ** ** | **High**                    | ** ** | **Low**                  | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **                | ** ** | **(Ps.  per share(1))**     | ** ** | **(U.S.$ per ADS)** | ** ** |
| 2009                      |       |                        |       |                     |       |   |   |   |   |
| 1st Quarter          |       | 7.32                        |       | 3.67                     |       | 2.14 |   | 0.92 |   |
| 2nd Quarter(3)       |       | 14.75                       |       | 5.55                     |       | 4.44 |   | 1.54 |   |
| **Monthly Price History** |       |                        |       |                     |       |   |   |   |   |
| December 2008        |       | 7.34                        |       | 6.30                     |       | 2.25 |   | 1.84 |   |
| January 2009         |       | 7.32                        |       | 6.20                     |       | 2.14 |   | 1.71 |   |
| February 2009        |       | 6.95                        |       | 4.88                     |       | 1.80 |   | 1.27 |   |
| March 2009           |       | 6.73                        |       | 3.67                     |       | 1.88 |   | 0.92 |   |
| April 2009           |       | 8.87                        |       | 5.55                     |       | 2.63 |   | 1.54 |   |
| May 2009             |       | 14.46                       |       | 11.07                    |       | 4.41 |   | 2.25 |   |
| June 2009(3)         |       | 14.75                       |       | 13.60                    |       | 4.44 |   | 4.04 |   |

 

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| (1) | Pesos per share reflect  nominal price at trade date.                  |
|-----|------------------------------------------------------------------------|
| (2) | Price per ADS in U.S.$;  one ADS represents four Series B Shares. |
| (3) | Through June 12, 2009.                                            |

 

On June 12, 2009, the last reported sale price ofthe B Shares on the Mexican Stock Exchange was Ps.14.55 per B Share.  On June 12, 2009, the last reported saleprice of the ADSs on the New York Stock Exchange was U.S.$4.30 per ADS.

 

**MEXICAN STOCK EXCHANGE**

 

The Mexican Stock Exchange, the *Bolsa Mexicana de Valores,S.A. de C. V.*, located in Mexico City, is the only stock exchange inMexico.  Founded in 1907, it is organizedas a corporation whose shares are held by brokerage firms, which areexclusively authorized to trade on the exchange.  As of June 13, 2008 the *Bolsa Mexicana de Valores* became a publicly traded company.Trading on the Mexican Stock Exchange takes place principally through automatedsystems and is open between the hours of 8:30 a.m. and 3:00 p.m.Mexico City time, each business day. Trades in securities listed on the Mexican Stock Exchange can also beperformed off the exchange.  The MexicanStock Exchange operates a system of automatic suspension of trading in sharesof a particular issuer as a means of controlling excessive price volatility.

 

Settlement is effected three business days after ashare transaction on the Mexican Stock Exchange.  Deferred settlement, even by mutualagreement, is not permitted without the approval of the *ComisiónNacional Bancaria y de Valores* (the Mexican National Banking andSecurities Commission, or CNBV).  Mostsecurities traded on the Mexican Stock Exchange, including ours, are on depositwith *S.D. Indeval Institución para el Depósito deValores, S.A. de C.V.*, or Indeval, a privately owned securitiesdepositary that acts as a clearinghouse for Mexican Stock Exchangetransactions.

 

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.       Additional Information.**

 

**BYLAWS**

 

Setforth below is a brief summary of certain significant provisions of our bylaws,according to their last comprehensive amendment.  This description does not purport to becomplete and is qualified by reference to our bylaws, which are incorporated asan exhibit to this Annual Report.

 

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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 additionalduties and liabilities on the members of the board of directors as well assenior officers.  Thus, we were requiredto carry out a comprehensive amendment of our bylaws through an extraordinarygeneral shareholders’ meeting held on November 30, 2006.

 

**Incorporationand Register**

 

Wewere incorporated in Monterrey, Mexico on December 24, 1971 as acorporation (*Sociedad Anónima de Capital Variable*)under the Mexican Corporations 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**

 

Ourmain corporate purpose, as fully described in Article Second of ourbylaws, is to serve as a holding company and to engage in various activitiessuch as:  (i) purchasing, selling,importing, exporting, and manufacturing all types of goods and products, (ii) issuingany kind of securities and taking all actions in connection therewith (iii) creating,organizing and managing all types of companies, (iv) acting as an agent orrepresentative, (v) purchasing, selling and holding real property, (vi) performingor receiving professional, technical or consulting services, (vii) establishingbranches, agencies or representative offices, (viii) acquiring, licensing,or using intellectual or industrial property, (ix) granting and receivingloans, (x) subscribing, issuing and negotiating all types of creditinstruments, and (xi) performing any acts necessary to accomplish theforegoing.

 

**Directors**

 

Our bylaws provide thatour management shall be vested in the board of directors and our ChiefExecutive Officer.  Each director iselected by a simple majority of the shares. Under Mexican law and our bylaws, any holder or group of holders owning10% or more of our capital stock may elect one director and its correspondingalternate.  The board of directors mustbe comprised of a minimum of five and a maximum of twenty-one directors, asdetermined by the shareholders at the annual 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 ofdirectors consists of 15 members.

 

The board of directorsshall meet at least four times a year. These meetings can be called by the Chairman of the board of directors,the Chairman of the Audit and Corporate Governance Committees, or by 25% of themembers 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 receivecompensation as determined by the shareholders at the annual ordinary generalshareholders’ meeting.  The majority ofdirectors are needed to constitute a 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 the general strategies for thebusiness of the company; (ii) oversee the performance and conduction ofbusiness of the company; (iii) oversee the main risks encountered by thecompany, identified by the information submitted by the committees, the ChiefExecutive Officer and the firm providing the external auditing services; (iv) approvethe information and communication policies with shareholders and the market;and (v) instruct the Chief Executive Officer to disclose to the investorpublic any material information when known.

 

Additionally, the boardof directors has the authority and responsibility to approve, with the previousopinion of the corresponding Committee:  (i) thepolicies for the use of the company’s assets by any related party; (ii) relatedparty transactions other than those occurring in the ordinary course of business,those of insignificant

 

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amount, and those deemedas done within market prices; (iii) the purchase or sale of 5% or more ofour corporate assets; (iv) granting of warranties or the assumption ofliabilities for more than 5% of our corporate assets; (v) the appointment,and in its case, destitution of the Chief Executive Officer and his integralcompensation, as the designation of integral compensation policies for allother senior officers; (vi) internal control and internal auditguidelines; (vii) the company’s accounting guidelines; (viii) thecompany’s financial statements; and (ix) the hiring of the firm providingexternal audit services and, in its case, any services additional orsupplemental to the external audit.  Theapproval of the board in all of these matters is non-delegable.

 

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

 

**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 beexclusively comprised by independent directors and by a minimum of threemembers, elected by the board of directors at the proposal of the Chairman ofthe Board.  The Chairman of suchCommittees shall be exclusively designated and/or removed from office by theannual ordinary general shareholders’ meeting.

 

For the performance ofits duties, the Corporate Governance Committee shall:  (i) render its opinion to the board ofdirectors, pursuant to the Mexican Securities Law; (ii) request theopinion of independent experts, when deemed convenient; (iii) conveneshareholders meetings and include issues in the agenda they deem appropriate; (iv) assistthe board of directors when making the annual reports; and (v) beresponsible of any other activity provided by law or our bylaws.

 

Likewise, for theperformance of its duties, the Audit Committee shall:  (i) render its opinion to the board ofdirectors, pursuant to the Mexican Securities Law; (ii) request theopinion of independent experts when deemed convenient; (iii) conveneshareholders meetings and include issues in the agenda they deem appropriate; (iv) assessthe performance of the external auditing firm, as well as analyze the opinionsand reports rendered by the external auditor; (v) discuss the financialstatements of the company and, if appropriate, recommend its approval to theboard of directors; (vi) inform the board of directors of the condition ofthe internal controls and internal auditing systems, including anyirregularities detected therein; (vii) prepare the opinion of the reportrendered by the Chief Executive Officer; (viii) assist the board ofdirectors when making the annual reports; (ix) request from the seniorofficers and from other employees, reports relevant to the preparation of thefinancial information and of any other kind deemed necessary for theperformance of their duties; (x) investigate possible irregularitieswithin the company, as well as carry out the actions deemed appropriate; (xi)request meetings with senior officers in connection with the internal controland internal audit; (xii) inform the board of directors about the materialirregularities detected while exerting their duties, and in case of any irregularities,notify the board of directors of any corrective measures taken; (xiii) ensurethat the Chief Executive Officer complies with the resolutions taken by theShareholders’ Meetings and by the board of directors; (xiv) oversee theestablishment of internal controls in order to verify that the transactions ofthe company conform to the applicable legal regulations; and (xv) beresponsible of any other activity provided by law or our bylaws.

 

**Fiduciary Duties - Duty ofDiligence**

 

Our bylaws and the MexicanSecurities Law provide that the directors shall act in good faith and in ourbest interest.  In order to fulfill itsduty, our directors may:  (i) requestinformation about us that is reasonably necessary to take actions; (ii) requirethe presence of any officers or other key employees, including the externalauditors, that may contribute elements for taking actions at board meetings; (iii) postponeboard meetings when a director has not been given sufficient notice of themeeting or in the event that a director has not been provided with theinformation provided to the other directors; and (iv) discuss and vote onany item requesting, if deemed convenient, the exclusive presence of themembers and the secretary of the board of directors.

 

Our directors may be liable for damagescaused when breaching their duty of diligence if such failure causes economicdamage to the company or our subsidiaries, as well as if the director:  (i) fails to attend board or 

 

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committee meetings and, as a result ofsuch absence, the board was unable to take action, unless such absence isapproved by the shareholders meeting; (ii) fails to disclose to the boardof directors or the committees material information necessary to reach adecision; and/or (iii) fails to comply with its duties imposed by theMexican Securities Law or our bylaws.  Membersof the board of directors may not represent shareholders at any shareholders’meeting.

 

**FiduciaryDuties - Duty of Loyalty**

 

Our bylaws and the Mexican Securities Law provide that the directorsand secretary of the board shall keep confidential any non-public informationand matters about which they have knowledge as a result of their position.  Also, directors must abstain fromparticipating, attending or voting at meetings related to matters where theyhave 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, the directors will fail tocomply with their duty of loyalty if they: (i) vote at a board meeting or take any action where there is aconflict of interest; (ii) fail to disclose a conflict of interest theymay have during a board meeting; (iii) knowingly favor a particular shareholderof the company against the interests of other shareholders; (iv) approverelated party transactions without complying with the requirements of theMexican Securities Law; (v) use company assets infringing the policiesapproved by the board of directors; (vi) unlawfully use materialnon-public information of the company; 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.  Ourdirectors may be liable for damages when breaching their duty of loyalty ifsuch failure causes economic damage to the company or our subsidiaries.

 

**Civil Actions 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 theevent the majority of the shareholders decide to bring such action, thedirector against whom such action is brought will immediately cease to be amember of the board of directors. Additionally, shareholders representing not less than 5% of ouroutstanding shares may directly bring such action against directors.  Any recovery of damages with respect to suchaction will be for our benefit and not for the benefit of the shareholdersbringing the action.

 

**Chief Executive 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 approval of the board of directors, thebusiness strategies of the company; (ii) execute the resolutions of theShareholders’ Meetings and of the board of directors; (iii) propose to theAudit Committee, the internal control system and internal audit guidelines ofthe company, as well as execute the guidelines approved thereof by the board ofdirectors; (iv) disclose any material information and events that shouldbe disclosed to the investor public; (v) comply with the provisionsrelevant to the repurchase and placement transactions of the company’s ownstock; (vi) exert any corresponding corrective measures and liabilitysuits; (vii) assure that adequate accounting, registry and informationsystems are maintained by the company; (viii) prepare and submit to theboard of directors his annual report; (ix) establish mechanisms and internalcontrols permitting certification that the actions and transactions of thecompany conform to the applicable regulations; and (x) exercise his rightto file  the liability suits referred toin the Mexican Securities Law against related parties or third parties thatallegedly cause damage to the company.

 

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**VotingRights and 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 ofthe outstanding common stock has the right to appoint one director and hiscorresponding alternate, with the remaining directors being elected by majorityvote.

 

General shareholders’meetings may be ordinary or extraordinary. Extraordinary general shareholders’ meetings are called to considermatters specified in Article 182 of the Mexican Corporations Law,including, principally, changes in the authorized fixed share capital and otheramendments to the bylaws, the issuance of preferred stock, the liquidation,merger and spin-off of the company, changes in the rights of security holders,and transformation from one corporate form to another.  All other matters may be approved by anordinary general shareholders’ meetings. Ordinary general shareholders’ meetings must be called to consider andapprove matters specified in Article 181 of the Mexican Corporations Law,including, principally, the appointment of the members of the board ofdirectors and the Chairman of the Audit and Corporate Governance Committees,the compensation paid to the directors, the distribution of our profits for theprevious year, and the annual reports presented by the board of directors andthe Chief Executive Officer.  Ourshareholders establish the number of members that will serve on our board ofdirectors at the ordinary general shareholders’ meeting.

 

A general ordinaryshareholders’ meeting must be held during the first four months after the endof each fiscal year.  In order to attenda general shareholders’ meeting, the day before the meeting shareholders mustdeposit the certificates representing their common stock or other appropriateevidence of ownership either with the secretary of our board of directors, witha credit institution, or with Indeval. The secretary, credit institution or Indeval will hold the certificatesuntil 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 not present, a subsequentmeeting may be called at which the shareholders present, whatever their number,will constitute a quorum and action may be taken by a majority of the sharespresent.  A quorum for extraordinarygeneral shareholders’ meetings is at least 75% of the outstanding common stock,but if a quorum is not present, a subsequent meeting may be called.  A quorum for the subsequent meeting is atleast 50% of the outstanding shares. Action at an extraordinary general shareholders’ meeting may only betaken by a vote of holders representing at least 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 of directors or the Chairman of the Audit orCorporate Governance Committees may be required to call a shareholders’ meetingif holders of at least 10% of our outstanding share capital request a meetingin writing, or at the written request of any shareholder if no shareholders’meeting has been held for two consecutive years, or, if during a period of twoconsecutive years, the board of directors’ annual report for the previous yearand the company’s financial statements were not presented to the shareholders,or if the shareholders did not elect directors.

 

Notice of shareholders’meetings must be published in the Federal Official Gazette or in a newspaper ofgeneral circulation in Monterrey, Nuevo León at least 15 days prior to themeeting.  Shareholders’ meetings may beheld without such publication provided that 100% of the outstanding shares arerepresented.  Shareholders’ meetings mustbe held within the corporate domiciles in Monterrey, Nuevo León.

 

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 at whichsuch action was taken, by showing that the challenged action violates Mexicanlaw or our bylaws.  Relief under theseprovisions is only available to holders who were entitled to vote on thechallenged shareholder action and whose shares were not represented when theaction was taken or, if represented, voted against it.

 

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**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 allocate5% of any new profits to a legal reserve which is not thereafter available fordistribution until the amount of the legal reserve equals 20% of our capitalstock (before adjusting for inflation). Amounts in excess of those allocated to the legal reserve fund may beallocated to other reserve funds as the shareholders determine, including areserve for the repurchase of our shares. The remaining balance of new profits, if any, is available fordistribution as dividends.  Cashdividends on the shares held through Indeval will be distributed by us throughIndeval.  Cash dividends on the sharesevidenced by physical certificates will be paid when the relevant dividendcoupon registered in the name of its holder is delivered to us.  No dividends may be paid, 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 theextraordinary general shareholders’ meeting does not make said appointment, aCivil or District Judge can do so at the 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 notbeen paid in full will be entitled to these proceeds in proportion to thepaid-in amount.

 

If theextraordinary general shareholders’ meeting does not give express instructionson liquidation, the bylaws stipulate that the liquidators will (i) concludeall pending matters they deem most convenient, (ii) prepare a generalbalance and inventory, (iii) collect all credits and pay all debts byselling assets necessary to accomplish this task, (iv) sell assets anddistribute income, and (v) distribute the amount remaining, if any, prorata among the shareholders.

 

**Changesin Capital Stock**

 

Our outstanding capitalstock consists of Class I and Class II series B shares.  Class I shares are the fixed portion ofour capital stock and have no par value. Class II shares are the variable portion of our capital stock andhave no par value.  The fixed and capitalportion of our capital stock cannot be withdrawn.  The issuance of variable capital shares,unlike the issuance of fixed capital shares, does not require an amendment ofthe bylaws, although it does require approval at an ordinary generalshareholders’ meeting.  The fixed portionof our capital stock may only be increased or decreased by resolution of anextraordinary general shareholders’ meeting and an amendment to our bylaws,whereas the variable portion of our capital stock may be increased or decreasedby resolution of an ordinary general shareholders’ meetings.  Currently, our outstanding capital stockconsists 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 capital stock generally maynot be made until all previously issued and subscribed shares of capital stockhave been fully paid.  A reduction ofcapital stock may be effected to absorb losses, to redeem shares, to repurchaseshares in the market or to release shareholders from payments not made.

 

As of April 30,2009, our capital stock was represented by 565,174,609 issued Series “B”,class I, no par value shares, of which 563,650,709 shares were outstanding,fully subscribed and paid, and 1,523,900 shares were held in our treasury.

 

**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 to

 

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maintain the holder’sexisting proportionate holdings of shares of that series.  Preemptive rights must be exercised withinthe period and under the conditions established for such purpose by theshareholders at the corresponding shareholders’ meeting.  Under Mexican law and our bylaws, theexercise period may not be less than 15 days following the publication ofnotice of the capital increase in the Federal Official Gazette or following thedate of the shareholders’ meeting at which the capital increase was approved ifall shareholders were represented; otherwise such rights will lapse.

 

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 may be restricted in theirability to participate in the exercise of preemptive rights.  See “Item 3. Key Information—Risk Factors—Risks Relating to Our ControllingShareholders and Capital Structure—Holders of ADSs May Not Be Able toParticipate 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 of Economy and the NationalCommission on Foreign Investment are responsible for the administration of theForeign Investment Law and the Foreign Investment Regulations.

 

Our bylaws do notrestrict the participation of non-Mexican investors in our capital stock.  However, approval of the National ForeignInvestment Commission must be obtained for foreign investors to acquire adirect or indirect participation in excess of 49% of the capital stock of aMexican company that has an aggregate asset value that exceeds, at the time offiling the corresponding notice of acquisition, an amount determined annuallyby the National Foreign Investment Commission.

 

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.  Suchshareholders cannot invoke the protection of their government under penalty offorfeiting to the Mexican State the ownership interest that they may haveacquired.

 

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 he may have withrespect to its investment in us, including any rights under U.S. securitieslaws.  If a shareholder should invokegovernmental protection in violation of this provision, his shares could beforfeited to the Mexican government. Mexican law requires that such a provision be included in the bylaws ofall Mexican companies unless such bylaws prohibit ownership of shares bynon-Mexicans.  See “Item 3.  Key Information—Risk Factors—Risks Relatingto Our 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**

 

Ourshares are evidenced by certificates in registered form.  We maintain a stock registry and, inaccordance with Mexican law, only those persons whose names are recorded on thestock registry are recognized as owners of the series B shares.

 

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**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 whohas voted 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 which a withdrawing shareholder isentitled to receive is equal to its proportionate interest in our capital stockaccording to our most recent balance sheet approved by an ordinary generalshareholders’ meeting.  The reimbursementmay 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 bemade charging our equity, in which case we may keep them without reducing ourcapital stock, or charging our capital stock, in which case we must convertthem into unsubscribed treasury stock. The ordinary general shareholders’ meeting shall determine the maximumamount of funds to be allocated for the repurchase of shares, which amountshall not exceed 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.  Ifthe repurchased shares are kept in our treasury, we may not exercise theireconomic and voting rights, and such shares will not be deemed to beoutstanding for purposes of calculating any quorum or voting at anyshareholders’ meeting.  The repurchasedshares held by us as outstanding shares may not be represented at anyshareholder meeting.  The decrease orincrease of our capital stock as a result of the repurchase does not requirethe approval of a shareholders’ meeting or of the board of directors.

 

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 commonstock representing 3% or more of our outstanding share capital in any 20trading-day period must be conducted through 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 tenderoffer shall be made at least at the 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 Exchange referred to in the precedingparagraph shall be the weightedaverage share price as quoted on the MexicanStock Exchange for the last 30 days in which our shares were traded, in aperiod not greater than six months prior to the date of the publictender offer. If the number of days in which our shares have traded during the periodreferred to above is less than 30, then only the actual number of days in whichour shares have traded during such period will be taken into account.  If shares have not been exchanged during suchperiod, then the tender offer shall be made at a price equal to at least thebook value of 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.

 

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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 of the holdersof at least 95% of our outstanding common shares, by a resolution at ashareholders’ meeting; (ii) the aggregate amount offered for thesecurities in the market is less than 300,000 investment units (UDIs); (iii) thetrust referred to in the preceding paragraph is executed, and (iv) noticeis given to the CNBV of the execution and cancellation of the trust through theestablished 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 well as anyconflicts of interest that its members may have in connection with the tenderoffer.  The opinion of the board ofdirectors may be accompanied by another opinion issued by an independent expertthat 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.  TheCNBV shall take into account our financial situation in considering whether togrant such approval.  In requesting suchapproval, the following must be submitted to the CNBV:  (i) the resolution of the board ofdirectors approving such request, (ii) the opinion of the CorporateGovernance Committee addressing the reasons why it deems appropriate the use ofa different price, and (iii) a report from an independent expertindicating that the price is consistent with the terms of the MexicanSecurities 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 abusiness transaction in which its interest conflicts with ours may be liablefor damages if the transaction would not have been approved without suchshareholder’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 and responsibilities of directors and controllingshareholders has not been the subject of extensive judicial interpretation inMexico, unlike the United States where judicial decisions have been issuedregarding the duties of diligence and loyalty, which more effectively protectthe rights of minority shareholders.  Inaddition, Mexican civil procedure does not contemplate class actions orshareholder derivative actions, which permit shareholders in U.S. courts tobring actions on behalf of other shareholders or to enforce rights of thecorporation itself.  Shareholders cannotchallenge corporate action taken at a shareholders’ meeting unless they meetcertain 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 equitysecurities registered under the Exchange Act, including the proxy solicitationrules, the rules requiring disclosure of share ownership by directors,officers and certain shareholders.  Weare also exempt from certain of the corporate governance requirements of theNew York Stock Exchange, including certain requirements concerning auditcommittees and independent directors.  Asummary of significant ways in which our corporate governance standards differfrom those followed by U.S. companies pursuant to NYSE listing standards isavailable on our website at www.gruma.com. The information found at this website is not incorporated by referenceinto this document.

 

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.  Key Information—RiskFactors—Risks Relating to Our Controlling Shareholders and CapitalStructure—The Protections Afforded to Minority Shareholders in Mexico AreDifferent 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

 

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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.

 

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.  Inaddition, pursuant to our bylaws, these holders will be obligated to pay us apenalty in an amount equal to the greater of (i) the market value of theshares such party acquired without obtaining the prior approval of the board ofdirectors and (ii) the market value of shares representing 5% of ourcapital stock.

 

*Board Notices, Meetings, Quorum Requirementsand Approvals**.* To obtain the prior approval of our board of directors, a potentialpurchaser must properly deliver a written application complying with theapplicable requirements set forth in our bylaws.  Such application shall state, among other things:  (i) the number and class of our sharesthe person beneficially owns or to which such person has any right, (ii) thenumber and class of shares the Person intends to acquire, (iii) the numberand class of shares with respect to which such Person intends to acquire anyright, (iv) the percentage that the shares referred to in (i) representof our total outstanding shares and of the class or series to which such sharesbelong, (v) the percentage that the shares referred to in (ii) and (iii) representof our total outstanding shares and of the class or series to which such sharesbelong, (vi) the person’s identity, or in the case of a purchaser which isa corporation, trust or legal entity, its shareholders, partners orbeneficiaries as well as the identity and nationality of each personeffectively controlling such corporation, trust or legal entity, (vii) thereasons and purpose behind such acquisition, (viii) if such person is,directly or indirectly, a competitor of the company or any of its subsidiariesor affiliates, and if such person has the authority to legally acquire theshares pursuant to our bylaws and Mexican law, (ix) its source offinancing the intended acquisition, (x) if the Person is part of aneconomic group, formed by one or more of its related parties, which intends toacquire shares of our common stock or rights to such shares, (xi) if the personhas obtained any financing from one of its related parties for the payment ofthe shares, (xii) the identity and nationality of the financial institution, ifany, that will act as the underwriter or broker in connection with any tenderoffer, 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 meeting of the board ofdirectors shall be in writing and sent to each of the directors and theiralternates at least 45 calendar days prior to the meeting.  Action by unanimous written consent is notpermitted.

 

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 acquisitionsmust be resolved by our board of directors within 60 calendar days followingthe receipt of the written application described above, unless the board ofdirectors determines that it does not have sufficient information upon which tobase its decision.  In such case, theboard of directors shall deliver a written request to the potential purchaserfor any additional information that it deems necessary to make its determination.  The 60 calendar days referred to above willcommence following the receipt of the additional information from the potentialpurchaser.

 

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*MandatoryTender Offers in the Case of Certain Acquisitions. *If our board of directors authorizes anacquisition of common shares which increases the purchaser’s ownership to 30%or more, but not more than 50%, of our capital stock, then the purchaser 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 purchaser’sownership to more than 50% of our capital stock or result in a change ofcontrol, in which case the purchaser 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.

 

The aforementioned tenderoffers must be made simultaneously in the Mexican and US stock markets.  Furthermore, an opinion issued by the boardof directors regarding any such tender offer must be made available to thepublic through the authorized means of communication within 10 days aftercommencement of the tender offer.  In theevent of any tender offer, the shareholders shall have the right to hear morecompetitive offers.

 

*Notices**. *In addition to the aforementionedapprovals, 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 of our bylaws summarizedabove will not apply to:  (i) transfersof shares by operation of the laws of succession; (ii) acquisitions ofshares 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, 2003hold(s), directly or indirectly, more than 20% of the shares representing thecompany’s capital stock, and; (iv) any other exceptions provided for inthe Mexican Securities Law and other legal dispositions derived from said law.

 

**MATERIAL CONTRACTS**

** **

**Archer-Daniels-Midland**

 

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

 

As a result of this association, (i) we received U.S.$258.0million in cash, (ii) Gruma and Archer-Daniels-Midland combined their U.S.corn flour operations under Azteca Milling, our wholly-owned U.S. corn flouroperations, and, as a result, Archer-Daniels-Midland received a 20%  partnership interest in Azteca Milling, and (iii) wereceived 60% of the capital stock of Molinera de México, Archer-Daniels-Midland’swholly-owned Mexican wheat milling operations. We also gained exclusivity rights from Archer-Daniels-Midland inspecified corn flour and wheat flour markets. In return, Archer-Daniels-Midland received 74,696,314 of our then newlyissued shares, which represented at that time approximately 22% of our totaloutstanding shares and a 20% partnership interest in Azteca Milling in additionto retaining 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 González Barrera, the Chairman of ourboard of directors, acquire additional shares of our company.  As of April 30, 2009,Archer-Daniels-Midland owned, directly and indirectly, approximately 23.22% ofour outstanding shares.  A total of24,566,561 of these shares are held by Archer-Daniels Midland through a Mexicancorporation jointly

 

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owned with Mr. González Barrera and controlled byhim.  Thus, Archer-Daniels-Midland onlyhas the right to vote 18.87% of our outstanding shares.  In addition, Archer-Daniels-Midland has theright to nominate 2 of the 15 members of our board of directors and theircorresponding alternates. Archer-Daniels-Midland did not participate in the preemptive rightsoffering we completed on May 20, 2008. Prior to the preemptive rights offering, Archer-Daniels-Midland,directly and indirectly, owned approximately 27.1% of our outstanding sharesand controlled the right to vote approximately 22% of our outstanding shares.

 

Furthermore, Archer-Daniels-Midland must give Mr. González Barreraa right of first refusal on any sale of our shares.  Mr. González Barrera must giveArcher-Daniels-Midland a similar right on any sale of his shares in us if atthe time of the sale, he owns, or as a result of the sale will own, less than30% of our outstanding shares.  See “Item7.  Major Stockholders and Related PartyTransactions—Related Party Transactions.”

 

The documents which detail the terms of theassociation include the Shareholders Agreement by and among us, RobertoGonzález Barrera, Archer-Daniels-Midland and ADM Bioproductos, S.A. de C.V.,the Asset Contribution Agreement among Gruma Corporation, Gruma Holding, Inc.,ADM Milling Co., Valley Holding, Inc., GRUMA-ADM, and Azteca Milling,L.P., and the Investment Agreement by and between us andArcher-Daniels-Midland, all dated as of August 21, 1996, as well as AmendmentNo. 1 and Amendment No. 2 to the Shareholders Agreement, dated as of September 13,1996 and August 18, 1999, respectively. See “Item 19.  Exhibits.”

 

**BBVA Bancomer**

 

On July 28, 2005**,**we obtained aU.S.$250 million, five-year syndicated senior credit facility, which we referto as the 2005 Facility, from a group of five banks, led by BBVA Bancomer,which consists of a U.S.$150 million senior term loan facility and a U.S.$100million revolving credit facility, 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 March 31,2009, there was U.S.$150 million outstanding under the term facility withU.S.$53 million of revolving credit available. The interest rate for the facility is LIBOR plus 40 basis points for thefirst year.  Thereafter, the spread couldfluctuate in relation to our leverage and could be between 37.5 and 45 basispoints.  This Loan Agreement was executedon July 22, 2005 among us, the Lenders party thereto, BBVA Securities Inc.as Bookrunner and Documentation Agent, and BBVA Bancomer, S.A. asAdministrative Agent.  See “Item 19.  Exhibits.” As a condition of entering into the Financing and the Credit AgreementAmendments, we anticipate amending and extending the term of the 2005 Facility.

 

**Perpetual Bonds**

 

We issued U.S.$300 million 7.75% senior unsecured perpetual bonds underan indenture dated as of December 3, 2004, among Gruma, S.A.B. de C.V.,and JP Morgan Chase Bank, N.A. as trustee. Pursuant to the indenture, the bonds have no stated maturity, have acall option exercisable by GRUMA at any time beginning five years after theissue date and will bear interest at a fixed rate of 7.75% per annum from thedate of issuance.  Interest on the bondswill be paid quarterly in arrears on March 3, June 3, September 3and December 3 of each year, commencing on March 3, 2005, to theperson in whose name such bond (or any predecessor bond) is registered at theclose of business on the preceding February 15, May 15, August 15or November 15, as the case may be. Interest on the bonds will be computed on the basis of a 360-day year oftwelve 30-day months.  The Bonds willconstitute direct senior unsecured obligations of Gruma S.A.B. de C.V. and willrank at least *pari passu*in priority of paymentwith all other present and future unsecured and unsubordinated indebtedness ofGruma S.A.B. de C.V.  See “Item 19.  Exhibits.”

 

The indenture describes covenants with which we mustcomply, including:

 

·                  limitations on liens;

 

·                  limitations with respect to consolidations, mergers or transfer ofproperty; and

 

·                  limitations on certain sale and lease-back transactions.

 

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These covenants are subject to a number of important qualifications andexceptions as described in the indenture.

 

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

 

·                  failure to pay interest and other amounts within 30 calendar days of thedue date; and

 

·                  breach by us of any covenant or agreement in the indenture or any ofthe other relevant transaction documents.

 

**Inconnection with consummation of the Financing and the Credit AgreementAmendments, Gruma expects to pledge certain collateral to secure theborrowings. As a result, the Company intends to enter into a supplementalindenture amending the indenture governing the bonds to provide holders of ourperpetual bonds with equal and ratable security interests in the collateralexpected to be pledged.**

 

**Revolving CreditFacility**

** **

In October 2006, Gruma Corporation entered into a U.S.$100 million5-year revolving credit facility with a syndicate of financial institutions.  The credit facility replaced the U.S.$70million revolving credit facility which was scheduled to mature in June 2007.  The new facility has an interest rate basedon LIBOR rate plus a spread of 0.35% to 0.45% that fluctuates in relation toGruma Corporation’s leverage and contains less restrictive provisions thanthose in the facility replaced.  Theterms of the new facility provide that Gruma Corporation may request that thecommitments available under the facility be increased by up to an additionalU.S.$50 million, subject to the banks’ approval.

 

**Bancomext**

** **

On November 12, 2008, we obtained a Ps.3,367 millionpeso-denominated two year bullet senior credit facility from Bancomext (*Banco Nacional de Comercio Exterior*) which we refer as the2008 Peso Facility. This facility has an interest rate based on the TIIE rateplus a spread of 2.0%. Bancomext entered into a separate guarantee agreementwith the Mexican Government, pursuant to which Banco de México guarantees thisfacility through a fund that specializes in guaranteeing the debt of theMexican agricultural sector (*Fondo Especial deAsistencia Técnica y Garantía para Créditos Agropecuarios*).  The 2008 Peso Facility limits our ability,among other things, to transfer or encumber our assets.  As a condition of entering into the Financingand the Credit Agreement Amendments, we anticipate extending and amending theterm of the 2008 Peso Facility.

 

**EXCHANGECONTROLS**

** **

Mexican law does not restrict our ability to remitdividends and interest payments, if any, to non-Mexican holders of oursecurities.  Payments of dividends toequity-holders generally will not be subject to Mexican withholding tax.  See “—Taxation—MexicanTax Considerations—Payment of Dividends.” Mexico has hada free market for foreign exchange since 1991, and the government has allowedthe peso to float freely against the U.S. dollar since December 1994.

 

Our ability to repatriate dividends from GrumaVenezuela may be adversely affected by exchange controls and other recentevents.  See “Item 3.  Key Information—Risk Factors—Risks Related toVenezuela—Venezuela Presents Significant Economic Uncertainty and PoliticalRisk.”

 

**TAXATION**

 

The following summary contains a description of certain Mexican federaland U.S. federal income tax consequences of the acquisition, ownership anddisposition of B Shares or B Share ADSs (which are evidenced by ADRs), but itdoes not purport to be a comprehensive description of all of the taxconsiderations that may be relevant to a decision to purchase or hold B Sharesor ADSs, such as the tax treatment of holders that are dealers or

 

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that own (actually or constructively under rules prescribedin the Internal Revenue Code of 1986, as amended, or the Code), 10% or more ofthe voting shares of GRUMA.

 

The Convention for the Avoidance of Double Taxation and a Protocolthereto, or the Tax Treaty, between the United States and Mexico entered intoforce on January 1, 1994.  TheUnited States and Mexico have also entered into an agreement concerning theexchange of information with respect to tax matters.

 

The summary is based upon tax laws of the UnitedStates and Mexico as in effect on the date of this document, which are subjectto change, including changes that may have retroactive effect.  Holders of B Shares or ADSs should consulttheir own tax advisers as to the Mexican, U.S. or other tax consequences of thepurchase, ownership and disposition of shares or ADSs, including, inparticular, the effect of any foreign, state or local tax laws.

** **

**Mexican TaxConsiderations**

 

The following is a general summary of the principal consequences underthe *Ley del Impuesto sobre la Renta*, orMexican Income Tax Law, and rules and regulations thereunder, as currentlyin effect, of an investment in Shares or ADSs by a holder that is not aresident of Mexico and that will not hold shares or ADSs or a beneficialinterest therein in connection with the conduct of a trade or business througha permanent establishment or fixed base in Mexico.

 

For purposes of Mexican taxation, a natural person isa resident of Mexico for tax purposes if he has established his home in Mexico,unless he has resided in another country for more than 183 days, whetherconsecutive or not, in any one calendar year and can demonstrate that he hasbecome a resident of that country for tax purposes, and a legal entity is aresident of Mexico if it was incorporated in Mexico or maintains the principaladministration of its business or the effective location of its management inMexico.  A Mexican citizen is presumed tobe a resident of Mexico unless such person can demonstrate the contrary.  If a non-resident of Mexico is deemed to havea permanent establishment or fixed base in Mexico for tax purposes, all incomeattributable to such permanent establishment or fixed base will be subject toMexican taxes, in accordance with applicable tax laws.

 

***TaxTreaties***

 

Provisions of the Tax Treaty that may affect the taxation of certainU.S. holders are summarized below.  TheUnited States and Mexico have also entered into an agreement that covers theexchange of information with respect to tax matters.

 

Mexico has also entered into and is negotiating several other taxtreaties that may reduce the amount of Mexican withholding tax to which paymentof dividends on shares or ADSs may be subject. Holders of shares or ADSs should consult their own tax advisors as tothe tax consequences, if any, of such treaties.

 

Under the Mexican Income Tax Law, in order for anybenefits from the Tax Treaty or any other tax treaties to be applicable,residence for tax purposes must be demonstrated.

 

***Payment of Dividends***

 

Under the Mexican Income Tax Law, dividends, either in cash or in kind,paid with respect to shares represented by ADSs are not subject to Mexicanwithholding tax.  A Mexican corporationwill not be subject to any tax if the amount of declared dividends does notexceed the net tax profit account (*cuenta de utilidad fiscalneta,*or**CUFIN).

 

If we pay a dividend in an amount greater than ourCUFIN balance (which may occur in a year when net profits exceed the balance insuch accounts), then we are required to pay 28% income tax on an amount equalto the product of the portion of the grossed-up amount which exceeds suchbalance multiplied by 1.3889.

 

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***Taxationof Dispositions***

*** ***

The sale or other disposition of ADSs by a non-resident holder will notbe subject to Mexican tax.  Deposits ofshares in exchange for ADSs and withdrawals of shares in exchange for ADSs willnot give rise to Mexican tax or transfer duties.

 

The sale of shares by a non-resident holder will not be subject to anyMexican tax if the transaction is carried out through the Mexican StockExchange or other securities markets approved by the Mexican Ministry ofFinance.  Sales or other dispositions ofshares made in other circumstances generally would be subject to Mexican tax,regardless of the nationality or residence of the transferor.

 

Under the Mexican Income Tax Law, gains realized by a nonresidentholder of shares on the sale or disposition of shares not conducted through arecognized stock exchange generally are subject to a Mexican tax at a rate of25% of the gross sale price.  However, ifthe holder is a resident of a country which (i) is not considered to be alow tax rate country, (ii) its legislation does not contain territorialtaxation, and (iii) such income is not subject to a preferential taxregime, the holder may elect to designate a resident of Mexico as itsrepresentative, in which case taxes would be payable at a 28% rate on the gainon such disposition of shares.

 

Pursuant to the Tax Treaty, gains realized by qualifying U.S. holdersfrom the sale or other disposition of shares, even if the sale is not conductedthrough a recognized stock exchange, will not be subject to Mexican income taxexcept that Mexican taxes may apply if:

 

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

 

·                  such U.S. holder owned 25% or more of the sharesrepresenting the capital stock of GRUMA (including ADSs), directly or indirectly,during the 12-month period preceding such disposition; or

 

·                  the gain is attributable to a permanent establishmentor fixed base of the U.S. holder in Mexico.

 

***OtherMexican Taxes***

 

A non-resident holder will not be liable for estate, inheritance or similartaxes with respect to its holdings of shares or ADSs; provided, however, thatgratuitous transfers of shares may in certain circumstances result inimposition of a Mexican tax upon the recipient. There are no Mexican stamp, issue registration or similar taxes payableby a non-resident holder with respect to shares or ADSs.

 

Reimbursement of capital pursuant to a redemption ofshares will be tax exempt up to an amount equivalent to the adjustedcontributed capital corresponding to the shares that will be redeemed.  Any excess distribution pursuant to aredemption will be considered a dividend for tax purposes and we may be taxedas described above.

 

**U.S. FederalIncome Tax Considerations**

 

The following is a summary of certain U.S. federal income tax consequencesto U.S. holders, as defined below, of the acquisition, ownership anddisposition of B Shares or ADSs.  Thissummary is based upon the federal income tax laws of the United States as ineffect on the date of this Annual Report, including the provisions of the TaxTreaty, all of which are subject to change, possibly with retroactive effect inthe case of U.S. federal income tax law.

 

The summary does not purport to be a comprehensive description of allof the tax consequences of the acquisition, ownership or disposition of BShares or ADSs.  The summary applies onlyto U.S. holders that will hold their B Shares or ADSs as capital assets anddoes not apply to special classes of holders such as dealers in securities orcurrencies, holders with a functional currency other than the U.S. dollar,holders of 10% or more of our voting shares (whether held directly or throughADSs or both), tax-exempt organizations, financial institutions, holders liablefor the alternative minimum tax, securities traders electing to account fortheir investment in their B Shares or

 

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ADSs on a mark-to-market basis, and persons holdingtheir B Shares or ADSs in a hedging transaction or as part of a straddle orconversion transaction.

 

For purposes of this discussion, a “U.S. holder” is abeneficial owner of B Shares or ADSs that is:

 

·                  a citizen or resident of the United States of America;

 

·                  a corporation or partnership organized in or under thelaws of the United States of America or any state thereof or the District ofColumbia;

 

·                  an estate the income of which is subject to UnitedStates federal taxation regardless of its source;

 

·                  a trust if a court within the U.S. is able to exerciseprimary supervision over the administration and one or more U.S. persons have the authority to control allsubstantial decisions of the trust; or

 

·                  otherwise subject to U.S. federal income taxation on anet income basis with respect to the shares or ADSs.

 

A holder of B Shares or ADSs that is a partnership,and partners in such partnership, should consult their tax advisors about theUnited States federal income tax consequences of holding and disposing of the BShares or the ADSs, as the case may be.

 

Prospective investors in the B Shares or ADSs shouldconsult their own tax advisors as to the U.S. federal, Mexican or other taxconsequences of the purchase, ownership and disposition of the B Shares or ADSs,including, in particular, the effect of any foreign, state or local tax lawsand their entitlement to the benefits, if any, afforded by the Tax Treaty.

 

***Treatmentof ADSs***

*** ***

In general, a U.S. holder of ADSs will be treated asthe beneficial owner of the B Shares represented by those ADSs for U.S. federalincome tax purposes.  Deposits orwithdrawals of B Shares by U.S. holders in exchange for the ADSs will notresult in the realization of gain or loss for U.S. federal income taxpurposes.  U.S. holders that withdraw anyshares should consult their own tax advisors regarding the treatment of anyforeign currency gain or loss on any pesos received in respect of such shares.

 

***Taxationof Distributions***

*** ***

In this discussion, the term “dividends” is used to mean distributionspaid out of our current or accumulated earnings and profits (calculated forU.S. federal income tax purposes) with respect to B Shares or ADSs.  In general, the gross amount of any dividendswill be includible in the gross income of a U.S. holder as ordinary income onthe day on which the dividends are received by the U.S. holder in the case ofshares, 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 as capitalgain (provided that the B Shares or ADSs are held as capital assets).  Distributions will be paid in pesos and willbe includible in the income of a U.S. holder in a U.S. dollar amount calculatedby reference to the exchange rate in effect on the day that they are receivedby the U.S. holder in the case of shares, or by the depositary in the case ofADSs.  U.S. holders should consult theirown tax advisors regarding the treatment of foreign currency gain or loss, ifany, on any pesos received by a U.S. holder or depositary that are convertedinto U.S. dollars on a date subsequent to receipt.

 

Distributions of additional shares or ADSs to U.S. holders with respectto their shares or ADSs that are made as part of a pro rata distribution to allof our shareholders generally will not be subject to U.S. federal income tax.

 

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Dividends paid on shares or ADSs generally will be treated for U.S.foreign tax credit purposes as foreign source passive category income.  In the event Mexican withholding taxes areimposed on such dividends, any such withheld taxes would be treated as part ofthe 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 or accumulated earningsand profits), and such taxes may be treated as a foreign income tax eligible,subject to generally applicable limitations and conditions under U.S. federalincome tax law, for credit against a U.S. holder’s U.S. federal income taxliability or, at the U.S. holder’s election, for deduction from gross income incomputing the U.S. holder’s taxable income. The calculation and availability of foreign tax credits and, in the caseof a U.S. holder that elects to deduct foreign taxes, the availability ofdeductions, involves the application of rules that depend on a U.S. holder’sparticular circumstances.  In the eventMexican withholding taxes are imposed, U.S. holders should consult their owntax advisors regarding the availability of foreign tax credits.

*** ***

***QualifiedDividend Income***

*** ***

Notwithstanding the foregoing, certain dividendsreceived by individual U.S. holders that constitute “qualified dividend income”will be subject to a reduced maximum marginal U.S. federal income taxrate.  Qualified dividend incomegenerally includes, among other dividends, dividends received during thetaxable year from “qualified foreign corporations.”  In general, the term “qualified foreigncorporation” includes a foreign corporation that is eligible for the benefitsof a comprehensive income tax treaty with the United States which the U.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 the previous rule, dividends receivedfrom a foreign corporation that is a passive foreign investment company (asdefined in section 1297 of the Code) will not constitute qualified dividendincome.  In addition, the term “qualifieddividend income” will not include, among other dividends, any (i) dividendson any share of stock or ADS which is held by a taxpayer for 60 days or lessduring the 120-day period beginning on the date which is 60 days before thedate on which such share or the shares backing the ADS become ex-dividend withrespect to such dividends (as measured under section 246(c) of the Code)or (ii) dividends to the extent that the taxpayer is under an obligation(whether pursuant to a short sale or otherwise) to make related payments withrespects to positions in substantially similar or related property.  Moreover, special rules apply indetermining a taxpayer’s foreign tax credit limitation under section 904 of theCode in the case of qualified dividend income.

 

Individual U.S. holders should consult their own taxadvisors to determine whether or not amounts received as dividends from us willconstitute qualified dividend income subject to a reduced maximum marginal U.S.federal income tax rate and, in such case, the effect, if any, on theindividual U.S. holder’s foreign tax credit.

 

***Taxationof Dispositions***

*** ***

Gain or loss realized by a U.S. holder on the sale, redemptionor other disposition of B Shares or ADSs will be subject to U.S. federal incometaxation as capital gain or loss in an amount equal to the difference betweensuch U.S. holder’s adjusted basis in the B Shares or the ADSs and the amountrealized on the disposition (including any amounts withheld in respect ofMexican withholding tax).  Gain(including gain that arises because the U.S. holder’s basis in the B Shares orADSs has been reduced because a distribution is treated as a return of capitalrather than as a dividend) and loss realized by a U.S. holder on a sale,redemption or other disposition of B Shares or ADSs generally will be treatedas U.S. source income or loss for U.S. foreign tax credit purposes.

 

The availability of U.S. foreign tax credits or anydeduction from gross income for any Mexican taxes imposed on the sale,redemption or other disposition is subject to certain limitations and involvesthe application of rules that depend on a U.S. holder’s particularcircumstances.  U.S. holders shouldconsult their own tax advisors regarding the application of the foreign taxcredit rules to their investment in, and disposition of, B Shares or ADSs.

 

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***TaxReturn Disclosure Regulations***

 

Pursuant to U.S. Treasury regulations (the “DisclosureRegulations”), any taxpayer that has participated in a “reportable transaction”and who is required to file a U.S. Federal income tax return must generallyattach a disclosure statement disclosing such taxpayer’s participation in thereportable transaction to the taxpayer’s tax return for each taxable year forwhich the taxpayer participates in the reportable transaction.  The Disclosure Regulations provide that, inaddition to certain other transactions, “loss transactions” and “transactionsinvolving a brief asset holding period” constitute “reportable transactions.”  “Loss transactions” include transactions thatproduce a foreign currency exchange loss in an amount equal to or in excess ofcertain threshold amounts.  “Transactionsinvolving a brief asset holding period” are generally transactions resulting inthe taxpayer claiming a tax credit in excess of $250,000 if the underlyingasset giving rise to the credit is held by the taxpayer for 45 days orless.  U.S. holders should consult theirown advisors concerning the implications of the tax return disclosurerequirements in light of their particular circumstances.

 

***InformationReporting and Backup Withholding***

 

Dividends on, and proceeds from the sale or other disposition of, the BShares or ADSs paid to a U.S. holder generally may be subject to theinformation reporting requirements of the Code and may be subject to backupwithholding at the applicable rate unless the holder:

 

·                  establishes that it is a corporation or other exemptholder; or

 

·                  provides an accurate taxpayer identification number ona properly completed Internal Revenue Service Form W-9 and certifies thatno loss of exemption from backup withholding has occurred.

 

The amount of any backup withholding from a payment toa holder will be allowed as a credit against the U.S. holder’s U.S. federalincome tax liability and may entitle such holder to a refund, provided thatcertain required information is furnished to the Internal Revenue Service.

 

***U.S.Tax Consequences for Non-U.S. Holders***

 

*Distributions:*

 

A holder of shares or ADSs that is, with respect to the 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 withholding tax ondividends 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 of shares or ADSs will not besubject to U.S. federal income or withholding tax on gain realized on the saleof shares or ADSs, unless:

 

·                  such gain is effectively connected with the conduct bythe holder of a U.S. trade or business, or

 

·                  in the case of gain realized by an individual holder,the holder is present in the United States for 183 days or more in thetaxable year of the sale and certain other conditions are met.

* *

*Information Reporting and Backup Withholding:*

* *

Although non-U.S. holders generally are exempt frombackup withholding, a non-U.S. holder may be required to comply withcertification and identification procedures in order to establish its exemptionfrom information reporting and backup withholding.

 

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**DOCUMENTS ON DISPLAY**

** **

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

 

## **ITEM 11.       Quantitative And Qualitative DisclosuresAbout Market Risk**

 

We are exposed to market risks arising from changes ininterest rates, foreign exchange rates, equity prices and commodityprices.  We use derivative instruments,on a selective basis, to manage these risks. In addition, we have also historically used certain derivativeinstruments for trading purposes. However, as discussed in “Item 15. Controls and Procedures”, we are in the process of implementing a newrisk management policy that precludes the use of derivative instruments fortrading purposes.  We maintain andcontrol our treasury operations and overall financial risk through practicesapproved by our senior management.

 

**RISK MANAGEMENT AND FINANCIAL INSTRUMENTS**

 

**As discussed in “Item 15.  Controls and Procedures”, during 2008 we implementedspecific improvements to our internal controls concerning the use of  derivative financial instruments. Inaddition, we are in the process of consolidating such improvements as well as implementing a new risk managementpolicy that besides consolidating such improvements, will prohibit the Companyfrom entering into derivative financial instruments for trading purposes withthe aim of obtaining profits based on changes in market values. However, theuse of financial derivative instruments for hedging purposes will be allowed ifused with the objective of mitigating financial risks and associated with ahedged item that is relevant to business activities.**

 

**INTEREST RATE RISK**

 

We depend upon debt financing transactions, including debt securities,bank and vendor credit facilities and leases, to finance our operations.  All such financial instruments, as well asthe related interest rate derivatives discussed further below, are used forother than trading purposes. These transactions expose us to interest raterisk, with the primary interest-rate risk exposure resulting from changes inthe relevant base rates (mostly LIBOR and to a lesser extent, Prime, TIIE and *Tasa Promedio Ponderada* in Venezuela)which are used to determine the interest rates that are applicable toborrowings under our credit facilities. We are also exposed to interest rate risk in connection with refinancingof maturing debt.  We had approximatelyU.S.$313****million (Ps.4,329 million) of fixedrate debt and approximately U.S.$710 million (Ps.9,818 million) in floatingrate debt at December 31, 2008. A hypothetical 100 basis point increase ordecrease in interest rates would not have a significant effect on the fairvalue of our fixed rate debt. The following table sets forth, as of December 31,2008, principal cash flows and the related weighted average interest rates byexpected maturity dates for our debt obligations.

 
| ** **           | ** ** | **Maturity  Dates**                             | ** ** |
|----------------------|------------|-------------------------------------------------|------------|
| ** **           | ** ** | **2009**                                        | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|                 |       | **(in  millions of pesos, except percentages)** |       |
| Liabilities          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt                 |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed Rate (Ps.)     |       | 71.5                                            |       | 82.4 |   | 18.5 |   | 6.6 |   | 4,150 |   | 4,329 |   | 2,576 |   |
| Average Rate         |       | 7.0                                             | %          | 5.1 | % | 7.8 | % | 7.8 | % | 7.8 | % |   |   |   |   |
| Floating Rate  (Ps.) |       | 2,347                                           |       | 6,171 |   | 1,300 |   |   |   |   |   | 9,818 |   | 9,818 |   |
| Average Rate         |       | 8.7                                             | %          | 4.1 | % | 1.6 | % |   |   |   |   |   |   |   |   |

 

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From time to time, we use derivative financial instruments such asinterest rate swaps for purposes of hedging a portion of our long-term debt, inorder to reduce our exposure to increases in interest rates.  Several of these contracts, however, do notqualify for treatment as hedging transactions, as described in Note 17 to ourfinancial statements.  On November 2,2004, we entered into an interest rate swap transaction with five banks with anaggregate notional 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%. 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. On September 30, 2005, this interestrate swap was modified resulting in an average fixed rate of 3.2775% and amaturity date of 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 wemodified this 6% level up to 6.5% and 6.75% for the interest payment dates duein 2007 obtaining a fixed average rate of 3.6175% for this year.  In addition, in December 12, 2005 we enteredinto a new interest rate swap for the 2005 Facility with a single bank,starting on March 30, 2008 and maturing on March 30, 2009, whereby wefixed the 6-month LIBOR rate associated with the term portion at an averagerate of 4.505%.  The swap transactionprovides that the counterparty pay us unless 6-month LIBOR reaches 7%, in whichcase the parties have no obligation to pay any amount for the applicableperiod.  For a description of our debt,see Note 9 to our financial statements. After the March 30, 2009 maturitywe did not enter into any additional swap transactions.  As of May 31, 2009, we no longer haveany further swap contracts. For a description of our debt, see Note 9 to ourfinancial statements.

 

Additionally, some of the exchange rate forward and option contracts weentered into to financially hedge  partof the interest payments due in 2006, 2007, 2008 and first two coupon dates of2009 corresponding to our U.S.$300 million 7.75% senior unsecured perpetualbonds. As of May 31, 2009, these forward contracts to hedge all theinterest payments on our U.S.$300 million 7.75% senior unsecured perpetualbonds had either expired or had been closed out by the company.

 

In the case of our cash and short-term investments,declines in interest rates decrease the interest return on floating rate cashdeposits and short-term investments.  Ahypothetical 100 basis point decrease in interest rates would not have asignificant effect on our results of operations.

 

In the case of our floating interest rate debt, a risein interest rates increases the interest expense on floating rate debt.  A hypothetical 100 basis point increase ininterest rates would not have a significant effect on our results ofoperations.

 

**FOREIGN EXCHANGE RATE RISK**

 

Our net sales are denominated in U.S. dollars, Mexican pesos and othercurrencies.  During 2008, approximately41% of our revenues were generated in U.S. dollars, and approximately 29% inpesos.  In addition, as of December 31,2008, approximately 62% of our total assets were denominated in currenciesother than Mexican pesos, particularly U.S. dollars.  A significant portion of our operations isfinanced through U.S. dollar-denominated debt.

 

We believe that we have natural foreign exchange hedges incorporated inour balance sheet, in significant part because we have subsidiaries outsideMexico, and the peso-denominated value of our equity in these subsidiaries isalso exposed to fluctuations in exchange rates. Changes in the peso value of equity in our subsidiaries caused bymovements in foreign exchange rates are recognized as a component ofequity.  See Note 15****toour financial statements.

 

An important part of our foreign exchange rate risk relates to oursubstantial U.S. dollar-denominated debt for our non-U.S. subsidiaries.  As of December 31, 2008, approximately68% of our debt obligations was denominated in U.S. dollars.  The following table sets forth informationconcerning our U.S. dollar-denominated debt as of December 31, 2008.  The table does not reflect our U.S. dollarsales or our U.S. dollar-denominated assets.

 

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| ** **                       | ** ** | **Expected Maturity or  Transaction Date** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| **U.S. dollar-denominated debt** | ** ** | **2009**                                   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
| ** **                       | ** ** | **(in millions of pesos)**                 | ** ** |
| 7.75%  Perpetual bond            |       |                                       |       |   |   |   |   |   |   | 4,149 |   | 4,149 |   | 2,396 |   |
| Syndicated  loan                 |       |                                       |       | 2,724 |   |   |   |   |   |   |   | 2,724 |   | 2,724 |   |
| Revolving  credit facility       |       |                                       |       |   |   | 1,300 |   |   |   |   |   | 1,300 |   | 1,300 |   |
|                             |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other*                           |       | 2,419                                      |       | 3,528 |   | 19 |   | 7 |   |   |   | 5,973 |   | 5,973 |   |
|                             |       | 2,419                                      |       | 6,252 |   | 1,319 |   | 7 |   | 4,149 |   | 14,146 |   | 12,393 |   |

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* Includes debt in Euros, Mexican Pesos and Bolívares

 

During 2004 and 2005, weentered into forward contracts and exchange rate option contracts (Mexican peso— U.S. dollar) for a nominal amount of U.S.$55.8 million, with differentmaturity dates until November 2007. The purpose of these contracts is to hedge the financial risks due toexchange rate fluctuations over the quarterly interest payments related to ourperpetual notes.  The unfavorable effectof the contracts due during 2007 of Ps.15.2 million was recognized in ourincome statement for the year 2007.

 

During 2007, we entered into forward contracts andexchange rate option contracts (Mexican peso — U.S. dollar) with respect to ourforeign exchange exposure related to the 7.75% perpetual notes.  These contracts covered four coupon dates for2007, as well as four additional dates for 2008 and two for 2009.  Accordingly, the maturity dates for thesecontracts ranged from March 2007 to June 2009.  As of May 31, 2009, those financialinstruments had either expired by their terms or were terminated by theCompany.

 

During 2007, we also entered into exchange rate optioncontracts expiring during 2008 and 2009. On an average basis, by maturity date, the purchase trades wereU.S.$370.5 million against U.S.$420 million of sale trades.  In addition, for 2008 and for the remainingtwo dates in 2009, we entered into exchange rate options contracts, under whichGRUMA could either sell or buy U.S. dollars depending on the behavior of thespot rate, for an aggregate notional amount of U.S.$115 million for eachdate.  Additionally, at the end of 2007,twelve call contracts maturing on February 28, 2008, were sold with anexchange rate of Ps.12.00 per U.S. dollar. These contracts were not recognized under hedge accountingprinciples.  The favorable effect of thecontracts due in 2007 of Ps.290.7 million was recognized in our incomestatement for 2007.  As of December 31,2007, the unfavorable effect for changes in the fair value of outstandingcontracts was Ps.16.8 million, which was also recognized in our incomestatement.

 

During 2008, Gruma entered into foreign exchangederivative instruments which covered varying periods of time and had varyingpricing provisions. The Company primarily entered into swap forwards andoptions contracts, for which the periodic settlement results depended on thebehavior of the spot rate at a future maturity date. In the first quarter of2008, we entered into foreign exchange derivative instruments covering a basketof currencies. In the second quarter of 2008 and through July, August and September of2008, we entered into foreign exchange derivative instruments mainly in respectof the dollar/peso and the dollar/euro exchange rate. These derivativeinstruments were entered into for trading purposes and did not qualify forhedge accounting treatment.

 

During 2008, we entered into foreign exchangederivative instruments with several counterparties maturing in 2008, 2009, 2010and 2011. The table below summarized the foreign exchange derivativeinstruments in effect as of December 31, 2008:

 

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| ** **     | ** ** | ** **  | ** ** | **Purchase/** | ** ** | ** **     | ** ** | **Notional  Amount*********(thousands of** | ** ** | **Installments** | ** ** |
|----------------|------------|-------------|------------|---------------|------------|----------------|------------|--------------------------------------------|------------|------------------|------------|
| **Derivative** | ** ** | **Purpose** | ** ** | **Sale**      | ** ** | **Currency**   | ** ** | **USD)**                                   | ** ** | **Fair Value**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
| Forwards       |       | Trading     |       | Sale          |       | USD — MXN |       | U.S.$                                      | 712,900    |             | Ps.        | (3,125,165 | ) | Ps. | (437,670 | ) | Ps. | (618,396 | ) | Ps. | (2,069,099 | ) |
| Structures     |       | Trading     |       | Sale          |       | USD — MXN |       | 110,500                                    |       | (7,708,933       | )          | (5,275,600 | ) | (2,335,266 | ) | (98,067 | ) |
| Structures     |       | Trading     |       | Purchase      |       | EUR — USD |       | 16,636                                     |       | (396,072         | )          | (361,329 | ) | (34,743 | ) | — |   |
|           |       |        |       |          |       | Total          |       | U.S.$                                      | 840,036    |             | Ps.        | (11,230,170 | ) | Ps. | (6,074,599 | ) | Ps. | (2,988,405 | ) | Ps. | (2,167,166 | ) |

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(*)The reported notional value of US$840,036 thousand dollars is the nominal valueused to calculate the payment of the weekly, monthly or quarterly fixings ofthe maturities of the different structures in the future years. Certain ofthese instruments have leverage features requiring payouts by the company basedon increased notional amounts.

 

We account for our currency derivative instrumentsusing the mark-to-market accounting method. Extreme exchange rate volatility in the financial markets during thelast two quarters of 2008 and the first quarter of 2009 resulted in significantfluctuations in the mark-to-market value of Gruma’s foreign exchange derivativeinstruments. These fluctuations were further exacerbated by the leveragefeatures included in certain of these instruments. As of September 30,2008, these instruments represented a negative mark-to-market net value ofapproximately U.S.$291.4 million.  As of October 8,2008, these instruments represented a mark-to-market unrealized loss ofapproximately U.S.$684 million.  As of October 28,2008, these instruments represented an aggregate mark-to-market non-cash chargeof approximately U.S.$788 million; of which U.S.$105 million, U.S.$354 million,U.S.$220 million, and U.S.$109 million on instruments maturing in 2008, 2009,2010, and 2011, respectively.

 

On November 12, 2008 we entered into a loanagreement with Bancomext in the amount of Ps. 3,367 million and applied theproceeds to terminate our commitments arising under all the currency derivativeinstruments that we had entered into with one of our derivative counterpartiesand to pay other commitments arising under the currency derivative instrumentsmaturing from the date of such loan agreement with Bancomext and until December 31st, 2008.  As of December 31,2008, GRUMA had a Ps.11,230 million non-cash loss that related to themark-to-market valuation of positions that were still open; of which Ps.6,075million, Ps.2,988 million and Ps.2,167 million matured in 2009, 2010, and 2011,respectively.

 

In connection with our efforts to terminate ourobligations under most of our remaining currency derivative instruments, on March 23,2009 we terminated all of our derivative instruments entered into with thethree Derivative Counterparties pursuant to a Term Sheet we entered into on March 19,2009 that provides for financing of the obligations that would result from thetermination of all of our foreign exchange derivative instruments with suchDerivative Counterparties (which totaled U.S.$668.3 million).  The change in the mark-to-market value ofthese derivative instruments between January 1 and March 23, 2009 representedan unfavorable effect of U.S.$37.6 million. Gruma and the Derivative Counterparties have agreed to negotiate in goodfaith to convert the U.S.$668.3 million owing to the Derivative Counterparties,under the derivative instruments, into the Term Loan within 120 days of March 23,2009.  Pursuant to the Term Sheet, we arerequired to pay interest on the Termination Amount at the rate of 1 month LIBOR+ 1% for the first six weeks following March 23, 2009, and LIBOR + 2.875% thereafter.Following the expiration of the 120-day period contemplated by the Term Sheet,we will be required to pay default interest on the Termination Amount at therate of 2% + LIBOR + 2.875%. For additional information concerning the 2008Peso Facility and the Term Loan, see “Item 5. Operating and FinancialReview and Prospects—Liquidity and Capital Resources—Indebtedness.” 

 

On June 18, 2009, Gruma and BNP Paribas(“BNP”) entered into a Term Sheet (the “BNP Term Sheet”) that provides for thefinancing of the obligations that would result from scheduled settlement of theforeign exchange derivative instruments entered into with BNP. Pursuant to theBNP Term Sheet, Gruma and BNP agreed to negotiate in good faith to convert theamount of such obligations payable by Gruma under such derivative instrumentsinto an unsecured loan on or before September 8, 2009, the date on which suchderivative instruments expire. If Gruma and BNP fail to reach an agreement toconvert the obligations payable by Gruma under such derivative instruments intoa loan, such obligations will become due and payable immediatelyfollowing September 8, 2009.On June 26, 2009, Gruma and Barclays BankPLC (“Barclays”) entered into a Term Sheet (the “Barclays Term Sheet”) thatprovides for the financing of the obligations that would result from thetermination of all of its foreign exchange derivative instruments that it hadentered into with Barclays. Pursuant to the Barclays Term Sheet, Gruma andBarclays agreed to terminate all of Gruma’s derivative instruments owing toBarclays and fixed the total amount of obligations payable by Gruma to Barclaysat $21.5 million (the “Barclays Termination Amount”). In connection with theBarclays Term Sheet, Gruma and Barclays have agreed to negotiate in good faithto convert the Barclays Termination Amount into an unsecured loan by July 21,2009. Pursuant to the Barclays Term Sheet, we are required to pay interest onthe Barclays Termination Amount at the rate of 1 month LIBOR + 1% for theperiod between June 26, 2009 and July 21, 2009. Following July 21, 2009, wewill be required to pay default interest on the Termination Amount at the rateof 2% + LIBOR + 2.875%. If Gruma fails to convert the Barclays TerminationAmount into a loan by July 21, 2009, the aggregate amount of U.S.$21.5 milliontogether with interest will become due and payable immediately. Gruma is in theprocess of reaching an agreement to unwind its Remaining Derivatives with itsother counterparties.

 

Certain foreign exchange derivative transactions arestill in effect as of June 12, 2009. The mark-to-market value of thesederivative instruments as of March 31, 2009 represented a negativemark-to-market value of approximately U.S.$96.1 million. This value canincrease or decrease in the future before the settlement date of theinstruments. Changes in the currency exchange rates can be the result of, amongother things, changes in economic conditions, tax and foreign exchange andcurrency policies, volatility, liquidity in the global markets, local andinternational political events. Based on our position as of March 31, 2009,a hypothetical change consisting in a 10% depreciation of the peso against thedollar would result in an additional unfavorable effect of $504 million pesosin the income statement of the company. As a condition of the Financing and theCredit Agreement Amendments, we are in the process of reaching an agreement tounwind our Remaining Derivatives.

 

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**COMMODITY AND DERIVATIVE PRICE RISK**

 

The availability and price of corn and other agricultural commoditiesare subject to wide fluctuations due to factors outside our control, such asweather, plantings, government (domestic and foreign) farm programs andpolicies, changes in global demand/supply and global production of similar andcompetitive crops.  We hedge a portion ofour production requirements through commodity futures and options contracts inorder to reduce the risk created by price fluctuations and supply of corn,wheat, natural gas and soy oils which exist as part of ongoing businessoperations.  The open positions forhedges of purchases do not exceed the maximum production requirements for aone-year period.

 

During 2008, we entered into short-term hedge transactionsthrough commodity futures and options for a portion of our requirements.  For cash-flow hedge transactions, changes inthe fair value 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 realized.  Hedge contracts other than cash flow arerecognized at fair value and their valuation gain or loss is recognized inincome.  As of December 31, 2008, wehad an unfavorable effect due to changes in the fair value of cash flow hedgesamounting to Ps.104 million net of taxes, which was recognized as comprehensiveincome within stockholders’ equity.  Weexpect to reclassify the effects initially registered as stockholders’ equityto income within the following 12 months. As of December 31, 2008, we did not have outstanding fair valuehedge contracts.  From time to time wehedge commodity price risks utilizing futures and options strategies that donot qualify for hedge accounting.  As aresult of non-qualification, these derivative financial instruments arerecognized at their estimated fair values and are marked to market with theassociated effect recorded in current period earnings.  For the year ended December 31, 2008, wehad an unfavorable effect of approximately Ps.54.1 million from thesecontracts.  Additionally, as of December 31,2008, we recognized an unfavorable effect of approximately Ps.295 million forthe valuation of these contracts that did not qualify for hedge accounting,which were marked to market and recognized in current period earnings.

 

Based on our overall commodity exposure at March 31,2009, a hypothetical 10 percent decline in market prices applied to the fairvalue of the instruments would result in a charge to other comprehensive lossof approximately Ps.46 million (for contracts that qualify for hedgeaccounting), and a charge to income of Ps.32 million (for non-qualifying contracts).

 

**EQUITY PRICE RISK**

** **

We classify our equity investments, consisting primarily of shares ofGFNorte, a Mexican financial services holding company, as long-termassets.  Since these investments areaccounted for using the equity method, we do not believe our exposure to ahypothetical 10% decrease in the value of these equity investments would have amaterial effect on our results.  Foradditional information concerning our investment in GFNorte, see “Item 4.  Information on the Company—Description ofBusiness—Miscellaneous—Banorte Investment.” We did not enter into any equity swap agreements in 2008.

 

**COUNTERPARTY RISK**

 

We maintain centralized treasury operations in Mexico for our Mexicanoperations 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.  In addition, we minimizecounterparty solvency risk by entering into derivative instruments only withmajor national and international financial institutions using standardInternational Swaps and Derivatives Association, Inc. (“ISDA”) forms andagreements. For our Central American operations and Gruma Venezuela, we onlyinvest cash reserves with well-known local banks and local branches ofinternational banks.  In addition, wealso keep small investments abroad.

 

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The above discussion of the effects on us of changesin interest rates, foreign exchange rates, commodity prices and equity pricesis not necessarily indicative of our actual results in the future.  Future gains and losses will be affected byactual changes in interest rates, foreign exchange rates, commodity prices,equity prices and other market exposures, as well as changes in the actualderivative instruments employed during any period.

 

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

 

Not applicable.

 

# **PART II**

# ** **

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

 

Notapplicable.

 

## **ITEM 14.       Material Modifications To The Rights OfSecurity Holders And Use Of Proceeds.**

 

Not applicable.

 

## **ITEM 15.       Controls and Procedures.**

 

(a) *Disclosure controls and procedures. *We carried out an evaluation underthe supervision and with the participation of our management, including ourChief Executive Officer, Chief Financial Officer and Chief Corporate Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures as of December 31, 2008. There are inherent limitations to the effectiveness of any system ofdisclosure controls and procedures, including the possibility of human errorand the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosurecontrols and procedures can only provide reasonable assurance of achievingtheir control objectives.  Based upon ourevaluation, our Chief Executive Officer, Chief Financial Officer and ChiefCorporate Officer concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the applicable rules and forms, and that it is accumulated andcommunicated to our management, including our Chief Executive Officer, ChiefFinancial Officer and Chief Corporate Officer, as appropriate to allow timelydecisions regarding required disclosure.

 

(b) *Management’s annual report on internal controls overfinancial reporting.* Our management is responsible for establishingand maintaining adequate internal control over financial reporting, as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management,including our Board of Directors, Chief Executive Officer, Chief FinancialOfficer, Chief Corporate Officer and other personnel, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Our internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with Mexican FRS,including the reconciliation to U.S. GAAP in accordance with Item 18 of Form 20-F.  Our internal control over financial reportingincludes those policies and procedures that (i) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of our assets; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with Mexican FRS, and that our receipts andexpenditures are being made only in accordance with authorizations of ourmanagement and directors; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof our assets that could have a material effect on our financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.  Based on our evaluation under the frameworkin Internal Control—

 

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Integrated Framework, ourmanagement concluded that our internal control over financial reporting waseffective as of December 31, 2008.

 

PricewaterhouseCoopers,an independent registered public accounting firm, our independent auditor,issued an attestation report on our internal control over financial reportingon June 29, 2009.

 

(c) *Attestation Report of the registered publicaccounting firm*.  The reportof PricewaterhouseCoopers, an independent registered public accounting firm, onour internal control over financial reporting is included herein at page F-2.

 

 (d) *Changesin internal control over financial reporting.*

 

Therehas been no change in our internal control over financial reporting during 2008that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting, except as follows:

 

During2008, we have made specific improvements in our internal controls concerningthe approval process for financial derivative transactions, including but notlimited to, the following:

 

1.             formation of a DerivativeCommittee, including an external financial specialist, for the purpose ofreviewing derivative transactions, negotiating with our derivativecounterparties and reporting to the Audit Committee and the Board of Directors;

2.             implementation of morestringent policies and procedures to limit our exposure to derivativeinstruments;

3.             performing ongoing reviewsof the mark-to-market exposure and the risk exposure of our derivativeinstruments; and

4.             implementation of a processto monitor risk exposure by developing valuation models and simulations, aswell as consulting a third-party expert.

 

Allof these improvements were implemented during 2008.

 

In addition toconsolidating the improvements mentioned above, we are in the process ofissuing a new Risk Management Policy that besides consolidating the aboveimprovements, will prohibit the Company from entering into financial derivativeinstruments for trading purposes with the aim of obtaining profits based onchanges in market values. However, the use of financial derivative instruments for hedgingpurposes will be allowed if used with the objective of mitigating financialrisks and associated with a hedged item that is relevant to businessactivities.

 

**ITEM 16A.            Audit Committee Financial Expert.**

 

Our Board of Directors has determined that Juan Diez-Canedo Ruizqualifies as an “audit committee financial expert”, and Mr. Diez-CanedoRuiz is independent, within the meaning of this Item 16A.

 

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

 

We have adopted a code of ethics, as defined in Item 16B of Form 20-Funder the Securities Exchange Act of 1934, as amended.  Our code of ethics applies, among others, toour Chief Executive Officer, Chief Financial Officer and Chief CorporateOfficer, and persons performing similar functions.  Our code of ethics is available on our website at www.gruma.com.  If we amend anyprovisions of our code of ethics that apply to our chief executive officer,chief financial officer, comptroller and persons performing similar functions,or if we grant any waiver of such provisions, we will disclose such amendmentor waiver on our web site at the same address.

 

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

 

**Audit and Non-Audit Fees**

** **

The followingtable sets forth the fees billed to us and our subsidiaries by our independentauditors, PricewaterhouseCoopers, during the fiscal years ended December 31,2007 and 2008:

 
| ** **          | ** ** | **Year ended December 31,** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **2007**                         | ** ** | **2008** | ** ** |
| ** **          | ** ** | **(thousands of Mexican pesos)** | ** ** |
| Audit fees          |       | Ps.                              | 30,636     |   | Ps. | 32,396 |   |
| Audit-related  fees |       |                             | —     |   | — |   |
| Tax fees            |       |                             | 9,522      |   | 6,686 |   |
| Other fees          |       |                             | 1,561      |   | 635 |   |
| Total fees          |       | Ps.                              | 41,719     |   | Ps. | 39,717 |   |

 

Audit fees in the above table are the aggregate feesbilled by PricewaterhouseCoopers and its affiliates in connection with theaudit of our annual financial statements, the review of our interim financialstatements and statutory and regulatory audits.

 

Audit-related fees in the above table are theaggregate fees billed by PricewaterhouseCoopers and its affiliates forfinancial accounting and reporting consultations.

 

Tax fees in the above table are fees billed byPricewaterhouseCoopers and its affiliates for tax compliance services, taxplanning services and tax advice services.

 

Otherfees in the above table are fees billed by PricewaterhouseCoopers and itsaffiliates for non-audit services, mainly related to advice on immigration andmaintenance of the Company’s electronic systems.

 

**Audit Committee Approval Policies and Procedures**

** **

We have adoptedpre-approval policies and procedures under which all audit and non-auditservices provided by our external auditors must be pre-approved by the auditcommittee.  Any service proposalssubmitted by external auditors need to be discussed and approved by the auditcommittee during its meetings, which take place at least four times ayear.  Once the proposed service isapproved, we or our subsidiaries formalize the engagement of services.  The approval of any audit and non-auditservices to be provided by our external auditors is specified in the minutes ofour audit committee.  In addition, themembers of our board of directors are briefed on matters discussed in themeetings of the audit committee.

 

**ITEM 16D.            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 followingtable sets out certain information concerning purchases of our shares by us in2008:

 

**Issuer Purchases of Equity Securities**

**(for the fiscal year ended December 31, 2008)**

 
| **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    |       | 771,500                                           |       | 27.25                                       |       |                                                                                                     |       |                                                                                                                                  |       |
| February   |       | —                                            |       | —                                      |       |                                                                                                     |       |                                                                                                                                  |       |
| March      |       | —                                            |       | —                                      |       |                                                                                                     |       |                                                                                                                                  |       |
| April      |       | —                                            |       | —                                      |       |                                                                                                     |       |                                                                                                                                  |       |
| May        |       | —                                            |       | —                                      |       |                                                                                                     |       |                                                                                                                                  |       |
| June       |       | —                                            |       | —                                      |       |                                                                                                     |       |                                                                                                                                  |       |
| July       |       | 40,000                                            |       | 25.84                                       |       |                                                                                                     |       |                                                                                                                                  |       |
| August     |       | 10,100                                            |       | 29.10                                       |       |                                                                                                     |       |                                                                                                                                  |       |
| September  |       | 104,600                                           |       | 23.94                                       |       |                                                                                                     |       |                                                                                                                                  |       |
| October    |       | 2,000                                             |       | 18.75                                       |       |                                                                                                     |       |                                                                                                                                  |       |
| November   |       | —                                            |       | —                                      |       |                                                                                                     |       |                                                                                                                                  |       |
| December   |       | —                                            |       | —                                      |       |                                                                                                     |       |                                                                                                                                  |       |
| Total      |       | 928,200                                           |       | Ps.                                         | 26.82      |                                                                                                     |       |                                                                                                                                  |       |   |
|            |            |                                                   |            |                                             |            |                                                                                                          |            |                                                                                                                                       |            |  |

 

**ITEM 16F.             Changein Registrant’s Certifying Accountant.**

 

Not Applicable.

 

**ITEM 16G.            CorporateGovernance.**

 

We are a Mexicancorporation with shares listed on the Mexican Stock Exchange and on theNYSE.  Our corporate governance practicesare governed by our bylaws and the Mexican corporate governance practices,including those set forth in the Mexican Securities Law, the *Circular Única de Emisoras* (the “Mexican Circular Única”)issued by the Mexican Banking and Securities Commission and the *Reglamento Interior de la Bolsa Mexicana de Valores* (the “MexicanStock Exchange Rules”), and to applicable US securities laws including theSarbanes-Oxley Act of 2002 (“SOX”) and the rules of the NYSE (the “NYSERules”) to the extent SOX and the NYSE Rules apply to foreign privateissuers like us.  Certain NYSE Rules relatingto corporate governance are not applicable to us because of our status as aforeign private issuer.  Specifically, weare permitted to follow home country practices in lieu of certain provisions ofSection 303A of the NYSE Rules.  Inaccordance with the requirement of Section 303A.11 of the NYSE Rules, thefollowing is a summary of significant ways in which our corporate governancepractices differ from those required to be followed by U.S. domestic companiesunder the NYSE’s listing standards.

 

**Independence of our Board of Directors**

** **

Under the NYSERules, controlled companies like us (regardless of our status as a foreignprivate issuer) are not required to have a board of directors composed of amajority of independent directors. However, the Mexican Securities Law requires that, as a listed companyin Mexico, at least 25% of the members of our Board of Directors be independentas determined under the Mexican Securities Law. We have an alternate director for each of our directors.  The Mexican Securities Law further providesthat alternates of independent directors be independent as well.  The Mexican Securities Law sets forthdetailed standards for establishing independence which differ from those set forthin the NYSE Rules.

 

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**Executive Sessions**

** **

Under the NYSERules, non-management directors must meet at executive sessions withoutmanagement.  We are not required, underMexican law, to hold executive sessions in which non-management directors meetwithout the management or to hold meetings of only independent directors.  Our Board of Directors must meet at leastfour times per year.

 

**Audit Committee**

** **

Under the NYSERules, listed companies must have an audit committee with a minimum of threemembers who are independent directors. Under the Mexican Securities Law, listed companies are required to havean Audit Committee comprised solely of independent directors.  The members of the Audit Committee areappointed by the Board of Directors, with the exception of its Chairman, who isappointed by the shareholders at the Shareholders’ Meeting.  Currently, our Audit Committee is comprisedof 3 members.  Our Audit Committeeoperates pursuant to the provisions of the Mexican Securities Law and ourBylaws.  A description of the specificfunctions of our Audit Committee can be found in Item 10.  See “Item 10. Additional Information—Audit and Corporate Governance Committees” forfurther information about our Audit Committee.

 

**Audit Committee Reports**

** **

Under the NYSERules, Audit Committees are required to prepare an Audit Committee Report asrequired by the SEC to be included in the listed company’s annual proxy statement.  As a foreign private issuer, we are notrequired by the SEC to prepare and file proxy statements.  In this regard, we are subject to Mexicansecurities law requirements.  We havechosen to follow Mexican law and practice in this regard.

 

**Corporate Governance Committee**

** **

Under both NYSE Rules andMexican securities laws and regulations, listed companies are also required tohave a Corporate Governance Committee comprised solely of independentdirectors.  The Company’s Board ofDirectors appoints the members of the Corporate Governance Committee, with theexception of its Chairman, who is appointed by the shareholders at aShareholders’ Meeting.  Currently, ourCorporate Governance Committee is comprised of the same three members of ourAudit Committee.  Our CorporateGovernance Committee operates pursuant to the provisions of the MexicanSecurities Law and our Bylaws.  Adescription of the specific functions of our Corporate Governance Committee canbe found in Item 10.  See “Item 10.  Additional Information——Audit and CorporateGovernance Committees” for further information about our Corporate GovernanceCommittee.

 

**Compensation Committee.**

** **

Under NYSE Rules,listed companies must have a compensation committee composed entirely ofindependent directors.  Under our Bylawsand the Mexican securities laws and regulations, we are not required to have acompensation committee.  Currently, we donot have such a committee.

 

**Corporate Governance Guidelines and Code of Ethics**

** **

Domestic issuerslisted on the NYSE are required to adopt and disclose corporate governanceguidelines and a code of business conduct and ethics for directors, officersand employees and promptly disclose any waivers of such code for directors orexecutive officers.  We are not requiredto adopt and disclose corporate governance guidelines under Mexican law to thesame extent as the NYSE Rules. However, under Mexican law we are required~~~~toannually file with the *Bolsa Mexicana de Valores*or Mexican Stock Exchange a statement relating to our level of adherence to theMexican Code of Best Corporate Practices. Our statement can be found on our corporate web page.  We are not required to adopt a Code of Ethicsunder Mexican law.  However, in April 2003,we adopted a Code of Ethics applicable to our directors, officers andemployees.  Our Code of Ethics can alsobe found on our corporate web page under “Corporate Governance.”

 

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# **PART III**

# ** **

## **ITEM 17.               FinancialStatements.**

## ** **

**NotApplicable.**

 

## **ITEM 18.               FinancialStatements.**

## ** **

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

 

## **ITEM 19.               Exhibits.**

## ** **

Pursuant to the rules andregulations of the SEC, we have filed certain agreements as exhibits to thisannual report on Form 20-F.  Theseagreements may contain representations and warranties by the parties.  These representations and warranties havebeen made solely for the benefit of the other party or parties to suchagreements and (i) may be intended not as statements of fact, but ratheras a way of allocating the risk to one of the parties to such agreements ifthose statements turn out to be inaccurate, (ii) may have been qualifiedby disclosures that were made to such other party or parties and that eitherhave been reflected in the company’s filings or are not required to bedisclosed in those filings, (iii) may apply materiality standardsdifferent from what may be viewed as material to investors, and (iv) weremade only as of the date of such agreements or such other date(s) as maybe specified in such agreements and are subject to more recentdevelopments.  Accordingly, theserepresentations and warranties may not describe our actual state of affairs atthe date hereof.

 

Documents filed as exhibits to this annual report:

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                                                                                                                                                                   |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                   |
| 1                    |       | Our bylaws (*estatutos sociales*)  as amended through May 26, 2008, 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)              |       | 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)(4)              |       | 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.******                                                                              |

 

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| **Exhibit No.** | ** ** | ** **                                                                                                                                                                                                                        |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                              |
| 2(b)(5)              |       | 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.******* |
|                 |       |                                                                                                                                                                                                                              |
| 2(b)(6)              |       | Ps 3,367 million two year term loan between us and  Bancomext with a variable interest rate of TIIE + 2%, dated November 12,  2008.                                                                                          |
|                 |       |                                                                                                                                                                                                                              |
| 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.****                            |
|                 |       |                                                                                                                                                                                                                              |
| 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 30, 2009.                                                                                                                      |
|                 |       |                                                                                                                                                                                                                              |
| 12(a)(2)             |       | CFO Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002, dated June 30, 2009.                                                                                                                      |
|                 |       |                                                                                                                                                                                                                              |
| 13                   |       | Officer Certifications pursuant to Section 906  of the Sarbanes-Oxley Act of 2002, dated June 30, 2009.                                                                                                                 |

 

----

| *       | Previously filed in Annual Report on Form 20-F  (File No. 1-14852), originally filed with the SEC on June 27, 2008.  Incorporated herein by reference.             |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **      | 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.             |
| ******* | Previously filed in Annual Report on Form 20-F  (File No. 1-14852), originally filed with the SEC on June 29, 2007.  Incorporated herein by reference.             |

 

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** **

**SIGNATURES**

** **

The registrant,Gruma, S.A.B. de C.V., hereby certifies that it meets all of the requirementsfor filing 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 30, 2009

 

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Tableof Contents

 

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

** **

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

** **
| ** **                                                                                                                 | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                       |       |     |
| Report  of Independent Registered Public Accounting Firm                                                                   |       | F-2      |
| Consolidated Balance Sheets as of December 31,  2007 and 2008                                                         |       | F-4      |
| Consolidated  Statements of Income for the Years Ended December 31, 2006, 2007 and  2008                              |       | F-5      |
| Consolidated Statements of Changes in Stockholders’  Equity for the Years Ended December 31, 2006, 2007 and 2008 |       | F-6      |
| Consolidated Statement of Cash Flows for the Year  Ended December 31, 2008                                            |       | F-8      |
| Consolidated Statements of Changes in Financial  Position for the Years Ended December 31, 2006 and 2007              |       | F-9      |
| Notes to Consolidated Financial Statements                                                                                 |       | F-10     |

 

**GrupoFinanciero Banorte, S.A.B. de C.V. and Subsidiaries**

 

**Report of Independent Registered Public AccountingFirm and Consolidated Financial Statements as of December 31, 2008, 2007and 2006.**

 

**Table ofContents**

 
|                                                             |   | **Page** |
|------------------------------------------------------------------|--------|----------|
|                                                             |   |     |
| Report  of Independent Registered Public Accounting Firm         |   | F-75     |
|                                                             |   |     |
| Consolidated  Balance Sheets                                     |   | F-76     |
|                                                             |   |     |
| Consolidated  Statements of Income                               |   | F-78     |
|                                                             |   |     |
| Consolidated Statements of Changes in Stockholders’  Equity |   | F-79     |
|                                                             |   |     |
| Consolidated Statements of Changes in Financial  Position        |   | F-81     |
|                                                             |   |     |
| Notes to Consolidated Financial Statements                       |   | F-82     |

 

F-1

----

Table of Contents

 

 

**PricewaterhouseCoopers, S. C.**

AvenidaRufino Tamayo No. 100

Col.Valle Oriente

66269Garza Garcia, N. L.

Teléfono:(81) 8152 2000

Fax:         (81) 8152 2075

**www.pwc.com**

 

# **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Stockholders of

Gruma, S. A. B. de C. V.

 

Inour opinion, based on our audits and the report of other auditors, theaccompanying consolidated balance sheets and the related consolidatedstatements of income, of changes in stockholders’ equity of cash flows in 2008and of changes in financial position in 2007 and 2006, present fairly, in allmaterial respects, the financial position of Gruma, S. A. B. de C. V. and itssubsidiaries (the Company) at December 31, 2008 and 2007, and the resultsof their operations for each of the three years in the period ended December 31,2008, the changes in their financial position for the years ended December 31,2007 and 2006 and their cash flows for the year ended December 31, 2008,in conformity with Mexican Financial Reporting Standards. Also in our opinion,the Company maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2008, based on criteriaestablished in *Internal Control - Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany’s management is responsible for these financial statements, formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reportingincluded in “Management’s Report on Internal Control Over Financial Reporting”appearing on Item 15. Our responsibility is to express opinions on thesefinancial statements and on the Company’s internal control over financialreporting based on our integrated audits (which were integrated audits in 2008and 2007). We did not audit the financial statements of Grupo FinancieroBanorte, S. A. B. de C. V., and subsidiaries, an associated company, whoseinvestment in common stock as of December 31, 2008 and 2007 represents 7%and 8%, respectively, of the consolidated total assets, and whose equity inincome represented (5%), 32% and 40% of consolidated net (loss) income, foreach of the three years in the period ended December 31, 2008, 2007 and2006, respectively. The financial statements of Grupo Financiero Banorte, S. A.B. de C. V. were audited by other auditors whose report thereon has beenfurnished to us, and our opinion on the financial statements expressed herein,insofar as it relates to that investment, is based solely on the report of theother auditors. We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States) and generallyaccepted auditing standards in Mexico. Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects. Ouraudits of the financial statements included examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Ouraudits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits and the report ofthe other auditors provide a reasonable basis for our opinions.

 

F-2

----

Tableof Contents

 

Asexplained in Note 2, as of January 1, 2008 five new MFRS, whosecharacteristics and effects of adoption are described in that Note, becameeffective. These are: (a) B-10 “Effects of inflation”, (b) B-2 “Cashflow statements”, (c) B-15 “Foreign currency translation”, (d) D-3“Employee benefits” and (e) D-4 “Taxes on profits”.

 

MexicanFinancial Reporting Standards vary in certain significant respects fromaccounting principles generally accepted in the United States of America.Information relating to the nature and effect of such differences is presentedin Note 21 to the consolidated financial statements.

 

Acompany’s internal control over financial reporting is 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. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern. As discussed in Note 2 to the financialstatements, the Company had a net loss of Ps.12,339,758 in fiscal year ended December 31,2008 and had obligations to its derivative counterparties as of December 31,2008 in the amount of Ps.11,230,170. In addition, the Company had long-termdebt in the amount of Ps.11,728,068 as of December 31, 2008, some of whichit will be required to renegotiate in order to be able to finance itsobligations to its derivative counterparties on a long-term basis. As discussedin Note 2, these facts raise substantial doubt about the Company’s ability tocontinue as a going concern. Management’s plans in regard to these matters arealso described in Note 2. The accompanying financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 

 

Monterrey, Mexico

June 29, 2009

 

F-3

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Tableof Contents

 

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

 

**CONSOLIDATEDBALANCE SHEETS**

**ASOF DECEMBER 31, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos)**

**(Notes 1 and 2)**

 
| ** **                                                   | ** ** | **2007**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                   |       |       |       |       |       |
| Current:                                                     |       |       |       |       |       |
| Cash                                                         |       | Ps.        | 383,469    |       | Ps.        | 865,861 |   |
| Cash equivalents  (Note 2-G)                                 |       | 97,459     |       | 560,392    |       |
| Accounts  receivable, net (Note 3)                           |       | 4,776,378  |       | 6,232,601  |       |
| Refundable taxes  (Note 3)                                   |       | 764,514    |       | 1,038,703  |       |
| Inventories  (Note 4)                                        |       | 5,549,290  |       | 7,628,517  |       |
| Prepaid expenses                                             |       | 294,810    |       | 372,975    |       |
| Total current  assets                                        |       | 11,865,920 |       | 16,699,049 |       |
|                                                         |       |       |       |       |       |
| Investment in  common stock of associated companies (Note 5) |       | 2,849,978  |       | 3,435,648  |       |
| Property, plant  and equipment, net (Note 6)                 |       | 16,274,447 |       | 20,653,274 |       |
| Intangible  assets, net (Note 7)                             |       | 844,489    |       | 827,286    |       |
| Goodwill (Note  2-K)                                         |       | 1,908,798  |       | 2,204,087  |       |
| Other assets  (Note 8)                                       |       | 167,070    |       | 615,333    |       |
| **Total  assets**                                            |       | Ps.        | 33,910,702 |       | Ps.        | 44,434,677 |   |
| ** **                                                   |       |       |       |       |       |
| **LIABILITIES**                                              |       |       |       |       |       |
| Current:                                                     |       |       |       |       |       |
| Bank loans (Note  9)                                         |       | Ps.        | 666,232    |       | Ps.        | 1,910,929 |   |
| Current portion  of long-term debt (Note 9)                  |       | 274,841    |       | 507,631    |       |
| Trade accounts  payable                                      |       | 2,670,731  |       | 3,171,907  |       |
| Accrued  liabilities and other accounts payable              |       | 2,415,650  |       | 2,932,260  |       |
| Income taxes  payable                                        |       | —     |       | 124,991    |       |
| Employees’  statutory profit sharing payable            |       | 21,964     |       | 28,123     |       |
| Derivative  financial instruments (Note 17)                  |       | 25,557     |       | 6,316,721  |       |
| Total current  liabilities                                   |       | 6,074,975  |       | 14,992,562 |       |
| Long-term debt  (Note 9)                                     |       | 6,913,173  |       | 11,728,068 |       |
| Derivative  financial instruments (Note 17)                  |       | —     |       | 5,155,571  |       |
| Deferred taxes  (Note 14-B)                                  |       | 2,005,814  |       | 2,556,308  |       |
| Deferred  employees’ statutory profit sharing           |       | —     |       | 298,501    |       |
| Other liabilities                                            |       | 339,541    |       | 422,117    |       |
| Total long-term  liabilities                                 |       | 9,258,528  |       | 20,160,565 |       |
| **Total  liabilities**                                       |       | 15,333,503 |       | 35,153,127 |       |
| Contingencies  and commitments (Note 11)                     |       |       |       |       |       |
| ** **                                                   |       |       |       |       |       |
| **STOCKHOLDERS’ EQUITY**                                |       |       |       |       |       |
| Majority  interest (Note 12):                                |       |       |       |       |       |
| Common stock                                                 |       | 4,852,296  |       | 6,972,425  |       |
| Restatement of  common stock                                 |       | 8,437,310  |       | —     |       |
|                                                         |       | 13,289,606 |       | 6,972,425  |       |
| Additional  paid-in capital                                  |       | 4,831,370  |       | 2,144,238  |       |
| Contributed  capital                                         |       | 18,120,976 |       | 9,116,663  |       |
|                                                         |       |       |       |       |       |
| Lost capital                                                 |       | (2,425,766 | )          | (3,477,366 | )          |
| Total majority  interest                                     |       | 15,695,210 |       | 5,639,297  |       |
| Minority  interest                                           |       | 2,881,989  |       | 3,642,253  |       |
| **Total  stockholders’ equity**                         |       | 18,577,199 |       | 9,281,550  |       |
| ** **                                                   |       | Ps.        | 33,910,702 |       | Ps.        | 44,434,677 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-4

----

Table of Contents

 

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

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except share and per share amounts)**

**(Notes 1and 2)**

 
| ** **                                                          | ** ** | **2006**    | ** ** | **2007**    | ** ** | **2008**    | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                | ** ** | ** **  |       |        |       |        |       |
| Net sales                                                           |       | Ps.         | 32,189,955 |        | Ps.        | 35,816,046  |       | Ps. | 44,792,572 |   |
| Cost of sales                                                       |       | (20,975,201 | )          | (24,192,290 | )          | (30,236,597 | )          |
| Gross profit                                                        |       | 11,214,754  |       | 11,623,756  |       | 14,555,975  |       |
|                                                                |       |        |       |        |       |        |       |
| Selling and  administrative expenses                                |       | (9,342,921  | )          | (9,749,888  | )          | (11,288,995 | )          |
| Operating income                                                    |       | 1,871,833   |       | 1,873,868   |       | 3,266,980   |       |
|                                                                |       |        |       |        |       |        |       |
| Other (expense)  income, net (Notes 2-A and 13)                     |       | (49,112     | )          | 555,743     |       | (181,368    | )          |
|                                                                |       |        |       |        |       |        |       |
| Comprehensive  financing (expense) income:                          |       |        |       |        |       |        |       |
| Interest expense                                                    |       | (602,315    | )          | (683,578    | )          | (823,702    | )          |
| Interest income                                                     |       | 82,012      |       | 64,357      |       | 90,399      |       |
| (Loss) gain from  derivative financial instruments (Note 17 and 20) |       | (146,693    | )          | 155,456     |       | (15,056,799 | )          |
| Monetary  position gain, net                                        |       | 336,552     |       | 558,509     |       | 446,720     |       |
| (Loss) gain from  foreign exchange differences, net (Note 15-A)     |       | (19,363     | )          | 72,129      |       | 255,530     |       |
|                                                                |       | (349,807    | )          | 166,873     |       | (15,087,852 | )          |
|                                                                |       |        |       |        |       |        |       |
| Equity in  earnings of associated companies                         |       | 643,318     |       | 707,835     |       | 618,476     |       |
|                                                                |       |        |       |        |       |        |       |
| Income (loss)  before income taxes                                  |       | 2,116,232   |       | 3,304,319   |       | (11,383,764 | )          |
|                                                                |       |        |       |        |       |        |       |
| Income taxes  (Note 14):                                            |       |        |       |        |       |        |       |
| Current                                                             |       | (355,849    | )          | (627,675    | )          | (304,753    | )          |
| Deferred                                                            |       | (76,321     | )          | (298,035    | )          | (129,942    | )          |
|                                                                |       | (432,170    | )          | (925,710    | )          | (434,695    | )          |
|                                                                |       |        |       |        |       |        |       |
| Consolidated  income (loss)                                         |       | 1,684,062   |       | 2,378,609   |       | (11,818,459 | )          |
| Minority  interest                                                  |       | (82,937     | )          | (145,288    | )          | (521,299    | )          |
| Majority net  income (loss)                                         |       | Ps.         | 1,601,125  |        | Ps.        | 2,233,321   |       | Ps. | (12,339,758 | ) |
|                                                                |       |        |       |        |       |        |       |
| Earnings (loss)  per share (in pesos)                               |       | Ps.         | 3.34       |        | Ps.        | 4.63        |       | Ps. | (21.84 | ) |
| Weighted average  shares outstanding (thousands)                    |       | 480,007     |       | 482,506     |       | 564,853     |       |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

F-5

----

Tableof Contents

 

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

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except share and per share amounts)(Notes 1 and 2)**

 
| ** **                                              | ** ** | **Common  stock** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | **Cumulative  effect of**  | ** **  | **Retained  earnings**   | ** ** | **Foreign**  | ** ** | ** **      | ** ** | ** **       | ** ** | ** **   | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|------------|------------|----------------|------------|-------------------|------------|----------------------------|-------------|--------------------------|------------|--------------|------------|-----------------|------------|------------------|------------|--------------|------------|
| ** **                                              | ** ** | **(Note  12-A)**  | ** ** | ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | **deferred  income taxes** | ** **  | **(Note  12-B)**         | ** ** | **currency** | ** ** | ** **      | ** ** | ** **       | ** ** | ** **   | ** ** |
| ** **                                              | ** ** | **Number  of**    | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **        | ** ** | **Derivative**             | ** **  | **and  employees’** | ** ** | ** **   | ** ** | **Net  income** | ** ** | **translation**  | ** ** | **Total**    | ** ** | ** ** | ** ** | **Total** | ** ** |
| ** **                                              | ** ** | **shares**        | ** ** | ** ** | ** ** | **paid-in**    | ** ** | **Deficit  from** | ** ** | **financial**              | ** **  | **statutory  profit**    | ** ** | **Prior**    | ** ** | **(loss)  for** | ** ** | **adjustments**  | ** ** | **majority** | ** ** | **Minority** | ** ** | **stockholders’** | ** ** |
| ** **                                              | ** ** | **(thousands)**   | ** ** | **Amount** | ** ** | **capital**    | ** ** | **restatement**   | ** ** | **instruments**            | ** **  | **sharing**              | ** ** | **years**    | ** ** | **the year**    | ** ** | **(Note  12-D)** | ** ** | **interest** | ** ** | **interest** | ** ** | **equity** | ** ** |
| **Balances  at December 31, 2005**                 |       | 452,550           |       | Ps.        | 12,991,207 |           | Ps.        | 3,973,857         |       | Ps.                        | (14,885,764 | )                        | Ps.        | 95           |       | Ps.             | (226,316   | )                | Ps.        | 10,430,300   |       | Ps. | 1,304,693 |   | Ps. | (1,227,526 | ) | Ps. | 12,360,546 |   | Ps. | 3,148,232 |   | Ps. | 15,508,778 |   |
|                                                    |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       |             |       |         |       |   |   |   |   |
| Appropriation of  prior year net income                 |       |              |       |       |       |           |       |              |       |                       |        |                     |       | 1,304,693    |       | (1,304,693      | )          |             |       | —       |       |   |   | — |   |
| Stock issuance                                          |       | 30,000            |       | 326,067    |       | 865,228        |       |              |       |                       |        |                     |       |         |       |            |       |             |       | 1,191,295    |       |   |   | 1,191,295 |   |
| Contributions by  minority interest                     |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       |             |       | —       |       | 98,735 |   | 98,735 |   |
| Dividends paid  (Ps.0.91 per share)                     |       |              |       |       |       |           |       |              |       |                       |        |                     |       | (440,347     | )          |            |       |             |       | (440,347     | )          | (246,852 | ) | (687,199 | ) |
| Net purchases and  sales of Company’s common stock |       |              |       | 161        |       | 2,402          |       |              |       |                       |        |                     |       | 149          |       |            |       |             |       | 2,712        |       |   |   | 2,712 |   |
|                                                    |       | 30,000            |       | 326,228    |       | 867,630        |       |              |       |                       |        |                     |       | 864,495      |       | (1,304,693      | )          |             |       | 753,660      |       | (148,117 | ) | 605,543 |   |
| Comprehensive  income (loss):                           |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       |             |       |         |       |   |   |   |   |
| Recognition of  inflation effects for the year          |       |              |       |       |       |           |       | (205,526          | )          |                       |        |                     |       | (102,440     | )          |            |       |             |       | (307,966     | )          | 55,170 |   | (252,796 | ) |
| Foreign currency  translation adjustments               |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       | 419,500          |       | 419,500      |       | (80,008 | ) | 339,492 |   |
| Derivative  financial instruments, net of taxes         |       |              |       |       |       |           |       |              |       | 6,630                      |        |                     |       |         |       |            |       |             |       | 6,630        |       | 10,542 |   | 17,172 |   |
| Net income for  the year                                |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       | 1,601,125       |       |             |       | 1,601,125    |       | 82,937 |   | 1,684,062 |   |
| Comprehensive  income for the year                      |       |              |       |       |       |           |       | (205,526          | )          | 6,630                      |        |                     |       | (102,440     | )          | 1,601,125       |       | 419,500          |       | 1,719,289    |       | 68,641 |   | 1,787,930 |   |
| ** **                                              |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       |             |       |         |       |   |   |   |   |
| **Balances  at December 31, 2006**                 |       | 482,550           |       | 13,317,435 |       | 4,841,487      |       | (15,091,290       | )          | 6,725                      |        | (226,316                 | )          | 11,192,355   |       | 1,601,125       |       | (808,026         | )          | 14,833,495   |       | 3,068,756 |   | 17,902,251 |   |
|                                                    |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       |             |       |         |       |   |   |   |   |
| Appropriation of  prior year net income                 |       |              |       |       |       |           |       |              |       |                       |        |                     |       | 1,601,125    |       | (1,601,125      | )          |             |       | —       |       |   |   | — |   |
| Decrease of  minority interest                          |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       |             |       | —       |       | (21,191 | ) | (21,191 | ) |
| Dividends paid  (Ps.0.88 per share)                     |       |              |       |       |       |           |       |              |       |                       |        |                     |       | (423,625     | )          |            |       |             |       | (423,625     | )          | (203,639 | ) | (627,264 | ) |
| Net purchases and  sales of Company’s common stock |       | (1,047            | )          | (27,829    | )          | (10,117        | )          |              |       |                       |        |                     |       | 2,516        |       |            |       |             |       | (35,430      | )          |   |   | (35,430 | ) |
|                                                    |       | (1,047            | )          | (27,829    | )          | (10,117        | )          |              |       |                       |        |                     |       | 1,180,016    |       | (1,601,125      | )          |             |       | (459,055     | )          | (224,830 | ) | (683,885 | ) |
| Comprehensive  income (loss):                           |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       |             |       |         |       |   |   |   |   |
| Recognition of  inflation effects for the year          |       |              |       |       |       |           |       | (1,104,888        | )          |                       |        |                     |       | (197,668     | )          |            |       |             |       | (1,302,556   | )          | (61,073 | ) | (1,363,629 | ) |
| Foreign currency  translation adjustments               |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       | 354,940          |       | 354,940      |       | (46,152 | ) | 308,788 |   |
| Derivative  financial instruments, net of taxes         |       |              |       |       |       |           |       |              |       | 35,065                     |        |                     |       |         |       |            |       |             |       | 35,065       |       |   |   | 35,065 |   |
| Net income for  the year                                |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       | 2,233,321       |       |             |       | 2,233,321    |       | 145,288 |   | 2,378,609 |   |
| Comprehensive  income for the year                      |       |              |       |       |       |           |       | (1,104,888        | )          | 35,065                     |        |                     |       | (197,668     | )          | 2,233,321       |       | 354,940          |       | 1,320,770    |       | 38,063 |   | 1,358,833 |   |
|                                                    |       |              |       |       |       |           |       |              |       |                       |        |                     |       |         |       |            |       |             |       |         |       |   |   |   |   |
| **Balances  at December 31, 2007**                 |       | 481,503           |       | 13,289,606 |       | 4,831,370      |       | (16,196,178       | )          | 41,790                     |        | (226,316                 | )          | 12,174,703   |       | 2,233,321       |       | (453,086         | )          | 15,695,210   |       | 2,881,989 |   | 18,577,199 |   |
|                                                         |            |                   |            |            |            |                |            |                   |            |                            |             |                          |            |              |            |                 |            |                  |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-6

----

Tableof Contents

 

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

 

**CONSOLIDATED STATEMENTS OFCHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except share and per share amounts)(Notes 1 and 2)**

 
|                                                                                   |       |             |       |       |       |           |       |              |       |                   |       |                  |       |         |       |           |       |            |       |                  |       |         |              |                   |       |    |   |   |      |   |   |      |   |   |      |   |
|----------------------------------------------------------------------------------------|------------|------------------|------------|------------|------------|----------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|--------------|------------|----------------|------------|-----------------|------------|-----------------------|------------|--------------|-------------------|------------------------|------------|---------|--------|--------|-----------|--------|--------|-----------|--------|--------|-----------|--------|
| ** **                                                                             | ** ** | ** **       | ** ** | ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | ** **             | ** ** | **Cumulative effect** | ** ** | ** **   | ** ** | ** **     | ** ** | ** **      | ** ** | ** **            | ** ** | ** **   | ** **        | ** **             | ** ** |
| ** **                                                                             | ** ** | **Common stock** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | **of deferred income** | ** ** | **Retained earnings** | ** ** | **Foreign**  | ** ** | ** **     | ** ** | ** **      | ** ** | ** **            | ** ** |
| ** **                                                                             | ** ** | **(Note 12-A)**  | ** ** | ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | **taxes and**          | ** ** | **(Note 12-B)**       | ** ** | **currency** | ** ** | ** **     | ** ** | ** **      | ** ** | ** **            | ** ** |
| ** **                                                                             | ** ** | **Number of**    | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **        | ** ** | **Derivative**         | ** ** | **employees’**   | ** ** | ** **   | ** ** | **Net income** | ** ** | **translation** | ** ** | ** **            | ** ** | ** **   | ** **        | **Total**              | ** ** |
| ** **                                                                             | ** ** | **shares**       | ** ** | ** ** | ** ** | **paid-in**    | ** ** | **Deficit  from** | ** ** | **financial**          | ** ** | **statutory profit**  | ** ** | **Prior**    | ** ** | **(loss) for** | ** ** | **adjustments** | ** ** | **Total**             | ** ** | **Minority** | ** **        | **stockholders’** | ** ** |
| ** **                                                                             | ** ** | **(thousands)**  | ** ** | **Amount** | ** ** | **capital**    | ** ** | **restatement**   | ** ** | **instruments**        | ** ** | **sharing**           | ** ** | **years**    | ** ** | **the year**   | ** ** | **(Note 12-D)** | ** ** | **majority interest** | ** ** | **interest** | ** **        | **equity**             | ** ** |
| Appropriation  of prior year net income                                                |       |             |       |       |       |           |       |              |       |                   |       |                  |       | 2,233,321    |       | (2,233,321     | )          |            |       | —                |       |         |              | —                 |       |
| Dividends  paid                                                                        |       |             |       |       |       |           |       |              |       |                   |       |                  |       |         |       |           |       |            |       | —                |       | (62,953      | )                 | (62,953                | )          |
| Stock  issuance                                                                        |       | 82,625           |       | 2,111,060  |       |           |       |              |       |                   |       |                  |       |         |       |           |       |            |       | 2,111,060             |       |         |              | 2,111,060              |       |
| Net  purchases and sales of Company’s common stock                                |       | (477             | )          | 9,069      |       | 3,732          |       |              |       |                   |       |                  |       | (24,362      | )          |           |       |            |       | (11,561               | )          |         |              | (11,561                | )          |
|                                                                                   |       | 82,148           |       | 2,120,129  |       | 3,732          |       |              |       |                   |       |                  |       | 2,208,959    |       | (2,233,321     | )          |            |       | 2,099,499             |       | (62,953      | )                 | 2,036,546              |       |
| Comprehensive  income (loss):                                                          |       |             |       |       |       |           |       |              |       |                   |       |                  |       |         |       |           |       |            |       |                  |       |         |              |                   |       |
| Reclassification  of deficit from restatement (Note 12)                           |       |             |       | (8,437,310 | )          | (2,690,864     | )          | 16,196,178        |       |                   |       | 226,316               |       | (5,294,320   | )          |           |       |            |       | —                |       |         |              | —                 |       |
| Cumulative  effect of income tax and deferred employees’ statutory profit sharing |       |             |       |       |       |           |       |              |       |                   |       |                  |       | (579,454     | )          |           |       |            |       | (579,454              | )          | (91,166      | )                 | (670,620               | )          |
| Effect  of labor obligations recognized in equity                                      |       |             |       |       |       |           |       |              |       |                   |       |                  |       | 36,577       |       |           |       |            |       | 36,577                |       | 141          |              | 36,718                 |       |
| Equity  ownership from associated company                                              |       |             |       |       |       |           |       |              |       |                   |       |                  |       | (103,232     | )          |           |       |            |       | (103,232              | )          | (700         | )                 | (103,932               | )          |
| Foreign  currency translation adjustments                                              |       |             |       |       |       |           |       |              |       |                   |       |                  |       |         |       |           |       | 976,141         |       | 976,141               |       | 393,643      |              | 1,369,784              |       |
| Derivative  financial instruments, net of taxes                                        |       |             |       |       |       |           |       |              |       | (145,686               | )          |                  |       |         |       |           |       |            |       | (145,686              | )          |         |              | (145,686               | )          |
| Net  loss for the year                                                                 |       |             |       |       |       |           |       |              |       |                   |       |                  |       |         |       | (12,339,758    | )          |            |       | (12,339,758           | )          | 521,299      |              | (11,818,459            | )          |
| Comprehensive  loss for the year                                                       |       |             |       | (8,437,310 | )          | (2,690,864     | )          | 16,196,178        |       | (145,686               | )          | 226,316               |       | (5,940,429   | )          | (12,339,758    | )          | 976,141         |       | (12,155,412           | )          | 823,217      |              | (11,332,195            | )          |
| **Balances at December 31, 2008**                                                 |       | 563,651          |       | Ps.        | 6,972,425  |           | Ps.        | 2,144,238         |       | Ps.                    | —     |                  | Ps.        | (103,896     | )          | Ps.            | —     |            | Ps.        | 8,443,233             |       | Ps.          |  (12,339,758 | )                      | Ps.        | 523,055 |   | Ps.    | 5,639,297 |   | Ps.    | 3,642,253 |   | Ps.    | 9,281,550 |   |

 

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

 

F-7

----

Tableof Contents

 

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

 

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**FOR THE YEAR ENDED DECEMBER 31,2008**

** (Expressed in thousands of Mexican pesos)(Notes 1 and 2)**

 
| ** **                                                        | ** ** | **2008**   | ** **  |
|-------------------------------------------------------------------|------------|------------|-------------|
|                                                              |       |       |        |
| Loss before income taxes                                          |       | Ps.        | (11,383,764 | ) |
|                                                              |       |       |        |
| Restatement effects from companies in an inflationary environment |       | (173,504   | )           |
| Items related with investing activities:                          |       |       |        |
| Depreciation and amortization                                     |       | 1,410,420  |        |
| Impairment of long-lived assets                                   |       | 46,851     |        |
| Interest income                                                   |       | (56,030    | )           |
| Foreign exchange gain from cash                                   |       | (104,979   | )           |
| Equity in earnings of associated companies                        |       | (618,476   | )           |
| Loss from sale of fixed assets                                    |       | 11,315     |        |
| Items related with financing activities:                          |       |       |        |
| Derivative financial instruments                                  |       | 15,056,799 |        |
| Foreign exchange loss from bank loans                             |       | 577,627    |        |
| Interest expense                                                  |       | 734,266    |        |
|                                                              |       | 5,500,525  |        |
|                                                              |       |       |        |
| Accounts receivable, net                                          |       | (1,674,995 | )           |
| Inventories                                                       |       | (921,227   | )           |
| Prepaid expenses                                                  |       | 3,935      |        |
| Trade accounts payable                                            |       | (245,707   | )           |
| Accrued liabilities and other accounts payable                    |       | 191,118    |        |
| Income taxes paid                                                 |       | (660,589   | )           |
| Employees’ retirement benefits and others, net               |       | 19,936     |        |
|                                                              |       | (3,287,529 | )           |
| Net cash flows from operating activities                          |       | 2,212,996  |        |
|                                                              |       |       |        |
| Investing activities:                                             |       |       |        |
| Acquisition of property, plant and equipment                      |       | (2,696,744 | )           |
| Sales of property, plant and equipment                            |       | 27,880     |        |
| Intangible assets                                                 |       | (60,198    | )           |
| Acquisition of shares of associated companies                     |       | (154,568   | )           |
| Interests received                                                |       | 43,828     |        |
| Dividends received from associated companies                      |       | 83,446     |        |
| Other                                                             |       | (201,846   | )           |
| Net cash flows from investing activities                          |       | (2,958,202 | )           |
|                                                              |       |       |        |
| Cash to be obtained from financing activities                     |       | (745,206   | )           |
|                                                              |       |       |        |
| Financing activities:                                             |       |       |        |
| Proceeds from bank loans and long-term debt                       |       | 6,912,197  |        |
| Repayment of bank loans and long-term debt                        |       | (3,206,050 | )           |
| Interests paid                                                    |       | (781,525   | )           |
| Derivative financial instruments paid                             |       | (3,538,840 | )           |
| Proceeds from stock issuance                                      |       | 2,111,060  |        |
| Net purchases and sales of Company’s common stock            |       | (11,561    | )           |
| Dividends paid                                                    |       | (62,953    | )           |
| Other                                                             |       | (11,517    | )           |
| Net cash flows from financing activities                          |       | 1,410,811  |        |
| Net increase in cash and cash equivalents                         |       | 665,605    |        |
| Exchange differences on cash and cash equivalents                 |       | 279,720    |        |
| Cash and cash equivalents at beginning of year                    |       | 480,928    |        |
| Cash and cash equivalents at end of year                          |       | Ps.        | 1,426,253   |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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

 

**CONSOLIDATEDSTATEMENT OF CHANGES IN FINANCIAL POSITION**

**FOR THE YEARS ENDED DECEMBER 31,2006 AND 2007**

**(Expressed in thousands ofconstant Mexican pesos as of December 31, 2007)(Notes 1 and 2)**

 
| ** **                                                                                            | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Operating  activities:                                                                                |       |       |       |       |       |
| Majority net  income for the year                                                                     |       | Ps.        | 1,601,125  |       | Ps.        | 2,233,321 |   |
| Minority  interest                                                                                    |       | 82,937     |       | 145,288    |       |
| Consolidated net  income                                                                              |       | 1,684,062  |       | 2,378,609  |       |
|                                                                                                  |       |       |       |       |       |
| Adjustments to  reconcile consolidated net income to net resources provided by operating  activities: |       |       |       |       |       |
| Depreciation and  amortization                                                                        |       | 1,262,299  |       | 1,178,797  |       |
| Impairment of  long-lived assets                                                                      |       | 488,935    |       | 140,049    |       |
| Equity in  earnings of associated companies, net of dividends received                                |       | (561,467   | )          | (628,635   | )          |
| Deferred income  taxes and employees’ statutory profit sharing                                   |       | 59,498     |       | 280,776    |       |
| Net gain from  sale of subsidiaries’ shares                                                      |       | (144,883   | )          | (75,718    | )          |
| Net gain from  sale of associated company’s shares                                               |       | (399,639   | )          | (847,175   | )          |
| Loss from sale  of fixed assets                                                                       |       | 6,007      |       | 49,847     |       |
| Labor  obligations and other long-term accrued liabilities                                            |       | 9,467      |       | 21,263     |       |
|                                                                                                  |       | 2,404,279  |       | 2,497,813  |       |
| Changes in  working capital:                                                                          |       |       |       |       |       |
| Accounts  receivable, net                                                                             |       | (1,148,184 | )          | (294,768   | )          |
| Inventories                                                                                           |       | 139,532    |       | (2,166,018 | )          |
| Prepaid expenses                                                                                      |       | (57,811    | )          | 45,984     |       |
| Trade accounts  payable                                                                               |       | 205,271    |       | 193,450    |       |
| Accrued  liabilities and other accounts payable                                                       |       | 441,170    |       | 17,653     |       |
| Income taxes and  employees’ statutory profit sharing payable                                    |       | (10,646    | )          | (26,767    | )          |
|                                                                                                  |       | (430,668   | )          | (2,230,466 | )          |
| Net resources provided  by operating activities                                                       |       | 1,973,611  |       | 267,347    |       |
|                                                                                                  |       |       |       |       |       |
| Financing  activities:                                                                                |       |       |       |       |       |
| Proceeds from  bank loans and long-term debt                                                          |       | 2,452,888  |       | 4,133,286  |       |
| Repayment of  bank loans and long-term debt                                                           |       | (3,214,893 | )          | (3,151,536 | )          |
| Long-term notes  payable for new acquisitions                                                         |       | (50,628    | )          | (50,666    | )          |
| Proceeds from  stock issuance                                                                         |       | 1,191,295  |       | —     |       |
| Contributions  (decrease) by minority interest                                                        |       | 98,735     |       | (21,191    | )          |
| Net purchases  and sales of Company’s common stock and derivative financial instruments          |       | 19,884     |       | (365       | )          |
| Dividends paid                                                                                        |       | (687,199   | )          | (627,264   | )          |
| Other                                                                                                 |       | 21,729     |       | (74,261    | )          |
| Net resources  (used in) provided by financing activities                                             |       | (168,189   | )          | 208,003    |       |
|                                                                                                  |       |       |       |       |       |
| Investing  activities:                                                                                |       |       |       |       |       |
| Acquisition of  property, plant and equipment                                                         |       | (1,921,881 | )          | (2,222,903 | )          |
| Acquisition of  subsidiaries, net of cash acquired                                                    |       | (599,173   | )          | —     |       |
| Sale of  property, plant and equipment                                                                |       | 369,293    |       | 194,549    |       |
| Intangible  assets                                                                                    |       | (16,480    | )          | (16,487    | )          |
| Resources  received from sale of subsidiaries’ shares                                            |       | 144,883    |       | 167,420    |       |
| Resources  received from sale of associated company’s shares                                     |       | 618,356    |       | 1,267,353  |       |
| Other                                                                                                 |       | (159,745   | )          | 16,260     |       |
| Net resources  used in investing activities                                                           |       | (1,564,747 | )          | (593,808   | )          |
| Net increase  (decrease) in cash and cash equivalents                                                 |       | 240,675    |       | (118,458   | )          |
| Cash and cash  equivalents at beginning of year                                                       |       | 358,711    |       | 599,386    |       |
| Cash and cash  equivalents at end of year                                                             |       | Ps.        | 599,386    |       | Ps.        | 480,928 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

F-9

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Tableof Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwiseindicated)**

 

**1.****                                     ****ENTITY AND NATURE OF BUSINESS**

 

Gruma, S.A.B. de C.V. is a Mexican corporation whosesubsidiaries are located in Mexico, the United States of America, CentralAmerica, Venezuela, Europe, Asia and Oceania. These subsidiaries are engagedprimarily in manufacturing and distributing corn flour, tortillas, wheat flourand other related products. Gruma, S.A.B. de C.V. and its subsidiaries areherein collectively referred to as “the Company”.

 

The accompanying consolidated financial statements andnotes were authorized on June 25, 2009 by Juan Quiroga García, ChiefCorporate Officer and Homero Huerta Moreno, Chief Administrative Officer.

** **

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES**

 

A)               BASIS OF PRESENTATION AND LIQUIDITY

 

The accompanyingconsolidated financial statements have been prepared in accordance with MexicanFinancial Reporting Standards (MFRS or Mexican FRS), assuming that the Companywill continue as a going concern. This basis of accounting contemplates the recoveryof its assets and the satisfaction of its liabilities in the normal course ofbusiness. The Company had a net loss of Ps.12,339,758 in fiscal year ended December 31,2008 and had obligations to its derivative counterparties as of December 31,2008 in the amount of Ps.11,230,170.  In addition, theCompany had long-term debt in the amount of Ps.11,728,068 as of December 31,2008, some of which it will be required to renegotiate in order to be able tofinance its obligations to derivative counterparties on a long-term basis asfurther discussed below.

 

In October 2008, theCompany began negotiating with certain of its derivative counterparties andduring November 2008 partially settled its open positions on certain ofthese instruments in the amount of Ps.2,501,960 using a loan obtained from afinancial institution for an amount of Ps.3,367,000. During the remainder of2008 and until the date of signing the preliminary agreements described in thefollowing paragraph, the Company has continued negotiating the settlement ofits derivative positions on certain of these instruments.

 

On March 19, 2009the Company entered into a term sheet (the “Term Sheet”) that provides for thefinancing of the obligations that would result from the termination of all ofits foreign exchange derivative instruments that it had entered with CreditSuisse, Deutsche Bank and JP Morgan Chase as counterparties (the “DerivativeCounterparties”). On March 23, 2009, the Company and the DerivativeCounterparties agreed to terminate certain additional derivative instrumentsand fixed the total amount of obligations payable by the Company to theDerivative Counterparties at U.S.$668.3 million (the “Termination Amounts”). Inconnection with the Term Sheet, the Company and the Derivative Counterpartieshave agreed to negotiate in good faith to convert the Termination Amounts intoa secured term loan (the “Financing”) within 120 days of March 23, 2009.As a condition of the Financing, the Term Sheet establishes a term of 120 daysfor performing the following: (a) the Company and its counterpartiesshould formalize this preliminary agreement, (b) the Company should enterinto agreements to amend and restate its existing major credit facilities (the “CreditAgreement Amendments”), and (c) the Company should settle the remainingderivative open positions. If the Company, the Derivative Counterparties andits creditors fail to enter into an agreement within the 120-day periodcontemplated by the Term Sheet, the Termination Amount of U.S.$668.3 milliontogether with interest accrued will become immediately due and payable. Inaddition, if the Company fails to enter into the agreement contemplated by theTerm Sheet, certain other indebtedness of the Company could become due andpayable in the event of the exercise by the creditors of their right toaccelerate repayment of these obligations under specified events of default.

 

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Tableof Contents

 

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

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES(continued)**

 

Management of the Companybelieves it will sign the final agreement and will successfully renegotiate thebank loans subject to this agreement. If the Company is unable to successfullyconsummate the Financing and the Credit Agreement Amendments, it will attemptto restructure or refinance its existing financial obligations, seek additionalequity capital or sell assets since it does not have sufficient liquidity torepay the U.S.$668.3 million obligation owing to the Derivative Counterparties,and other indebtedness that may become due at that time. Although the Companyexpects the successful consummation of the Financing and the Credit AgreementAmendments, there can be no assurance that this will be consummated. Thesefacts raise substantial doubt about the Company’s ability to continue as agoing concern

 

In order to achieve afair presentation of the Company’s financial performance, the Company’smanagement followed the criteria of presenting the statement of income on afunctional basis, since the different levels of income are disclosed whengrouping its costs and expenses in a general way. Additionally, for convenienceof the readers, operating income is presented separately, since this concept isuseful for the analysis of the financial information and has been disclosed bythe Company on a regular basis.

 

Derived from theapplication of MFRS B-2 “Statement of Cash Flows”, effective starting January 1,2008, the Company presents, as a basic financial statement, the statement ofcash flows for the year ending December 31, 2008. This financial statementpresents cash inflows and outflows that show how cash is provided or usedduring the year, classified as operating, investing and financing activities.For this purpose, the Company used the indirect method, which presents earningsor losses before taxes, adjusted for the effects of operations of prior periodsreceived or paid in the current period, and for operations in the currentperiod that will be received or paid in the future. For the years ended December 31,2006 and 2007, the statement of changes in financial position was presentedseparately as a basic financial statement which classifies changes in financialposition for operating, financing, and investing activities. These financialstatements are expressed in Mexican pesos of constant purchasing power as of December 31,2007.

 

Based on the criteriamentioned above, the Company applied the accounting policies that are describedbelow. A reconciliation from Mexican FRS to United States generally acceptedaccounting principles (U.S. GAAP) is included in Note 21.

 

B)                 BASIS OF CONSOLIDATION

 

The consolidatedfinancial statements include the accounts of Gruma, S.A.B. de C.V. and all ofthose subsidiaries in which the majority of the common shares are owneddirectly or indirectly by the Company or it otherwise has control. Allsignificant intercompany balances and transactions have been eliminated fromthe consolidated financial statements.

 

As of December 31,2007 and 2008 the main subsidiaries included in the consolidation are thefollowing:

 
| ** **                                                                     | ** ** | **% of ownership** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                     | ** ** | **2007**           | ** ** | **2008** | ** ** |
| Gruma  Corporation and subsidiaries                                            |       | 100.00             |       | 100.00 |   |
| Grupo Industrial Maseca, S.A.B. de C.V. and  subsidiaries                      |       | 83.18              |       | 83.18 |   |
| Molinos Nacionales, C.A. (Note 17-D)                                           |       | 72.86              |       | 72.86 |   |
| Derivados de Maíz Seleccionado, C.A. (Note 17-D)                          |       | 57.00              |       | 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.                                 |       | 100.00             |       | 100.00 |   |
| Investigación de Tecnología Avanzada, S.A. de C.V.  and subsidiaries |       | 100.00             |       | 100.00 |   |

 

F-11

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Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwiseindicated)**

 

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES (continued)**

 

C)                 USE OF ESTIMATES

 

The preparation ofthe financial statements in conformity with Mexican FRS requires management tomake certain estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosures of contingent assets and liabilities atthe dates of the financial statements, and reported amounts of revenues, costsand expenses for the reporting years. Actual results could differ from thoseestimates.

 

D)                FOREIGN CURRENCY TRANSLATION

 

Starting January 1,2008, the Company adopted the provisions established in the new MFRS B-15 “ForeignCurrency Translation”, under which the Mexican peso is defined as the Company’sfunctional currency as well as its reporting currency. Based on the newstandard, the financial statements of the foreign subsidiaries are translatedto Mexican pesos, depending on the economic environment in which the subsidiaryoperates, as follows:

 

Non-inflationary economicenvironment:

 

a.               As of December 31, 2008, assets andliabilities are translated to Mexican pesos using the year-end exchange rate ofPs.13.83.

b.              As of December 31, 2007,stockholders’ equity was translated to Mexican pesos using the exchange rate atthat date, whereas the transactions of the year 2008 were translated byapplying the exchange rate in effect at the dates on which the stockholders’contributions were made and income was generated. The average exchange rate wasPs.11.21.

c.               Revenues, costs and expenses for the year2008 are translated to Mexican pesos using the historical exchange rate. Theaverage exchange rate was Ps.11.21.

d.              The effects of translation are recognizedas a component of stockholders’ equity entitled “Foreign currency translationadjustments”.

 

Inflationary economicenvironment:

 

Financial statements arerestated following the provisions of MFRS B-10, applying the price index of theforeign country, which reflects the change in purchasing power of the currencyin which the subsidiary reports. Afterwards, the financial statements aretranslated to Mexican pesos as follows:

 

a.               As of December 31, 2008, assets,liabilities and stockholders’ equity are translated to Mexican pesos using theyear-end exchange rate of Ps.13.83.

b.              Revenues, costs and expenses for the year2008 are translated to Mexican pesos using the year-end exchange rate ofPs.13.83.

c.               The changes were recognized by theCompany as a component of stockholders’ equity entitled “Foreign currencytranslation adjustments”.

 

F-12

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Tableof Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwiseindicated)**

 

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES(continued)**

 

E)                  RECOGNITION OF THE EFFECTS OF INFLATION

 

Starting January 1,2008, the provisions of MFRS B-10 “Effects of inflation” became effective. Thisstandard establishes the guidelines for recognizing the effects of inflationbased on the inflationary environment of the country. According to theprovisions of MFRS B-10, as long as the accumulated inflation rate does notexceed 26% in the last three years, the effects of inflation in the financialinformation will not be applied (except in foreign subsidiaries whereaccumulated inflation exceeds 26%). Since the accumulated inflation for theyears ended December 31, 2005, 2006 and 2007 did not exceed 26%, thefinancial statements as of December 31, 2008 have been prepared based onthe modified historical cost model (that is, the effects of transactionsrecognized as of December 31, 2007 are expressed in Mexican pesos ofconstant purchasing power at that date, and the effects of transactions thatoccurred after that date are expressed in nominal Mexican pesos). Financialstatements for the years ended December 31, 2006 and 2007, which arepresented for comparative purposes, are expressed in constant Mexican pesos of December 31,2007, based on the factors derived from the National Consumer Price Index (“NCPI”),published by the Mexican Central Bank (Banco de México) for domestic companies, and by the General ConsumerPrice Index (“GCPI”) of the countries in which the foreign subsidiaries operate.

 

The accumulated inflationof the last three years in countries where the Company and its subsidiariesoperate did not exceed 26% mentioned in the previous paragraph, with theexception of Venezuela, and some other countries that are not significant forthese financial statements.

 

F)                  FOREIGN CURRENCY TRANSACTIONS

 

Foreign currencytransactions are recorded at the exchange rate in effect on the dates thetransactions are realized. Monetary assets and liabilities denominated inforeign currencies are translated into Mexican pesos at the exchange rate ineffect at the balance sheet dates. Foreign exchange differences arising fromthe valuation and settlement of these balances are credited or charged toincome, except for the effects of translation of foreign currency-denominatedliabilities, which are accounted for as a hedge of the Company’s net investmentin foreign subsidiaries, and are recognized as a component of equity under “Foreigncurrency translation adjustments”.

 

G)                 CASH EQUIVALENTS

 

Cash equivalents arehighly liquid investments with maturities of less than a year from the date ofthe balance sheet and are stated at cost, which approximates market value.

 

H)                INVENTORIES AND COST OF SALES

 

Starting January 1,2008, inventories are expressed at their historical cost determined by theaverage cost method. Additionally, cost of sales is recognized at thehistorical cost of purchases and production of inventories sold during 2008plus restated values (replacement cost) of the final inventories of 2007 soldduring the year. The values so determined do not exceed their market value.

 

As of December 31,2007, inventories were stated at the lower of estimated replacement cost ormarket. Estimated replacement cost was mainly determined by the last purchaseprice or the last production cost for the year. Cost of sales was determinedusing estimated replacement costs for the month in which inventories were sold.

 

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Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressedin thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES(continued)**

 

In January 2007, theMexican government and several participants in the corn, corn flour andtortilla supply chain signed an agreement which establishes rights andobligations to fix prices of corn and related products, in order to preventsignificant increases of the tortilla price. As a result, the Company, throughits subsidiary Grupo Industrial Maseca, S.A.B. de C.V. (GIMSA), agreed a priceof Ps.5 per ton of corn flour in all Mexico until the end of April of thatyear. On April 25, 2007, the Mexican government announced a secondagreement that extended the term until August 15, 2007. GIMSA kept itscorn flour at this price until the end of May 2008.

 

On October 21, 2008,the Federal Official Gazette published, on behalf of the Ministry of Economyand within the Agreement to Promote Competitiveness of the Industrial Sectors (“PROIND”),the Guidelines for the Operation of the Program of Benefits for the Corn FlourIndustry (“PROHARINA”) for the fiscal year 2008. The PROHARINA has among itsobjectives to reduce the impact on the final consumer of increases in theinternational prices of corn, using a mechanism of granting benefits to thefinal consumer, through the industry that produces corn flour, to which theCompany belongs. These benefits are granted subject to the kilogram of cornflour being sold at a maximum price of Ps.5.45 per kilogram starting June 2008.These benefits are recognized in the income statement as a reduction in thecost of sales. The benefits obtained by the Company through PROHARINA in 2008amounted to Ps.1,270,687.

 

I)                     INVESTMENT IN COMMON STOCK

 

Investments in commonstock with ownership between 10% and 50% of the investees’ voting stock, orwhere the Company exercises significant influence, are accounted for by theequity method.

 

J)                    PROPERTY, PLANT AND EQUIPMENT, NET

 

As of December 31,2008, property, plant and equipment, including acquisitions through capitalleases, are stated as follows: i) acquisitions made starting January 1,2008, at its historical cost, and ii) acquisitions made until December 31,2007 are restated utilizing NCPI factors until December 31, 2007, exceptfor plant and equipment of foreign origin, which are restated on the basis of aspecific index composed of the GCPI from the foreign country and the change invalue of the Mexican peso against the foreign currency at the year-end 2007.Consequently, as of December 31, 2008, property, plant and equipment areexpressed at its modified historical cost.

 

Depreciation expense iscomputed based on the modified historical cost less salvage value, using thestraight-line method over the estimated useful lives of the assets. Usefullives of 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. The interest expense, foreign exchange differences, monetaryposition gain or loss and other costs of the financing required for fixedassets whose acquisition or construction requires a substantial period of time,are capitalized as part of the cost of the assets. The values so determined donot exceed their fair value.

 

Direct internal andexternal costs related to the development and implementation of internal usesoftware are capitalized and amortized over its estimated useful life beginningwhen such software is ready for its intended use.

 

F-14

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Tableof Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwiseindicated)**

 

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES(continued)**

 

The value of these assetsis subject to impairment tests when certain events and circumstances arepresent, as mentioned in Note 2-L.

 

K)                INTANGIBLE ASSETS, NET AND GOODWILL

 

As of December 31,2008, intangible assets acquired or developed are stated as follows: i)acquisitions or developments made starting January 1, 2008, at historicalcost, and ii) acquisitions or developments realized through December 31,2007, at restated value determined by applying NCPI factors until December 31,2007 to their cost of acquisition or development. Consequently, as of December 31,2008, intangible assets are restated at modified historical cost.

 

As of December 31,2008, for foreign subsidiaries in an inflationary environment the value ofthese assets is restated using the GCPI factors.

 

Expenses incurred duringthe development stage are capitalized as preoperating expenses. The developmentstage concludes upon the commencement of commercial operations. Researchexpenses are expensed as incurred. Capitalized preoperating expenses areamortized using the straight-line method over a period no longer than 12 years.

 

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. Estimateduseful lives of intangible assets with finite lives are determined based on theanalysis of contractual, economic, legal or regulatory factors that may limitthe useful lives. Indefinite-lived intangible assets are no longer amortized.

 

Business combinations andinvestments in subsidiaries and associated companies are accounted for by thepurchase method. Goodwill is no longer amortized and is tested annually forimpairment.

 

Debt issuance costs arecapitalized and restated using NCPI factors through December 31, 2007.Amortization expense of debt issuance costs is computed using the straight-linemethod over the term of the related debt.

 

The value of these assetsis subject to impairment tests, when certain events and circumstances arepresent as mentioned in Note 2-L.

 

L)                   IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company performsimpairment tests for its property, plant and equipment; intangible assets;goodwill and investment in associated companies, when certain events orcircumstances suggest that the carrying value of these assets might not berecovered. Intangible assets with indefinite lives and goodwill are subject toimpairment tests at least once a year.

 

The recoverable value ofassets held for use is determined using the higher of the estimated discountednet cash flows expected to be generated by the assets or the market price; whenappropriate, an impairment loss is recognized to the extent that the net bookvalue exceeds the estimated recoverable value of the assets. The net salesprice is determined using market values or transactions with similar assets,less selling costs.

 

The value of assets to bedisposed of is determined using lower of book value or net sales price; whenappropriate, an impairment loss is recognized for the excess of book value overnet sales price. These assets are restated using NCPI factors until December 31,2007, and are not depreciated or amortized.

 

As of December 31,2007 and 2008, impairment losses of Ps. 140,049 and Ps. 46,851, respectively,were included in income of the year as part of ordinary expenses and the assetsare stated net of such losses.

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwiseindicated)**

 

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES(continued)**

 

M)              LABOR OBLIGATIONS

 

The most significantchanges derived from the new provisions of MFRS D-3, applied prospectivelystarting January 1, 2008 are:

 

·                  The reduction in the amortization periods of itemsrelated to past services. These items are amortized in a period of five years.The effect of adoption is presented in Note 10. Until December 31, 2007,past services were amortized over to the employees’ estimated remaining workinglife.

 

·                  The recognition of deferred employees’ statutoryprofit sharing (ESPS) based on the comprehensive assets and liabilities method,when the payment or recovery of these benefits is likely to occur for employees’that render future services. The accumulated effect of the adoption of thismethod, which amounted to Ps.343,467, was recognized in retained earnings inthe statement of changes in stockholders’ equity. The effect of the year ispresented in the statement of income within other income and expenses. SeeNotes 10 and 13. Until December 31, 2007, deferred ESPS was onlyrecognized for those temporary differences between net income of the year andadjusted income for ESPS, that was reasonably presumed would generate a liabilityor a benefit in the future.

 

As a result of theabove-mentioned changes, the information presented in Note 10-A covers 2008only.

 

The Company does not havedefined contribution benefit plans, except for those required by the socialsecurity laws. The Company uses December 31 as a measurement date for itsplans.

 

The benefits granted bythe Company to its employees, including defined benefit plans, are described asfollows: direct benefits (salaries, over-time, vacations, holidays and absencepermissions with salary payment, etc.) are expensed as incurred and theirliabilities are expressed at nominal value, due to their short-term nature.Compensated absences according to legal or contractual provisions are notcumulative. The Company does not have any long-term direct benefit plans.

 

The benefits at the endof the labor relationship other than for restructuring causes (legalindemnities for dismissal, seniority premium plan, voluntary separation, etc.),as well as benefits when employees reach the 60-year retirement age accordingto the Company’s single-payment retirement plan, are recognized based onstudies by independent actuaries using the projected unit credit method. Forthese purposes, the Company has established trust funds to meet these obligations.The employees do not contribute to these funds.

 

The net period cost ofeach benefit plan is recognized as an expense in the period when incurred, thiscost includes the amortization of labor costs of past services and actuarialgains (losses) of prior years.

 

With respect to itemspending amortization at December 31, 2007, known as transitionliabilities, which include past service costs and net actuarial gains to beamortized, these items will be amortized starting January 1, 2008 over aperiod of five years instead of the estimated work life of employees, as wasthe case until 2007. This change caused an additional expense in 2008 ofPs.27,483.

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwiseindicated)**

 

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES(continued)**

 

N)                 FINANCIAL INSTRUMENTS

 

Derivative financialinstruments that are not designated as accounting hedges are recorded initiallyat cost and at each period-end at fair value, in the balance sheet as assets and/orliabilities. Any gain or loss on valuation is recognized in income of the year.

 

The fair value isdetermined based on recognized market prices. When the instruments are notquoted in a market, their fair value is determined based on valuation techniquesaccepted in the financial sector.

 

The changes in fair valueof such derivative financial instruments are recognized as part of thecomprehensive financing income or expense, except when the instruments aredesignated as hedges and comply with all hedge requirements, such as:documentation of such designation at the beginning of the hedge contract,including objective, primary position, risks being hedged, type of instruments,effectiveness, characteristics, accounting recognition, and method to evaluatethe effectiveness.

 

The effectiveness of ahedge is determined when changes in the fair value or cash flows for theprimary position are compensated by changes in the fair value or cash flows ofthe hedging instruments with a quotient that ranks from 80% to 125% of inversecorrelation.

 

When hedgeineffectiveness is present, as well when the hedge designation does not complywith the requirements for documentation established in Statement C-10 “DerivativeFinancial Instruments”, the gain or loss on valuation of the financialinstruments at fair value is recognized in income, in comprehensive financingincome or expense.

 

For cash-flow hedgetransactions, changes in the fair value of the derivative financial instrumentare included as comprehensive income in stockholders’ equity, based on theevaluation of the hedge effectiveness, and are reclassified to income in theperiods when the hedged commitment or projected transaction is realized. Hedgecontracts other than for cash flows are valued at fair value, and theirvaluation gain or loss is recognized in income.

 

O)                 REVENUE RECOGNITION

 

Revenue on product salesis recognized upon shipment to, and acceptance by, the Company’s customers andthe risk of ownership has passed to the customers. Provisions for discounts andrebates to customers, returns and other adjustments are recognized in the sameperiod that the related sales are recorded and are based upon either historicalestimates or actual terms.

 

P)                   INCOME TAX

 

The Company recognizes inincome the expense or income for deferred income taxes for all the temporarydifferences between the carrying values for financial reporting and tax valuesof assets and liabilities that are expected to be reversed. Valuationallowances are provided if**,** based uponthe weight of available evidence**,** it is morelikely than not that some or all the deferred tax assets will not berealizable.

 

Starting October 1,2007, date when the new “Flat Tax Law” was approved in Mexico, the Companyrecognized the effects of this new law, which became effective on January 1,2008. According to the interpretation published by the Mexican FinancialReporting Standards Board (CINIF) on December 21, 2007, with respect tothe accounting effects of the Flat Tax and based on the financial and tax projectionsprepared for this purpose, it was determined that the Company and itssubsidiaries in Mexico will essentially pay income tax rather than flat tax inthe future; therefore, the Company did not recognize any deferred flat tax at December 31,2007 or 2008.

 

F-17

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwiseindicated)**

** **

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES(continued)**

 

According to theapplicable law effective January 1, 2008, the asset tax law wassuperseded. Nevertheless, the new law includes a procedure for recovering assettax paid in previous years, which under the old law could be recovered in thefollowing ten years if the income tax exceeded the asset tax in those years.See Note 14-C.

 

Q)                EARNINGS (LOSS) PER SHARE

 

Earnings (loss) per shareis computed by dividing majority net income (loss) for the year by the weightedaverage number of common shares outstanding during the year.

 

R)                 COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income(loss) is comprised of: income (loss) of the year, translation effects offoreign entities, effect from changes in the fair value of derivative financialinstruments designated as an accounting hedge and items that due to a specificaccounting requirement are recognized in stockholders’ equity and do notconstitute increases, reductions or distributions of capital. The amounts ofcomprehensive income (loss) of 2008 are expressed in modified historicalMexican pesos and those for 2007 as Mexican pesos of purchasing power of December 31,2007.

 

**3.****                                     ****ACCOUNTS RECEIVABLE, NET ANDREFUNDABLE TAXES**

 

Accounts receivable, netcomprised the following as of December 31:

 
| ** **                        | ** ** | **2007**  | ** ** | **2008**  | ** ** |
|-----------------------------------|------------|-----------|------------|-----------|------------|
| Trade accounts  receivable        |       | Ps.       | 4,329,437  |      | Ps.        | 4,936,849 |   |
| Allowance for  doubtful accounts  |       | (233,733  | )          | (245,941  | )          |
|                              |       | 4,095,704 |       | 4,690,908 |       |
| Related parties                   |       | 3,164     |       | 84,146    |       |
| Derivative  financial instruments |       | 63,921    |       | 15,145    |       |
| Employees                         |       | 32,302    |       | 42,977    |       |
| Other debtors                     |       | 581,287   |       | 1,399,425 |       |
|                              |       | Ps.       | 4,776,378  |      | Ps.        | 6,232,601 |   |

 

Refundable taxescomprised the following as of December 31:

 
| ** **      | ** ** | **2007** | ** ** | **2008** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| Value-added tax |       | Ps.      | 295,053    |     | Ps.        | 243,375 |   |
| Income tax      |       | 469,461  |       | 795,328  |       |
|            |       | Ps.      | 764,514    |     | Ps.        | 1,038,703 |   |

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwiseindicated)**

 

**4.****                                     ****INVENTORIES**

 

Inventories consisted ofthe following as of December 31:

 
| ** **                            | ** ** | **2007** | ** ** | **2008** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Raw materials,  mainly corn and wheat |       | Ps.      | 3,914,798  |     | Ps.        | 6,039,906 |   |
| Finished  products                    |       | 596,081  |       | 716,363  |       |
| Materials and  spare parts            |       | 392,454  |       | 471,487  |       |
| Production in  process                |       | 184,222  |       | 210,541  |       |
| Advances to  suppliers                |       | 350,808  |       | 124,374  |       |
| Inventory in  transit                 |       | 110,927  |       | 65,846   |       |
|                                  |       | Ps.      | 5,549,290  |     | Ps.        | 7,628,517 |   |

 

**5.****                                     ****INVESTMENT IN COMMON STOCK OFASSOCIATED COMPANIES**

 

Investment in common stock of associated companiesconsists of the investment in common stock of Grupo Financiero Banorte, S.A.B. de C.V. and subsidiaries (GFNorte) and Harinera de Monterrey, S.A. de C.V.which produces wheat flour and related products in Mexico.

 

These investments, accounted for by the equity method,comprised the following as of December 31:

 
| ** **                          | ** ** | **2007** | ** ** | **Ownership as  of December  31, 2007** | ** ** | **2008** | ** ** | **Ownership as  of December  31, 2008** | ** ** |
|-------------------------------------|------------|----------|------------|-----------------------------------------|------------|----------|------------|-----------------------------------------|------------|
|                                |       |     |       |                                    |       |     |       |                                    |       |
| GFNorte                             |       | Ps.      | 2,713,592  |                                    | 8.6232     | %        | Ps.        | 3,299,031                               |       | 8.7966 | % |
| Harinera de Monterrey, S.A. de C.V. |       | 136,386  |       | 40                                      | %          | 136,617  |       | 40                                      | %          |
|                                |       | Ps.      | 2,849,978  |                                    |       |     | Ps.        | 3,435,648                               |       |   |   |

 

During 2008, the Company purchased 3,500,000 shares ofGFNorte for a total amount of Ps.154,568, generating a goodwill for Ps.91,813. These shares represented 0.1734% ofthe capital stock of GFNorte. Prior to the purchase of these shares, theinterest of the Company in GFNorte was 8.6232%.

** **

**6.****                                     ****PROPERTY, PLANT AND EQUIPMENT,NET**

 

Property, plant andequipment, net consisted of the following as of December 31:

 
| ** **                                 | ** ** | **2007**    | ** ** | **2008**    | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|
| Land                                       |       | Ps.         | 1,318,173  |        | Ps.        | 1,565,601 |   |
| Buildings                                  |       | 5,272,783   |       | 6,504,098   |       |
| Machinery and  equipment                   |       | 20,182,964  |       | 24,258,404  |       |
| Construction in  progress                  |       | 1,152,810   |       | 2,403,119   |       |
| Software for  internal use                 |       | 832,344     |       | 1,034,415   |       |
| Leasehold  improvements                    |       | 394,073     |       | 626,802     |       |
| Other                                      |       | 35,138      |       | 45,840      |       |
|                                       |       | 29,188,285  |       | 36,438,279  |       |
| Accumulated  depreciation and amortization |       | (12,913,838 | )          | (15,785,005 | )          |
|                                       |       | Ps.         | 16,274,447 |        | Ps.        | 20,653,274 |   |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**6.****                                     ****PROPERTY, PLANT AND EQUIPMENT,NET (continued)**

 

Forthe years ended December 31, 2006, 2007 and 2008, depreciation expenseamounted to Ps. 1,146,393,  Ps. 1,072,174and Ps.1,312,322, respectively. For the years ended December 31, 2006,2007 and 2008, comprehensive financing costs of Ps. 5,778, Ps. 2,894 andPs.12,170, respectively, were capitalized to property, plant and equipment.

 

As of December 31,2007 and 2008, property, plant and equipment included temporarily idled assetswith a carrying value of approximately Ps. 649,015 and Ps.646,916,respectively, resulting from the temporary shut-down of the productiveoperations of various plants in Mexico, mainly in the corn flour division.These assets are stated at their net realizable value and are not beingdepreciated.

 

Forthe years ended December 31, 2006, 2007 and 2008, the Company recognizedimpairment losses of Ps. 334,725, Ps. 97,196 and Ps.46,851, respectively, in “Otherincome (expense), net” in accordance with the provisions of  MFRS C-15, “Impairment of Long-Lived Assetsand their Disposal”, as follows:

 
| **Segment**                                            | ** ** | **2006** | ** **    | **2007** | ** ** | **2008**     | ** ** |
|--------------------------------------------------------|------------|----------|---------------|----------|------------|--------------|------------|
| Corn flour division (Mexico)                           |       | Ps.      |  14,814  |     | Ps.        |  27,975 |       | Ps. |  26,051 |   |
| Corn flour, wheat flour and other products (Venezuela) |       | 94,808   |          | 35,848   |       | —       |       |
| Other                                                  |       | 191,972  |          | 33,373   |       | 20,800       |       |
| Other reconciling items                                |       | 33,131   |          | —   |       | —       |       |
| Total                                                  |       | Ps.      |  334,725 |     | Ps.        |  97,196 |       | Ps. |  46,851 |   |

 

**7.****                                     ****INTANGIBLE ASSETS, NET**

 

Intangibleassets, net, comprised the following:

 

**As of December 31,2007:**

 
| ** **                               | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Net carrying  amount** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Intangible assets with finite lives:     |       |                        |       |                          | ** ** | ** **               | ** ** |
| Acquired:                                |       |                        |       |                          |       |                     |       |
| Covenants not to compete                 |       | Ps.                         | 937,774    |                          | Ps.        | (535,818                 | )          | Ps. | 401,956 |   |
| Debt issuance costs                      |       | 556,715                     |       | (229,939                      | )          | 326,776                  |       |
| Patents and trademarks                   |       | 95,670                      |       | (43,582                       | )          | 52,088                   |       |
| Customer lists                           |       | 50,363                      |       | (20,584                       | )          | 29,779                   |       |
| Generated:                               |       |                        |       |                          |       |                     |       |
| Pre-operating expenses                   |       | 56,317                      |       | (55,871                       | )          | 446                      |       |
| Development of new projects              |       | 32,606                      |       | (32,606                       | )          | —                   |       |
| Other                                    |       | 64,304                      |       | (52,016                       | )          | 12,288                   |       |
|                                     |       | Ps.                         | 1,793,749  |                          | Ps.        | (970,416                 | )          | 823,333 |   |
| Intangible assets with indefinite lives: |       |                        |       |                          |       |                     |       |
| Trademarks                               |       |                        |       |                          |       | 21,156                   |       |
|                                     |       |                        |       |                          |       | Ps.                      | 844,489    |   |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**7.****                                     ****INTANGIBLE ASSETS, NET(continued)**

 

**As of December 31,2008:**

 
| ** **                               | ** ** | **Remaining  useful life  (years)** | ** ** | **Gross  carrying  amount** | ** **      | **Accumulated  amortization** | ** ** | **Net carrying  amount** | ** **    |
|------------------------------------------|------------|-------------------------------------|------------|-----------------------------|-----------------|-------------------------------|------------|--------------------------|---------------|
| Intangible assets with finite lives:     |       |                                |       |                        |            |                          | ** ** | ** **               | ** **    |
| Acquired:                                |       |                                |       |                        |            |                          |       |                     |          |
| Covenants not to compete                 |       | 8                                   |       | Ps.                         |  941,500   |                          | Ps.        |  (586,686           | )             | Ps. |  354,814 |   |
| Debt issuance costs                      |       | 1 – 16                         |       | 578,844                     |            | (246,337                      | )          | 332,507                  |          |
| Patents and trademarks                   |       | 1 – 13                         |       | 121,165                     |            | (65,499                       | )          | 55,666                   |          |
| Customer lists                           |       | 1 – 13                         |       | 94,950                      |            | (57,388                       | )          | 37,562                   |          |
| Generated:                               |       |                                |       |                        |            |                          |       |                     |          |
| Pre-operating expenses                   |       | 1                                   |       | 7,854                       |            | (7,179                        | )          | 675                      |          |
| Development of new projects              |       | 9                                   |       | 32,062                      |            | (32,062                       | )          | —                   |          |
| Other                                    |       | 1 – 5                          |       | 71,666                      |            | (52,472                       | )          | 19,194                   |          |
|                                     |       |                                |       | Ps.                         |  1,848,041 |                          | Ps.        |  (1,047,623         | )             | 800,418 |   |
| Intangible assets with indefinite lives: |       |                                |       |                        |            |                          |       |                     |          |
| Trademarks                               |       |                                |       |                        |            |                          |       | 26,868                   |          |
|                                     |       |                                |       |                        |            |                          |       | Ps.                      |  827,286 |   |

 

Intangible assets recognized during 2007 amounted toPs.16,602, mainly due to trade names in the corn flour and other productsdivision in Central America for a total of Ps.7,029. Intangible assets recognized during 2008amounted to Ps.60,198 due mainly to the acquisition of customer lists for anamount of Ps.31,788, in the segment of Central America, and debt issuance costsof Ps.16,835.

 

The Company determined based on the provisions ofMFRS C-8, “Intangible Assets”, that certain trademarks have indefinite livessince their future cash flow generation is expected to be indefinite.

 

For the years ended December 31, 2006, 2007 and2008, amortization expense of intangible assets amounted to Ps.115,906,Ps.106,623 and Ps.98,098, respectively.

 

Research and development costs charged to incomeamounted to Ps. 61,860, Ps. 64,504 and Ps.93,638 for the years ended December 31,2006, 2007 and 2008, respectively.

 

As of December 31,2007, the Company recognized an impairment loss in certain intangible assets ofPs.42,853, in accordance with the provisions of MFRS C-15. The impairment losswas recognized in “Other income (expense), net” (Note 13) within the “Other”segment.

 

Estimatedamortization expense over the next five years is as follows:

 
| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2009       |       | Ps.        | 100,380    |   |
| 2010       |       | 91,546     |       |
| 2011       |       | 81,978     |       |
| 2012       |       | 78,805     |       |
| 2013       |       | 76,908     |       |
| Thereafter |       | 370,801    |       |
| Total      |       | Ps.        | 800,418    |   |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**7.****                                     ****INTANGIBLE ASSETS, NET (continued)**

 

Goodwill,net, is comprised of the following:

 
| ** **                               | ** ** | **Corn flour  and  packaged  tortillas (US  and  Europe)** | ** **      | **Corn flour  (Mexico)** | ** ** | **Other** | ** ** | **Other  reconciling  items** | ** **    | **Total** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------|-----------------|--------------------------|------------|-----------|------------|-------------------------------|---------------|-----------|------------|
| Balance at January 1,  2007         |       | Ps.                                                        | 877,886         |                     | Ps.        | 205,635   |       | Ps.                           |  486,128 |      | Ps.        |  312,254 |   | Ps. |  1,881,903 |   |
| Goodwill acquired                        |       |                                                       |            |                     |       | 16,762    |       |                          |          | 16,762    |       |
| Foreign currency  translation adjustment |       | 22,288                                                     |            |                     |       | 53,627    |       | —                        |          | 75,915    |       |
| Restatement                              |       | (33,377                                                    | )               | (10,436                  | )          | (21,102   | )          | (867                          | )             | (65,782   | )          |
| Balance at  December 31, 2007       |       | 866,797                                                    |            | 195,199                  |       | 535,415   |       | 311,387                       |          | 1,908,798 |       |
| Goodwill acquired                        |       |                                                       |            |                     |       | 768       |       |                          |          | 768       |       |
| Foreign currency  translation adjustment |       | 217,046                                                    |            |                     |       | 77,475    |       |                          |          | 294,521   |       |
| Balance at  December 31, 2008       |       | Ps.                                                        |  1,083,843 |                     | Ps.        | 195,199   |       | Ps.                           | 613,658       |      | Ps.        |  311,387 |   | Ps. |  2,204,087 |   |

 

**8.****                                     ****OTHER ASSETS**

 

Otherassets consisted of the following, as of December 31:

 
| ** **                             | ** ** | **2007** | ** ** | **2008** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Other investments and club memberships |       | Ps.      | 8,643      |     | Ps.        | 215,319 |   |
| Long-term recoverable asset tax        |       | —   |       | 119,996  |       |
| Guarantee deposits                     |       | 32,367   |       | 144,504  |       |
| Long-term notes receivable             |       | 126,060  |       | 135,514  |       |
|                                   |       | Ps.      | 167,070    |     | Ps.        | 615,333 |   |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**9.****                                     ****BANK LOANS AND LONG-TERM DEBT**

 

Bankloans and long-term debt as of December 31 are summarized as follows:

 
| ** **                                                                                                                                                                       | ** ** | **2007**  | ** **      | **2008**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|-----------------|------------|------------|
| Perpetual notes in U.S. dollars, bearing interest at  an annual rate of 7.75%, payable quarterly, redeemable starting 2009 at the  Company’s option                         |       | Ps.       |  3,276,000 |       | Ps.        |  4,149,000 |   |
| Loan in Mexican pesos, maturing in  November 2010 and bearing interest at a variable annual rate of TIIE  plus 2%, payable monthly                                          |       | —    |            | 3,367,000  |       |
| 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 (4.31% in 2008)     |       | 2,238,600 |            | 2,724,510  |       |
| Credit line in U.S. dollars, maturing in  October 2011, bearing interest at an annual rate of LIBOR plus 0.35% to  0.45% (1.6% in 2008), payable in 30, 60, 90 and 180 days |       | 764,400   |            | 1,300,020  |       |
| Loans in U.S. dollars and Euros, payable between  2009 and 2010 and bearing interest at variable annual rates from 1.2% to 7.0%  in 2008, payable in different installments      |       | 348,987   |            | 213,657    |       |
| Loans in Venezuelan bolivars payable in 2009 and  bearing interest at variable annual rates from 9.75% to 12.33% in 2008, payable  monthly                                       |       | 413,863   |            | 555,465    |       |
| Loans in U.S. dollars and Honduran lempiras due  between 2009 and 2010, bearing interest at variable annual rates from 2.28%  to 17.0%, payable monthly                          |       | 563,703   |            | 469,857    |       |
| Loans in Mexican pesos due in 2009 and 2013, bearing  interest at fixed annual rates from 10.74% to 14.70%, payable monthly                                                      |       | 134,033   |            | 557,978    |       |
| Loans in U.S. dollars due in 2009, bearing interest  at a variable annual rate between 3.49% to 7.75%                                                                            |       | 114,660   |            | 809,141    |       |
|                                                                                                                                                                             |       | 7,854,246 |            | 14,146,628 |       |
| Short-term bank loans                                                                                                                                                            |       | (666,232  | )               | (1,910,929 | )          |
| Current portion of long-term debt                                                                                                                                                |       | (274,841  | )               | (507,631   | )          |
| Long-term debt                                                                                                                                                                   |       | Ps.       |  6,913,173 |       | Ps.        |  11,728,068 |   |

 

As of December 31,2008, the short-term bank loans denominated in U.S. dollars amounting toPs.809,141 and Ps.297,419 (U.S.$59 and U.S.$21 million, respectively), bearinterest at an average rate of 6.4% and 8.5%, respectively. Short-term bankloans of Ps.433,670 denominated in Mexican pesos bear interest at an averagerate of 14.23% as of December 31, 2008. Short-term bank loans ofPs.359,572 denominated in Venezuelan bolivars (55,899 million of Venezuelanbolivars) bear interest at an average rate of 11.0% as of December 31,2008. Additionally, as of December 31, 2008, the Company had short-termloans of Ps.6,763 denominated in euros (0.4 million of euros) bearing interestat an average rate of 5.3%.

 

TheCompany has credit line agreements for Ps.4,840,000 (U.S.$350 million), fromwhich, as of December 31, 2008, Ps.816,000 (U.S.$59 million) areavailable. These credit line agreements require the payment of an annualcommitment fee of 0.10% to 0.20% on the unused amounts.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**9.****                                     ****BANK LOANS AND LONG-TERM DEBT(continued)**

 

Variouscredit agreements contain covenants, that require the Company to maintain: (1) aratio of consolidated total funded debt to EBITDA of not more than 3.5:1; and (2) aratio of consolidated EBITDA to consolidated interest charges of not less than2.5:1; and also limits the Company’s ability, among other things, to: (1) createliens; (2) merge or consolidate with other companies or sell substantiallyall of the Company’s assets; (3) make certain investments or otherrestricted payments; (4) engage in transactions with affiliates; and (5) guaranteeadditional indebtedness which if not complied with, may be considered as acause for early maturity of the debt. At December 31, 2008, the Companywas in compliance with these financial ratios.

 

At December 31,2008 the annual maturities of long-term debt outstanding were as follows:

 
| **Year**            | ** ** | **Amount** | ** ** |
|---------------------|------------|------------|------------|
| 2010                |       | Ps.        | 6,253,095  |   |
| 2011                |       | 1,318,501  |       |
| 2012                |       | 6,577      |       |
| 2013                |       | 895        |       |
| 2014 and thereafter |       | 4,149,000  |       |
|                |       | Ps.        | 11,728,068 |   |

 

**10.****                              ****LABOR OBLIGATIONS**

 

A)         RETIREMENT BENEFITS AND COMPENSATION UPONTERMINATION OF EMPLOYMENT (SEVERANCE COMPENSATION)

 

At December 31,2007 and 2008, the balance payable related to employee retirement benefitsamounted to Ps. 153,454 and Ps.162,045, respectively, and is included in “Otherliabilities”.

 

The reconciliationbetween the initial and final balances of the present value of defined benefitobligations (OBD) for the year 2008 is as follows:

 
| ** **                         | ** ** | **Severance  compensation** | ** ** | **Retirement  benefits** | ** ** |
|------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| OBD at January 1, 2008        |       | Ps.                         | 41,403     |                     | Ps.        | 165,737 |   |
| Add (deduct):                      |       |                        |       |                     |       |
| Current service cost               |       | 3,086                       |       | 10,541                   |       |
| Financial cost                     |       | 2,901                       |       | 13,472                   |       |
| Actuarial losses for the period    |       | 24,630                      |       | 19,345                   |       |
| Benefits paid                      |       | (26,638                     | )          | (11,122                  | )          |
| Anticipated reduction in liability |       | —                      |       | (9,262                   | )          |
| OBD at December 31, 2008      |       | Ps.                         | 45,382     |                     | Ps.        | 188,711 |   |

 

F-24

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**10.****                              ****LABOR OBLIGATIONS (continued)**

 

Theobligation for vested benefits as of December 31, 2007 and 2008 amountedto Ps.113,998 and Ps.169,759, respectively.

 

The reconciliationbetween the initial and final balances of the employee benefit plan assets atfair value for the year 2008 is as follows:

 
| ** **                                             | ** ** | **Severance  compensation** | ** ** | **Retirement  benefits** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Plan assets at market value at January 1, 2008    |       | Ps.                         | 22,569     |                     | Ps.        | 13,312 |   |
| Add (deduct):                                          |       |                        |       |                     |       |
| Expected return                                        |       | (2,597                      | )          | (1,256                   | )          |
| Benefits paid                                          |       | (193                        | )          | (81                      | )          |
| Plan assets at market value at December 31,  2008 |       | Ps.                         | 19,779     |                     | Ps.        | 11,975 |   |

 

Thefollowing table shows the reconciliation between the present value of thedefined benefit obligation and the plan assets at fair value, and the projectednet liability included in the balance sheet as of December 31, 2008:

 
| ** **                                        | ** ** | **Severance  compensation** | ** ** | **Retirement  benefits** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Employee benefit (assets) liabilities:            |       |                        |       |                     |       |
| OBD                                               |       | Ps.                         | 45,382     |                     | Ps.        | 188,711 |   |
| Plan assets                                       |       | (19,779                     | )          | (11,975                  | )          |
| Unfunded portion of the plan                      |       | 25,603                      |       | 176,736                  |       |
| Less items pending amortization:                  |       |                        |       |                     |       |
| Transition liability                              |       | (262                        | )          | (117                     | )          |
| Actuarial gains                                   |       | (50                         | )          | (87,433                  | )          |
| Projected net liability at December 31, 2008 |       | Ps.                         | 25,291     |                     | Ps.        | 89,186 |   |

 

Thecomponents of the net cost as of December 31, 2008 by type of plan consistof the following:

 
| ** **                      | ** ** | **Severance  compensation** | ** ** | **Retirement  benefits** | ** ** |
|---------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Current service cost            |       | Ps.                         | 3,086      |                     | Ps.        | 10,541 |   |
| Financial cost                  |       | 2,901                       |       | 13,472                   |       |
| Estimated return on plan assets |       | (1,975                      | )          | (1,165                   | )          |
| Actuarial gains, net            |       | 36,276                      |       | 5,613                    |       |
| Prior service cost              |       | 67                          |       | 31                       |       |
| Net cost for the year           |       | Ps.                         | 40,355     |                     | Ps.        | 28,492 |   |

 

At December 31,2008 plan assets stated at fair value and related percentages with respect tototal plan assets were analyzed as follows:

 
| ** **                | ** ** | **Severance compensation** | ** ** | **Retirement benefits** | ** ** |
|---------------------------|------------|----------------------------|------------|-------------------------|------------|
| Equity securities         |       | Ps.                        | 11,741     |                    | 59         | % | Ps. | 7,109 |   | 59 | % |
| Fixed rate securities     |       | 8,038                      |       | 41                      | %          | 4,866 |   | 41 | % |
| Plan assets at fair value |       | Ps.                        | 19,779     |                    | 100        | % | Ps. | 11,975 |   | 100 | % |

 

F-25

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**10.****                              ****LABOR OBLIGATIONS (continued)**

 

TheCompany has the policy of maintaining at least 30% of the trust assets inMexican Federal Government instruments. Guidelines have been established forthe remaining 70% and investment decisions are taken in accordance with theseguidelines to the extent market conditions and available funds allow it.

 

Todate, the funds maintained in plan assets are considered sufficient to face theshort-term needs; therefore, the Company’s management has determined that forthe moment no additional contributions will be needed to increase these assets.

 

The estimated long-term return on assets is based onthe annual recommendations issued by the Actuarial Commission of the MexicanAssociation of Actuaries. These recommendations consider historical informationand future market expectations.

 

Themain actuarial hypotheses used were as follows:

 
| ** **                                  | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|
| Discount rate                               |       | 9.00     | %          |
| Future increase rate in compensation levels |       | 4.50     | %          |
| Estimated return rate on plan assets        |       | 9.00     | %          |

 

Thedefined benefit obligation, the plan assets at fair value, the status of theplan, as well as the actuarial gains or losses for the most recent four yearare shown below:

 
| ** ** | ** ** | **Historical  amounts** | ** ** | **Actuarial  gains (losses)** | ** ** |
|------------|------------|-------------------------|------------|-------------------------------|------------|
| **Year**   | ** ** | **OBD**                 | ** ** | **Plan********assets**        | ** ** | **Unfunded  portion of  the plan** | ** ** | **OBD** | ** ** | **Plan********assets** | ** ** |
| 2008       |       | Ps.                     | 234,093    |                          | Ps.        |  31,754 |   | Ps. |  202,339 |   | Ps. |  (43,975 | ) | Ps. |  713 |   |
| 2007       |       | 162,243                 |       | 34,885                        |       | 127,358 |   | (38,370 | ) | 4,434 |   |
| 2006       |       | 131,600                 |       | 33,685                        |       | 97,915 |   | (28,046 | ) | 4,659 |   |
| 2005       |       | 127,894                 |       | 28,974                        |       | 98,920 |   | (16,756 | ) | 5,425 |   |
|            |            |                         |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |

 

In theUnited States of America, the Company has 401(k) plans involving voluntaryemployee contributions for saving and investing purposes, and contributions ofthe subsidiaries located in that country. For the years ended December 31,2006, 2007 and 2008, total expenses related to this plan were Ps.33,251(U.S.$3,045,000), Ps.37,335 (U.S.$3,419,000), and Ps.50,576 (U.S.$3,657,000),respectively.

 

InVenezuela, the Company recognizes a liability for seniority premiums andcompensation for dismissal established by the local Labor Law, considered as aright to which employees are entitled, amounting to Ps. 26,161 and Ps.25,976 asof December 31, 2007 and 2008, respectively.

 

InCentral America, the Labor Laws of Costa Rica, Nicaragua, El Salvador, Hondurasand Guatemala establish that the accumulated payments to which workers may beentitled, based on the years of service, must be paid in the case of death,retirement or dismissal. The Company records a liability of 9% over salariespaid, which amounted to Ps. 7,300 and Ps.21,592 as of December 31, 2007and 2008, respectively.

 

F-26

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**10.****                              ****LABOR OBLIGATIONS (continued)**

 

B)           EMPLOYEES’ STATUTORY PROFIT SHARING(ESPS)

 

TheCompany is subject to the payment of ESPS in its Mexican operations, which isdetermined by applying the procedures established by the Mexican Income TaxLaw.

 

Thedeferred ESPS is recognized starting January 1, 2008 based on thecomprehensive asset and liability method, which consists in determining thedeferred tax for all temporary differences between the book and tax values ofthe assets and liabilities that are expected to be realized in the future.

 

TheESPS provisions in 2007 and 2008 are shown below:

 
| ** **    | ** ** | **2007** | ** ** | **2008** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| Current ESPS  |       | Ps.      | 21,964     |     | Ps.        | 28,123 |   |
| Deferred ESPS |       | (13,818  | )          | 298,501  |       |
| Total         |       | Ps.      | 8,146      |     | Ps.        | 326,624 |   |

 

As of December 31,the main components of deferred ESPS were summarized as follows:

 
| ** **                          | ** ** | **(Assets) Liabilities** | ** ** |
|-------------------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **2007**                 | ** ** | **2008** | ** ** |
|                                |       |                     |       |   |   |
| Accrued liabilities                 |       | Ps.                      | (42,821    | ) | Ps. | (58,127 | ) |
| Net operating loss carryforwards    |       | (25,176                  | )          | — |   |
| Deferred ESPS asset                 |       | (67,997                  | )          | (58,127 | ) |
|                                |       |                     |       |   |   |
| Property, plant and equipment, net  |       | 19,449                   |       | 350,550 |   |
| Inventories                         |       | 11,622                   |       | 6,078 |   |
| Intangible assets and other         |       | 23,108                   |       | — |   |
| Deferred ESPS liability             |       | 54,179                   |       | 356,628 |   |
| Net deferred ESPS (asset) liability |       | Ps.                      | (13,818    | ) | Ps. | 298,501 |   |

 

C)           BENEFITS FOR KEY MANAGEMENT PERSONNEL

 

For2008, the total amount paid to all Board members, alternate Board members,officers and members of Auditing Committee and Corporate Governance Committeewas Ps.122.2 million. The deferred compensation accrued as of December 31,2008 was Ps.33.4 million.

 

**11.****                             ****CONTINGENCIES AND COMMITMENTS**

 

A)              CONTINGENCIES

 

**WaterDischarge Assessments**.- Certain subsidiaries were notified by the Comisión Nacional del Agua(“National Water Commission”) of fee assessments due from various prioryears.  These assessments mainly arosefrom the National Water Commission’s determination that waste water had beendischarged on public property. Nevertheless, the subsidiaries used the waterderived from the production process, previously treated, to irrigate certain ofthe Company’s property through a sprinkler system.  The affected subsidiaries subsequentlychallenged these assessments and as of December 5, 2007, all of theassessments the National Water Commission brought against GIMSA’s subsidiarieswere definitively resolved in favor of the Company.

 

F-27

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Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**11.****                              ****CONTINGENCIES AND COMMITMENTS(continued)**

 

**MexicanTax Claim**.- TheSecretaría de Hacienda y Crédito Público (“Ministry of Finance and PublicCredit”) has lodged tax assessments against the Company for an amount ofPs.340,700 in connection with our asset tax returns for the years 1994, 1996,1997, 1999 and 2000. The Company has filed several appeals to obtain anannulment of such assessments. Recently, the claim relevant to the previouslymentioned 1999 fiscal year was definitely resolved by the Suprema Corte deJusticia de la Nación (“Mexican Supreme Court of Justice”) against the Company,by resolution published on January 28, 2009. Said claim represents a debtfor asset taxes for the Company of approximately Ps.47,500. This resolution hasnot yet been officially notified to the Company.

 

In the same manner,regarding the tax claim litigation for the fiscal year 2000, said matter hasthe same merits and foundation as the case ruled on by the Mexican SupremeCourt of Justice for the fiscal year 1999 mentioned above, therefore we expecta similar result against the Company. Said claim currently represents acontingency of about Ps.21,600.

 

In order to deal withthis situation, the Company set up a provision of Ps.67,000, which is reflectedin accrued liabilities and other accounts payable.

 

Likewise, the Ministry ofFinance and Public Credit has lodged various tax assessments against theCompany for an amount of Ps.93,500 due to the alleged tax withholding at alower rate on interest payments to foreign creditors for the years 2000, 2001and 2002 (the Mexican authorities claim that the Company should have withheld10% of said payments in lieu of 4.9% actually withheld by it).

 

The Company intends tovigorously defend against these actions. It believes the resolution of theseproceedings will not have a material effect on its financial position andresults of operations.

 

Furthermore, the Ministryof Finance and Public Credit has made tax assessments against Molinera deMéxico for an amount of Ps.101,800 for wheat imports made during the year 2003,which according to the Mexican tax authorities were incorrectly classifiedunder the harmonized system. The Company has filed a total of 14 appeals toobtain an annulment of all of these assessments, all of which have beendefinitely and satisfactorily resolved in its favor.

 

**DistributorArbitrations and Litigations in the United States.-** In November 2001, one of GRUMA’sdistributors filed a putative class action lawsuit against Gruma Corporation(Dennis Johnson and Arnold Rosenfeld et al v. Gruma Corporation).  The case was removed from California statecourt to federal court.  In April 2005,the United States District Court, based upon a recent U.S. Supreme Court decision,ordered that the claims be referred to arbitration in Los Angeles and that thearbitrator decide whether the matter should proceed as a class action. Anadditional distributor subsequently joined the arbitration as a claimant.  The arbitrator has made a preliminary rulingthat a class of approximately 1,120 California distributors will be certified,but a final certification order has not yet been entered.  The claims, as amended, allege that:  (i) Gruma Corporation breached itsagreements with its distributors; (ii) Gruma Corporation’s distributorsare actually employees; (iii) Gruma Corporation has failed to make wageand other payments required for employees; (iv) Gruma Corporation hasviolated California’s labor, antitrust, and unfair competition statutes; and (v) GrumaCorporation has otherwise committed fraud and negligentmisrepresentations.  The arbitratorsubsequently dismissed the antitrust claims. The plaintiffs seek damages and equitable relief, but have not yetspecified the total amount of damages sought. The arbitrator has indicated that trial will be held in two phases.  The first phase to determine the existence ofany liability began on April 28, 2008 and finished on May 21,2008.  On August 12, 2008, thearbitrator issued his final award in writing finding that the distributors areproperly classified as independent contractors and denying all relief.  In November 2008, the District Court affirmedthe award on all grounds and plaintiffs have appealed the confirmation to theCourt of Appeals for the Ninth Circuit. The appeal is currently pending.

 

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Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2006, 2007 AND 2008**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**11.****                             ****CONTINGENCIES AND COMMITMENTS(continued)**

 

**OnJuly 28, 2006, another of GRUMA’s distributors sought to join the LosAngeles arbitration but was referred to arbitration in the State of Washington(Misty Brunner and Kyle Ruby et al v. Gruma Corporation).  An additionaldistributor subsequently sought arbitration in the State of Washington and thetwo proceedings have been consolidated before an arbitrator in Seattle.  The two distributors on behalf of allegedclasses of current and former distributors assert that:  (i) Gruma Corporation breached itsagreements with its distributors; (ii) Gruma Corporation’s distributorsare actually employees; (iii) Gruma Corporation has failed to make wageand other payments required for employees; (iv) Gruma Corporation hasviolated California and Washington labor statues, among others; and (v) GrumaCorporation has failed to pay federal excise payments on sales made by thedistributors.  Following the arbitrationaward in the Johnson case in Gruma Corporation’s favor, plaintiffs desistedfrom their action.**

** **

In April 2007, GRUMA was named in a class actionsuit, Enrique Garza, et al. v. Gruma Corporation doing business as MissionFoods, filed in the United States District Court for the Northern District ofCalifornia, San Jose Division.  Theplaintiffs assert that they were induced to enter into distributor agreementsand to pay for routes by false statements and that Gruma Corporation breachedthe distributor agreements by arbitrarily taking their routes, shuffling aroundthe routes, reselling the routes to others, and failing to adequately compensatethe plaintiffs. The plaintiffs also asserted a Racketeer Influenced and CorruptOrganizations (RICO) violation under 18 U.S. Code 1962 et seq.  Plaintiffs seek an unspecified amount ofdamages and injunctive relief.  On July 24,2008, the Court dismissed with prejudice the RICO claims.  The parties are scheduled for mediation onthe remaining claims on March 18, 2009. The Company intends to vigorously defend against this action.

 

**Drivers’ Class Action**.- In October 2005, the Company wasnamed as a defendant in a class action suit, Ramon Moreno et al. v. GuerreroMexico Food Products, Inc. and Gruma Corporation, filed in the UnitedStates District Court for the Central District of California, Los AngelesCounty. This suit was a punitive class action alleging a misclassification ofsales drivers who deliver some of our products to retail stores under theGuerrero brand, as exempt from certain overtime wage and other mandatory workhour requirements under the California Labor Code. The plaintiffs are members ofthe International Brotherhood of Teamsters. In March 2008, the Companyreached a definitive settlement agreement with the plaintiffs for an amount ofPs.40,100 ($2.9 million dollars). The Court agreed to the terms of thesettlement on April 21, 2008. The settlement amount, as well as a portionof the costs incurred in defending the case is being paid out of proceedsreceived under an existing labor liability insurance policy.

 

**Product Class Action**.- In December 2008, GrumaCorporation was named as a defendant in a class action suit, Catherine M.Herzog et al. v. Gruma Corporation dba Mission Foods, filed in the UnitedStates District Court for the Southern District of California. This suit was apurported class action alleging violations of sections of the California Bus. &Prof. Code, intentional misrepresentation, breach of implied warranty, andviolations of California’s Consumer Legal Remedies Act in connection with thecompany’s Guacamole Dip product. The company put the vendor of the product onnotice of Gruma’s claim for indemnity under the vendor’s supply contract. Atentative settlement has been reached pending court approval.

 

**Venezuelan Tax Claim**.- The Venezuelan tax authorities havelodged certain assessments against Molinos Nacionales, C.A. (MONACA) one of theCompany ́s Venezuelan subsidiaries, related to income tax returns for the years1998 and 1999, which amounted to Ps.19,400 ($1.4 million dollars) plus taxdebts presumably omitted in the amount of Ps.1,000 ($66,300 dollars). The casehas been appealed and is pending final decision. The resolution of these claimswill be assumed by the previous shareholder, International MultifoodsCorporation, in accordance with the agreement for the purchase of theVenezuelan subsidiary.

 

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Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**11.****                             ****CONTINGENCIES AND COMMITMENTS(continued)**

 

**Venezuelan Labor Lawsuits**.- Currently, our subsidiary Molinos Nacionales, C.A. (MONACA) wasnamed in one labor lawsuits and two extrajudicial claims, claiming damages inthe amount of Ps.8,700 ($631,200 dollars). The lawsuit and claims relate toissues and rights such as profit sharing, social security, vacations, overtimehours, seniority and indemnity payments. The “caleteros” who brought the claimsare workers who help freighters unload goods.

 

Currently MONACA has beennegotiating the payment of the above-mentioned labor lawsuit and theextrajudicial claims, trying to reach agreements for the lawsuit and claims inan amount of Ps.4,500 ($324,600 dollars). Likewise, MONACA has recorded a provision of Ps.9,400 ($676,400dollars) for potential damages, which is reflected in accrued liabilities andother accounts payable.

** **

**Additionally,the Company is involved in certain unresolved proceedings arisen in theordinary course of the business. The Company does not believe that theresolution of these proceedings will have a significant adverse effect on itsfinancial situation and operating results.**

** **

B)                COMMITMENTS

 

As of December 31,2008, the Company is leasing certain facilities and equipment under long-termoperating lease agreements in effect through 2017, which include an option forrenewal. These agreements are accounted for as operating leases. Future minimumlease payments under such leases amount to approximately Ps.1,872,524(U.S.$135,396,000), as follows:

 
| **Year**   | ** ** | **Facilities** | ** **    | **Equipment** | ** ** | **Total**     | ** ** |
|------------|------------|----------------|---------------|---------------|------------|---------------|------------|
| 2009       |       | Ps.            |  248,926 |          | Ps.        | 357,837       |       | Ps. |  606,763 |   |
| 2010       |       | 197,755        |          | 269,851       |       | 467,606       |       |
| 2011       |       | 155,311        |          | 152,046       |       | 307,357       |       |
| 2012       |       | 104,887        |          | 101,429       |       | 206,316       |       |
| 2013       |       | 64,558         |          | 71,459        |       | 136,017       |       |
| Thereafter |       | 148,465        |          | —        |       | 148,465       |       |
|       |       | Ps.            |  919,902 |          | Ps.        |  952,622 |       | Ps. |  1,872,524 |   |
|       |       | U.S.$          |  66,515  |          | U.S.$      |  68,881  |       | U.S.$ |  135,396 |   |

 

Rental expense wasapproximately Ps. 531,142, Ps. 559,058 and Ps.580,793 for the years ended December 31, 2006, 2007 and2008, respectively.

 

At December 31,2008, the Company had various outstanding commitments in the United States topurchase commodities and raw materials for approximately Ps.2,069,092(U.S.$149,609 thousand), which will be delivered during 2009.

 

As of December 31,2008, the Company had outstanding commitments to purchase machinery andequipment amounting to approximately Ps.119,602 (U.S.$8,648 thousand).

 

As of December 31,2008, the Company had irrevocable letters of credit of approximately Ps.204,407(U.S.$14,780 thousand) serving as collateral for claims pursuant to the Company’sself-insured workers’ compensation program in the United States.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**12.****                              ****STOCKHOLDERS’ EQUITY**

 

A)               COMMON STOCK

 

Starting January 1,2008, common stock, legal reserve, and accumulated earnings are stated inmodified historical Mexican pesos (See Note 2-E). Until December 31, 2007,common stock, legal reserve, and accumulated earnings were stated at restatedvalues determined using NCPI factors.

 

At theExtraordinary General Meeting held on April 11, 2008, the stockholdersagreed to increase the fiexd portion of common stock by Ps.2,111,060represented by 82,624,657 shares.

 

At December 31,2008, Gruma’s outstanding common stock consisted of 563,650,709 Series “B”shares, with no par value, fully subscribed and paid, which can only bewithdrawn with stockholders’ approval, and 1,523,900 shares held in Treasury(481,503,052 subscribed and paid shares, and 1,046,900 shares held in Treasuryas of December 31, 2007).

 

B)                 RETAINED EARNINGS

 

Inaccordance with Mexican Corporate Law, the legal reserve must be increasedannually by 5% of annual net profits until it reaches a fifth of the fully paidcommon stock amount. The legal reserve is included within retained earnings.

 

Dividendspaid from retained earnings that have not been previously taxed are subject toan income tax payable by the Company equal to 38.91%. The applicable tax may becredited against income tax the Company is subject to in the year or in thefollowing two fiscal years. Dividends paid by the Company are not subject toany withholding tax.

 

UntilDecember 31, 2007, deficit from restatement consisted of the initialaccumulated gain or loss on monetary position and gain or loss from holdingnon-monetary assets, expressed in Mexican pesos as of the end of the year. Inaccordance with the new MFRS B-10 “Effects of Inflation”, effective as of January 1,2008, the Company reclassified this item to the corresponding accounts ofrestatement from additional paid-in capital and restatement from common stock,as shown in the consolidated statement of changes in stockholders’ equity.

 

C)                 PURCHASE OF COMMON STOCK

 

The Stockholders’ Meeting approved a Ps.650,000reserve to repurchase the Company’s own shares. The total amount of repurchasedshares cannot exceed 5% of total equity. The difference between the acquisitioncost of the repurchased shares and their stated value, composed of common stockand additional paid-in capital, is recognized as part of the reserve torepurchase the Company’s own shares, which is included within retained earningsfrom prior years. The gain or loss in the sale of the Company’s own shares isrecorded as additional paid-in capital. As of December 31, 2008, theCompany carried out net purchases of 1,523,900 shares with a market value ofPs.10,667 at that date.

 

F-31

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**12.****                              ****STOCKHOLDERS’ EQUITY (continued)**

 

D)                FOREIGN CURRENCY TRANSLATION ADJUSTMENTS

 

Foreigncurrency translation adjustments consisted of the following as of December 31:

 
| ** **                                                                                                                                                                                  | ** ** | **2007** | ** ** | **2008**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Balance  at beginning of year                                                                                                                                                               |       | Ps.      | (808,026   | )          | Ps.        |  (453,086 | ) |
| Effect  of translating net investment in foreign subsidiaries                                                                                                                               |       | 396,049  |       | 2,264,919  |       |
| Exchange  differences arising from foreign currency liabilities accounted for as a  hedge of the Company’s net investments in foreign subsidiaries, net of taxes  of Ps.15,417 in 2007 |       | (41,109  | )          | (1,288,778 | )          |
|                                                                                                                                                                                        |       | Ps.      | (453,086   | )          | Ps.        |  523,055 |   |

 

The investment that theCompany maintains in its operations in the United States and Europe generates anatural hedge of up to U.S.$500 and U.S.$450 million as of December 31,2007 and 2008, respectively.

 

As of December 31,2007 and 2008, the accumulated effect of translating net investment in foreignsubsidiaries impacted minority interest in the amounts of Ps.(123,088) andPs.270,555, respectively.

 

E)                   TAX VALUES OFCOMMON STOCK AND RETAINED EARNINGS

 

As of December 31, 2008, tax values of commonstock and retained earnings were Ps.11,147,492 and Ps.3,260,200, respectively.

 

**13.****                              ****OTHER (EXPENSE) INCOME, NET**

 

Other (expense) income,net comprised the following:

 
| ** **                                                 | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2008** | ** ** |
| Net  gain from sale of GFNorte’s shares (Note 5)      |       | Ps.                               | 399,639    |   | Ps. | 847,175 |   | Ps. | — |   |
| Net  gain from sale of subsidiaries’ shares           |       | 144,883                           |       | 75,718 |   | — |   |
| Asset  tax from previous years                             |       | —                            |       | — |   | (67,000 | ) |
| Impairment  loss on assets (Note 2-L)                      |       | (488,935                          | )          | (140,049 | ) | (46,851 | ) |
| Economic  aid to Chiapas and Tabasco for natural disasters |       | —                            |       | (100,000 | ) | — |   |
| Amortization  of other deferred costs                      |       | (59,152                           | )          | (48,709 | ) | (49,748 | ) |
| Net  loss on sale of fixed assets                          |       | (6,007                            | )          | (49,847 | ) | (22,869 | ) |
| Current  ESPS (Note 2-M and 10)                            |       | (51,160                           | )          | (21,395 | ) | (28,368 | ) |
| Deferred  ESPS                                             |       | 16,822                            |       | 17,259 |   | 28,587 |   |
| Other                                                      |       | (5,202                            | )          | (24,409 | ) | 4,881 |   |
|                                                       |       | Ps.                               | (49,112    | ) | Ps. | 555,743 |   | Ps. | (181,368 | ) |

 

F-32

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**14.****                             ****INCOME TAX**

 

A)               INCOME TAX

 

Gruma files aconsolidated income tax return for Mexican income tax purposes, consolidatingtaxable income and losses of Gruma and its controlled Mexican subsidiaries.Filing a consolidated tax return had the effect of reducing income tax expensefor the years ended December 31, 2006, 2007 and 2008 by Ps. 429,359, Ps.283,208 and Ps.332,966, respectively, as compared to filing a tax return on anunconsolidated basis.  Tax regulations permit the consolidation of 100% ofthe ownership interest.

 

Starting January 1,2008, the asset tax was superseded and the flat tax became effective, asdescribed in section D.

 

B)                 RECONCILIATION OF FINANCIAL AND TAXABLEINCOME

 

For the years ended December 31,2006, 2007 and 2008, the reconciliation between statutory income tax amountsand the effective income tax amounts is summarized as follows:

 
| ** **                                                                        | ** ** | **Years ended December 31,** | ** **    |
|-----------------------------------------------------------------------------------|------------|-----------------------------------|---------------|
| ** **                                                                        | ** ** | **2006**                          | ** **    | **2007** | ** ** | **2008** | ** ** |
| Statutory  federal income tax (29% for 2006, 28% for 2007 and 2008)               |       | Ps.                               |  613,707 |   | Ps. |  925,209 |   | Ps. |  (3,187,405 | ) |
| Equity  in earnings of associated companies                                       |       | (186,562                          | )             | (198,194 | ) | (173,223 | ) |
| Sale  of shares of subsidiaries and associated company                            |       | 38,981                            |          | 49,783 |   | — |   |
| Effect  of deferred flat tax in subsidiaries                                      |       | —                            |          | 18,719 |   | 2,960 |   |
| Valuation  allowance for tax loss carryforwards                                   |       | 61,208                            |          | 89,178 |   | 3,334,661 |   |
| Losses  of Mexican subsidiaries which cannot be used for income tax consolidation |       | 10,614                            |          | 17,998 |   | — |   |
| Foreign  income tax rate differences                                              |       | (87,004                           | )             | 66,473 |   | 287,836 |   |
| Effects  related to inflation                                                     |       | 4,259                             |          | (26,629 | ) | 103,081 |   |
| Other                                                                             |       | (23,033                           | )             | (16,827 | ) | 66,785 |   |
| Effective  income tax (20.4% for 2006, 28% for 2007 and -3.4% for 2008)           |       | Ps.                               |  432,170 |   | Ps. |  925,710 |   | Ps. |  434,695 |   |

 

F-33

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Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**14.****                             ****INCOME TAX (continued)**

 

At December 31, 2007and 2008 the principal components of the deferred income tax liability were asfollows:

 
| ** **                                              | ** ** | **(Assets) Liabilities** | ** **      |
|---------------------------------------------------------|------------|--------------------------|-----------------|
| ** **                                              | ** ** | **2007**                 | ** **      | **2008** | ** ** |
| Deferred  tax assets:                                   |       |                     |            |   |   |
| Net  operating loss carryforwards and other tax credits |       | Ps.                      |  (106,419  | ) | Ps. |  (496,512 | ) |
| Accrued  liabilities                                    |       | (205,881                 | )               | (168,121 | ) |
| Recoverable  asset tax                                  |       | (82,174                  | )               | (17,791 | ) |
| Intangible  asset resulting from intercompany operation |       | (38,693                  | )               | (17,539 | ) |
| Other                                                   |       | (128,593                 | )               | (229,295 | ) |
|                                                    |       | (561,760                 | )               | (929,258 | ) |
| Deferred  tax liabilities:                              |       |                     |            |   |   |
| Property,  plant and equipment, net                     |       | 1,827,552                |            | 2,211,278 |   |
| Inventories                                             |       | 164,631                  |            | 154,338 |   |
| Intangible  assets and other                            |       | 181,430                  |            | 220,046 |   |
| Investment  in partnership and equity method investee   |       | 393,961                  |            | 899,904 |   |
|                                                    |       | 2,567,574                |            | 3,485,566 |   |
| Net  deferred tax liability                             |       | Ps.                      |  2,005,814 |   | Ps. |  2,556,308 |   |

 

At December 31,2008, the Company did not recognize a deferred income tax asset ofPs.2,859,739  for tax loss carryforwards,since insufficient evidence was available that these tax loss carryforwardswill be realizable.

 

C)                 TAX LOSS CARRYFORWARDS AND RECOVERABLEASSET TAX

 

At December 31,2008, the Company has tax loss carryforwards in Mexico corresponding to the taxconsolidation, which amounted to Ps.11,246,305. Based on projections preparedby the Company’s management of expected future taxable income, it has beendetermined that only tax losses for an amount of Ps.1,400,729 will be used.Therefore, for the determination of deferred income taxes, a valuationallowance was recognized for the difference.

 

As of December 31,2008, certain foreign subsidiaries have tax loss carryforwards of approximatelyPs.35,786 (1,435,445 thousand Costa Rican colons) that expire in 2009 to 2011.

 

Asset tax paid in yearsprior to 2008 is subject to refund, according to the procedure established inthe tax law, to the extent that income tax exceeds asset tax in the eligibleyears. The Company has the right to apply for asset tax refund of Ps.334,800,as shown below:

 
| **Expiration year** | ** ** | **Recoverable  asset tax** | ** ** |
|---------------------|------------|----------------------------|------------|
| 2010                |       | Ps.                        | 33,974     |   |
| 2012                |       | 70,631                     |       |
| 2013                |       | 89,794                     |       |
| 2014                |       | 68,079                     |       |
| 2015                |       | 72,322                     |       |
|                |       | Ps.                        | 334,800    |   |

 

F-34

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Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**14.****                             ****INCOME TAX (continued)**

 

D)                FLAT RATE BUSINESS TAX

 

The Flat Rate BusinessTax Law was published on October 1, 2007, and is effective starting January 1,2008. This law is applicable to individuals and companies with permanentestablishment in Mexico, and its consolidation is not allowed. The flat tax forthe period is calculated by applying the tax rate of 17.5% (16.5% and 17% for2008 and 2009, respectively) to income determined based on cash flow; suchincome is determined by deducting the authorized expenses from total incomefrom taxed activities. From this result, the flat tax credits are deducted,according to the applicable laws.

 

The flat tax determinedfor a fiscal year can be credited against current income tax for the same year.When the amount of flat tax exceeds current income tax, then the total flat taxamount will be paid as a final payment and its crediting will not be allowed infuture years.

 

Based on financial andtax projections, the Company considers that this tax will not have an impact inits results of operation, since the Company will essentially pay income tax.

 

**15.****                             ****FOREIGN CURRENCY**

 

A)               EXCHANGE DIFFERENCES

 

For the years ended December 31,2006, 2007 and 2008, the effects of exchange rate fluctuations on the Company’smonetary assets and liabilities were recognized as follows:

 
| ** **                                                                                                                                                                                                                                                       | ** ** | **2006** | ** **    | **2007** | ** ** | **2008**      | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|---------------|----------|------------|---------------|------------|
| 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.      |  (79,424 | )        | Ps.        |  (56,526 | )          | Ps. |  (1,288,778 | ) |
| Exchange  differences arising from foreign currency transactions credited (charged) to  income                                                                                                                                                                   |       | (19,363  | )             | 72,129   |       | 255,530       |       |
|                                                                                                                                                                                                                                                             |       | Ps.      |  (98,787 | )        | Ps.        |  15,603  |       | Ps. |  (1,033,248 | ) |

 

B)                 FOREIGN CURRENCY POSITION

 

As of December 31, 2007 and 2008, monetary assetsand liabilities held or payable in U.S. dollars are summarized below:

 
| ** **                       | ** ** | **Thousands of U.S. dollars** | ** **     |
|----------------------------------|------------|-------------------------------|----------------|
| ** **                       | ** ** | **2007**                      | ** **     | **2008** | ** ** |
| In companies  located in Mexico: |       |                          |           |   |   |
| Assets:                          |       |                          |           |   |   |
| Current                          |       | U.S.$                         |  1,477    |   | U.S.$ |  5,866 |   |
| Non-current                      |       | —                        |           | 71 |   |
| Liabilities:                     |       |                          |           |   |   |
| Current                          |       | (52,798                       | )              | (886,900 | ) |
| Long-term                        |       | (505,041                      | )              | (497,038 | ) |
|                             |       | U.S.$                         |  (556,362 | ) | U.S.$ |  (1,378,001 | ) |

 

F-35

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**15.****                             ****FOREIGN CURRENCY (continued)**

 
| ** **             | ** ** | **Thousands of U.S. dollars** | ** ** |
|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **2007**                      | ** ** | **2008** | ** ** |
| In  foreign companies: | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Assets:                |       |                          |       |   |   |
| Current                |       | U.S.$                         | 289,361    |   | U.S.$ | 331,399 |   |
| Non-current            |       |                          | 7,178      |   |   | 9,129 |   |
| Liabilities:           |       |                          |       |   |   |   |   |
| Current                |       |                          | (403,057   | ) |   | (443,995 | ) |
| Long-term              |       |                          | (258,683   | ) |   | (262,933 | ) |
|                   |       | U.S.$                         | (365,201   | ) | U.S.$ | (366,400 | ) |

 

Additionally, the Companyand its subsidiaries had instruments to protect against exchange risks asdescribed in Note 17.

 

At December 31, 2007and 2008, the exchange rates used to translate U.S. dollar assets andliabilities were Ps.10.92 and Ps.13.83, respectively. On June 29, 2009,date of issuance of these financial statements, the exchange rate for the U.S.dollar was Ps.13.18.

 

During October 2008,the Mexican peso experienced a devaluation against various foreign currencies.With respect to U.S. dollar, the exchange rate fell approximately 27% withrespect to the exchange rate as of December 31, 2007. This situationcaused the Company to incur in an exchange loss of Ps.1,033,248 as of December 31,2008, from which Ps.1,288,788 is recognized in Foreign currency translationadjustments within stockholders’ equity.

 

For the years ended December 31,2006, 2007 and 2008, the Company’s Mexican subsidiaries had transactions inU.S. dollars as follows:

 
| ** **                            | ** ** | **Thousands of U.S. dollars** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **2006**                      | ** ** | **2007** | ** ** | **2008** | ** ** |
| Flour  sales and others               |       | U.S.$                         | —     |   | U.S.$ | (9,641 | ) | U.S.$ | (24,096 | ) |
| Corn  purchases and other inventories |       |                          | 144,453    |   |   | 184,446 |   |   | 225,883 |   |
| Interest  expense                     |       |                          | 38,222     |   |   | 40,028 |   |   | 35,740 |   |
| Purchases  of plant and equipment     |       |                          | 300        |   |   | 1,232 |   |   | 1,913 |   |
| Services                              |       |                          | 6,771      |   |   | 5,891 |   |   | 6,975 |   |
|                                  |       | U.S.$                         | 189,746    |   | U.S.$ | 221,956 |   | U.S.$ | 246,415 |   |

 

F-36

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**15.****                             ****FOREIGN CURRENCY (continued)**

 

As of December 31,2007 and 2008, the consolidated non-monetary assets of foreign origin aresummarized as follows:

 
| ** **          | ** ** | **2007**                             | ** ** | **2008**                       | ** ** |
|---------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **Foreign   currency   (thousands)** | ** ** | **Year-end   exchange   rate** | ** ** | **Foreign   currency   (thousands)** | ** ** | **Year-end   exchange   rate** | ** ** |
| U.S.  dollars       |       | 925,439                              |       | 10.92                          |       | 972,221 |   | 13.83 |   |
| Swiss  francs       |       | 31,938                               |       | 9.64                           |       | 22,634 |   | 12.94 |   |
| Euros               |       | 31,547                               |       | 15.9334                        |       | 29,469 |   | 19.297 |   |
| Venezuelan bolivars |       | 457,391,236                          |       | 0.0051                         |       | 674,328,456 |   | 0.0064 |   |
| Australian Dollars  |       | 62,543                               |       | 9.5910                         |       | 114,816 |   | 9.5607 |   |
| Yuans               |       | 207,976                              |       | 1.4951                         |       | 233,003 |   | 2.0246 |   |
| Pounds sterling     |       | 10,167                               |       | 21.7144                        |       | 12,843 |   | 19.9512 |   |
| Malaysian Ringgit   |       | 10,022                               |       | 3.2879                         |       | 8,399 |   | 3.977 |   |
| Canadian dollars    |       | 443                                  |       | 11.06                          |       | 327 |   | 11.29 |   |
| Costa Rican colons  |       | 58,130,829                           |       | 0.0210                         |       | 76,571,625 |   | 0.0249 |   |

 

**16.          SEGMENT INFORMATION**

 

The Company’sreportable segments are strategic business units that offer different productsin different geographical regions. These business units are managed separatelybecause each business segment requires different technology and marketingstrategies.

 

The Company’sreportable segments are as follows:

 

·      Corn flour and packaged tortilla division (UnitedStates and Europe) — manufactures and distributes more than 20 varieties ofcorn flour that are used mainly to produce and distribute different types oftortillas and tortilla chip products in the United States. The main brands areMASECA for corn flour and MISSION and GUERRERO for packaged tortillas.

 

·      Corn flour division (Mexico) — engaged principally inthe production, distribution and sale of corn flour in Mexico under the MASECAbrand. Corn flour produced by this division is used mainly in the preparationof tortillas and other related products.

 

·      Corn flour, wheat flour and other products division(Venezuela) — engaged mainly in producing and distributing grains, usedprincipally for industrial and human consumption. 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.

 

·      “Other” division — represents those segments amountingto less than 10% of the consolidated total. These segments are: corn flour andother products division in Central America, wheat flour division in Mexico,packaged tortillas division in Mexico, wheat flour tortillas and snacksdivision in Asia and Oceania and technology and equipment division. The cornflour and other products division in Central America is engaged in theproduction and marketing of corn products, snacks and preserves. The wheatflour division in Mexico is engaged in the production and local marketing ofwheat flour in this country. The packaged tortilla division in Mexico producesand distributes packaged tortillas. The Asia and Oceania division produces anddistributes wheat flour tortillas and snacks. The technology and equipmentdivision conducts research and development regarding flour and tortillamanufacturing equipment, produces machinery for corn flour and tortillaproduction and is engaged in the construction of the Company’s corn flourmanufacturing facilities.

 

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands of Mexicanpesos, except where otherwise indicated)**

** **

**16.          SEGMENT INFORMATION (continued)**

 

·      The “Other reconciling items” row includes thecorporate expenses and the elimination of inter-business unit transactions.

 

Allinter-segment sales prices are market-based. The Company’s management evaluatesperformance based on operating income of the respective business units.

 

Summarizedfinancial information concerning the Company’s reportable segments is shown inthe following tables.

 

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.                                     |  16,167,983 |                           | Ps.        | 1,703                          |       | Ps.                                   | 942,332    |   | Ps. | 609,689 |   |
| Corn  flour division (Mexico)                                         |       | 7,379,404                               |             | 286,670                        |       | 854,034                        |       | 290,697                               |       |
| Corn  flour, wheat flour and other products (Venezuela)               |       | 3,874,434                               |             | —                         |       | 119,039                        |       | 126,555                               |       |
| Other                                                                 |       | 4,750,825                               |             | 1,057,508                      |       | 190,200                        |       | 179,180                               |       |
| Other  reconciling items                                              |       | 17,309                                  |             | (1,345,881                     | )          | (233,772                       | )          | 56,178                                |       |
| Total                                                                 |       | Ps.                                     |  32,189,955 |                           | Ps.        | —                         |       | Ps.                                   | 1,871,833  |   | Ps. | 1,262,299 |   |

** **
| **Segment**                                                           | ** ** | **Total assets** | ** ** | **Total   liabilities** | ** ** | **Expenditures for********fixed assets** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|------------------------------------------|------------|
| Corn  flour and packaged tortilla division (United States and Europe) |       | Ps.              | 11,878,285 |                    | Ps.        | 4,882,504                                |       | Ps. | 1,324,431 |   |
| Corn  flour division (Mexico)                                         |       | 9,307,310        |       | 2,138,297               |       | 350,785                                  |       |
| Corn  flour, wheat flour and other products (Venezuela)               |       | 3,202,635        |       | 1,899,731               |       | 101,512                                  |       |
| Other                                                                 |       | 5,875,400        |       | 2,048,978               |       | 493,821                                  |       |
| Other  reconciling items                                              |       | 1,488,771        |       | 2,880,640               |       | (126,493                                 | )          |
| Total                                                                 |       | Ps.              | 31,752,401 |                    | Ps.        | 13,850,150                               |       | Ps. | 2,144,056 |   |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**16.          SEGMENT INFORMATION (continued)**

 

Segment information as ofand for the year ended December 31, 2007:

 
| **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.                                     | 17,402,790 |                                | Ps.        | 3,363                          |       | Ps.                                   | 919,344    |   | Ps. | 633,884 |   |
| Corn  flour division (Mexico)                                         |       | 8,606,160                               |       | 405,835                             |       | 786,378                        |       | 247,949                               |       |
| Corn  flour, wheat flour and other products (Venezuela)               |       | 3,862,214                               |       | —                              |       | 58,050                         |       | 90,872                                |       |
| Other                                                                 |       | 5,971,831                               |       | 915,188                             |       | 209,614                        |       | 196,158                               |       |
| Other  reconciling items                                              |       | (26,949                                 | )          | (1,324,386                          | )          | (99,518                        | )          | 9,934                                 |       |
| Total                                                                 |       | Ps.                                     | 35,816,046 |                                | Ps.        | —                         |       | Ps.                                   | 1,873,868  |   | Ps. | 1,178,797 |   |
|                                                                       |            |                                         |            |                                     |            |                                |            |                                       |            |  |  |  |  |  |  |  |  |

 
| **Segment**                                                           | ** ** | **Total assets** | ** ** | **Total liabilities** | ** ** | **Expenditures for   fixed assets** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|-------------------------------------|------------|
| Corn  flour and packaged tortilla division (United States and Europe) |       | Ps.              | 12,675,499 |                  | Ps.        | 4,955,944                           |       | Ps. | 1,049,192 |   |
| Corn  flour division (Mexico)                                         |       | 8,864,109        |       | 2,032,640             |       | 257,170                             |       |
| Corn  flour, wheat flour and other products (Venezuela)               |       | 2,893,111        |       | 1,732,019             |       | 72,739                              |       |
| Other                                                                 |       | 7,400,327        |       | 3,772,000             |       | 924,916                             |       |
| Other  reconciling items                                              |       | 2,077,656        |       | 2,840,900             |       | (81,114                             | )          |
| Total                                                                 |       | Ps.              | 33,910,702 |                  | Ps.        | 15,333,503                          |       | Ps. | 2,222,903 |   |
|                                                                       |            |                  |            |                       |            |                                     |            |  |  |  |  |  |  |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**16.          SEGMENT INFORMATION (continued)**

 

Segmentinformation as of and for the year ended December 31, 2008:

 
| **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.                                     | 19,331,804 |                           | Ps.        | 23,794                         |       | Ps.                                   | 983,501    |   | Ps. |  744,390 |   |
| Corn  flour division (Mexico)                                         |       | 8,709,122                               |       | 433,086                        |       | 1,317,689                      |       | 304,327                               |       |
| Corn  flour, wheat flour and other products (Venezuela)               |       | 8,727,009                               |       | —                         |       | 829,527                        |       | 145,535                               |       |
| Other                                                                 |       | 7,986,032                               |       | 1,017,753                      |       | 174,216                        |       | 224,444                               |       |
| Other  reconciling items                                              |       | 38,605                                  |       | (1,474,633                     | )          | (37,953                        | )          | (8,276                                | )          |
| Total                                                                 |       | Ps.                                     | 44,792,572 |                           | Ps.        | —                         |       | Ps.                                   | 3,266,980  |   | Ps. |  1,410,420 |   |
|                                                                       |            |                                         |            |                                |            |                                |            |                                       |            |  |  |  |  |  |  |  |

 
| **Segment**                                                           | ** ** | **Total assets** | ** ** | **Total liabilities** | ** ** | **Expenditures for   fixed assets** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|-------------------------------------|------------|
| Corn  flour and packaged tortilla division (United States and Europe) |       | Ps.              | 16,664,516 |                  | Ps.        | 6,397,744                           |       | Ps. |  1,321,402 |   |
| Corn  flour division (Mexico)                                         |       | 9,186,945        |       | 2,096,549             |       | 139,156                             |       |
| Corn  flour, wheat flour and other products (Venezuela)               |       | 5,804,022        |       | 3,452,650             |       | 261,733                             |       |
| Other                                                                 |       | 9,094,427        |       | 5,999,723             |       | 1,027,653                           |       |
| Other  reconciling items                                              |       | 3,684,767        |       | 17,206,461            |       | (53,200                             | )          |
| Total                                                                 |       | Ps.              | 44,434,677 |                  | Ps.        | 35,153,127                          |       | Ps. |  2,696,744 |   |
|                                                                       |            |                  |            |                       |            |                                     |            |  |  |  |  |  |

 

Thefollowing table presents the details of “Other reconciling items” for operatingincome:

 
| **Other reconciling items**                      | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Corporate  expenses                              |       | Ps.      | (125,579   | )        | Ps.        | (126,757 | )          | Ps. |  (99,018 | ) |
| Elimination  of inter-business unit transactions |       | (108,193 | )          | 27,239   |       | 61,065   |       |
| Total                                            |       | Ps.      | (233,772   | )        | Ps.        | (99,518  | )          | Ps. |  (37,953 | ) |
|                                                  |            |          |            |          |            |          |            |  |  |  |  |  |

 

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Table ofContents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**16.          SEGMENT INFORMATION (continued)**

 

Additionally, a summaryof information by geographic segment is as follows:

 
| ** **                | ** ** | **2006**   | ** **       | **%**  | ** ** | **2007**   | ** ** | **%**           | ** ** | **2008**   | ** ** | **%**  | ** **      |
|---------------------------|------------|------------|------------------|--------|------------|------------|------------|-----------------|------------|------------|------------|--------|-----------------|
| **NET SALES:**            |       |       |             |   |       |       |       |            |       |       |       |   |            |
| United  States and Europe |       | Ps.        | 16,167,983       |   | 50         |       | Ps.        | 17,402,790      |       | 48         |       | Ps.    | 19,331,804      |   | 43 |   |
| Mexico                    |       | 9,976,597  |             | 31     |       | 11,651,844 |       | 33              |       | 12,784,001 |       | 29     |            |
| Venezuela                 |       | 3,874,434  |             | 12     |       | 3,862,214  |       | 11              |       | 8,727,009  |       | 19     |            |
| Central America           |       | 1,862,648  |             | 6      |       | 2,076,158  |       | 6               |       | 2,948,721  |       | 7      |            |
| Asia and Oceania          |       | 308,293    |             | 1      |       | 823,040    |       | 2               |       | 1,001,037  |       | 2      |            |
|                      |       | Ps.        | 32,189,955       |   | 100        |       | Ps.        | 35,816,046      |       | 100        |       | Ps.    | 44,792,572      |   | 100 |   |
|                      |       |       |             |   |       |       |       |            |       |       |       |   |            |
| **IDENTIFIABLE ASSETS:**  |       |       |             |   |       |       |       |            |       |       |       |   |            |
| United  States and Europe |       | Ps.        |  11,878,285 |   | 37         |       | Ps.        | 12,675,499      |       | 37         |       | Ps.    | 16,664,516      |   | 37 |   |
| Mexico                    |       | 14,359,434 |             | 46     |       | 14,920,029 |       | 44              |       | 16,965,087 |       | 38     |            |
| Venezuela                 |       | 3,202,635  |             | 10     |       | 2,893,111  |       | 9               |       | 5,804,022  |       | 13     |            |
| Central America           |       | 1,401,609  |             | 4      |       | 1,689,943  |       | 5               |       | 2,477,969  |       | 6      |            |
| Asia and Oceania          |       | 910,438    |             | 3      |       | 1,732,120  |       | 5               |       | 2,523,083  |       | 6      |            |
|                      |       | Ps.        | 31,752,401       |   | 100        |       | Ps.        | 33,910,702      |       | 100        |       | Ps.    | 44,434,677      |   | 100 |   |
|                      |       |       |             |   |       |       |       |            |       |       |       |   |            |
| **CAPITAL EXPENDITURES:** |       |       |             |   |       |       |       |            |       |       |       |   |            |
| United  States and Europe |       | Ps.        | 1,324,431        |   | 62         |       | Ps.        |  1,049,192 |       | 48         |       | Ps.    |  1,321,402 |   | 49 |   |
| Mexico                    |       | 300,362    |             | 14     |       | 259,430    |       | 12              |       | 205,036    |       | 8      |            |
| Venezuela                 |       | 101,512    |             | 5      |       | 72,739     |       | 3               |       | 261,733    |       | 10     |            |
| Central America           |       | 149,195    |             | 7      |       | 143,070    |       | 6               |       | 304,941    |       | 11     |            |
| Asia  and Oceania         |       | 268,556    |             | 12     |       | 698,472    |       | 31              |       | 603,632    |       | 22     |            |
|                      |       | Ps.        | 2,144,056        |   | 100        |       | Ps.        | 2,222,903       |       | 100        |       | Ps.    | 2,696,744       |   | 100 |   |
|                           |            |            |                  |        |            |            |            |                 |            |            |            |        |                 |  |  |  |  |  |  |  |  |

 

**17.          FINANCIAL INSTRUMENTS**

 

A)               FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying amounts ofcash and cash equivalents, accounts receivable, refundable taxes, tradeaccounts payable, short-term bank loans, current portion of long-term debt andaccrued liabilities and other payables approximate their fair value, due totheir short maturity. In addition, the net book value of accounts and notesreceivable and refundable taxes represent the expected cash flow to bereceived.

 

F-41

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**17.          FINANCIAL INSTRUMENTS (continued)**

 

The Company hasnegotiable securities called interest and capital (TICC) bonds for a nominalamount of U.S.$11.1 million, with annual interest of 5.25% and maturing in March 2019.The fair value of these instruments amounted to Ps.146,218. The unfavorableeffect due to changes in the fair value of the outstanding contracts wasPs.17,516, which was recognized in income.

 

The estimated fair value of the Company’s financialinstruments is as follows:

 
| ** **                                                                                       | ** ** | **Carrying amount** | ** ** | **Fair value** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| **At December 31, 2007:**                                                                   | ** ** | ** **          | ** ** | ** **     | ** ** |
|                                                                                             |       |                |       |           |       |
| Liabilities:  Perpetual bonds in U.S. dollars bearing fixed interest at an annual rate of  7.75% |       | Ps.                 | 3,276,000  |           | Ps.        | 3,213,789 |   |
| Non-current  portion of long-term debt                                                           |       | 3,637,173           |       | 3,637,173      |       |
| Liabilities:  Derivative financial instruments – exchange rate                              |       | 16,825              |       | 16,825         |       |
| Liabilities:  Derivative financial instruments – interest rate                              |       | 8,731               |       | 8,731          |       |
| Asset:  Derivative financial instruments – interest rate                                    |       | 15,022              |       | 15,022         |       |
| Asset:  Derivative financial instruments – commodities                                      |       | 4,510               |       | 4,510          |       |
| Asset:  Interest and capital (TICC) bonds                                                        |       | 44,389              |       | 44,389         |       |
|                                                                                                  |            |                     |            |                |            |  |  |

 
| ** **                                                                                       | ** ** | **Carrying amount** | ** ** | **Fair value** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------|------------|
| **At December 31, 2008:**                                                                   | ** ** | ** **          | ** ** | ** **     | ** ** |
|                                                                                             |       |                |       |           |       |
| Liabilities:  Perpetual bonds in U.S. dollars bearing fixed interest at an annual rate of  7.75% |       | Ps.                 | 4,149,000  |           | Ps.        | 2,396,048 |   |
| Non-current  portion of long-term debt                                                           |       | 7,579,068           |       | 7,579,068      |       |
| Liabilities:  Derivative financial instruments – exchange rate                              |       | 11,230,170          |       | 11,230,170     |       |
| Liabilities:  Derivative financial instruments – corn                                       |       | 279,233             |       | 279,233        |       |
| Liabilities:  Derivative financial instruments – other raw materials                        |       | 108,685             |       | 108,685        |       |
| Liabilities:  Derivative financial instruments – interest rate                              |       | 27,741              |       | 27,741         |       |
| Asset:  Derivative financial instruments – corn                                             |       | 13,086              |       | 13,086         |       |
| Asset:  Derivative financial instruments – other raw materials                              |       | 2,059               |       | 2,059          |       |
| Asset:  Interest and capital (TICC) bonds                                                        |       | 146,218             |       | 146,218        |       |
|                                                                                                  |            |                     |            |                |            |  |  |

 

The fair values ofdebt and derivative financial instruments were determined by the Company basedon available market prices and estimates using market data information andappropriate valuation methodologies for the same or similar instruments..

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**17.          FINANCIAL INSTRUMENTS (continued)**

 

B)                        FINANCIAL RISKS

 

The availabilityand price of corn and other agricultural commodities are subject to importantfluctuations due to factors that are beyond our control, such as the weather,planting seasons, agricultural programs and government policies (both nationaland foreign), global changes in the supply/demand created by population growth,competitors and global production of similar harvests. We hedge a part of ourproduction requirements through futures contracts and options in order toreduce the risk generated by the fluctuations in price and supply of corn,wheat, natural gas, and diesel, risks that exist as an ordinary part of thebusiness. As of December, 31, 2008, the open positions of these instrumentswere valued at their fair value. The derivative financial instruments that wererecorded for accounting purposes as hedges resulted in a unfavorable effect ofPs.103,896 which was recognized in comprehensive income within shareholdersequity. The financial instruments that did not qualify as hedges for accountingpurposes resulted in an unfavorable effect of Ps.295,092, which was recognizedin income. As of December 31, 2008, these instruments had not affected theCompany’s cash flow.

 

Certain foreignexchange derivative transactions were entered into for trading purposes, whichas of the end of December 2008, were primarily referenced to Mexicanpeso/U.S. dollar and U.S. dollar/Euro exchange rates. The fair value of thesederivative instruments can decrease or increase in the future before theirsettlement date. Changes in the currency exchange rates can be the result of,among other things, changes in economic conditions, tax and foreign exchangecurrency policies, volatility, liquidity in the global markets, and local andinternational political events.

 

These foreignexchange financial instruments were valued in accordance with their estimatedfair value. This estimated fair value represents the amount through which afinancial asset may be exchanged or a financial liability be paid, betweeninterested and willing parties in an orderly transaction, based on theinformation given by the financial counterparties participating in thesetrades. As of December 31, 2008, the open positions of these instrumentsrepresented a net loss of approximately Ps.11,230,170. The total loss wasrecognized in income of the year ended December 31, 2008. At that samedate, these instruments did not have an effect on cash flow for the Company. Asof March 23, 2009, the majority of these positions were closed as it isdescribed in Note 20.

 

As of December 31,2008, the Company has complied with all obligations under its derivativefinancial instrument contracts.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**17.          FINANCIAL INSTRUMENTS (continued)**

 

C)                        QUANTITATIVE INFORMATION

 

As of December 31,2008, the foreign exchange derivative financial instruments are summarized asfollows:

 
| ** **     | ** ** | **Purchase** | ** ** | **Purpose:**          | ** ** | ** **   | ** ** | **Notional  Amount**               | ** ** | **Underlying**         | ** ** | ** **      | ** ** | **Installments** | ** ** |
|----------------|------------|--------------|------------|-----------------------|------------|--------------|------------|------------------------------------|------------|------------------------|------------|-----------------|------------|------------------|------------|
| **Derivative** | ** ** | **/  Sale**  | ** ** | **Hedging/  Trading** | ** ** | **Currency** | ** ** | **(thousands  of   U.S. Dollar)*** | ** ** | **Asset********Value** | ** ** | **Fair  Value** | ** ** | **2009**         | ** ** | **2010** | ** ** | **2011** | ** ** |
| Forwards       |       | Sale         |       | Trading               |       | USD–MXN |       | U.S.$                              | 712,900    |                   | 15.0965    |            | Ps.        | (3,125,165       | )          | Ps. | (437,670 | ) | Ps. | (618,396 | ) | Ps. | (2,069,099 | ) |
| Structures     |       | Sale         |       | Trading               |       | USD–MXN |       | 110,500                            |       | 14.1751                |       | (7,708,933      | )          | (5,275,600       | )          | (2,335,266 | ) | (98,067 | ) |
| Structures     |       | Purchase     |       | Trading               |       | EUR–USD |       | 16,636                             |       | 1.3444                 |       | (396,072        | )          | (361,329         | )          | (34,743 | ) | — |   |
|           |       |         |       |                  |       | Total        |       | U.S.$                              | 840,036    |                   |       |            | Ps.        | (11,230,170      | )          | Ps. | (6,074,599 | ) | Ps. | (2,988,405 | ) | Ps. | (2,167,166 | ) |
|                |            |              |            |                       |            |              |            |                                    |            |                        |            |                 |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(*) The reported notional value of US$840,036 thousand dollars is thenominal value used to calculate the payment of the weekly, monthly or quarterlyfixings of the maturities of the different structures in the future years.Certain of these instruments have leverage features requiring payouts by theCompany based on increased notional amounts.

 

The operationsthat terminated during the year 2008 in foreign exchange derivative financialinstruments resulted in a loss of Ps.3,479,549.

 

As of December 31,2008, the derivative financial instruments for corn futures contracts aresummarized as follows:

 
| **Derivative**     | ** ** | **Purpose  Hedging/Trading** | ** ** | **Notional********Amount********Bushells** | ** ** | ** Underlying********Asset********Value** | ** ** | **Fair  Value** | ** ** | **Installments  2009** | ** ** | **Collateral  /  Lines of Credit /  Guarantees** | ** ** |
|--------------------|------------|------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|-----------------|------------|------------------------|------------|--------------------------------------------------|------------|
| Futures (Bushels)  |       | Hedging                      |       | 5,730,000                                  |       | 58.8959                                        |       | Ps.             | 13,086     |                   | Ps.        | 13,086                                           |       | Ps. | 23,774 |   |
| Futures  (Bushels) |       | Hedging                      |       | 5,705,000                                  |       | 58.9731                                        |       | (225,282        | )          | (225,282               | )          | 23,670                                           |       |
| Futures  (Bushels) |       | Hedging                      |       | 3,045,000                                  |       | 56.2881                                        |       | (26,342         | )          | (26,342                | )          | 39,338                                           |       |
| Futures (Bushels)  |       | Hedging                      |       | 2,950,000                                  |       | 57.7817                                        |       | (27,608         | )          | (27,608                | )          | 38,110                                           |       |
|               |       | Total                        |       | 17,430,000                                 |       |                                           |       | Ps.             | (266,146   | )                      | Ps.        | (266,146                                         | )          | Ps. | 124,892 |   |
|                    |            |                              |            |                                            |            |                                                |            |                 |            |                        |            |                                                  |            |  |  |  |  |  |

 

The operationsthat terminated during 2008 with respect to corn futures contracts representedan unfavorable effect of Ps.21,762.

 

D)               CONCENTRATION OF RISK

 

The financial instrumentsthat are potentially subject to a concentration of risk are principally cash,cash equivalents and trade accounts receivable. The Company deposits its cashand cash equivalents in recognized financial institutions. The concentration ofthe credit risk with respect to trade receivables is limited since the Companysells its products to a large number of customers located in different parts ofMexico, the United States, Central America, Venezuela, Europe, Asia andOceania. The Company maintains reserves for potential credit losses.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**17.****                              ****FINANCIAL INSTRUMENTS (continued)**

 

Operations in Venezuelarepresented approximately 19% of net sales in 2008. In recent years, politicaland social instability has prevailed in Venezuela. This severe political andcivil uncertainty represents a risk to the business in this country, whichcannot be controlled or measured accurately. For instance, as a result of thenationwide general strike that took place from December 2002 to February 2003,the Company’s operations in Venezuela temporarily ceased for approximately 14days. In response to the general strike and in an effort to shore up theeconomy and control inflation, since 2003 Venezuelan authorities imposedforeign exchange and price controls on certain products. These foreign exchangecontrols may limit the Company’s capacity to convert bolivars to othercurrencies and also transfer funds outside Venezuela. In February 2003,the Venezuelan government set a single fixed exchange rate for the bolivaragainst the U.S. dollar of 1,600 bolivars to U.S.$1.00. Later, in February 2004the Venezuelan government set a new fixed exchange rate of 1,920 bolivars toU.S.$1.00. Additionally, in February 2003 the government of Venezuelaestablished price controls for certain products such as corn flour and wheatflour, which could limit the Company’s ability to increase prices in order tocompensate for the higher costs of raw materials. In March 2005, thegovernment established a new exchange rate of 2,150 bolivars per U.S. dollar.The financial situation and results of the Company might be negatively affecteddue to the fact that (i) a part of its sales is denominated in bolivars, (ii) thesubsidiaries in Venezuela make products that are subject to price controls, and(iii) it might be difficult for Venezuelan subsidiaries to pay dividends,as well as to import some of their requirements of raw materials as a result ofthe foreign exchange control.

 

The current president inVenezuela was reelected for a second term in December 2006; thus, thecivil and political uncertainty will continue during the next six-year term.Additionally, starting 2007 the current president was granted by thelegislative power of this country with extraordinary faculties to legislate bydecree for a period of 18 months in several strategic areas, which could resultin certain structural changes in the economical and social policies inVenezuela, thus increasing the uncertainty in that country.

 

E)                 OTHER RELEVANT EVENTS

 

Starting September 2008,the exchange markets that have prevailed in Mexico and in the entire world,experienced a depreciation of the Mexican peso against the U.S. dollar. Thisdepreciation and the leverage features included in certain of the Company’sderivative financial instruments generated exchange losses with respect to theCompany’s net liability position in foreign currency in the amount ofPs.1,033,248 as of December 31, 2008, from which Ps.1,288,788 wasrecognized in Foreign currency translation adjustments within stockholders’equity.

 

Additionally, thedepreciation of the Mexican peso with respect to U.S. dollar caused losses inthe valuation of the exchange rate derivative instruments.

 

**18.****                              ****RELATED PARTY TRANSACTIONS**

 

Starting January 1,2007, MFRS C-13 “Related Parties” became effective. This MFRS extends thedefinition (scope) of related parties and increases the disclosurerequirements.

 

As of December 31,2007 and 2008, the Company owned 8.6232% and 8.7966% interest in GFNorte,respectively, a Mexican financial institution. In the normal course ofbusiness, the Company obtains long-term financing from GFNorte and othersubsidiaries of that institution at market rates and terms. During 2008, theCompany did not obtain financings from GFNorte’s subsidiaries.

 

F-45

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

The Company has insurancecontracts with Seguros Banorte Generali, S.A. de C.V. (subsidiary of GFNorte)in order to manage different risks in some of its subsidiaries. As of December 31,2007 and 2008, the Company paid insurance premiums of approximately Ps.30,652and Ps.49,488, respectively.

** **

**18.****                              ****RELATED PARTY TRANSACTIONS(continued)**

 

As of December 31,2007 and 2008, the Company had accounts payable to Archer-Daniels-Midland (ADM)included in trade accounts payable for Ps.162,851 and Ps.135,307, respectively.Additionally, during 2007 and 2008, the Company purchased inventory ingredientsfrom ADM amounting to Ps.1,455,155 (U.S.$133 million) and Ps.2,436,716(U.S.$183 million), respectively. ADM is a North American company associatedwith the Company in some of its subsidiaries.

 

As of December 31,2007 and 2008, the Company had accounts receivable from different companiesrelated to the minority stockholder of the Venezuelan subsidiaries for Ps.3,164and Ps.84,146, respectively. Additionally, the Company had accounts payableincluded in trade accounts of Ps.11,006 and Ps.12,375, respectively.

** **

**19.****                              ****NEW ACCOUNTING PRONOUNCEMENTS**

 

The Mexican FinancialReporting Standards Board issued a series of Financial Reporting Standards(MFRS) and their interpretations (INIF) during the last months of the year2008. These standards will become effective starting January 1, 2009, andfor INIF 14, January 1, 2010. Management considers these MFRS and theirinterpretations will not have a significant effect in the financial informationof the Company, as explained bellow:

 

MFRS B-7 “Businessacquisitions” — Establishes the general standards for valuation and disclosureof the initial recognition of the net assets at acquisition date, as well asthe ownership of minority stockholders and other items that may arise, such asgoodwill and purchase gain. This standard supersedes Bulletin B-7 “Businessacquisitions”, which was effective until December 31, 2008.

 

MFRS B-8 “Consolidatedand combined financial statements” — Establishes the general standards for thepreparation and presentation of consolidated and combined financial statementsas well as the disclosures required for such financial statements. This MFRSsupersedes Statement B-8 “Consolidated and combined financial statements andvaluation of investments in common stock”, which was effective until December 31,2008.

 

MFRS C-7 “Investment inassociates and other permanent investments” — Establishes the standards for theaccounting recognition of the investments in associated companies, as well asother permanent investments where no control, joint control or significantinfluence is present.

 

MFRS C-8 “IntangibleAssets” — Establishes the valuation, presentation and disclosure rules forthe recognition both initial and subsequent of the intangible assets acquiredindividually or through a business acquisition, or internally generated duringthe normal course of the entity’s operations. This MFRS supersedes Bulletin C-8“Intangible Assets”, which was effective until December 31, 2008.

 

MFRS D-8 “Share-basedpayments” — Establishes the standards for the recognition of share-basedpayments in the financial information. This MFRS supersedes the supplementalapplication in Mexico of the IFRS-2 “Shared-based payments” issued by theInternational Accounting Standards Board.

 

Also, the CINIF hasissued the following interpretation to the Financial Reporting Standards(INIF):

 

INIF 14 “Contracts onconstruction, sale and rendering of services related to real estate”,complements the standards contained in Statement D-7 “Contracts on constructionand manufacturing of some capital assets”. This interpretation will becomeeffective starting January 1, 2010 for all the entities celebratingcontracts on construction, sale and rendering of services related to realestate. Early adoption is allowed.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**20.****                              ****SUBSEQUENT EVENTS**

 

On March 23, 2009, the Company and someDerivative Counterparties agreed to terminate some derivative instruments andfixed the total amount of such obligations payable by the Company to theDerivative Counterparties at U.S.$668.3 million, which represents approximately87% of the market value of all foreign exchange derivative obligations at thatdate. The Company and the Derivative Counterparties have agreed to negotiate ingood faith to convert the Termination Amounts into a secured term loan within120 days following March 23, 2009 (the “Financing”). Pursuant to the TermSheet, the Company is required to pay interest on the Termination Amount at therate of 1 month LIBOR + 1% for the first six weeks following March 23, 2009,and LIBOR + 2.875% thereafter. Following the expiration of the 120-day periodcontemplated by the Term Sheet, the Company will be required to pay defaultinterest on the Termination Amount at the rate of 2% + LIBOR + 2.875%. As acondition of the Financing, the Company intends to terminate its otheroutstanding foreign exchange derivative instruments and also intends to enterinto agreements to amend and restate its existing debt obligations under its5-year revolving credit facility and its 2008 Peso Facility.

 

At the date of authorization of these consolidated financial statements,the fair value of the open positions (liability) for foreign exchangederivative financial instruments amounted to Ps.906,951 (U.S.$68.1 million).

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP**

 

The Company’sconsolidated financial statements are prepared in accordance with Mexican FRS,which differ in certain significant respects from U.S. GAAP.

 

Starting January 1,2008, under Mexican FRS, the Company adopted the provisions of MFRS B-10, “Effectsof Inflation”, which replaces the previous Bulletin B-10, “Recognition of theEffects of Inflation in Financial Information”. MFRS B-10 establishes standardsfor recognizing the effects of inflation in an entity’s financial statements asmeasured by changes in a general price index only, eliminating the use of anyother valuation method established in the previous Bulletin B-10. MFRS B-10also provides criteria for identifying both inflationary and non-inflationaryeconomic environments, and provides guidelines to cease or start recognizingthe effects of inflation in financial statements when the general price indexapplicable to a specific entity is up to or above 26%, respectively, in acumulative three-year period. Upon adoption, MFRS B-10 includes an option forthe accounting treatment of the result from holding non-monetary assetsrecognized by an entity as accumulated other comprehensive income or loss underprevious guidelines by either recycling this result from stockholders’ equityto income as it is realized, or reclassifying the outstanding balance of suchresult to retained earnings in the period in which this standard becomeseffective. Since the cumulative inflation in Mexico measured by the NationalConsumer Price Index in the three-year period ended December 31, 2007 wasbelow 26%, the Company ceased recognizing the effects of inflation in thefinancial statements of its Mexican subsidiaries beginning January 1,2008. In addition, the Company elected to reclassify to retained earnings theinitial accumulated gain or loss from holding of non monetary assets. TheCompany does not provide a reconciliation between reported amounts and amountsthat would have been reported under U.S. GAAP in reliance on the accommodation providedby Form 20-F for this item.

 

The principal differencesbetween Mexican FRS and U.S. GAAP and the effect on consolidated net income andconsolidated stockholders’ equity are presented below, with an explanation ofthe adjustments.

 

F-47

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

**Reconciliationof net income:**

 
| ** **                                                         | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2008** | ** ** |
| **Net majority income (loss) under Mexican FRS**                   |       | Ps.                               | 1,601,125  |   | Ps. | 2,233,321 |   | Ps. | (12,339,758 | ) |
| U.S.  GAAP adjustments:                                            |       |                              |       |   |   |   |   |
| Depreciation  expense (see C)                                      |       | (69,803                           | )          | (71,722 | ) | (78,909 | ) |
| Impairment  loss in the carrying value of idle assets (see C)      |       | 14,814                            |       | 20,838 |   | 18,334 |   |
| Preoperating  expenses and other deferred costs (see D)            |       | (3,435                            | )          | 10,461 |   | (229 | ) |
| Capitalized  comprehensive financing costs (see E)                 |       | 3,387                             |       | 3,346 |   | 3,346 |   |
| Sale-leaseback  transaction (see F):                               |       |                              |       |   |   |   |   |
| Interest  expense                                                  |       | (11,431                           | )          | (8,976 | ) | (2,667 | ) |
| Rental  and depreciation expense, net                              |       | 2,713                             |       | 590 |   | 3,431 |   |
| Deferred  income taxes (see H)                                     |       | (101,303                          | )          | (177,829 | ) | 32,843 |   |
| Deferred  employees’ statutory profit sharing (see L)         |       | 510                               |       | (609 | ) | 2,806 |   |
| Net  gain from sale of associated company’s shares (see N)    |       | 10,810                            |       | 13,281 |   | — |   |
| Effect  of U.S. GAAP adjustments on equity method investee (see N) |       | (19,011                           | )          | (18,885 | ) | (53,310 | ) |
| Negative  goodwill (see I):                                        |       |                              |       |   |   |   |   |
| Depreciation  expense                                              |       | 62,538                            |       | 61,793 |   | 61,793 |   |
| Goodwill  and indefinite-lived intangible assets (see J)           |       | (6,540                            | )          | — |   | — |   |
| Extinguishment  of debt (see K)                                    |       | 14,371                            |       | 14,205 |   | 14,251 |   |
| Debt  issuance costs (see K)                                       |       | 2,224                             |       | 1,148 |   | 1,033 |   |
| Labor  obligations (See L)                                         |       | —                            |       | — |   | 13,051 |   |
| Fair  value measurements (See M)                                   |       | —                            |       | — |   | 537,749 |   |
| Monetary  position loss resulting from U.S. GAAP adjustments       |       | (17                               | )          | (9 | ) | — |   |
| Effects  of restatement (see A)                                    |       | (17,878                           | )          | — |   | — |   |
| Total  U.S. GAAP adjustments                                       |       | (118,051                          | )          | (152,368 | ) | 553,522 |   |
| Minority  interest (see B)                                         |       | 19,793                            |       | 26,809 |   | 7,296 |   |
| **Net income (loss) under U.S. GAAP**                              |       | Ps.                               | 1,502,867  |   | Ps. | 2,107,762 |   | Ps. | (11,778,940 | ) |
| **Basic and diluted earnings (loss) per share (in  pesos)**        |       | Ps.                               | 3.13       |   | Ps. | 4.37 |   | Ps. | (20.85 | ) |
| **Weighted average shares outstanding (thousands)**                |       | 480,007                           |       | 482,506 |   | 564,853 |   |

 

F-48

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

**Reconciliationof stockholders’ equity:**

 
| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | **2007**                    | ** ** | **2008** | ** ** |
| **Stockholders’ equity under Mexican FRS**            |       | Ps.                         | 18,577,199 |   | Ps. | 9,281,550 |   |
| U.S.  GAAP adjustments:                                    |       |                        |       |   |   |
| Property,  plant and equipment (see C)                     |       | 911,194                     |       | 850,619 |   |
| Preoperating  expenses and other deferred costs (see D)    |       | (446                        | )          | (675 | ) |
| Capitalized  comprehensive financing cost (see E)          |       | (3,346                      | )          | — |   |
| Sale-leaseback  transaction (see F)                        |       | (97,384                     | )          | (122,990 | ) |
| Goodwill  (see G)                                          |       | (172,951                    | )          | (172,951 | ) |
| Deferred  income taxes (see H)                             |       | (296,093                    | )          | 92,172 |   |
| Deferred  employees’ statutory profit sharing (see L) |       | —                      |       | (48,495 | ) |
| Equity  method investee (see N)                            |       | 2,802                       |       | 33,801 |   |
| Negative  goodwill (see I)                                 |       | (722,854                    | )          | (661,061 | ) |
| Goodwill  and indefinite-lived intangible assets (see J)   |       | 190,588                     |       | 190,588 |   |
| Extinguishment  of debt (see K)                            |       | (242,263                    | )          | (228,013 | ) |
| Debt  issuance costs (see K)                               |       | (724                        | )          | 309 |   |
| Labor  obligations (see L)                                 |       | —                      |       | (87,863 | ) |
| Fair  value measurements (See M)                           |       | —                      |       | 551,735 |   |
| U.S.  GAAP adjustments attributable to minority interest   |       | (146,984                    | )          | (119,673 | ) |
| Minority  interest under Mexican FRS (see B)               |       | (2,881,989                  | )          | (3,642,253 | ) |
| Total  U.S. GAAP adjustments                               |       | (3,460,450                  | )          | (3,364,750 | ) |
| **Stockholders’ equity under U.S. GAAP**              |       | Ps.                         | 15,116,749 |   | Ps. | 5,916,800 |   |

 

A summary of the Company’sstatement of changes in stockholders’ equity with balances determined underU.S. GAAP is as follows:

 
| ** **                                                             | ** ** | **2007**  | ** ** | **2008**    | ** ** |
|------------------------------------------------------------------------|------------|-----------|------------|-------------|------------|
| Beginning  balance                                                     |       | Ps.       | 13,929,767 |        | Ps.        | 15,116,749 |   |
| Stock  issuance                                                        |       | —    |       | 2,111,060   |       |
| Net  purchases and sales of Company’s common stock                |       | (35,430   | )          | (11,561     | )          |
| Dividends  paid                                                        |       | (423,625  | )          | —      |       |
| Cumulative  effect of change in accounting for deferred profit sharing |       | —    |       | (296,027    | )          |
| Derivative  financial instruments                                      |       | 35,065    |       | (131,699    | )          |
| Recognition  of inflation effects for the year                         |       | (832,483  | )          | —      |       |
| Equity  ownership from associated company                              |       | —    |       | (18,924     | )          |
| Labor  obligation adjustments (net of income tax)                      |       | (18,938   | )          | (23,627     | )          |
| Foreign  currency translation adjustments                              |       | 354,631   |       | 949,769     |       |
| Net  income (loss) for the year                                        |       | 2,107,762 |       | (11,778,940 | )          |
| Ending  balance                                                        |       | Ps.       | 15,116,749 |        | Ps.        | 5,916,800 |   |

 

F-49

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

A)                EFFECTS OF RESTATEMENT

 

As disclosed in Note 2-E, until December 31, 2007, under MexicanFRS, the Company restated information from prior periods for comparisonpurposes to information of the most current period presented, based on aweighted average restatement factor that reflected the relative inflation andcurrency exchange movements of the countries in which the Company operates.This restatement did 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.Starting January 1, 2008, under Mexican FRS and in accordance with INIF 9 “Presentationof Financial Statements from Earlier Periods due to the Adoption of MFRS B-10”,the Company has included the financial statements for earlier periods expressedin thousands of Mexican pesos of purchasing power as of December 31, 2007.The U.S. GAAP adjustments to net income for the year 2006 reflect the differencebetween restating this prior period, including the U.S. GAAP adjustments, to December 31,2007 pesos utilizing the Mexican NCPI and the weighted average restatementfactor. See Note 21-S for summarized financial information prepared on a U.S.GAAP basis.

 

B)                 MINORITY INTEREST

 

Under Mexican FRS, the minority interest in consolidated subsidiariesis presented as a separate component within stockholders’ equity in theconsolidated balance sheet. For U.S. GAAP purposes, the minority interest isnot included in stockholders’ equity.

 

C)                 PROPERTY, PLANT AND EQUIPMENT

 

Until December 31, 2007, under Mexican FRS, theCompany used a specific index, which contemplated inflation and currencyexchange movements in the restatement and related depreciation expense formachinery and equipment of foreign origin. For U.S. GAAP purposes, the use ofthe specific index, which contemplates currency exchange variations, is not inaccordance with the historical cost concept nor does it present financialinformation in a constant reporting currency.

 

Upon the adoption of MFRS B-10, starting January 1,2008, the Company ceased the use of a specific index for the restatement ofmachinery and equipment of foreign origin. Therefore, the U.S. GAAP adjustmentsrefer solely to the accumulated effect as of December 31, 2007. Under U.S.GAAP, the adjustment for restating fixed assets of foreign origin utilizing theMexican NCPI as of December 31, 2007 and 2008 increases stockholders’equity by Ps.1,001,647 and Ps.937,987, respectively.

 

Under Mexican FRS, depreciation on idle equipment is not required ifthe carrying value is expected to be recovered and is subject to an impairmentreview. Under U.S. GAAP, these assets should continue to be depreciated andsubject to an impairment review. Therefore, the adjustment to property, plantand equipment decreases stockholders’ equity as of December 31, 2007 and2008 by Ps.220,764 and Ps.236,013, respectively.

 

Under Mexican FRS, the Company recognized impairment losses in thevalue of certain idle assets that were not depreciated. Under U.S. GAAP, noimpairment was recognized given that the depreciation of these assets had notceased; consequently, the carrying value under U.S. GAAP was lower than MexicanFRS and the impairment recognized for Mexican FRS purposes was reversed.Therefore, the adjustment to property, plant and equipment increasesstockholders’ equity as of December 31, 2007 and 2008 by Ps.130,311 andPs.148,645, respectively.

 

F-50

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands of Mexicanpesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

D)                PREOPERATING EXPENSES AND OTHER DEFERRED COSTS

 

As of December 31, 2002, under Mexican FRS, preoperating expensesincurred were permitted to be capitalized and amortized by the Company over theperiod of time estimated to generate the income necessary to recover suchexpenses. The Company defined this period as 12 years based on priorexperience. Starting January 1, 2003, under Mexican FRS, only preoperatingexpenses incurred during the development stage are capitalized, whereaspreoperating expenses identified as research are expensed as incurred.Additionally, the preoperating expenses capitalized until January 1, 2003continue to be amortized using the straight-line method over a period not toexceed 12 years. Under U.S. GAAP, such expenses should be treated as periodexpenses.

 

The U.S. GAAP equity adjustments of Ps.446 and Ps.675 decreaseintangible assets presented in the balance sheets as of December 31, 2007and 2008, respectively.

 

E)                 COMPREHENSIVE FINANCING COSTS

 

Under Mexican FRS, comprehensive financing costs,including interest expense, foreign exchange gains or losses and monetaryposition of the related debt for major construction projects, are capitalizedas part of the assets during the construction period.  Under U.S. GAAP, monetary position andforeign exchange gains and losses on U.S. dollar or other stable currencyborrowings are excluded from capitalized interest.

 

F)                  SALE-LEASEBACK TRANSACTION

 

Under Mexican FRS, a sale-leaseback transaction that involves realestate was recognized with the use of the general criteria established forcapital and operating lease transactions. Based upon these criteria, asale-leaseback of real estate was recorded by the Company as an operatinglease. Under U.S. GAAP, Statement of Financial Accounting Standards (“SFAS”) No. 98,such a transaction was recognized 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. The lease hadan original 15-year term with an effective date of May 1, 1996; however,on April 30, 2008, the Company executed the early purchase option on thelease and finished this arrangement. Therefore, as of December 31, 2007the U.S. GAAP adjustment reflected increases in fixed assets, net, of Ps.7,688(net of accumulated depreciation of Ps.97,384), and debt increases ofPs.105,072.  As of December 31, 2008under both Mexican FRS and U.S. GAAP it is now being accounted for as a fixedasset and the adjustment to property, plant and equipment decrease stockholders’equity as of December 31, 2008 by Ps.122,990, as a result of a higher accumulated depreciation forU.S. GAAP purposes.

 

G)                 AMORTIZATION OF GOODWILL

 

Under Mexican FRS, until January 1, 2004, the excess of thepurchase price over the proportionate book value of net assets acquired wasrecorded as goodwill 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 adjustment of Ps.172,951 decreases goodwillpresented in the balance sheet as of December 31, 2007 and 2008. There isno net income reconciliation adjustment in 2006, 2007 and 2008, since theCompany ceased amortizing goodwill under Mexican FRS with the adoption of MFRSB-7.

 

F-51

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Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

H)                DEFERRED INCOME TAXES

 

Under Mexican FRS,the Company adopted the provisions of revised MFRS D-4 for the recognition ofdeferred tax assets and liabilities. The accounting treatment of MFRS D-4 is inaccordance with the comprehensive asset and liability method of SFAS No. 109,“Accounting for Income Taxes”. The U.S. GAAP adjustments to net income andstockholders’ equity reflect the deferred income taxes generated by the otherU.S. GAAP adjustments discussed elsewhere herein. Additionally, during 2007,the Company recognized under U.S. GAAP a deferred tax liability of  Ps.122,031, derived from the excess of theamount for financial reporting over the tax basis of the investment in GFNorte.Starting January 1, 2008, with the adoption of new MFRS D-4, the Companyrecognized this deferred tax liability under Mexican FRS.

 

Under thecomprehensive asset and liability method of SFAS No. 109, deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be reversed.

 

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 until December 31, 2007 as described in Note 3-E,and their respective tax bases also included the effects of inflation based ontax regulations.

 

Income tax expense:

 

The domestic and foreigncomponents of income before taxes reported under Mexican FRS were as follows:

 
| ** ** | ** ** | **Years ended December 31,** | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **2006**                          | ** ** | **2007** | ** ** | **2008** | ** ** |
| Domestic   |       |  Ps.                         | 1,046,635  |   |  Ps. | 2,151,090 |   |  Ps. | (12,919,047 | ) |
| Foreign    |       | 1,069,597                         |       | 1,153,229 |   | 1,535,283 |   |
|       |       |  Ps.                         | 2,116,232  |   |  Ps. | 3,304,319 |   |  Ps. | (11,383,764 | ) |

 

Provisions for domesticfederal, foreign federal and state income taxes in the Mexican FRS consolidatedstatements of income consisted of the following components:

 
|                |   | **Years ended December 31,** |       |
|---------------------|--------|-----------------------------------|------------|
|                |   | **2006**                          | ** ** | **2007** | ** ** | **2008** |   |
| Current:            |   | Ps.                               | 165,344    |   | Ps. | 390,074 |   | Ps. | 97,307 |   |
| Domestic  federal   |   | 160,025                           |       | 205,682 |   | 164,006 |   |
| Foreign  federal    |   | 30,480                            |       | 31,919 |   | 43,440 |   |
| Foreign  state      |   | Ps.                               | 355,849    |   | Ps. | 627,675 |   | Ps. | 304,753 |   |
|                |   |                              |       |   |   |   |   |
| Deferred:           |   | Ps.                               | 121,915    |   | Ps. | 265,820 |   | Ps. | (310,079 | ) |
| Domestic  federal   |   | (51,802                           | )          | 30,358 |   | 453,713 |   |
| Foreign  federal    |   | 6,208                             |       | 1,857 |   | (13,692 | ) |
| Foreign  state      |   | Ps.                               | 76,321     |   | Ps. | 298,035 |   | Ps. | 129,942 |   |
| Total  income taxes |   | Ps.                               | 432,170    |   | Ps. | 925,710 |   | Ps. | 434,695 |   |

 

F-52

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Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

The tax effects oftemporary differences that gave rise to significant portions of the deferredtax assets and liabilities at December 31, 2007 and 2008, were as follows:

 
|                                                        |   | **2007**  | ** ** | **2008**  |   |
|-------------------------------------------------------------|--------|-----------|------------|-----------|--------|
| **Deferred tax assets:**                                    |   |      |       |      |   |
| Net  operating loss carryforwards and other tax credits (a) |   | Ps.       | 188,593    |      | Ps.    | 514,303 |   |
| Accrued  liabilities                                        |   | 205,881   |       | 192,723   |   |
| Intangible  assets (b)                                      |   | 38,693    |       | 17,539    |   |
| Other                                                       |   | 128,593   |       | 229,295   |   |
| Total  gross deferred tax assets                            |   | 561,760   |       | 953,860   |   |
|                                                        |   |      |       |      |   |
| **Deferred tax liabilities:**                               |   |      |       |      |   |
| Property,  plant and equipment, net (c)                     |   | 1,855,951 |       | 2,197,436 |   |
| Inventories                                                 |   | 164,631   |       | 154,338   |   |
| Investment  in partnership and equity method investee       |   | 729,064   |       | 909,369   |   |
| Other  assets                                               |   | 114,021   |       | 156,853   |   |
| Total  gross deferred tax liabilities                       |   | 2,863,667 |       | 3,417,996 |   |
|                                                        |   |      |       |      |   |
| Net  deferred tax liability under U.S. GAAP                 |   | 2,301,907 |       | 2,464,136 |   |
| Net  deferred tax liability under Mexican FRS               |   | 2,005,814 |       | 2,556,308 |   |
| Adjustment  for U.S. GAAP                                   |   | Ps.       | 296,093    |      | Ps.    | (92,172 | ) |

 

----

(a)          SFAS No. 109 permits a deferred taxasset to be recorded if the asset meets a more likely than not standard (i.e.more than 50 percent likely) that the asset will be realized. Realization ofthe Company’s net operating loss carryforwards and other tax credits depends onthe Company’s ability to generate sufficient future taxable income of theappropriate character within carryforward periods of the jurisdictions in whichthe net operating losses and other tax credits were incurred. During 2008 asignificant increase in net operating loss carryforwards existed, arising fromloss of derivative financial instruments (See Note 14-B).  As of December 31, 2007 and 2008, thisitem includes a valuation allowance of  Ps.103,829and  Ps.2,859,739 since no sufficientevidence is available that these tax loss carryforwards will be realized.

(b)         Reflects a prepaid asset resulting froman intercompany transaction.

(c)          Principally due to the differencesbetween restated book and tax basis, including depreciation and capitalizedinterest.

 

A summary of the deferredtax liability (asset) balances on a U.S. GAAP basis is as follows:

 
|                    |   | **2007**  | ** ** | **2008**  |   |
|-------------------------|--------|-----------|------------|-----------|--------|
| Current:                |   |      |       |      |   |
| Deferred  tax asset     |   | Ps.       | (334,474   | )         | Ps.    | (397,416 | ) |
| Deferred  tax liability |   | 164,631   |       | 154,338   |   |
|                    |   | (169,843  | )          | (243,078  | )      |
| Non-current:            |   |      |       |      |   |
| Deferred  tax asset     |   | (227,286  | )          | (556,444  | )      |
| Deferred  tax liability |   | 2,699,036 |       | 3,263,658 |   |
|                    |   | 2,471,750 |       | 2,707,214 |   |
| Total                   |   | Ps.       | 2,301,907  |      | Ps.    | 2,464,136 |   |

 

F-53

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Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

The provision for incometax on a U.S. GAAP basis was as follows:

 
|     |   | **2006** | ** ** | **2007** | ** ** | **2008**   |   |
|----------|--------|----------|------------|----------|------------|------------|--------|
|     |   |     |       |     |       |       |   |
| Current  |   | Ps.      | (351,607   | )        | Ps.        | (627,675   | )      | Ps. | (304,753 | ) |
| Deferred |   | (175,508 | )          | (475,864 | )          | (97,099    | )      |
|     |   | Ps       | (527,115   | )        | Ps.        | (1,103,539 | )      | Ps. | (401,852 | ) |

 

Financial AccountingStandards Board (FASB) Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (FIN 48), was issued in July 2006 and interprets FASBStatement of Financial Accounting Standards (SFAS) No. 109. FIN 48 becameeffective for the Company on January 1, 2007 and prescribes acomprehensive model for the recognition, measurement, financial statementpresentation and disclosure of uncertain tax positions taken or expected to betaken in a tax return. FIN 48 provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition.

 

The Company classifiesincome tax-related interest and penalties as income taxes in the financialstatements.

 

The adoption of thispronouncement had no significant effect on the Company’s overall financialposition or results of operations.

 

As of December 31,2007 and 2008, the Company presented a liability for unrecognized tax benefitsof  Ps.89,304 and  Ps.121,801, respectively, which includedinterest and penalties. The following table presents a reconciliation of theCompany’s unrecognized tax benefits, excluding interest and penalties(primarily related to the U.S. operations):

 
|                                                                     |   | **2007** | ** ** | **2008** |   |
|--------------------------------------------------------------------------|--------|----------|------------|----------|--------|
| Unrecognized  tax benefits at beginning of year                          |   | Ps.      | 58,608     |     | Ps.    | 83,101 |   |
| Translation  adjustment of the initial balance                           |   | —   |       | 22,145   |   |
| Increase  as result of tax position taken in the year                    |   | 26,306   |       | 5,325    |   |
| Increase  (decrease) as a result of tax positions taken in prior periods |   | (1,813   | )          | 18,767   |   |
| Settlements                                                              |   | —   |       | (5,947   | )      |
| Reductions  due to a lapse of the statue of limitations                  |   | —   |       | (12,115  | )      |
| Unrecognized  tax benefits at end of year                                |   | Ps.      | 83,101     |     | Ps.    | 111,276 |   |

 

It is expected that theamount of unrecognized tax benefits will change in the next 12 months; however,the Company does not expect the change to have a significant impact on itsconsolidated financial position or results of operations. The Company hadaccrued interest and penalties, net of tax benefit of approximately  Ps.5,558,  Ps.6,203 and  Ps.10,525 related to unrecognized tax benefitsfor fiscal 2006, 2007 and 2008, respectively.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

The following yearsremain open to examination and adjustment by the Company’s major taxjurisdictions: United States — 2004 and all following years; Mexico — 2002 andall following years; and Venezuela — 2003 and all following years.

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

I)                NEGATIVE GOODWILL

 

Under Mexican FRS, until January 1,2004, the excess of the net book value of identifiable assets acquired overtheir purchase price was recorded as “Excess of book value over cost ofsubsidiaries acquired, net” and was amortized over a period of time not toexceed five years. Starting January 1, 2005, MFRS B-7 “BusinessAcquisitions” became effective and any unamortized negative goodwill existingas of that date was fully amortized to net income.

 

Under U.S. GAAP, theexcess of fair value of acquired net assets over cost is allocated to the bookvalue of the non-monetary assets acquired. Once the book value has been reduced to zero, any unallocated amountsare recorded in earnings.

 

As of December 31,2007 and 2008, the U.S. GAAP equity adjustments of  Ps.722,854 and  Ps.661,061 respectively, decreased the netfixed assets in the same amounts.

 

J)                    GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS

 

Under U.S. GAAP,effective January 1, 2002, the Company adopted the provisions of SFAS No. 142,“Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under SFAS No. 142,goodwill and indefinite-lived intangible assets are no longer amortized but arereviewed for impairment on an annual basis at the reporting unit level.

 

Under Mexican FRS, until January 1,2003, all intangible assets were amortized over their estimated useful life.MFRS C-8, “Intangible Assets”, was adopted starting January 1, 2003, andconsequently, certain intangible assets (excluding goodwill) were recognized ashaving indefinite lives and were no longer amortized. Accordingly, amortizationof indefinite-lived intangible assets ceased in 2002 for U.S. GAAP and in 2003for Mexican FRS. As mentioned in Note 2-K, starting January 1, 2004, underMexican FRS goodwill should no longer be amortized, but subject to annualimpairment tests. Accordingly, goodwill amortization ceased in 2002 for U.S.GAAP and in 2004 for Mexican FRS.

 

During 2006 the Companyrecognized in income an impairment loss for certain intangible assets. UnderU.S. GAAP, the carrying value of these assets was higher by  Ps.6,540.

 

The U.S. GAAP equityadjustment of  Ps.190,588 increased goodwillin  Ps.187,897 and intangible assets in  Ps.2,691 as of December 31, 2007 and2008, as a result of the above items.

 

K)           EXTINGUISHMENT OF DEBT

 

In December 2004,the Company issued perpetual notes for a total of  Ps.4,149,000 (U.S. $300,000 thousand) whichpay interest quarterly at a 7.75% annual rate. The proceeds were used mainly torepay U.S.$200 million of the 7.625% senior unsecured notes due October 2007.For the early redemption of the senior unsecured notes, the Company paid apremium of  Ps.276,879. Under MexicanFRS, this premium was recognized in intangible assets as debt issuance costs ofthe perpetual notes and amortized using the straight-line method over a periodof 20 years.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

Under U.S. GAAP, thispremium was recognized in income. The perpetual notes represented a new debtinstrument, since the exchange was not done with the holders of the old seniorunsecured notes. In addition, under U.S. GAAP, all previously unamortized debtissuance costs related to the old senior unsecured notes was also written off.

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

In July 2005 theCompany obtained a U.S.$250,000 thousand, five-year credit facility, at LIBORplus 40 basis points for the first year and LIBOR plus 37.5 and 45 basis pointsfor the following years depending on the Company’s leverage. The Companyincurred debt issuance costs of  Ps.7,849related to the new debt. The proceeds were used to repay U.S.$250 million debtwhich would mature between 2008 and 2009. At the redemption date, the Companyhad  Ps.10,102 of unamortized debtissuance costs related to this debt. Under Mexican FRS, the unamortized debtissuance costs related to the old debt will continue to be amortized throughoutthe maturity of the new debt as it has been considered a refinancing of the olddebt under MFRS C-9. Debt issuance costs incurred with the issuance of the newdebt have been expensed.

 

Under U.S. GAAP, theunamortized debt issuance costs related to the old debt that was redeemed havebeen written off and the debt issuance costs incurred with the issuance of thenew debt have been capitalized as they relate to a new debt instrument with a differentcreditor.

 

L)                   LABOR OBLIGATIONS

 

Retirement benefits andcompensation upon termination of employment (Severance compensation)

 

Under Mexican FRS,starting January 1, 2008, the Company adopted the provisions of new MFRSD-3, as mentioned in Note 2-M and 10. Under U.S. GAAP, the Company applied theguidelines in SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”)and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans—an amendment of FASB Statements No. 87, 88,106, and 132(R)” (“SFAS No. 158”). Under SFAS No. 158, the Companyrecognized as a component of other comprehensive income the gains or losses andprior service costs or credits that arise during the period but are notrecognized as components of net periodic benefit cost of the period. As of December 31,2008, the U.S. GAAP equity adjustment of  Ps.87,863 increased Other liabilities for thesame amount.

 

The disclosures accordingto SFAS No. 87, 132 and 158 are included below:

 

The components of the netseniority premium, pension plan and indemnities for dismissal cost for theyears ended December 31, were:

 
|                   |   | **2006** | ** ** | **2007** | ** ** | **2008** |   |
|------------------------|--------|----------|------------|----------|------------|----------|--------|
| Service  cost          |   | Ps.      | 12,454     |     | Ps.        | 11,291   |   | Ps. | 13,627 |   |
| Interest  cost         |   | 4,263    |       | 13,189   |       | 16,373   |   |
| Return  on plan assets |   | (6,086   | )          | (2,807   | )          | (3,140   | )      |
| Curtailment  loss      |   | 1,328    |       | —   |       | —   |   |
| Settlement  loss       |   | 14,378   |       | —   |       | —   |   |
| Net  amortization      |   | 7,257    |       | 2,168    |       | 5,718    |   |
| Net  cost for the year |   | Ps.      | 33,594     |     | Ps.        | 23,841   |   | Ps. | 32,578 |   |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

As of December 31,2007 and 2008, the status of the plan was as follows:

 
| ** **                                                                  |       | **2007**   | ** ** | **2008**   |   |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|--------|
| Actuarial  present value of accumulated benefit obligations:                | ** ** | ** ** | ** ** | ** ** |   |
| Vested  benefit obligation                                                  |       | Ps.        | (113,324   | )          | Ps.    | (144,155 | ) |
| Non-vested  benefit obligation                                              |       | (43,385    | )          | (47,951    | )      |
|                                                                        |       | (156,709   | )          | (192,106   | )      |
| Excess  of projected benefit obligation over accumulated benefit obligation |       | (5,534     | )          | (41,987    | )      |
| Projected  benefit obligation                                               |       | (162,243   | )          | (234,093   | )      |
| Plan  assets at fair value (trust funds)                                    |       | 34,886     |       | 31,753     |   |
| Labor  obligations liability as of year-end                                 |       | Ps.        | (127,357   | )          | Ps.    | (202,340 | ) |

 

Forthe years ended December 31, 2007 and 2008, the changes in projectedbenefit obligation and plan assets (trust funds) are summarized as follows:

 
| ** **                                         |   | **2007** | ** ** | **2008** |   |
|----------------------------------------------------|--------|----------|------------|----------|--------|
| Projected  benefit obligation at beginning of year |   | Ps.      | 131,600    |     | Ps.    | 162,243 |   |
| Effect  of inflation on beginning balance          |   | (6,278   | )          | —   |   |
| Service  cost                                      |   | 11,291   |       | 13,627   |   |
| Interest  cost                                     |   | 13,189   |       | 16,373   |   |
| Benefit  payments                                  |   | (25,929  | )          | (37,760  | )      |
| Actuarial  loss                                    |   | 38,370   |       | 79,610   |   |
| Projected  benefit obligation at end of year       |   | Ps.      | 162,243    |     | Ps.    | 234,093 |   |

 
| ** **                                      |   | **2007** | ** ** | **2008** |   |
|-------------------------------------------------|--------|----------|------------|----------|--------|
| Fair  value of plan assets at beginning of year |   | Ps.      | 33,685     |     | Ps.    | 34,886 |   |
| Effect  of inflation on beginning balance       |   | (1,607   | )          | —   |   |
| Return  on plan assets                          |   | 2,808    |       | (2,858   | )      |
| Benefit  payments                               |   | —   |       | (275     | )      |
| Fair  value of plan assets at end of year       |   | Ps.      | 34,886     |     | Ps.    | 31,753 |   |

 

The weighted averageassumptions used to determine obligations at the end of the labor relationshipand net periodic benefit cost for the years ended December 31 were asfollows:

 
|                                         |   | **2007** | ** ** | **2008** |   |
|----------------------------------------------|--------|----------|------------|----------|--------|
| Discount  rate                               |   | 8.75     | %          | 9.00     | %      |
| Future  increase rate in compensation levels |   | 4.50     | %          | 4.50     | %      |
| Estimated  return rate on plan assets        |   | 8.75     | %          | 9.00     | %      |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

The Company’sweighted average asset allocation by asset category as of December 31 wasas follows:

 
|                   |   | **2007** | ** ** | **2008** |   |
|------------------------|--------|----------|------------|----------|--------|
| Equity  securities     |   | 60       | %          | 59       | %      |
| Fixed  rate securities |   | 40       | %          | 41       | %      |
| Total                  |   | 100      | %          | 100      | %      |

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

The followingtable summarizes expected benefit payments from the Company’s plans as follows:

 
| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2009       |       | Ps.        | 47,383     |   |
| 2010       |       | 25,265     |       |
| 2011       |       | 26,775     |       |
| 2012       |       | 23,624     |       |
| 2013       |       | 20,478     |       |
| Thereafter |       | 90,568     |       |
|            |            |            |            |  |

 

Included in accumulated other comprehensive income at December 31,2007 and 2008 are the following amounts that have not yet been recognized innet periodic pension cost:

 
| ** **             | ** ** | **2007** | ** **                                | **2008** | ** ** |
|------------------------|------------|----------|-------------------------------------------|----------|------------|
| Unamortized  items (*) |       | Ps.      | 33,172  (net of income  tax of Ps.12,900) |     | Ps.        | 62,567  (net of income  tax of Ps.38,347) |   |
|                        |            |          |                                           |          |            |  |  |

 

----

(*)Comprised of cumulative actuarial losses, net transition liability and priorservice cost.

 

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.5,717.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

Amounts recognized inother comprehensive income included the following components:

 
| ** **                                                          | ** ** | **Before tax** | ** ** | **Tax effect** | ** ** | **After tax** | ** ** |
|---------------------------------------------------------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| Accumulated  other comprehensive income at December 31, 2006   |       | Ps.            | (19,769    | )              | Ps.        | (5,535        | )          | Ps. | (14,234 | ) |
|                                                                |       |           |       |           |       |          |       |
| Reclassification  adjustment for items included in 2007 net income: |       |           |       |           |       |          |       |
| Net  cumulative losses                                              |       | 2,087          |       | 584            |       | 1,503         |       |
| Net  transition liability                                           |       | 1              |       | —         |       | 1             |       |
| Prior  service cost                                                 |       | 79             |       | 22             |       | 57            |       |
|                                                                |       |           |       |           |       |          |       |
| Items  arising during 2007:                                         |       |           |       |           |       |          |       |
| Net  cumulative gain (losses)                                       |       | (28,366        | )          | (7,942         | )          | (20,424       | )          |
| Net  transition liability                                           |       | (10            | )          | (3             | )          | (7            | )          |
| Prior  service cost                                                 |       | (94            | )          | (26            | )          | (68           | )          |
|                                                                |       |           |       |           |       |          |       |
| Accumulated  other comprehensive income at December 31, 2007   |       | (46,072        | )          | (12,900        | )          | (33,172       | )          |
|                                                                |       |           |       |           |       |          |       |
| Reclassification  adjustment for items included in 2008 net income: |       |           |       |           |       |          |       |
| Actuarial  (gains) losses                                           |       | 5,645          |       | 2,145          |       | 3,500         |       |
| Transition  (asset) liability                                       |       | 71             |       | 27             |       | 44            |       |
| Enhancement  to the plan                                            |       | 1              |       | —         |       | 1             |       |
|                                                                |       |           |       |           |       |          |       |
| Items  arising during 2008:                                         |       |           |       |           |       |          |       |
| Actuarial  (gains) losses                                           |       | (60,661        | )          | (27,658        | )          | (33,003       | )          |
| Transition  (asset) liability                                       |       | 102            |       | 39             |       | 63            |       |
|                                                                |       |           |       |           |       |          |       |
| Accumulated  other comprehensive income at December 31, 2008   |       | Ps.            | (100,914   | )              | Ps.        | (38,347       | )          | Ps. | (62,567 | ) |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

Deferred employees’ statutory profit sharing (ESPS)

 

As stated in Note10-B, under Mexican FRS, the Company adopted the provisions of revised MFRS D-3and deferred ESPS was recognized starting January 1, 2008 based on thecomprehensive asset and liability method, which is consistent with SFAS No. 109.For U.S. GAAP purposes, the Company has historically recognized deferred ESPS,using the comprehensive asset and liability method; however, book values werenot restated for the effects of inflation, since per the applicable taxregulation the effects of inflation are not considered in the ESPS calculation.The revised MFRS D-3 requires full application of Mexican FRS to determine thebook values of the ESPS calculation and therefore, inflation effects areconsidered in the ESPS calculation. In order to align U.S. GAAP and MFRSaccounting for this item, the Company has concluded it would be preferable tochange its U.S. GAAP accounting policy to also take into account inflationeffects in the ESPS calculation. This cumulative effect of this change inaccounting as of January 1, 2008 was reported as a direct deduction fromretained earnings as of January 1, 2008 rather than retroactively appliedfor all periods presented as the effect on prior periods was consideredimmaterial. The U.S. GAAP adjustments to net income and stockholders’ equityincluded in the reconciliation are related to deferred employees’ statutoryprofit sharing generated by the other U.S. GAAP adjustments discussed elsewhereherein.

 

M)        FAIR VALUE MEASUREMENTS

 

During 2008, under U.S. GAAP, the Company adopted SFASNo. 157 “Fair Value Measurements”. SFAS No. 157 defines fair value, establishesa consistent framework for measuring fair value and expands disclosurerequirements about fair-value measurements. SFAS No. 157, among otherthings, requires the Company to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value.

 

SFAS No. 157 defines fair value as the price thatwould be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. SFAS No. 157clarifies that fair value should be based on the assumptions marketparticipants would use when pricing an asset or liability and establishes afair value hierarchy that prioritizes the information used to develop thoseassumptions. The fair value hierarchy gives the highest priority to quotedprices available in active markets (i.e., observable inputs) and the lowestpriority to data lacking transparency (i.e., unobservable inputs).Additionally, SFAS No. 157 requires an entity to consider all aspects ofnonperformance risk, including the entity’s own credit standing, when measuringthe fair value of a liability.

 

Fair-Value Hierarchy

 

SFAS No. 157 establishes a three-level hierarchyto be used when measuring and disclosing fair value. An instrument’scategorization within the fair value hierarchy is based on the lowest level ofsignificant input to its valuation. Following is a description of the threehierarchy levels:

 

·                  Level 1—Quoted prices for identical instruments in active markets.

·                  Level 2—Quoted prices for similar instruments in active markets; quoted prices foridentical or similar instruments in markets that are not active; andmodel-derived valuations in which all significant inputs and significant valuedrivers are observable in active markets.

·                  Level 3—Valuations derived from valuation techniquesin which one or more significant inputs or significant value drivers are unobservable*.*

 

This hierarchy requires the use of observable marketdata when available. The Company considers relevant and observable marketprices in its valuations where possible.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

Determination of Fair Value

 

When available, the Company generally uses quotedmarket prices to determine fair value and classifies such items in Level 1. Ifquoted market prices are not available, fair value is valued using industrystandard valuation models. When applicable, these models project future cashflows and discount the future amounts to a present value using market-basedobservable inputs, including interest rates, currency rates, volatilities, etc.Items valued using such inputs are classified according to the lowest levelinput or value driver that is significant to the valuation. Thus, an item maybe classified in Level 3 even though there may be some significant inputs thatare readily observable. In addition, the Company considers assumptions for itsown credit risk and the respective counterparty risk.

 

Measurement

 

Assets and liabilitiesmeasured at fair value are summarized below:

 
| ** **                                                            | ** ** | **December 31, 2008**                                             | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Quoted prices  in active  markets for  identical assets  (Level 1)** | ** ** | **Third-party  models with  observable  market inputs  (Level 2)** | ** ** | **Internal models  with  unobservable  market inputs  (Level 3)** | ** ** | **Total carrying  value in the  consolidated  balance sheet** | ** ** |
| *Assets:*                                                             |       |                                                                   |       |   |   |   |   |   |   |
| Derivative financial instruments – corn and other  raw materials |       | Ps.                                                                    | 15,223     |   | Ps. | — |   | Ps. | — |   | Ps. | 15,223 |   |
|                                                                  |       |                                                                   |       |   |   |   |   |   |   |
| *Liabilities:*                                                        |       |                                                                   |       |   |   |   |   |   |   |
| Derivative financial instruments – exchange rate                 |       | Ps.                                                                    | —     |   | Ps. | — |   | Ps. |  10,695,879 |   | Ps. |  10,695,879 |   |
| Derivative financial instruments – corn                          |       | 279,232                                                                |       |   |   |   |   | 279,232 |   |
| Derivative financial instruments – other raw  materials          |       |                                                                   |       |   |   | 104,253 |   | 104,253 |   |
| Derivative financial instruments – interest rate                 |       |                                                                   |       |   |   | 15,971 |   | 15,971 |   |
|                                                                  |       | Ps.                                                                    | 279,232    |   | Ps. | — |   | Ps. |  10,816,103 |   | Ps. |  11,095,335 |   |

 

The adoption of SFAS No. 157did not change the Company’s previous accounting for financial assets andliabilities, but had an impact of Ps.551,735 as equity adjustment when theCompany’s own credit risk was considered in the determination of the fair valueof the derivative financial instruments.

 

Level 1 ValuationTechniques

 

Financial instrumentsthat are negotiated active markets are classified as Level 1. The valuationtechniques and the inputs used in the Company’s financial statements to measurethe fair value include the following:

 

·                  Quoted market prices of corn listed onthe Chicago Board of Trade.

·                  Quoted market prices of natural gaslisted on the NYMEX Exchange.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

Level 2 ValuationTechniques

 

Financial instrumentsthat are classified as Level 2 refer mainly to quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that arenot active, as well as model-derived valuations in which all significant inputsand significant value drivers are observable in active markets. As of December 31,2008 the Company has not classified any assets or liabilities as Level 2.

 

Level 3 ValuationTechniques

 

The Company hasclassified as Level 3 the financial instruments whose fair values are obtainedusing valuation models that include observable inputs but also include certainunobservable inputs. For the Company, the unobservable input included in thevaluation of its liability positions refers solely to the Company’s own creditrisk, which is a significant input, considering the financial condition of theCompany as of December 31, 2008. Therefore, the Company classified all theOver the Counter derivatives with a liability position as Level 3.

 

The process ofdetermining credit risk spreads requires a high degree of judgment. Ahundred basis points increase over the Company’s own credit spreads, couldresult in an average increase of the credit valuation adjustment ofapproximately Ps.103,277, which represents approximately 30% of the credit riskincluded in the Company’s liabilities arising from derivative instruments.These sensitivity analyses do not represent management’s expectations of thechanges in the Company’s own credit risk, but are provided as hypotheticalscenarios to assess the sensitivity of the fair value of those liabilities tochanges in credit spreads.

 

The table below includesa roll-forward of the balance sheet amounts for the year ended December 31,2008 for financial instruments classified by the Company within Level 3 of thevaluation hierarchy. When a determination is made to classify a financialinstrument within Level 3, it is due to the use of significant unobservableinputs. However, Level 3 financial instruments typically include, in additionto the unobservable or level 3 components, observable components (that is,components that are actively quoted and can be validated to external sources);accordingly, the gains and losses in the table below include changes in fairvalue due, in part, to observable factors that are part of the valuationmethodology:

 
| Beginning  balance                           |   | Ps.        | 25,556     |   |
|----------------------------------------------|--------|------------|------------|--------|
| Realized  and unrealized loss                |   | 14,275,240 |       |
| Net  settlements (paid) received             |   | (3,484,693 | )          |
| Ending  balance as of December 31, 2008 |   | Ps.        | 10,816,103 |   |

 

The adoption of thisstatement did not change the Company’s previous accounting for financial assetsand liabilities, but had an impact when the risk for non performance by thecounterparty or credit risk was considered in the determination of the fairvalue of the derivative instruments.

 

Other Disclosures

 

In the Company’sconsolidated balance sheets, certain financial instruments are carried atamortized cost. Pursuant to SFAS No. 107, fair value disclosures arerequired; such fair values are in accordance with SFAS No. 157.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

The carrying amounts ofcash and cash equivalents, accounts receivable, refundable taxes, tradeaccounts payable, short-term bank loans, current portion of long-term debt andaccrued liabilities and other payables approximate their fair value, due totheir short maturity. In addition, the net book value of accounts and notesreceivable and refundable taxes represent the expected cash flow to bereceived. Fair value for long term debt and perpetual bonds is based on thepresent value of the cash flow discounted at interest rates based in readilyobservable market inputs.

 
| ** **            | ** ** | **Carrying  amount** | ** ** | **Estimated  fair value** | ** ** |
|-----------------------|------------|----------------------|------------|---------------------------|------------|
| Perpetual  bonds      |       | Ps.                  | 4,149,000  |                      | Ps.        | 2,396,048 |   |
| Other  long-term debt |       | 8,086,697            |       | 7,750,144                 |       |
|                       |            |                      |            |                           |            |  |  |

 

N)           SUPPLEMENTAL BALANCE SHEET INFORMATION

 

·                  Securities of related parties:

 

The investment in commonstock of GFNorte is accounted for under the equity method, since the Companyhas significant influence over the investee due to its representation on theBoard of Directors of GFNorte and the equity interest of the Company’sprincipal shareholder in GFNorte. The effect of applying U.S. GAAP adjustmentsto the equity investment has been included in the Company’s U.S. GAAPreconciliation.

 

During 2006 and 2007, theCompany sold 17,224,100 and 27,835,900 shares from its investment in GFNorte,respectively. Under Mexican FRS, the Company recognized a net gain of Ps.399,639and Ps.847,175 from this sale in 2006 and 2007, respectively. Considering thecarrying value of the investment in GFNorte under U.S. GAAP, the net gain fromthis sale amounted to Ps.410,449 and Ps.860,456, respectively.

 

During 2007 and 2008, theCompany received dividends from GFNorte amounting to Ps.79,200 and Ps.83,446,respectively.

 

Under both Mexican andU.S. GAAP, the Company recognized goodwill for the acquisition of GFNorte in1992. Under U.S. GAAP, effective January 1, 2002, with the adoption ofSFAS No. 142, goodwill was no longer amortized. The amount of suchremaining goodwill is Ps.38,690. Under Mexican FRS, goodwill was fullyamortized by December 31, 2002.

 

The Company’s investmentin GFNorte had a market value of Ps.4,417,357, based on the quoted market priceat December 31, 2008.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

Condensed financialinformation under Mexican Banking GAAP for GFNorte as of and for the yearsended December 31 is as follows:

 
| ** **                                      | ** ** | **Amounts in millions  of Mexican pesos** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                  | ** ** | **2008** | ** ** |
| Cash  and cash equivalents                      |       | Ps.                                       | 41,610     |   | Ps. | 54,402 |   |
| Investment  securities                          |       | 19,462                                    |       | 239,969 |   |
| Net  loan portfolio                             |       | 192,746                                   |       | 238,556 |   |
| Property,  furniture and equipment, net         |       | 8,098                                     |       | 8,429 |   |
| Total  assets                                   |       | 287,283                                   |       | 577,025 |   |
| Deposits                                        |       | 203,307                                   |       | 260,769 |   |
| Bank  and other entity loans — current     |       | 11,927                                    |       | 26,048 |   |
| Bank  and other entity loans — non-current |       | 10,796                                    |       | 10,635 |   |
| Total  liabilities                              |       | 253,127                                   |       | 537,279 |   |
| Majority  interest                              |       | 32,489                                    |       | 37,802 |   |
| Minority  interest                              |       | 1,667                                     |       | 1,944 |   |
|                                                 |            |                                           |            |  |  |  |  |

 
| ** **                       | ** ** | **Amounts in millions of Mexican pesos** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2008** | ** ** |
| Interest  income                 |       | Ps.                                      | 36,120     |   | Ps. | 40,585 |   | Ps. | 50,416 |   |
| Interest  expense                |       | (21,256                                  | )          | (22,838 | ) | (27,789 | ) |
| Income  before minority interest |       | 6,474                                    |       | 7,136 |   | 7,387 |   |
| Net  income                      |       | 6,255                                    |       | 6,810 |   | 7,014 |   |
|                                  |            |                                          |            |  |  |  |  |  |  |  |

 

·                  Other current assets:

 

Includedwithin accounts receivable, net as of December 31, 2008 are benefitsobtained through PROHARINA amounting to Ps.659,918, as mentioned in Note 2-H.

 

·                  Other current liabilities:

 

Included within accruedliabilities and other payables as of December 31, 2007 are accruedcompensation costs of Ps.509,352 and a short-term note payable of Ps.347,118.

 

·                  Other stockholders’ equity:

 

Included within retainedearnings as of December 31, 2007 and 2008 are undistributed earnings of GFNorte amounting to Ps.2,430,794 and Ps.2,106,698,respectively.

 

·                  Computer software:

 

Depreciation expense forthe years ended December 31, 2006, 2007 and 2008 amounted to Ps.69,782, Ps.36,216and Ps.27,587, respectively, on capitalized computer software cost. Unamortizedsoftware costs included as of December 31, 2007 and 2008 totaled Ps.45,665and Ps.26,230.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

O)           SUPPLEMENTAL INCOME STATEMENT INFORMATION

 

·                  Advertising costs:

 

Advertising costs,included in selling, general and administrative expenses, are expensed when theadvertising first takes place. Advertising expense was Ps.911,872, Ps.872,610and Ps.989,251 for the years ended December 31, 2006, 2007 and 2008,respectively. The Company had Ps.24,495 and Ps.25,240 of prepaid advertisingcosts reported as prepaid expenses as of December 31, 2007 and 2008,respectively.

 

·                  Shipping and handling costs:

 

Shipping andhandling costs are included in selling, general and administrative expenses andamounted to Ps.1,886,327, Ps.1,975,231 and Ps.2,699,354 for the years ended December 31,2006, 2007 and 2008.

 

·                  Operating income:

 

Under U.S. GAAP, certainother income items included in the Mexican FRS financial statements of theCompany, such as employees’ statutory profit sharing and amortization of otherdeferred costs would be included in the determination of operating income. Forthe years ended December 31, 2006, 2007 and 2008, these items amounted to Ps.93,491,Ps.52,845 and Ps.49,529, respectively.

 

·                  Consumer and trade sales promotionexpenses

 

Under U.S. GAAP, the Company has classified certainconsumer and trade sales promotion expenses, such as coupon redemption costs,cooperative advertising programs, new product introduction fees, feature price discountsand in-store display incentives as a reduction of revenue. For the years ended December 31,2006, 2007 and 2008 these items amounted to Ps.279,635, Ps.388,839 and Ps.411,857,respectively.

 

·                  Other

 

During 2006, theCompany recognized an impairment charge at its subsidiary Molinera de México,related to property, plant and equipment and certain intangibles totaling Ps.343,608.Molinera de México, which is included in the “Other” segment, has faced marketpressures in Mexico.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

 

P)             SUPPLEMENTAL CASH FLOW INFORMATION

 

Derived from theapplication of MFRS B-2 “Statement of Cash Flows”, effective starting January 1,2008, the Company presents under Mexican FRS, as a basic financial statement,the statement of cash flows for the year ending December 31, 2008. Until December 31,2007, under Mexican FRS, the Company presented a statement of   changes in financial position that identifythe sources and uses of resources based on the differences between beginningand ending consolidated financial statement balances in constant pesos.

 

Under U.S. GAAP, theCompany has applied the provisions of SFAS No. 95 “Statement of Cash Flows”.The differences between the statement of cash flows under Mexican FRS and U.S.GAAP are mainly related with minor presentation reclassifications between theoperating, investing and financing sections, as well as the recognition inoperating, financing and investing activities of the U.S. GAAP adjustments. Thefollowing presents the statements of cash flows for the years ended December 31,2006, 2007 and 2008, after considering the impact of U.S. GAAP adjustments inconformity with the AICPA SEC Regulations Committees’ International PracticeTask Force recommendation.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (continued)**

** **
| ** **                                                                                     | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2008** | ** ** |
| *Operating activities:*                                                                        | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income (loss)                                                                             |       | Ps.                                      | 1,502,867  |   | Ps. | 2,107,762 |   | Ps. | (11,778,940 | ) |
| Minority  interest                                                                             |       | 62,153                                   |       | 118,479 |   | 514,003 |   |
| Consolidated  income (loss)                                                                    |       | 1,565,020                                |       | 2,226,241 |   | (11,264,937 | ) |
| Adjustments  to reconcile net income to resources provided by operating activities:            |       |                                     |       |   |   |   |   |
| Monetary  position gain and restatement effects from companies in an inflationary  environment |       | (332,530                                 | )          | (558,500 | ) | (147,213 | ) |
| Depreciation  and amortization                                                                 |       | 1,241,875                                |       | 1,158,976 |   | 1,405,704 |   |
| Impairment  of long-lived assets                                                               |       | 468,473                                  |       | 119,211 |   | 28,517 |   |
| Allowance  for doubtful accounts                                                               |       | 79,398                                   |       | 42,336 |   | 79,539 |   |
| Equity  in earnings of associated companies                                                    |       | (616,872                                 | )          | (688,950 | ) | (565,166 | ) |
| Seniority  premium and other long-term accrued liabilities                                     |       | 9,354                                    |       | 21,263 |   | 55,796 |   |
| Net  gain from sale of subsidiaries’ shares                                               |       | (143,157                                 | )          | (75,718 | ) | — |   |
| Net  gain from sale of associated company’s shares                                        |       | (405,559                                 | )          | (860,456 | ) | — |   |
| Loss  from sale of fixed assets                                                                |       | 5,935                                    |       | 49,847 |   | 11,315 |   |
| Change  in fair value of derivative financial instruments                                      |       | 294                                      |       | 52,442 |   | 14,519,050 |   |
| Foreign  exchange loss from bank loans                                                         |       | —                                   |       | — |   | 577,627 |   |
| Deferred  income taxes and employees’ statutory profit sharing                            |       | 158,383                                  |       | 459,214 |   | 65,706 |   |
|                                                                                           |       | 2,030,614                                |       | 1,945,906 |   | 4,765,938 |   |
| Changes  in working capital:                                                                   |       |                                     |       |   |   |   |   |
| Accounts  receivable, net                                                                      |       | (1,401,667                               | )          | (654,980 | ) | (1,766,736 | ) |
| Inventories                                                                                    |       | 137,865                                  |       | (2,166,018 | ) | (921,227 | ) |
| Prepaid  expenses                                                                              |       | (57,120                                  | )          | 45,984 |   | 3,935 |   |
| Trade  accounts payable                                                                        |       | 257,480                                  |       | 498,656 |   | (245,707 | ) |
| Accrued  liabilities and other payable                                                         |       | 689,653                                  |       | 121,362 |   | 146,526 |   |
| Income  taxes and employees’ statutory profit sharing                                     |       | 4,444                                    |       | 31,776 |   | (327,249 | ) |
|                                                                                           |       | (369,345                                 | )          | (2,123,220 | ) | (3,110,458 | ) |
| Net  cash flows from operating activities                                                      |       | 1,661,269                                |       | (177,314 | ) | 1,655,480 |   |
|                                                                                                |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 
| * *                                                      |   | **For the  year ended December 31,** |    |
|---------------------------------------------------------------|--------|-------------------------------------------|---------|
| * *                                                      |   | **2006**                                  |    | **2007** |   | **2008** |   |
| *Investing activities:*                                       |   |                                      |    |   |   |   |   |
| Purchases  of property, plant and equipment                   |   | (2,304,890                                | )       | (2,221,326 | ) | (2,696,744 | ) |
| Purchases  of new facilities, net of cash                     |   | (592,035                                  | )       | — |   | — |   |
| Proceeds  from sale of property, plant and equipment          |   | 770,794                                   |    | 192,972 |   | 27,880 |   |
| Deferred  assets                                              |   | (16,284                                   | )       | (16,487 | ) | (60,198 | ) |
| Acquisition  of shares of associated company                  |   | —                                    |    | — |   | (154,568 | ) |
| Dividends  received from associated company                   |   | 80,878                                    |    | 79,200 |   | 83,446 |   |
| Proceeds  from sale of subsidiaries’ shares              |   | 143,157                                   |    | 167,420 |   | — |   |
| Proceeds  from sale of associated company’s shares       |   | 610,989                                   |    | 1,267,353 |   | — |   |
| Other                                                         |   | (157,840                                  | )       | 16,260 |   | (201,846 | ) |
| Net  cash flows from investing activities                     |   | (1,465,231                                | )       | (514,608 | ) | (3,002,030 | ) |
| *Financing activities:*                                       |   |                                      |    |   |   |   |   |
| Proceeds  from bank loans and long-term debt                  |   | 2,672,124                                 |    | 4,552,391 |   | 6,912,197 |   |
| Repayment  of bank loans and long-term debt                   |   | (3,176,593                                | )       | (3,151,536 | ) | (3,206,050 | ) |
| Repayment  of long-term note payable                          |   | (50,025                                   | )       | (50,666 | ) | — |   |
| Proceeds  from stock issuance                                 |   | 1,191,294                                 |    | — |   | 2,111,060 |   |
| Contributions  (distributions) by minority interest           |   | 97,558                                    |    | (21,191 | ) | — |   |
| Net  purchases-sales of Company’s common stock           |   | 2,712                                     |    | (365 | ) | (11,561 | ) |
| Proceeds  from (payments of) derivative financial instruments |   | 16,966                                    |    | — |   | (3,538,840 | ) |
| Dividends  paid                                               |   | (684,258                                  | )       | (627,264 | ) | (62,953 | ) |
| Other                                                         |   | 12,495                                    |    | (74,261 | ) | (60,428 | ) |
| Net  cash flows from by financing activities                  |   | 82,273                                    |    | 627,108 |   | 2,143,425 |   |
| Effect  of inflation on cash and cash equivalents             |   | (39,162                                   | )       | (46,503 | ) | (26,291 | ) |
| Net  increase (decrease) in cash and cash equivalents         |   | 239,149                                   |    | (111,317 | ) | 770,584 |   |
| Exchange  differences on cash and cash equivalents            |   | —                                    |    | — |   | 174,741 |   |
| Cash  and cash equivalents at beginning of year               |   | 353,096                                   |    | 592,245 |   | 480,928 |   |
| Cash  and cash equivalents at end of year                     |   | Ps.                                       | 592,245 |   | Ps. | 480,928 |   | Ps. | 1,426,253 |   |
|                                                               |        |                                           |         |  |  |  |  |  |  |  |

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

Net cash flow fromoperating activities reflects cash payments for interest and income taxes asfollows:

 
|                         |   | **Years  ended December 31,** |    |
|------------------------------|--------|------------------------------------|---------|
|                         |   | **2006**                           |    | **2007** |   | **2008** |   |
| Interest  paid               |   | Ps.                                | 701,693 |   | Ps. | 544,700 |   | Ps. | 781,225 |   |
| Income  and asset taxes paid |   | 357,874                            |    | 687,819 |   | 660,589 |   |
|                              |        |                                    |         |  |  |  |  |  |  |  |

 

For U.S. GAAPpurposes, cash equivalents represent those highly liquid instruments purchasedwith an original maturity of three months or less.  The aforementioned differ from the Company’scash equivalents accounting policy under Mexican FRS; however, as of December 31,2006, 2007 and 2008 the Company had no investments with original maturitiesover three months, therefore no reclassifications were needed.

 

Q)    COMPREHENSIVE INCOME

 

Comprehensive income forthe year is as follows:

 
|                                                  |   | **Years  ended December 31,** |       |
|-------------------------------------------------------|--------|------------------------------------|------------|
|                                                  |   | **2006**                           | ** ** | **2007** | ** ** | **2008** |   |
| Net  income (loss) under U.S. GAAP                    |   | Ps.                                | 1,502,867  |   | Ps. | 2,107,762 |   | Ps. | (11,778,940 | ) |
| Other  comprehensive loss, net of taxes:              |   |                               |       |   |   |   |   |
| Deficit  from restatement                             |   | (27,189                            | )          | (832,483 | ) | — |   |
| Equity  ownership from associated company             |   | —                             |       | — |   | (18,924 | ) |
| Derivative  financial instruments                     |   | 6,549                              |       | 35,065 |   | (131,699 | ) |
| Labor  obligations adjustments, net of income tax (a) |   | —                             |       | (20,499 | ) | (23,627 | ) |
| Foreign  currency translation adjustments             |   | 405,485                            |       | 354,631 |   | 949,769 |   |
| Comprehensive  income (loss) under U.S. GAAP          |   | Ps.                                | 1,887,712  |   | Ps. | 1,644,476 |   | Ps. | (11,003,421 | ) |

 

----

(a)           Excludes amortization of net cumulativelosses, net transition liability and prior service cost, reported in netincome.

 

Foreign currencytranslation adjustments are presented net of tax expense (benefit) ofPs.(21,568) and Ps.(15,417) for the years ended December 31, 2006 and2007, respectively.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

The components ofaccumulated other comprehensive loss were as follows as of December 31,2007 and 2008:

 
| ** **                         | ** ** | **Foreign  currency  translation  adjustments** | ** ** | **Derivative  financial  instruments** | ** ** | **Deficit  from  restatement** | ** ** | **Labor  obligations  adjustments,  net of  income tax** | ** ** | **Accumulated  other  comprehensive  loss** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------|------------|
| Balance  at December 31, 2006 |       | 659,245                                         |       | 6,725                                  |       | (15,495,070                    | )          | (14,234                                                  | )          | (14,843,334                                 | )          |
| Current  period changes            |       | 354,631                                         |       | 35,065                                 |       | (832,483                       | )          | (18,938                                                  | )          | (461,725                                    | )          |
| Balance  at December 31, 2007 |       | 1,013,876                                       |       | 41,790                                 |       | (16,327,553                    | )          | (33,172                                                  | )          | (15,305,059                                 | )          |
| Current  period changes            |       | 949,769                                         |       | (131,699                               | )          | 16,327,553                     |       | (23,627                                                  | )          | 17,121,996                                  |       |
| Balance  at December 31, 2008 |       | Ps.                                             | 1,963,645  |                                   | Ps.        | (89,909                        | )          | Ps.                                                      | —     |                                        | Ps.        | (56,799 | ) | Ps. | 1,816,937 |   |
|                                    |            |                                                 |            |                                        |            |                                |            |                                                          |            |                                             |            |  |  |  |  |  |

 

R)            VALUATION AND QUALIFYING ACCOUNTS

 

The valuation andqualifying accounts are as follows:

 

Allowance for doubtfulaccounts:

 
| **For  the year  ended   December 31,** | ** ** | **Balance at  beginning of  year** | ** ** | **Additions  charged to costs  and expenses** | ** ** | **Deductions** | ** ** | **Balance  at year-end** | ** ** |
|----------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|--------------------------|------------|
| 2006                                         |       | Ps.                                | 156,324    |                                          | Ps.        | 80,355         |       | Ps.                      | (21,579    | ) | Ps. | 215,100 |   |
| 2007                                         |       | 215,100                            |       | 42,336                                        |       | (23,703        | )          | 233,733                  |       |
| 2008                                         |       | 233,733                            |       | 79,539                                        |       | (67,331        | )          | 245,941                  |       |
|                                              |            |                                    |            |                                               |            |                |            |                          |            |  |  |  |  |

 

S)             CONDENSED FINANCIAL INFORMATION UNDER U.S. GAAP

 

The following tablepresents condensed financial information prepared on a U.S. GAAP basis. Theprior year balances of 2006 are restated to pesos of December 31, 2007using the Mexican NCPI. The difference in the factor applied to restate prioryear information to December 31, 2007 constant pesos utilizing the MexicanNCPI was 0.98809 (Note 21-A). Balances of 2008 are presented based on themodified historical cost model (Note 2-E).

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

Condensedconsolidated balance sheets as of December 31 are as follows:

 
| ** **                       | ** ** | **2007**   | ** ** | **2008**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
| Total  current assets            |       | Ps.        | 11,865,920 |       | Ps.        | 16,699,126 |   |
| Property,  plant and equipment   |       | 16,467,129 |       | 20,719,842 |       |
| Total  assets                    |       | 33,880,390 |       | 44,324,382 |       |
| Short-term  debt                 |       | 1,046,145  |       | 2,418,560  |       |
| Total  current liabilities       |       | 6,180,047  |       | 14,780,182 |       |
| Long-term  debt                  |       | 6,913,173  |       | 11,728,068 |       |
| Total  liabilities               |       | 15,734,668 |       | 34,645,656 |       |
| Minority  interest               |       | 3,028,973  |       | 3,761,926  |       |
| Total  stockholders’ equity |       | 15,116,749 |       | 5,916,800  |       |
|                                  |            |            |            |            |            |  |  |

 

Condensedconsolidated statements of income for the years ended December 31 are asfollows:

 
| ** **                  | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**    | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|-------------|------------|
| Net  sales                  |       | Ps.        | 31,530,165 |       | Ps.        | 35,427,207  |       | Ps. | 44,381,012 |   |
| Gross  profit               |       | 10,803,692 |       | 11,228,924 |       | 14,134,076  |       |
| Operating  income           |       | 1,753,111  |       | 1,824,882  |       | 3,222,739   |       |
| Majority  net income (loss) |       | 1,502,867  |       | 2,107,762  |       | (11,778,940 | )          |
|                             |            |            |            |            |            |             |            |  |  |  |

 

T)            RECENTLY ISSUED ACCOUNTING STANDARDS

* *

*Businesscombinations (FASB Statement No. 141(R)):*

 

In December 2007,the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 141(revised 2007), “Business Combinations” (“FAS 141(R)”) which replaces FASNo.141, “Business Combination”. FAS 141(R) retains the underlying conceptsof FAS 141 in that all business combinations are still required to be accountedfor at fair value under the acquisition method of accounting but FAS 141(R) changedthe method of applying the acquisition method in a number of significantaspects.  FAS 141(R) is effective ona prospective basis for all business combinations for which the acquisitiondate is on or after the beginning of the first annual period subsequent to December 15,2008, with the exception of the accounting for valuation allowances on deferredtaxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuationallowances on deferred taxes and acquired tax contingencies associated withacquisitions that closed prior to the effective date of FAS 141(R) wouldalso apply the provisions of FAS 141(R). Early adoption is not allowed. The Company does not expect the adoptionof this statement to have a material impact on its financial position orresults of operations.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

*Non-controllingInterests in Consolidated Financial Statements (FASB Statement No. 160):*

 

In December 2007,the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 160,“Non-controlling Interests in Consolidated Financial Statements, an Amendmentof ARB 51” (“FAS 160”). FAS 160 amends ARB 51 to establish new standards thatwill govern the accounting for and reporting of (1) non-controllinginterest in partially-owned consolidated subsidiaries and (2) the loss ofcontrol of subsidiaries. FAS 160 is effective on a prospective basis for allfiscal years, and interim periods within those fiscal years beginning on orafter December 15, 2008, except for the presentation and disclosurerequirements, which will be applied retrospectively. Early adoption is notallowed. The most significant effect of SFAS No. 160, at adoption, will beto reclassify retrospectively our minority interest to a separate component ofstockholders’ deficit, and to reclassify retrospectively income attributable tominority interest from an adjustment before net income to an allocation afternet income to the non-controlling interest.

* *

*Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133 (FASB Statement No. 161):*

 

On March 19, 2008,the FASB issued Statement No. 161, “Disclosures about DerivativeInstruments and Hedging Activities, an amendment of FASB Statement No. 133”(“FAS 161”).  This new standard requiresenhanced disclosures for derivative instruments, including those used inhedging activities. FAS 161 requires qualitative disclosures about objectivesand strategies for using derivatives, quantitative disclosures about fair valueamounts of gains and losses on derivative instruments, and disclosures aboutcredit-risk-related contingent features in derivative agreements. It iseffective for fiscal years and interim periods beginning after November 15,2008, with early adoption encouraged. This standard only requires enhanceddisclosures and will not have any impact on the financial condition and resultsof operations of the Company.

* *

*Determinationof the useful life of intangible assets (FSP FAS 142-3):*

 

In April 2008, theFASB issued FASB Staff Position FSP FAS 142-3, “Determination of the usefullife of intangible assets”, which amends FASB Statement No. 142, “Goodwilland Other Intangible Assets”, to provide guidance on the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,“Goodwill and Other Intangible Assets”. The intent of this FSP is to improve theconsistency between the useful life of a recognized intangible asset underStatement No. 142 and the period of expected cash flows used to measurethe fair value of the asset under FASB Statement No. 141 (revised 2007), “BusinessCombinations”, and other U.S. generally accepted accounting principles (GAAP).

 

This FSP shall beeffective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years. Early adoption isprohibited. The guidance for determining the useful life of a recognizedintangible asset of this FSP shall be applied prospectively to intangibleassets acquired after the effective date. The disclosure requirements shall beapplied prospectively to all intangible assets recognized as of, and subsequentto, the effective date. The Company does not expect the adoption of thisstatement to have a material impact on its financial position or results ofoperations.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

*Employer’sDisclosures about Postretirement Benefit Plan Assets**(FSP FAS 132 R-1):*

 

In December 2008,the FASB issued FSP FAS 132(R)-1.”Employer’sDisclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”) .The   FSP requires enhanced disclosures about plan assetscurrently required by FAS No. 132 (revised 2003), “Employer’s Disclosures about Pensions and Other PostretirementBenefits”.  FSP FAS 132(R)-1 requires more detaileddisclosures about employers’ plan assets, including employers’ investmentstrategies, major categories of plan assets, concentrations of risk within planassets, and valuation techniques used to measure the fair value of plan assets.FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009,and early adoption is permitted. The Company does not expect the adoption ofthis statement to have a material impact on its financial statementsdisclosures.

* *

*Effective Date of FASB Statement No. 157**(FSP FAS 157-2):*

 

In February 2008,the FASB issued Staff Position (FSP) FAS 157-2, “Effective Date of FASBStatement No. 157,” which delays by one year the effective date ofSFAS No. 157 for all non-financial assets and non-financialliabilities, except for those that are recognized or disclosed at fair value inthe financial statements at least annually. Assets and liabilities subject tothis deferral include goodwill, intangible assets, long-lived assets measured atfair value for impairment assessments, and nonfinancial assets and liabilitiesinitially measured at fair value in a business combination. For the Company,FSP FAS 157-2 will be effective at the beginning of its 2009 fiscal year.The Company does not expect the adoption of the remaining provisions to have amaterial impact on the measurement of the Company’s non-financial assets andliabilities.

* *

*Determiningfair value when the volume and level of activity for the asset or liabilityhave significantly decreased and identifying transactions that are not orderly(FSP FAS 157-4):*

 

In April 2009, theFASB issued FSP FAS 157-4, “Determining fair value when the volume and level ofactivity for the asset or liability have significantly decreased andidentifying transactions that are not orderly”, with an effective date forperiods ending after June 15, 2009. FSP FAS 157-4 provides additionalguidance in determining when observable transaction prices or quoted prices inmarkets that have become less active require significant adjustment to estimatefair value. FSP FAS 157-4 also includes guidance on identifying circumstancesthat indicate a transaction is not orderly. The Company does not expect theadoption of this statement to have a material impact on its financial positionor results of operation.

* *

*Subsequentevents (FAS Statement No. 165):*

 

In May 2009, theFASB issued Statement of Financial Accounting Standards No. 165, “SubsequentEvents” (SFAS No.165).  SFAS No. 165 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued.Specifically, SFAS No. 165 provides (i) the period after the balancesheet date during which management of a reporting entity should evaluate eventsor transactions that may occur for potential recognition or disclosure in thefinancial statements; (ii) the circumstances under which an entity shouldrecognize events or transactions occurring after the balance sheet date in itsfinancial statements; and (iii) the disclosures that an entity should makeabout events or transactions that occurred after the balance sheet date. SFAS No. 165is effective for interim or annual financial periods ending after June 15,2009 and shall be applied prospectively. The Company is currently analyzing theeffect that SFAS No.165 will have on its U.S.GAAP disclosures and financialinformation.

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2006, 2007 AND 2008**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (continued)**

 

*Accountingfor transfers of financial assets, an amendment of FASB Statement 140 (FASStatement No. 166):*

 

In June 2009 theFASB issued FASB No. 166 “Accounting for transfers of financial assets, anamendment of FASB Statement 140” (SFAS No. 166). SFAS No. 166 improvethe relevance, representational faithfulness, and comparability of theinformation that a reporting entity provides in its financial statements abouta transfer of financial assets; the effects of a transfer on its financialposition, financial performance, and cash flows; and a transferor’s continuinginvolvement, if any, in transferred financial assets. The Board undertook thisproject to address (1) practices that have developed since the issuance ofFASB Statement No. 140, Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities, that are not consistentwith the original intent and key requirements of that Statement and (2) concernsof financial statement users that many of the financial assets (and relatedobligations) that have been derecognized should continue to be reported in thefinancial statements of transferors. This Statement must be applied as of thebeginning of each reporting entity’s first annual reporting period that beginsafter November 15, 2009, for interim periods within that first annualreporting period and for interim and annual reporting periods thereafter.Earlier application is prohibited. This Statement must be applied to transfersoccurring on or after the effective date.

 

Additionally, on andafter the effective date, the concept of a qualifying special purpose entity isno longer relevant for accounting purposes. Therefore, formerly qualifyingspecial-purpose entities (as defined under previous accounting standards)should be evaluated for consolidation by reporting entities on and after theeffective date in accordance with the applicable consolidation guidance. If theevaluation on the effective date results in consolidation, the reporting entityshould apply the transition guidance provided in the pronouncement thatrequires consolidation. Additionally, the disclosure provisions of thisStatement should be applied to transfers that occurred both before and afterthe effective date of this Statement. The Company is currently analyzing theeffect that SFAS No.166 will have on its U.S.GAAP disclosures and financialinformation.

* *

*Amendmentsto FASB interpretation No. 46(R) (FAS Statement No. 167):*

 

In June 2009, theFASB issued FAS No. 167 “Amendments to FASB interpretation No. 46(R) (SFASNo. 167). This Standard improves financial reporting by enterprisesinvolved with variable interest entities. The FASB undertook this project toaddress (1) the effects on certain provisions of FASB Interpretation No. 46(revised December 2003), Consolidation of Variable Interest Entities, as aresult of the elimination of the qualifying special-purpose entity concept inFASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituentconcerns about the application of certain key provisions of Interpretation46(R), including those in which the accounting and disclosures under theInterpretation do not always provide timely and useful information about anenterprise’s involvement in a variable interest entity. This Statement shall beeffective as of the beginning of each reporting entity’s first annual reportingperiod that begins after November 15, 2009, for interim periods withinthat first annual reporting period, and for interim and annual reportingperiods thereafter. Earlier application is prohibited. The Company does notexpect the adoption of this statement to have a material impact on itsfinancial position or results of operation.

 

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**Report ofIndependent Registered PublicAccounting Firm to the Board of Directors and Stockholders of Grupo FinancieroBanorte, S.A.B. de C.V. and Subsidiaries**

 

Wehave audited the accompanying consolidated balance sheets of Grupo FinancieroBanorte, S.A.B. de C.V. and Subsidiaries (the “Financial Group”) as of December 31, 2008 and 2007, andthe related consolidated statements of income, changes in stockholders’ equityand changes in financial position for each of the three years inthe period ended December 31,2008. 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 audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin Mexico and with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement and that they are prepared in conformity withthe accounting practices prescribed by the Mexican National Banking andSecurities Commission (the “Commission”). The Financial Group is not requiredto have, nor were we engaged to perform, an audit of its internal control overfinancial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Financial Group’s internal control overfinancial reporting. Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Notes1 and 2 to the financial statements describe the Financial Group’s operationsand the current economic conditions brought on the by the global financialcrisis affecting such operations. Notes 4 and 37 describe the accountingcriteria established by the Commission through new accounting standards issuedto address current economic conditions and by other applicable laws which theFinancial Group adheres to for the preparation of its financial information, aswell as the modifications to such accounting criteria that became effectiveduring 2008 and others that will become effective as of January 1, 2009.Therefore, the financial statements are not comparable. Note 5 describes themain differences between the accounting practices prescribed by the Commissionand Mexican Financial Reporting Standards, commonly applied in the preparationof financial statements for other types of unregulated entities in Mexico.

 

Inour opinion, the consolidated financial statements present fairly, in allmaterial respects, the financial position of Grupo Financiero Banorte, S. A.B.de C. V. and Subsidiaries as of December 31, 2008 and 2007, and theresults of their operations, changes in their stockholders’ equity and changesin their financial position for each of the three years in the period ended December 31,2008, in conformity with the accounting practices prescribed by the MexicanNational Banking and Securities Commission.

 

Accountingpractices prescribed by the Commission vary in certain significant respectsfrom Mexican Financial Reporting Standards. The application of the latter wouldhave affected the determination of stockholders’ equity and net income as ofand for the years ended December 31, 2008 and 2007, to the extentsummarized in Note 38.

 

Accountingpractices prescribed by the Commission vary in certain significant respectsfrom accounting principles generally accepted in the United States of America.The application of the latter would have affected the determination ofstockholders’ equity as of December 31, 2008 and 2007 and net income foreach of the three years in the period ended December 31, 2008, to theextent summarized in Note 39.

 

Theaccompanying consolidated financial statements have been translated intoEnglish for the convenience of users.

 

 

Galaz, Yamazaki, Ruiz Urquiza, S. C.

Memberof Deloitte Touche Tohmatsu

 

 

C.P.C.Carlos A. García Cardoso

Monterrey, N.L., México

 

February 26,2009

June 19,2009 as to Notes 38 and 39

 

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**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER 31, 2008 AND 2007**

(In millions of Mexican pesos)

 
| **ASSETS**                                                  | ** ** | **2008**    | ** **  | **2007**    | ** ** |
|-------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **CASH AND  CASH EQUIVALENTS**                              | ** ** | **Ps.**     | **54,402**  | ** **  | **Ps.**    | **41,610** | ** ** |
| ** **                                                  |       |        |        |        |       |
| **INVESTMENTS  IN SECURITIES**                              |       |        |        |        |       |
| Trading securities                                          |       | 6,630       |        | 7,754       |       |
| Available for sale securities                               |       | 11,722      |        | 10,948      |       |
| Held to maturity securities                                 |       | 221,617     |        | 760         |       |
|                                                        | ** ** | **239,969** | ** **  | **19,462**  | ** ** |
| **DEBTOR BALANCES UNDER  REPURCHASE AND RESALE AGREEMENTS** | ** ** | **149**     | ** **  | **58**      | ** ** |
| ** **                                                  |       |        |        |        |       |
| **SECURITIES  AND DERIVATIVE FINANCIAL INSTRUMENTS**        | ** ** | **8,168**   | ** **  | **2,302**   | ** ** |
| ** **                                                  |       |        |        |        |       |
| **CURRENT  LOAN PORTFOLIO**                                 |       |        |        |        |       |
| Commercial loans                                            |       |        |        |        |       |
| Business loans                                              |       | 126,798     |        | 98,091      |       |
| Loans to financial  institutions                            |       | 10,860      |        | 13,158      |       |
| Government loans                                            |       | 26,989      |        | 17,948      |       |
| Consumer loans                                              |       | 29,369      |        | 27,225      |       |
| Housing mortgage loans                                      |       | 46,282      |        | 37,216      |       |
| **TOTAL CURRENT LOAN PORTFOLIO**                            | ** ** | **240,298** | ** **  | **193,638** | ** ** |
|                                                        | ** ** | ** **  | ** **  | ** **  | ** ** |
| **PAST-DUE LOAN PORTFOLIO**                                 | ** ** | ** **  | ** **  | ** **  | ** ** |
| Commercial loans                                            |       |        |        |        |       |
| Business loans                                              |       | 1,703       |        | 927         |       |
| Consumer loans                                              |       | 2,499       |        | 1,109       |       |
| Housing mortgage loans                                      |       | 746         |        | 858         |       |
| **TOTAL PAST-DUE LOAN PORTFOLIO**                           | ** ** | **4,948**   | ** **  | **2,894**   | ** ** |
|                                                        | ** ** | ** **  | ** **  | ** **  | ** ** |
| **LOAN PORTFOLIO**                                          | ** ** | **245,246** | ** **  | **196,532** | ** ** |
| (Minus) Allowance for loan losses                           |       | (6,690      | )           | (3,786      | )          |
| **LOAN PORTFOLIO, net**                                     | ** ** | **238,556** | ** **  | **192,746** | ** ** |
| **ACQUIRED LOAN PORTFOLIOS**                                | ** ** | **3,049**   | ** **  | **3,660**   | ** ** |
| **TOTAL LOAN PORTFOLIO, net**                               | ** ** | **241,605** | ** **  | **196,406** | ** ** |
|                                                        | ** ** | ** **  | ** **  | ** **  | ** ** |
| **OTHER ACCOUNTS RECEIVABLE, net**                          | ** ** | **9,514**   | ** **  | **7,617**   | ** ** |
| **MERCHANDISE INVENTORY**                                   | ** ** | **165**     | ** **  | **7**       | ** ** |
| **FORECLOSED ASSETS, net**                                  | ** ** | **863**     | ** **  | **385**     | ** ** |
| **PROPERTY, FURNITURE AND  FIXTURES, net**                  | ** ** | **8,429**   | ** **  | **8,098**   | ** ** |
| **PERMANENT STOCK INVESTMENTS**                             | ** ** | **2,559**   | ** **  | **2,590**   | ** ** |
| **DEFERRED TAXES, net**                                     | ** ** | **471**     | ** **  | **214**     | ** ** |
| ** **                                                  | ** ** | ** **  | ** **  | ** **  | ** ** |
| **OTHER ASSETS**                                            |       |        |        |        |       |
| Other assets, deferred charges and intangible  assets       | ** ** | **10,731**  | ** **  | **8,534**   | ** ** |
| **TOTAL ASSETS**                                            | ** ** | **Ps.**     | **577,025** | ** **  | **Ps.**    | **287,283** | ** ** |

 

MEMORANDUM ACCOUNTS (Note 32)

 

These balance sheets, consolidated with those of thefinancial entities and other companies that form part of the Financial Groupand are consolidated, were prepared according to accounting principlesapplicable to Financial Service Holding Companies issued by the MexicanNational Banking and Securities Commission according to Article 30 of theLaw of Financial Institutions.  Suchprinciples are consistently applied in the financial statements, which arepresented according to sound practices and applicable legal and administrativeprovisions and reflect all the operations conducted by the Financial Group, itsfinancial service subsidiaries and the other companies that form part of theFinancial Group and are consolidated as of the balance sheet dates above.

 

The stockholders’ equity amounts to Ps. 6,986(nominal value).

 

The accompanying Consolidated Balance Sheets havebeen approved by the Board of Directors in accordance with the responsibilityassigned to them.

 

The attached notes are an integral part of theseconsolidated balance sheets.

 

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| **LIABILITIES**                                               | ** ** | **2008**    | ** **  | **2007**    | ** ** |
|---------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **DEPOSITS**                                                  |       |        |        |        |       |
| Demand deposits                                               |       | Ps.         | 128,350     |        | Ps.        | 111,080 |   |
| Time deposits                                                 |       |        |        |        |       |
| General public                                                |       | 118,740     |        | 79,408      |       |
| Money market                                                  |       | 13,679      |        | 12,819      |       |
|                                                          | ** ** | **260,769** | ** **  | **203,307** | ** ** |
|                                                          |       |        |        |        |       |
| **INTERBANK  AND OTHER LOANS**                                |       |        |        |        |       |
| Demand loans                                                  |       | 1,245       |        | 871         |       |
| Short-term loans                                              |       | 24,803      |        | 11,056      |       |
| Long-term loans                                               |       | 10,635      |        | 10,796      |       |
|                                                          | ** ** | **36,683**  | ** **  | **22,723**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **CREDITOR  BALANCES UNDER REPURCHASE AND RESALE AGREEMENTS** | ** ** | **192,727** | ** **  | **515**     | ** ** |
| ** **                                                    | ** ** | ** **  | ** **  | ** **  | ** ** |
| **OVERNIGHT  SECURITIES**                                     | ** ** | **—**  | ** **  | **10**      | ** ** |
| ** **                                                    | ** ** | ** **  | ** **  | ** **  | ** ** |
| **COLLATERAL  SOLD OR PLEDGED**                               | ** ** | ** **  | ** **  | ** **  | ** ** |
| Repurchase or Resale  Agreements                              | ** ** | **2**       | ** **  | **—**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **SECURITIES  AND DERIVATIVE FINANCIAL INSTRUMENTS**          | ** ** | **10,746**  | ** **  | **2,435**   | ** ** |
| ** **                                                    |       |        |        |        |       |
| **OTHER  PAYABLES**                                           |       |        |        |        |       |
| Income taxes and employee profit sharing                      |       | 1,272       |        | 2,212       |       |
| Sundry creditors and other  payables                          |       | 13,121      |        | 10,888      |       |
|                                                          | ** ** | **14,393**  | ** **  | **13,100**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **SUBORDINATED  DEBENTURES**                                  | ** ** | **20,613**  | ** **  | **10,210**  | ** ** |
| **DEFERRED  CREDITS AND ADVANCED COLLECTIONS**                | ** ** | **1,346**   | ** **  | **827**     | ** ** |
| **TOTAL  LIABILITIES**                                        | ** ** | **537,279** | ** **  | **253,127** | ** ** |
| ** **                                                    |       |        |        |        |       |
| **STOCKHOLDERS’  EQUITY**                                |       |        |        |        |       |
| ** **                                                    |       |        |        |        |       |
| **PAID-IN  CAPITAL**                                          |       |        |        |        |       |
| Common stock                                                  |       | 11,941      |        | 11,965      |       |
| Additional paid-in capital                                    |       | 1,468       |        | 1,272       |       |
| ** **                                                    | ** ** | **13,409**  | ** **  | **13,237**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **OTHER  CAPITAL**                                            |       |        |        |        |       |
| Capital reserves                                              |       | 2,720       |        | 2,452       |       |
| Retained earnings from prior  years                           |       | 16,935      |        | 21,379      |       |
| Result from valuation of  available for sale securities       |       | (550        | )           | —      |       |
| Cumulative foreign currency  translation adjustment           |       | 1,095       |        | —      |       |
| Insufficiency in restated  stockholders’ equity          |       | —      |        | (6,380      | )          |
| Effect of holding  non-monetary assets                        |       | (2,821      | )           | (5,009      | )          |
| Net income                                                    |       | 7,014       |        | 6,810       |       |
| ** **                                                    | ** ** | **24,393**  | ** **  | **19,252**  | ** ** |
| **MINORITY  INTEREST IN STOCKHOLDERS’ EQUITY**           | ** ** | **1,944**   | ** **  | **1,667**   | ** ** |
| **TOTAL  STOCKHOLDERS’ EQUITY**                          | ** ** | **39,746**  | ** **  | **34,156**  | ** ** |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**          | ** ** | **Ps.**     | **577,025** | ** **  | **Ps.**    | **287,283** | ** ** |

 

| Dr. Alejandro Valenzuela del Río

Chief Executive Officer       |   |                                                            |   | Ing. Sergio García Robles Gil

Managing Director - CFO             |
|---------------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|-------------------------------------------------------------------------|
|                                                                      |   |                                                            |   |                                                                    |
| C.P. Román Martínez Méndez

Managing Director — Audit |   | Lic. Jorge Eduardo Vega  Camargo

Executive Director Controller |   | C.P.C.  Nora Elia Cantú Suárez

Executive Director Accounting |

 

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**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

## **CONSOLIDATEDSTATEMENTS OF INCOME**

## **FOR THEYEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

(In millions of Mexican pesos)

 
| ** **                                                                                        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Interest income                                                                                   |       | Ps.        | 50,416     |       | Ps.        | 40,585     |       | Ps. | 36,120 |   |
| Interest expense                                                                                  |       | (27,789    | )          | (22,838    | )          | (21,256    | )          |
| Monetary position loss, net                                                                       |       | —     |       | (363       | )          | (350       | )          |
| **FINANCIAL  MARGIN**                                                                             | ** ** | **22,627** | ** ** | **17,384** | ** ** | **14,514** | ** ** |
|                                                                                              |       |       |       |       |       |       |       |
| Provision for loan losses                                                                         |       | (6,896     | )          | (2,646     | )          | (1,530     | )          |
| **FINANCIAL  MARGIN AFTER ALLOWANCE FOR LOAN LOSSES**                                             | ** ** | **15,731** | ** ** | **14,738** | ** ** | **12,984** | ** ** |
|                                                                                              |       |       |       |       |       |       |       |
| Commission and fee income                                                                         |       | 8,535      |       | 7,693      |       | 6,324      |       |
| Commission and fee expense                                                                        |       | (1,208     | )          | (1,086     | )          | (920       | )          |
| Brokerage revenues                                                                                |       | 1,040      |       | 1,292      |       | 1,781      |       |
| ** **                                                                                        | ** ** | **8,367**  | ** ** | **7,899**  | ** ** | **7,185**  | ** ** |
| **NET  OPERATING REVENUES**                                                                       | ** ** | **24,098** | ** ** | **22,637** | ** ** | **20,169** | ** ** |
|                                                                                              |       |       |       |       |       |       |       |
| Administrative and  promotional expenses                                                          |       | (15,807    | )          | (14,432    | )          | (13,157    | )          |
| **OPERATING  INCOME**                                                                             | ** ** | **8,291**  | ** ** | **8,205**  | ** ** | **7,012**  | ** ** |
|                                                                                              |       |       |       |       |       |       |       |
| Other income                                                                                      |       | 3,789      |       | 2,835      |       | 3,192      |       |
| Other expenses                                                                                    |       | (1,569     | )          | (968       | )          | (905       | )          |
| ** **                                                                                        | ** ** | **2,220**  | ** ** | **1,867**  | ** ** | **2,287**  | ** ** |
| **INCOME  BEFORE INCOME TAXES AND****EMPLOYEE PROFIT SHARING**                                    | ** ** | **10,511** | ** ** | **10,072** | ** ** | **9,299**  | ** ** |
|                                                                                              |       |       |       |       |       |       |       |
| Current income taxes and  employee profit sharing                                                 |       | (3,645     | )          | (3,780     | )          | (3,098     | )          |
| Deferred income taxes and  employee profit sharing                                                |       | 245        |       | 487        |       | (355       | )          |
| ** **                                                                                        | ** ** | **(3,400** | **)**      | **(3,293** | **)**      | **(3,453** | **)**      |
|                                                                                              |       |       |       |       |       |       |       |
| **INCOME  BEFORE EQUITY IN EARNINGS OF UNCONSOLIDATED****SUBSIDIARIES  AND ASSOCIATED COMPANIES** | ** ** | **7,111**  | ** ** | **6,779**  | ** ** | **5,846**  | ** ** |
|                                                                                              |       |       |       |       |       |       |       |
| Equity in earnings of  unconsolidated subsidiaries and associated companies                       |       | 276        |       | 357        |       | 628        |       |
|                                                                                              |       |       |       |       |       |       |       |
| **NET  EARNINGS BEFORE MINORITY INTEREST**                                                        | ** ** | **7,387**  | ** ** | **7,136**  | ** ** | **6,474**  | ** ** |
|                                                                                              |       |       |       |       |       |       |       |
| Minority interest                                                                                 |       | (373       | )          | (326       | )          | (219       | )          |
|                                                                                              |       |       |       |       |       |       |       |
| **NET  INCOME**                                                                                   | ** ** | **Ps.**    | **7,014**  | ** ** | **Ps.**    | **6,810**  | ** ** | **Ps.** | **6,255** | ** ** |

 

These income statements, consolidated with those of the financialentities and other companies that form part of the Financial Group and areconsolidated, were prepared according to accounting principles applicable toFinancial Service Holding Companies issued by the National Banking andSecurities Commission according to Article 30 of the Law of FinancialInstitutions.  Such principles areconsistently applied in the financial statements, which are presented accordingto sound practices and applicable legal and administrative provisions and reflectall the operations conducted by the Financial Group, its financial servicesubsidiaries and the other companies that form part of the Financial Group andare consolidated as of the income statement dates above.

 

The accompanying Consolidated Statements of Income have been approved bythe Board of Directors in accordance with the responsibility assigned to them.

 

The attached notes are an integral part of these consolidated statementsof income.

** **

| Dr. Alejandro Valenzuela del Río

Chief Executive Officer  |   |                                                            |   | Ing. Sergio García Robles Gil

Managing Director - CFO             |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|-------------------------------------------------------------------------|
|                                                                 |   |                                                            |   |                                                                    |
| C.P. Román Martínez Méndez

Managing Director - Audit |   | Lic. Jorge Eduardo Vega  Camargo

Executive Director Controller |   | C.P.C.  Nora Elia Cantú Suárez

Executive Director Accounting |

 

F-78

----

Tableof Contents

 

**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

## **CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

(In millions of Mexican pesos)

 
| ** **                                                                                         | ** ** | **PAID-IN  CAPITAL** | ** ** | **OTHER  CAPITAL**               | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------------------|------------|
| ** **                                                                                         | ** ** | **Common  stock**    | ** ** | **Additional  paid-in  capital** | ** ** | **Capital  reserves** | ** ** | **Retained  earnings  from prior  years** | ** ** | **Result  from  valuation of  available for  sale  securities** | ** ** | **Cumulative  foreign  currency  translation  adjustment** | ** ** |
| **Balances, January 1, 2006**                                                                 | ** ** | **Ps.**              | **12,021** | ** **                       | **Ps.**    | **1,858** | ** ** | **Ps.** | **1,807** | ** ** | **Ps.** | **11,331** | ** ** | **Ps.** | **—** | ** ** | **Ps.** | **—** | ** ** |
| **TRANSACTIONS APPROVED BY STOCKHOLDERS**                                                          |       |                 |       |                             |       |   |   |   |   |   |   |   |   |
| Issuance  (repurchase of shares)                                                                   |       | (1                   | )          | 4                                |       | 28 |   | — |   | — |   | — |   |
| Transfer  of prior year’s result                                                              |       | —               |       | —                           |       | — |   | 6,261 |   | — |   | — |   |
| Creation  of reserves as per General Stockholders’ meeting on April 28, 2006             |       | —               |       | —                           |       | 305 |   | (305 | ) | — |   | — |   |
| Dividend  declared at the General Stockholders’ meeting on October 6, 2006               |       | —               |       | —                           |       | — |   | (792 | ) | — |   | — |   |
| **Total transactions approved by stockholders**                                                    | ** ** | **(1**               | **)**      | **4**                            | ** ** | **333** | ** ** | **5,164** | ** ** | **—** | ** ** | **—** | ** ** |
| **COMPREHENSIVE INCOME**                                                                           | ** ** | ** **           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                                                        |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| Effect  of holding non-monetary assets                                                             |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| Changes  in accounting principles                                                                  |       | —               |       | —                           |       | — |   | (78 | ) | — |   | — |   |
| **Total comprehensive income**                                                                     | ** ** | **—**           | ** ** | **—**                       | ** ** | **—** | ** ** | **(78** | **)** | **—** | ** ** | **—** | ** ** |
| Minority  interest                                                                                 |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| **Balances, December 31, 2006**                                                               | ** ** | **12,020**           | ** ** | **1,862**                        | ** ** | **2,140** | ** ** | **16,417** | ** ** | **—** | ** ** | **—** | ** ** |
| Changes  in accounting principles                                                                  |       |                 |       |                             |       |   |   |   |   |   |   |   |   |
| **Balances, December 31, 2006 after retroactive effect  of changes in accounting principles** | ** ** | **12,020**           | ** ** | **1,862**                        | ** ** | **2,140** | ** ** | **16,417** | ** ** | **—** | ** ** | **—** | ** ** |
| **TRANSACTIONS APPROVED BY STOCKHOLDERS**                                                          |       |                 |       |                             |       |   |   |   |   |   |   |   |   |
| Issuance  (repurchase of shares)                                                                   |       | (55                  | )          | (590                             | )          | 6 |   | — |   | — |   | — |   |
| Transfer  of prior year’s result                                                              |       | —               |       | —                           |       | — |   | 6,255 |   | — |   | — |   |
| Creation  of reserves as per General Stockholders’ meeting on March 30, 2007             |       | —               |       | —                           |       | 306 |   | (306 | ) | — |   | — |   |
| Dividend  declared at the General Stockholders’ meeting on October 3, 2007               |       | —               |       | —                           |       | — |   | (917 | ) | — |   | — |   |
| **Total transactions approved by stockholders**                                                    | ** ** | **(55**              | **)**      | **(590**                         | **)**      | **312** | ** ** | **5,032** | ** ** | **—** | ** ** | **—** | ** ** |
| **COMPREHENSIVE INCOME**                                                                           | ** ** | ** **           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                                                        |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| Effect  of holding non-monetary assets                                                             |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| Changes  in accounting principles                                                                  |       | —               |       | —                           |       | — |   | (70 | ) | — |   | — |   |
| **Total comprehensive income**                                                                     | ** ** | **—**           | ** ** | **—**                       | ** ** | **—** | ** ** | **(70** | **)** | **—** | ** ** | **—** | ** ** |
| Minority  interest                                                                                 |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| **Balances, December 31, 2007 previously reported**                                           | ** ** | **11,965**           | ** ** | **1,272**                        | ** ** | **2,452** | ** ** | **21,379** | ** ** | **—** | ** ** | **—** | ** ** |
| Change  in credit card loan rating criterion                                                       |       | —               |       | —                           |       | — |   | (100 | ) | — |   | — |   |
| **Balances, January 1, 2008**                                                                 | ** ** | **11,965**           | ** ** | **1,272**                        | ** ** | **2,452** | ** ** | **21,279** | ** ** | **—** | ** ** | **—** | ** ** |
| **TRANSACTIONS APPROVED BY STOCKHOLDERS**                                                          |       |                 |       |                             |       |   |   |   |   |   |   |   |   |
| Issuance  (repurchase of shares)                                                                   |       | (24                  | )          | 199                              |       | (72 | ) | — |   | — |   | — |   |
| Transfer  of prior year’s result                                                              |       | —               |       | —                           |       | — |   | 6,810 |   | — |   | — |   |
| Creation  of reserves as per General Stockholders’ meeting on April 29, 2008             |       | —               |       | —                           |       | 340 |   | (340 | ) | — |   | — |   |
| Dividends  declared at the General Stockholders’ meeting on October 6, 2008              |       | —               |       | —                           |       | — |   | (949 | ) | — |   | — |   |
| **Total transactions approved by stockholders**                                                    | ** ** | **(24**              | **)**      | **199**                          | ** ** | **268** | ** ** | **5,521** | ** ** | **—** | ** ** | **—** | ** ** |
| **COMPREHENSIVE INCOME**                                                                           | ** ** | ** **           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                                                        |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| Effects  of subsidiaries                                                                           |       | —               |       | (3                               | )          | — |   | (30 | ) | (550 | ) | 1,095 |   |
| Unrealized  gain on valuation of cash flow hedge instruments                                       |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| Changes  in accounting principles (NIF B-10)                                                       |       | —               |       | —                           |       | — |   | (9,835 | ) | — |   | — |   |
| **Total comprehensive income**                                                                     | ** ** | **—**           | ** ** | **(3**                           | **)**      | **—** | ** ** | **(9,865** | **)** | **(550** | **)** | **1,095** | ** ** |
| Minority  interest                                                                                 |       | —               |       | —                           |       | — |   | — |   | — |   | — |   |
| **Balances, December 31, 2008**                                                               | ** ** | **Ps.**              | **11,941** | ** **                       | **Ps.**    | **1,468** | ** ** | **Ps.** | **2,720** | ** ** | **Ps.** | **16,935** | ** ** | **Ps.** | **(550** | **)** | **Ps.** | **1,095** | ** ** |

 

These statements of changes in stockholders’ equity,consolidated with those of the financial entities and other companies that formpart of the Financial Group and are consolidated, were prepared according toaccounting principles applicable to Financial Service Holding Companies issuedby the Mexican National Banking and Securities Commission according to Article 30of the Law of Financial Institutions. Such principles are consistently appliedin the financial statements, which are presented according to sound practicesand applicable legal and administrative provisions and reflect all theoperations conducted by the Financial Group, its financial service subsidiariesand the other companies that form part of the Financial Group and areconsolidated as of the dates above.

 

The accompanying Consolidated Statements of Changes inStockholders’ Equity have been approved by the Board of Directors in accordancewith the responsibility assigned to them.

 

The attached notes are an integral part of these consolidatedstatements of changes in stockholders’ equity.

 

F-79

----

Tableof Contents

 
| ** **                                                                                         | ** ** | **OTHER  CAPITAL**                                         | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **Insufficiency  in  restated stockholders’  equity** | ** ** | **Effect  of  holding non-  monetary  assets** | ** ** | **Net  income** | ** ** | **Total  majority  interest** | ** ** | **Total  minority  interest** | ** ** | **Total  stockholders’  equity** | ** ** |
| **Balances, January 1, 2006**                                                                 | ** ** | **Ps.**                                                    | **(6,380** | **)** | **Ps.** | **(5,060** | **)** | **Ps.** | **6,261** | ** ** | **Ps.** | **21,838** | ** ** | **Ps.** | **1,045** | ** ** | **Ps.** | **22,883** | ** ** |
| **TRANSACTIONS APPROVED BY STOCKHOLDERS**                                                          |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Issuance  (repurchase of shares)                                                                   |       | —                                                     |       | — |   | — |   | 31 |   | — |   | 31 |   |
| Transfer  of prior year’s result                                                              |       | —                                                     |       | — |   | (6,261 | ) | — |   | — |   | — |   |
| Creation  of reserves as per General Stockholders’ meeting on April 28, 2006             |       | —                                                     |       | — |   | — |   | — |   | — |   | — |   |
| Dividend  declared at the General Stockholders’ meeting on October 6, 2006               |       | —                                                     |       | — |   | — |   | (792 | ) | — |   | (792 | ) |
| **Total transactions approved by stockholders**                                                    | ** ** | **—**                                                 | ** ** | **—** | ** ** | **(6,261** | **)** | **(761** | **)** | **—** | ** ** | **(761** | **)** |
| **COMPREHENSIVE INCOME**                                                                           |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net  income                                                                                        |       | —                                                     |       | — |   | 6,185 |   | 6,185 |   | — |   | 6,185 |   |
| Effect  of holding non-monetary assets                                                             |       | —                                                     |       | (496 | ) | — |   | (496 | ) | — |   | (496 | ) |
| Changes  in accounting principles                                                                  |       | —                                                     |       | 400 |   | — |   | 322 |   | 14 |   | 336 |   |
| **Total comprehensive income**                                                                     | ** ** | **—**                                                 | ** ** | **(96** | **)** | **6,185** | ** ** | **6,011** | ** ** | **14** | ** ** | **6,025** | ** ** |
| Minority  interest                                                                                 |       | —                                                     |       | — |   | — |   | — |   | 402 |   | 402 |   |
| **Balances, December 31, 2006**                                                               | ** ** | **(6,380**                                                 | **)**      | **(5,156** | **)** | **6,185** | ** ** | **27,088** | ** ** | **1,461** | ** ** | **28,549** | ** ** |
| Changes  in accounting principles                                                                  |       | —                                                     |       | (578 | ) | 70 |   | (508 | ) | (15 | ) | (523 | ) |
| **Balances, December 31, 2006 after retroactive effect  of changes in accounting principles** | ** ** | **(6,380**                                                 | **)**      | **(5,734** | **)** | **6,255** | ** ** | **26,580** | ** ** | **1,446** | ** ** | **28,026** | ** ** |
| **TRANSACTIONS APPROVED BY STOCKHOLDERS**                                                          |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Issuance  (repurchase of shares)                                                                   |       | —                                                     |       | — |   | — |   | (639 | ) | — |   | (639 | ) |
| Transfer  of prior year’s result                                                              |       | —                                                     |       | — |   | (6,255 | ) | — |   | — |   | — |   |
| Creation  of reserves as per General Stockholders’ meeting on March 30, 2007             |       | —                                                     |       | — |   | — |   | — |   | — |   | — |   |
| Dividend  declared at the General Stockholders’ meeting on October 3, 2007               |       | —                                                     |       | — |   | — |   | (917 | ) | — |   | (917 | ) |
| **Total transactions approved by stockholders**                                                    | ** ** | **—**                                                 | ** ** | **—** | ** ** | **(6,255** | **)** | **(1,556** | **)** | **—** | ** ** | **(1,556** | **)** |
| **COMPREHENSIVE INCOME**                                                                           |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net  income                                                                                        |       | —                                                     |       | — |   | 6,810 |   | 6,810 |   | — |   | 6,810 |   |
| Effect  of holding non-monetary assets                                                             |       | —                                                     |       | 147 |   | — |   | 147 |   | — |   | 147 |   |
| Changes  in accounting principles                                                                  |       | —                                                     |       | 578 |   | — |   | 508 |   | 15 |   | 523 |   |
| **Total comprehensive income**                                                                     | ** ** | **—**                                                 | ** ** | **725** | ** ** | **6,810** | ** ** | **7,465** | ** ** | **15** | ** ** | **7,480** | ** ** |
| Minority  interest                                                                                 |       | —                                                     |       | — |   | — |   | — |   | 206 |   | 206 |   |
| **Balances, December 31, 2007 previously reported**                                           | ** ** | **(6,380**                                                 | **)**      | **(5,009** | **)** | **6,810** | ** ** | **32,489** | ** ** | **1,667** | ** ** | **34,156** | ** ** |
| Change  in credit card loan rating criterion                                                       |       | —                                                     |       | — |   | — |   | (100 | ) | — |   | (100 | ) |
| **Balances, January 1, 2008**                                                                 | ** ** | **(6,380**                                                 | **)**      | **(5,009** | **)** | **6,810** | ** ** | **32,389** | ** ** | **1,667** | ** ** | **34,056** | ** ** |
| **TRANSACTIONS APPROVED BY STOCKHOLDERS**                                                          |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Issuance  (repurchase of shares)                                                                   |       | —                                                     |       | — |   | — |   | 103 |   | — |   | 103 |   |
| Transfer  of prior year’s result                                                              |       | —                                                     |       | — |   | (6,810 | ) | — |   | — |   | — |   |
| Creation  of reserves as per General Stockholders’ meeting on April 29, 2008             |       | —                                                     |       | — |   | — |   | — |   | — |   | — |   |
| Dividends  declared at the General Stockholders’ meeting on October 6, 2008              |       | —                                                     |       | — |   | — |   | (949 | ) | — |   | (949 | ) |
| **Total transactions approved by stockholders**                                                    | ** ** | **—**                                                 | ** ** | **—** | ** ** | **(6,810** | **)** | **(846** | **)** | **—** | ** ** | **(846** | **)** |
| **COMPREHENSIVE INCOME**                                                                           |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net  income                                                                                        |       | —                                                     |       | — |   | 7,014 |   | 7,014 |   | — |   | 7,014 |   |
| Effects  of subsidiaries                                                                           |       | —                                                     |       | — |   | — |   | 512 |   | — |   | 512 |   |
| Unrealized  loss on valuation of cash flow hedge instruments                                       |       | —                                                     |       | (1,267 | ) | — |   | (1,267 | ) | — |   | (1,267 | ) |
| Changes  in accounting principles (NIF B-10)                                                       |       | 6,380                                                      |       | 3,455 |   | — |   | — |   | — |   | — |   |
| **Total comprehensive income**                                                                     | ** ** | **6,380**                                                  | ** ** | **2,188** | ** ** | **7,014** | ** ** | **6,259** | ** ** | **—** | ** ** | **6,259** | ** ** |
| Minority  interest                                                                                 |       | —                                                     |       | — |   | — |   | — |   | 277 |   | 277 |   |
| **Balances, December 31, 2008**                                                               | ** ** | **Ps.**                                                    | **—** | ** ** | **Ps.** | **(2,821** | **)** | **Ps.** | **7,014** | ** ** | **Ps.** | **37,802** | ** ** | **Ps.** | **1,944** | ** ** | **Ps.** | **39,746** | ** ** |

 

| Dr. Alejandro Valenzuela del Río

Chief Executive Officer  |   |                                                            |   | Ing. Sergio García Robles Gil

Managing Director - CFO             |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|-------------------------------------------------------------------------|
|                                                                 |   |                                                            |   |                                                                    |
| C.P. Román Martínez Méndez

Managing Director - Audit |   | Lic. Jorge Eduardo Vega  Camargo

Executive Director Controller |   | C.P.C.  Nora Elia Cantú Suárez

Executive Director Accounting |

 

F-80

----

Table of Contents

 

**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

## **CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIALPOSITION**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

(In millions of Mexican pesos)

 
| ** **                                                                               | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**    | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| **OPERATING  ACTIVITIES:**                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Net income                                                                               | ** ** | **Ps.**    | **7,014**  | ** ** | **Ps.**    | **6,810**   | ** ** | **Ps.** | **6,255** | ** ** |
| Items not requiring  (generating) resources:                                             |       |       |       |       |       |        |       |
| Fair value adjustments of  financial instruments                                         |       | (268       | )          | (192       | )          | 176         |       |
| Allowance for loan losses                                                                |       | 6,896      |       | 2,646      |       | 1,530       |       |
| Depreciation and amortization                                                            |       | 1,099      |       | 980        |       | 923         |       |
| Deferred taxes                                                                           |       | (245       | )          | (487       | )          | 355         |       |
| Provisions for other  obligations                                                        |       | 24         |       | 2,433      |       | (107        | )          |
| Minority interest                                                                        |       | 373        |       | 326        |       | 219         |       |
| Equity in earnings of  subsidiaries and associated companies                             |       | (276       | )          | (357       | )          | (628        | )          |
|                                                                                     | ** ** | **14,617** | ** ** | **12,159** | ** ** | **8,723**   | ** ** |
| Increase or decrease in operating accounts:                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Increase in deposits                                                                     |       | 57,462     |       | 27,447     |       | 27,260      |       |
| Increase in loan portfolio                                                               |       | (52,095    | )          | (51,124    | )          | (24,143     | )          |
| (Increase) decrease from  treasury transactions (investment securities)                  |       | (220,239   | )          | 10,171     |       | (6,444      | )          |
| Decrease (increase) in  transactions with securities and derivative financialinstruments |       | 194,558    |       | (2,370     | )          | 3,380       |       |
| Increase (decrease) from bank  and other loans                                           |       | 13,960     |       | 5,233      |       | (3,668      | )          |
| (Increase) decrease of  deferred taxes                                                   |       | (12        | )          | (65        | )          | 419         |       |
| **Net  resources generated by operating activities**                                     | ** ** | **8,251**  | ** ** | **1,451**  | ** ** | **5,527**   | ** ** |
| **FINANCING  ACTIVITIES:**                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Increase (decrease) in subordinated debentures                                           |       | 10,403     |       | (1,551     | )          | 6,837       |       |
| Issuance (repurchase) of shares                                                          |       | 103        |       | (639       | )          | 31          |       |
| Increase (decrease) in  other payables                                                   |       | 1,269      |       | (418       | )          | 4,443       |       |
| Dividends paid                                                                           |       | (949       | )          | (917       | )          | (792        | )          |
| **Net resources generated by (used  in) financing activities**                           | ** ** | **10,826** | ** ** | **(3,525** | **)**      | **10,519**  | ** ** |
| **INVESTING  ACTIVITIES:**                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Acquisition of property, furniture and fixtures,  net                                    |       | (1,308     | )          | (1,961     | )          | (1,378      | )          |
| (Increase) decrease in permanent stock investments                                       |       | (644       | )          | 353        |       | (416        | )          |
| Increase in deferred charges and credits                                                 |       | (1,958     | )          | (388       | )          | (5,987      | )          |
| Increase (decrease) in foreclosed assets                                                 |       | (478       | )          | (6         | )          | 89          |       |
| (Increase) decrease in  other accounts receivable                                        |       | (1,897     | )          | 632        |       | (5,239      | )          |
| **Net resources used in investing  activities**                                          | ** ** | **(6,285** | **)**      | **(1,370** | **)**      | **(12,931** | **)**      |
| Net increase (decrease) in cash and equivalents                                          |       | 12,792     |       | (3,444     | )          | 3,115       |       |
| Cash and cash equivalents available at the  beginning of the year                        |       | 41,610     |       | 45,054     |       | 41,939      |       |
| **Cash and cash equivalents  available at the end of the year**                          | ** ** | **Ps.**    | **54,402** | ** ** | **Ps.**    | **41,610**  | ** ** | **Ps.** | **45,054** | ** ** |

 

These statements of changes in financial position,consolidated with those of the financial entities and other companies that formpart of the Financial Group and are consolidated, were prepared according toaccounting principles applicable to Financial Service Holding Companies issuedby the Mexican National Banking and Securities Commission according to Article 30of the Law of Financial Institutions. Such principles are consistently applied in the financial statements,which are presented according to sound practices and applicable legal andadministrative provisions and reflect all the operations conducted by theFinancial Group, its financial service subsidiaries and the other companiesthat form part of the Financial Group and are consolidated as of the datesabove.

 

The accompanying Consolidated Statements of Changes inFinancial Position have been approved by the Board of Directors in accordancewith the responsibility assigned to them.

 

The attached notes are an integral part of theseconsolidated statements of changes in financial position.

 

| Dr. Alejandro Valenzuela del Río

Chief Executive Officer  |   |                                                            |   | Ing. Sergio García Robles Gil

Managing Director - CFO             |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|-------------------------------------------------------------------------|
|                                                                 |   |                                                            |   |                                                                    |
| C.P. Román Martínez Méndez

Managing Director - Audit |   | Lic. Jorge Eduardo Vega  Camargo

Executive Director Controller |   | C.P.C.  Nora Elia Cantú Suárez

Executive Director Accounting |

 

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**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

## **NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

## **FOR THEYEARS ENDED DECEMBER 31, 2008, 2007 AND 2006**

**(In millions of Mexican pesos)**

** **

**1 – ACTIVITY AND REGULATORY ENVIRONMENT**

 

GrupoFinanciero Banorte, S.A.B. de C.V. (the “Financial Group”) is authorized by theMexican Treasury Department (SHCP) to operate as a financial group under theform and terms established by the Mexican Financial Group Law, subject to thesupervision and monitoring of the Mexican National Banking and SecuritiesCommission (the “Commission”). Its main activities consist of acquiring andmanaging entities engaged in the financial services industry and supervisingtheir activities, as defined in the above-mentioned Law. The Financial Groupand its subsidiaries are regulated, depending on their activities, by theCommission, the Mexican National Insurance and Bond Commission, the MexicanNational Retirement Savings Systems Commission (the Commissions), the MexicanCentral Bank (Banco de México) and other applicable laws and regulations.

 

Themain activity of the Financial Group’s subsidiaries is to carry out financialtransactions that include the rendering of full-banking services, securitiesbrokerage activities, management of retirement funds, leasing, the purchase andsale of uncollected invoices and notes, rendering of general warehousingservices, annuities (pensions) and providing life insurance and casualtyinsurance.

 

Perlegal requirements, the Financial Group has unlimited liability for theobligations assumed and losses incurred by each of its subsidiaries.

 

Thepowers of the Commission in their capacity as regulator of the Financial Groupand its subsidiaries include reviewing the financial information and requestingmodifications to such information.

 

TheFinancial Group’s consolidated financial statements have been approved by theBoard of Directors at their January 29, 2009 meeting in accordance withthe responsibility assigned to them.

 

**2 – SIGNIFICANT EVENTS DURING THE YEAR**

 

**a. Economicsituation**

 

Thedifficult worldwide economic situation has rendered several financial sectorparticipants bankrupt. In Mexico, several companies have reported lossesderived from transactions involving derivative financial instruments, includingapplications to file for bankruptcy, caused by the concern in the localmarkets. The Financial Group has declared the risk exposure of its subsidiary,Banco Mercantil del Norte, S.A. (Banorte) with each of the affected companies,and has acknowledged such risks in the earnings as per subsections f) and g) ofthis Note. Even though such effects were reported, Banorte has been able toreach a record accumulated profit as of December 31, 2008, which shows ithas ample liquidity, strong levels of capitalization and sufficient reservesfor its past-due loans, as well as to continue to be a profitable investmentfor its shareholders.

 

**b. Issue ofsubordinated debentures**

 

Banorte listed three issues of subordinated debentureson the Mexican Stock Exchange for a total of Ps. 7,525. The transactionsincluded the simultaneous placement of two issues of subordinated debentures,one in March and another in June, which due to their features, helpedstrengthen Banorte’s capital. The first issue of non-preferred andnon-convertible subordinated debentures (BANORTE 08) was for Ps. 3,000 with a10-year term and a 28-day TIIE rate plus 60 basis points; the second issue ofnon-preferred non-convertible debentures (BANORTE 08U) was made in Units ofInvestment (UDIS) for an amount equivalent to Ps. 1,775 with a 20-year term anda fixed rate of 4.95% payable every 182 days; the third issue of non-preferrednon-convertible subordinated debentures (BANORTE08-2) was for Ps. 2,750 with a10-year term and a 28-day TIIE rate plus 77 basis points. These placements arepart of a preferred and non-preferred non-convertible subordinated debentureprogram that is calculated as regulatory capital for a sum of up to Ps. 15,000over a five-year period, approved at the Extraordinary General Stockholders’Meeting held on February 22, 2008.

 

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**c. Effectsof the VISA Inc. reorganization**

 

Banorterecorded 1,545,128 ordinary class C (series I) shares of Visa Inc. (VISA) thatwere assigned to it as a consequence of VISA’s reorganization in March 2008,through which VISA indirectly acquired VISA LAC, in which Banorte has a shareas a member authorized to use its trademark. The purpose of reorganizing VISAwas to go public and place shares on the New York Stock Exchange. A total of868,138 shares were sold at the time of the assignment, recording an incomebefore taxes of Ps. 394 in “Other income”. Furthermore, Banorte recorded theremaining 676,990 shares received by VISA that were not put up for trading asinvestments in securities under the category “Available for sale securities.”During the third quarter of the year, 544,690 shares were sold, recording again of Ps. 312. The remaining 132,300 VISA shares in possession of Banorte arerecorded at market value, with the valuation effect presented under “Valuationof available for sale securities” in stockholders’ equity.

 

**d. Effectsof the Mexican Stock Exchange Reorganization**

 

Asa result of the Mexican Stock Exchange’s reorganization to become a publiccompany during the second quarter of 2008, Banorte sold the shares of S.D.Indeval Institución para el Depósito de Valores, S.A. de C.V. (S.D. Indeval)that it had recorded under “Permanent Investments in Shares”, thereby recordinga Ps. 91 profit before taxes in “Other income”.

 

Moreover,Casa de Bolsa Banorte, S.A. de C.V. (Brokerage House) generated revenues fromselling the shares it had that were recorded under “Earnings from available forsale securities valuation” in the Balance Sheet for Ps. 144 and under “Otherincome” in the income statement for Ps. 40. The share and corporaterestructuring consisted mainly of the sale or swap of shares of the MexicanStock Exchange, Asigna, Mexder, Contraparte Central de Valores de México andS.D. Indeval, for which a specific treatment was applied in each case. In thecase of S.D. Indeval, such treatment consisted of selling the total number ofshares in two parts. The first was for 75% of the transaction value thatcorresponds to the future benefits of the share in the Brokerage House for Ps.40 million recorded under “Other income”. The remaining 25% corresponded topayment of the shares, because they cannot be realized until the Stock MarketLaw that restricts this operation is modified.

 

**e. Mergerof subsidiaries**

 

Atthe Extraordinary Stockholders’ Meetings held on October 3, 2007, themerger of “Arrendadora y Factor Banorte, S.A. de C.V., Sociedad Financiera deObjeto Múltiple, Entidad Regulada, Grupo Financiero Banorte” (previously FactorBanorte, S.A. de C.V.) with “Arrendadora Banorte, S.A. de C.V., SociedadFinanciera de Objeto Múltiple, Entidad Regulada, Grupo Financiero Banorte” wasauthorized, whereby the former was the merged entity and the latter the mergingentity that took on the merged entity’s name. The merger became effective as ofJanuary 31, 2008.

 

At the ExtraordinaryStockholders’ Meetings held on June 16, 2008, the merger of Banorte, asthe merging entity, with its subsidiaries Inmobiliaria Bancrecer, S.A. de C.V.,Inmobiliaria Innova, S.A. de C.V., Inmobiliaria Banormex, S.A. de C.V.,Inmuebles de Tijuana, S.A. de C.V., Inmobiliaria Banorte, S.A. de C.V.,Constructora Primero, S.A. de C.V., Inmuebles de Occidente, S.A., InmobiliariaFinsa, S.A. de C.V., and Inmobiliaria Bra, S.A. de C.V., as the merged entitieswas authorized, using the May 31, 2008 balance sheets as a basis for themerger. The merger will become effective when the approved agreements or basisfor the merger are inscribed in the Public Registry of Commerce and when theMexican Treasury Department’s (SHCP) gives its authorization.

 

**f. LehmanBrothers’ securities**

 

During September 2008,Banorte recorded under “Brokerage revenues” a loss of Ps. 295 associated withthe permanent impairment and loss generated by the sale of these securities. Theloss is made up of USD 24 million in senior debt notes and USD 1 million inderivative financial instruments.

 

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**g. COMERCI’scredit quality impairment**

 

As a result of the difficult economic situation andits participation in transactions involving derivative financial instrumentsand given the request submitted by Controladora Commercial Mexicana, S.A.B. deC.V. (COMERCI) to file for bankruptcy, Banorte acknowledged a loan lossexposure from COMERCI in the amount of Ps. 1,030 created an unsecured loanmaturing in March 2009. Such exposure represents 0.18% of Banorte’s totalassets, 0.4% of the overall loan portfolio, and 2.8% of the stockholders’equity reported by December 31, 2008. COMERCI never revealed itsderivative position that could lead it to the current situation when the loanwas originated nor during the periodic revisions. Banorte is waiting for COMERCI’srequest to file for bankruptcy to be resolved in order to start therestructuring process and negotiate the partial or total recovery of the loan.

 

As of December 31, 2008, Management has createdsufficient loan reserves according to the corresponding methodology.

 

**h. Credit card payment campaign**

 

Given the liquidity problems some customers arehaving in the current difficult economic situation, as reflected in theimpairment of credit card loan asset quality, Banorte decided to take a seriesof measures to help its customers face these difficult times. During 2008, amassive campaign was launched to offer an option to customers who wanted todefer their debt repayment and improve their payment profile, under which thecustomer’s debt was frozen for the agreed term and amortized in fixed payments.As of December 31, 2008, the total amount of the loans under this campaignwas Ps. 703.

 

**3 – BASIS OF PRESENTATION**

 

**Monetary unit of the financial statements**

 

Thefinancial statements and notes as of December 31, 2008 and for the yearthen ended include balances and transactions in Mexican pesos of a differentpurchasing power. The financial statements and notes as of December 31,2007 and for the year then ended include balances and transactions in Mexicanpesos of purchasing power of December 31, 2007.

 

**Consolidation of financial statements**

 

Theaccompanying consolidated financial statements include those of the FinancialGroup and its subsidiaries mentioned below. All significant intercompanybalances and transactions have been eliminated in consolidation.

 

Asof December 31, 2008 and 2007, the Financial Group’s consolidatedsubsidiaries and its ownership percentage are as follows:

 
| Banco Mercantil del Norte, S.A. and subsidiaries |   | 97.06 | % |
|--------------------------------------------------|--------|-------|---|
| Casa de Bolsa Banorte, S.A. de C.V.              |   | 99.99 | % |
| Arrendadora y Factor Banorte, S.A. de C.V.       |   | 99.99 | % |
| Almacenadora Banorte, S.A. de C.V.               |   | 99.99 | % |
| Créditos Pronegocio, S.A. de C.V.           |   | 99.99 | % |

 

**Consolidation of financial statements of Banorte USA, Corporation andsubsidiaries (indirect foreign subsidiary)**

 

Inorder to consolidate the financial statements of Banorte USA, they are firstadjusted in the recording currency (U.S. dollar) to conform to the accountingcriteria established by the Commission. The financial statements are thenconverted to Mexican pesos according to the following methodology:

 

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As of 2008, foreignoperations whose recording and functional currency are one and the same converttheir financial statements using the following exchange rates: a) year-end ratefor assets and liabilities, b) historical rate for stockholders’ equity, and c)weighted average rate of the period for income, costs and expenses. Up until2007, conforming to theaccounting criteria established by the Commission included recording the inflation effects ofthe foreign country and then converting them at the year-end exchange rate forall assets, liabilities income, costs and expenses, and the historical exchangerate was used for paid-in capital. In 2008, 2007 and 2006 the conversioneffects are presented in stockholders’ equity.

 

**Comprehensive income**

 

Thisis the change in stockholders’ equity during the year, for concepts other thandistributions and activity in contributed common stock, and is comprised of thenet income of the year, plus other comprehensive income (loss) items of thesame period, which are presented directly in stockholders’ equity withoutaffecting the consolidated statements of income, in accordance with theaccounting practices established by the Commission. In 2008, 2007 and 2006,comprehensive income includes the net income of the year, the result fromvaluation of available for sale securities, the unrealized gain or loss onvaluation from cash flow hedge instruments, and the conversion effects offoreign operations.

 

**4 –SIGNIFICANT ACCOUNTING POLICIES**

 

Thesignificant accounting policies of the Financial Group are in conformity withpractices prescribed by the Commission through issued accounting standards andother applicable laws,  which requireManagement to make certain estimates and use certain assumptions to determinethe valuation of certain items included in the consolidated financialstatements and make the required disclosures therein. Even though they maydiffer in their final effect, Management considers the estimates andassumptions were adequate under the current circumstances.

 

Pursuantto accounting Circular A-1, “Basic Scheme of the Set of Accounting CriteriaApplicable to Banking Institutions”, prescribed by the Commission, theinstitutions’ accounting will adhere to the Financial Reporting Standards(NIF), defined by the Mexican Board for Research and Development of FinancialReporting Standards (CINIF), except when the Commission deems it necessary toapply a specific accounting standard or Circular, considering the fact that theinstitutions perform specialized operations.

 

**Changes in accounting principles**

 

OnSeptember 1, 2008, the Commission issued a resolution that modifies the “GeneralProvisions Applicable to Banking Institutions” thereby replacing accountingCircular C-1, “Recording and Cancellation of Financial Assets”, and C-2, “SecuritizationOperations”, and adding accounting Circular C-5 “Consolidation of SpecialPurpose Entities.” These provisions will become effective as of January 1,2009, except for C-1, which according to the following paragraph, should beapplied as of October 14, 2008.

 

Moreoveron October 13, 2008, the Commission issued another resolution thatmodifies the “General Provisions Applicable to Banking Institutions” therebyreplacing accounting Circular B-3, “Repurchase or Resale Agreements”, B-4, “SecuritiesLoans”, and C-1, “Recording and Cancellation of Financial Assets,” as well asCircular D-1, “Balance Sheet”, D-2, “Income Statements”, and D-4, “Statement ofChanges in the Financial Position.” This resolution became effective as of October 14,2008, for which Banorte certified that it had the necessary systems toimplement the aforementioned accounting criteria. If it hadn’t, been able to itwould have had to use the criteria in effect until this Resolution becameeffective. As Banorte certified the above, it applied these criteria as of October 1,2008. The application of Circular B-3 was made “prospectively” pursuant to NIFB-1, “Accounting Changes and Corrections of Errors”, and therefore transactionspreviously recorded were not reevaluated.

 

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Additionally,on October 16 and November 10, 2008, by means of official documents100-035/2008 and 100-042/2008, respectively, the Commission authorized Banorteto transfer the investment in securities it held in the category of “Tradingsecurities” to the category of “Available for sale securities” or “Securitiesheld to maturity”, at the last book value recorded in the balance sheet at the timeof the reclassification without reversing the valuation recorded in income onthe transfer date. Furthermore, it enabled Banorte to transfer debt instrumentsfrom “Available for sale securities” to “Securities held to maturity” at thelast book value recorded in the balance sheet at the time of thereclassification without reversing the valuation recorded in stockholders’equity at the transfer date, which will be amortized in the year’s earningsbased on the security’s remaining life. These provisions were applied equallyto securities to receive in repurchase agreement operations. The Commissionallowed this accounting criteria to be applied only once on the value date of October 1,2008 and during the last quarter of 2008.

 

Giventhe above, during October 2008 Banorte reclassified from “Tradingsecurities” to “Securities held to maturity” a total of 6,035,947,400securities with an accounting value of Ps. 12,803 on the reclassification date.Additionally, it reclassified from “Available for sale securities” to “Securitiesheld to maturity” a total of 560,523,193 instruments with an accounting valueof USD 553 million and EUR 20 million.

 

Theaforementioned reclassifications were driven by the value loss in tradingsecurities when stated at fair value, caused by the volatility and uncertaintyof the financial markets during the last quarter of 2008. According to theanalyses made by Management as of December 31, 2008, the securities heldto maturity position has not shown any indication of permanent impairment.

 

Ifthe Financial Group had not made this reclassification, as of October 31,2008 it would have recorded a loss in the year’s earnings equivalent to Ps. 20and Ps. 710 in stockholders’ equity, for “Trading securities” and “Availablefor sale securities”, respectively.

 

Theprinciple changes in the accounting policies that apply to the Financial Groupare explained below:

 

·                  Repurchase or resale transactions pursuant toCircular B-3, “Repurchase or Resale Agreements”, are recorded according to theeconomic substance of the transaction, which is financing with collateral, bywhich the purchaser gives cash as financing in exchange for financial assets asguarantee in case of non-compliance. The financial assets pledged as collateralare still recorded in the balance sheet as it retains the risks, benefits andcontrol over them.

 

Onthe repurchasing agreement operation contract date, the cash income or outlayshould be recorded, or a liquidating account as well as receivable or payableaccount at its fair value, initially at the agreed price, which represents theright or the obligation of restoring the cash to the counterparty.

 

·                  Circular C-1, “Recording and Cancellation ofFinancial Assets”, states that in order for an entity to cancel a financialasset, it must transfer all the contract rights to receive the cash flows fromthe financial asset or retain the contract rights to receive the cash flowsfrom the financial asset and, at the same time, assume the contract obligationof paying such cash flows to a third party who meets certain requirements.Moreover, the substantial transfer of risks and benefits is considered a prerequisitefor cancelling an asset as a sale. This modification impacts the accountingrecording of repurchase agreements and securities loans, as well assecuritization transactions as mentioned below.

 

·                  Up until 2007 securitization transactionswere not reported in the balance sheet, as the transferred assets met therequirements of a sale and, consequently, the transferred asset, the liabilitycorresponding to issues made and the effects in earnings based on this Circularwere not recorded. As of October 14, 2008, securitization operations mustmeet the requirements established in accounting Circular C-1 to be consideredas a sale. Otherwise, the assets, debt issues made on the same and the effectson earning based on this Circular should remain in the balance sheet. On theother hand, the prerequisite of “control” is established in order toconsolidate the specific purpose entities (e.g. securitization trusts),regardless of the equity holding percentage. Therefore, unless it is proventhat the special purpose entity is not controlled by the asset “assigning”entity, it must be consolidated.

 

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Note36 describes the effects that would have been recorded if the new accountingCirculars C-1, C-2 and C-5 had been applied retrospectively.

 

Thefollowing are some of the principal changes derived from the new NIF’s andinterpretations (INIF’s) issued or modified by CINIF that went into effect asof January 1, 2008:

 

·                  NIF B-10, “Effects of Inflation”, considerstwo economic environments: a) inflationary; when the cumulative inflation ofthe three previous annual periods is 26% or more, in which case the inflationeffects must be recognized; b) non-inflationary; when in the same periodcumulative inflation is less than 26%; in this case the effects of inflationmay not be recorded in the financial statements. Furthermore, it eliminates thereplacement cost valuation and specific indexing methods and requires that theequity monetary position and the result of holding non-monetary assets holding(RETANM) be reclassified to retained earnings, except the RETANM identified as unrealizedat the date this standard becomes effective, which will be kept in stockholders’equity to be applied to the earnings of the year when such assets are realized.

 

TheFinancial Group reclassified Ps. 6,380 to retained earnings from prior years, whichcorresponds to the cancellation of the initial balance of the “Insufficiency inRestated Stockholders’ Equity”.

 

Thecumulative inflation over the previous three years was 11.26%. Therefore, theMexican economy qualifies as non-inflationary. As of January 1, 2008, theFinancial Group discontinued recording the inflation effects in the financialstatements. However, assets, liabilities and stockholders’ equity of December 31,2008 and 2007 include the restatement effects recorded up until December 31,2007.

 

·                  NIF B-15, “Conversion of Foreign Currencies”,eliminates the classifications of integrated foreign operation and foreignentity as it incorporates the concepts of currency of recording, functional andreporting currencies. It sets forth the procedures for converting financialinformation of foreign operations: i) from the recording currency to thefunctional currency; and ii) from the functional to the reporting currency.

 

·                  NIF D-3, “Employee Benefits”, incorporatescurrent and deferred PTU as part of its scope and establishes that deferred PTUshould be determined with the same asset and liability methodology as NIF D-4, “IncomeTaxes.” It includes the concept of career salary, and the amortization periodof most of the items is reduced to the lower of the remaining labor life orfive years, as follows:

 

· The initial balance of the severance andretirement benefits liability transition

· The initial balance of previous services andplan modifications.

· The initial balance of the actuarial gainsand losses of severance benefits is amortized in 2008 income statements.

· The initial balance of the actuarial gainsand losses of severance benefits is amortized in five years (net transitionliability) with the option to amortize it in the 2008 income statement.

 

·                  NIF D-4, “Income Taxes”, eliminates the term “permanentdifference” and incorporates some definitions. It also requires that the lineitem called “Initial Cumulative Effect of Deferred Income Taxes” bereclassified to retained earnings, unless it is identified with any items ofother comprehensive income that have not yet been applied to earnings.

 

·                  INIF 5, “Recording the AdditionalCompensation Agreed at the Beginning of the Derivative Financial Instrument toAdjust to its Fair Value”, establishes an additional compensation agreed at thebeginning of the derived financial instrument equivalent to its fair value and,therefore, should be part of the instrument’s initial fair value instead ofbeing subject to amortization as per Bulletin C-10.

 

·                  INIF 8, “Effects of the Business Flat Tax”,establishes that the Business Flat Tax (IETU) should be considered as a tax onprofit and provides the accounting guidelines to record it as a deferred taxwhen it is expected to be greater than the ISR (income tax) of the same period.To date the Financial Group has not incurred IETU.

 

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**Retrospectiveapplication of the changes in accounting criteria**

 

As a result of theaccounting changes in 2007, the 2006 financial statements reflect the effect ofsuch changes retrospectively in order for them to be comparative with the 2008and 2007 financial statements. The deferral of income for fees obtained wasperformed beginning with loans issued in 2005.

 

The following accountshave been adjusted retrospectively as a result of the changes noted abovedisclosing the previously presented balances, the adjusted balances and thevariance between the two.

 

**CONSOLIDATED BALANCE SHEETS**

 
| **ASSETS**                                            | ** ** | **2006********As originally  presented** | ** **  | **2006********As adjusted** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|-------------|-----------------------------|------------|--------------|------------|
| **CASH AND  CASH EQUIVALENTS**                        | ** ** | **Ps.**                                  | **45,054**  | ** **                  | **Ps.**    | **45,054**   | ** ** | **Ps.** | **—** | ** ** |
| **INVESTMENTS  IN SECURITIES**                        | ** ** | **26,646**                               | ** **  | **29,441**                  | ** ** | **2,795**    | ** ** |
| **SECURITIES  AND DERIVATIVE FINANCIAL INSTRUMENTS:** | ** ** | **46**                                   | ** **  | **2,194**                   | ** ** | **2,148**    | ** ** |
| **LOAN PORTFOLIO**                                    | ** ** | **149,499**                              | ** **  | **147,104**                 | ** ** | **(2,395**   | **)**      |
| (Less) Allowance for loan losses                      | ** ** | **(3,667**                               | **)**       | **(3,140**                  | **)**      | **(527**     | **)**      |
| **LOAN PORTFOLIO, net**                               | ** ** | **145,832**                              | ** **  | **143,964**                 | ** ** | **(1,868**   | **)**      |
| **ACQUIRED LOAN PORTFOLIOS**                          | ** ** | **3,755**                                | ** **  | **4,617**                   | ** ** | **862**      | ** ** |
| **TOTAL LOAN PORTFOLIO, net**                         | ** ** | **149,587**                              | ** **  | **148,581**                 | ** ** | **(1,006**   | **)**      |
| **OTHER ACCOUNTS RECEIVABLE, net**                    | ** ** | **5,853**                                | ** **  | **8,249**                   | ** ** | **2,396**    | ** ** |
| **FORECLOSED ASSETS, net**                            | ** ** | **328**                                  | ** **  | **393**                     | ** ** | **65**       | ** ** |
| **PROPERTY, FURNITURE AND  FIXTURES, net**            | ** ** | **6,899**                                | ** **  | **6,899**                   | ** ** | **—**   | ** ** |
| **PERMANENT STOCK INVESTMENTS**                       | ** ** | **3,284**                                | ** **  | **2,544**                   | ** ** | **(740**     | **)**      |
| **DEFERRED TAXES, net**                               | ** ** | **—**                               | ** **  | **—**                  | ** ** | **—**   | ** ** |
| **OTHER ASSETS**                                      | ** ** | **5,649**                                | ** **  | **7,635**                   | ** ** | **1,986**    | ** ** |
| **TOTAL ASSETS**                                      | ** ** | **Ps.**                                  | **243,346** | ** **                  | **Ps.**    | **250,990**  | ** ** | **Ps.** | **7,644** | ** ** |

 
| **LIABILITIES**                                      | ** ** | **2006********As originally presented** | ** **  | **2006********As adjusted** | ** ** | **Variance** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|-------------|-----------------------------|------------|--------------|------------|
| **DEPOSITS**                                         | ** ** | **Ps.**                                 | **175,980** | ** **                  | **Ps.**    | **175,860**  | ** ** | **Ps.** | **(120** | **)** |
| **BANK AND  OTHER LOANS**                            | ** ** | **17,490**                              | ** **  | **17,490**                  | ** ** | **—**   | ** ** |
| **OVERNIGHT  SECURITIES**                            | ** ** | **—**                              | ** **  | **1,810**                   | ** ** | **1,810**    | ** ** |
| **SECURITIES  AND DERIVATIVE FINANCIAL INSTRUMENTS** | ** ** | **246**                                 | ** **  | **3,933**                   | ** ** | **3,687**    | ** ** |
| **OTHER  PAYABLES**                                  | ** ** | **9,058**                               | ** **  | **11,145**                  | ** ** | **2,087**    | ** ** |
| **SUBORDINATED  DEBENTURES**                         | ** ** | **11,799**                              | ** **  | **11,761**                  | ** ** | **(38**      | **)**      |
| **DEFERRED TAXES, net**                              | ** ** | **149**                                 | ** **  | **338**                     | ** ** | **189**      | ** ** |
| **DEFERRED CREDITS AND ADVANCED  COLLECTIONS**       | ** ** | **74**                                  | ** **  | **627**                     | ** ** | **553**      | ** ** |
| **TOTAL LIABILITIES**                                | ** ** | **214,796**                             | ** **  | **222,964**                 | ** ** | **8,168**    | ** ** |
|                                                 | ** ** | ** **                              | ** **  | ** **                  | ** ** | ** **   | ** ** |
| **STOCKHOLDERS’ EQUITY**                        | ** ** | ** **                              | ** **  | ** **                  | ** ** | ** **   | ** ** |
| **PAID-IN-CAPITAL**                                  | ** ** | **13,883**                              | ** **  | **13,882**                  | ** ** | **(1**       | **)**      |
| **OTHER CAPITAL**                                    | ** ** | **13,206**                              | ** **  | **12,698**                  | ** ** | **(508**     | **)**      |
| NET INCOME                                           |       | 6,185                                   |        | 6,255                       |       | (70          | )          |
| **MINORITY INTEREST IN  STOCKHOLDERS’ EQUITY**  | ** ** | **1,461**                               | ** **  | **1,446**                   | ** ** | **(15**      | **)**      |
| **TOTAL STOCKHOLDERS’ EQUITY**                  | ** ** | **28,550**                              | ** **  | **28,026**                  | ** ** | **(524**     | **)**      |
| **TOTAL LIABILITIES AND STOCKHOLDERS’  EQUITY** | ** ** | **Ps.**                                 | **243,346** | ** **                  | **Ps.**    | **250,990**  | ** ** | **Ps.** | **7,644** | ** ** |

 

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| **CONSOLIDATED STATEMENTS OF  INCOME**                                         | ** ** | **2006********As originally  presented** | ** ** | **2006********As adjusted** | ** ** | **Variance** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|--------------|------------|
| Interest income                                                                | ** ** | **Ps.**                                  | **36,828** | ** **                  | **Ps.**    | **36,120**   | ** ** | **Ps.** | **(708** | **)** |
| Interest expense                                                               | ** ** | **(21,409**                              | **)**      | **(21,256**                 | **)**      | **153**      | ** ** |
| Monetary position loss, net                                                    | ** ** | **(349**                                 | **)**      | **(350**                    | **)**      | **(1**       | **)**      |
| **FINANCIAL  MARGIN**                                                          | ** ** | **15,070**                               | ** ** | **14,514**                  | ** ** | **(556**     | **)**      |
| Allowance for loan losses                                                      | ** ** | **(1,588**                               | **)**      | **(1,530**                  | **)**      | **58**       | ** ** |
| **FINANCIAL  MARGIN AFTER PROVISION FOR LOAN LOSSES**                          | ** ** | **13,482**                               | ** ** | **12,984**                  | ** ** | **(498**     | **)**      |
| Commission and fee income                                                      | ** ** | **7,876**                                | ** ** | **6,324**                   | ** ** | **(1,552**   | **)**      |
| Commission and fee expense                                                     | ** ** | **(1,586**                               | **)**      | **(920**                    | **)**      | **666**      | ** ** |
| Brokerage revenues                                                             | ** ** | **1,781**                                | ** ** | **1,781**                   | ** ** | **—**   | ** ** |
| **NET  OPERATING REVENUE**                                                     | ** ** | **21,553**                               | ** ** | **20,169**                  | ** ** | **(1,384**   | **)**      |
| Administrative and  promotional expenses                                       | ** ** | **(12,931**                              | **)**      | **(13,157**                 | **)**      | **(226**     | **)**      |
| **OPERATING  INCOME**                                                          | ** ** | **8,622**                                | ** ** | **7,012**                   | ** ** | **(1,610**   | **)**      |
| Other income                                                                   | ** ** | **1,127**                                | ** ** | **3,192**                   | ** ** | **2,065**    | ** ** |
| Other expenses                                                                 | ** ** | **(919**                                 | **)**      | **(905**                    | **)**      | **14**       | ** ** |
| **INCOME  TAXES AND EMPLOYEE PROFIT SHARING**                                  | ** ** | **8,830**                                | ** ** | **9,299**                   | ** ** | **469**      | ** ** |
| Current income taxes and  employee profit sharing                              | ** ** | **(3,034**                               | **)**      | **(3,098**                  | **)**      | **(64**      | **)**      |
| Deferred income taxes and  employee profit sharing                             | ** ** | **(221**                                 | **)**      | **(355**                    | **)**      | **(134**     | **)**      |
| **INCOME  BEFORE EQUITY IN EARNINGS OF SUBSIDIARIES AND ASSOCIATED COMPANIES** | ** ** | **5,575**                                | ** ** | **5,846**                   | ** ** | **271**      | ** ** |
| Equity in earnings of  subsidiaries and associated companies, net              | ** ** | **827**                                  | ** ** | **628**                     | ** ** | **(199**     | **)**      |
| **NET  EARNINGS BEFORE MINORITY INTEREST**                                     | ** ** | **6,402**                                | ** ** | **6,474**                   | ** ** | **72**       | ** ** |
| Minority interest                                                              | ** ** | **(217**                                 | **)**      | **(219**                    | **)**      | **(2**       | **)**      |
| **NET INCOME**                                                                 | ** ** | **Ps.**                                  | **6,185**  | ** **                  | **Ps.**    | **6,255**    | ** ** | **Ps.** | **70** | ** ** |

 

The significantaccounting policies followed by the Financial Group are described below:

 

**Recognitionof the effects of inflation in financial information**

 

As mentioned above, as ofJanuary 1, 2008, the Financial Group discontinued recording the effects ofinflation. Up until December 31, 2007, such recording resulted mainly ininflationary gains or losses on non-monetary and monetary items, which areshown in the financial statements under “Insufficiency in Restated Stockholders’Equity”, “Effect of Holding Non-Monetary Assets” and “Monetary Position Gainsand Losses”.

 

The inflation rates forthe periods ending on December 31, 2008 and 2007 were 6.39% and 3.80%,respectively.

 

**Cash andcash equivalents**

 

Cash and cash equivalentsare stated at nominal value plus accrued yields, which are recognized inresults as they accrue. Funds available in foreign currency are valued at theexchange rate published by Banco de México at the balance sheet date.

 

**Tradingsecurities**

 

Trading securitiesrepresent debt instruments and equity securities owned by the Financial Group,from which it intends to obtain profits by actively trading in the market. Theyare stated at fair value, which is determined by the price vendor contracted bythe Financial Group, in conformity with the following guidelines:

 

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*Debt securities*

 

·                  Applying market values

·                  If the market value cannot be obtainedfrom a reliable source or it is not representative, the market prices ofsimilar instruments or prices calculated based on formal valuation techniqueswill be used.

·                  When the fair value of the securitiescannot be determined, these will be stated at the last fair value determined orat the acquisition cost, plus accrued interest.

 

*Equity securities*

 

·                  Applying market values

·                  If the market value cannot be obtainedfrom a reliable source or it is not representative, the fair value will bedetermined based on the equity method described in Bulletin B-8, “Consolidatedand Combined Financial Statements and Permanent Stock Investments”, of MFRS or,in rare cases, based on the acquisition cost restated by a factor derived forthe value of the UDI.

·                  When the fair value of the securitiescannot be determined, these will be stated at the last fair value determined orat the acquisition cost, which should be adjusted to it net trading value.

 

The increase ordecrease in the fair value of these securities is recognized in the results ofoperations.

 

**Availablefor sale securities**

 

Available for salesecurities are debt or equity securities that are classified neither as tradingnor held to maturity. They are valued in the same way as trading securities,but with unrealized gains and losses recognized in stockholders’ equity.

 

**Held tomaturity securities**

 

Held to maturitysecurities consist of debt instruments whose payments can be determined andwith known maturities exceeding 90 days, which are acquired with the intent tohold them to maturity. They are initially recorded at acquisition cost and aresubsequently carried at amortized cost.

 

If sufficient evidenceexists that a security represents a high credit risk and/or its estimated valuedecreases, the book value could be modified based on the net realizable valuedetermined by using formal valuation techniques, with a charge to resultsrecorded in the year of the write-down.

 

Transfers from this itemto “Available for sale securities” can only be made providing the relatedinstruments will not be held to maturity.

 

**Customerrepurchase agreements**

 

Thisis a transaction by which the purchaser acquires ownership of credit titles fora sum of money and is obliged to transfer titles of the same kind to the sellerof the securities within the agreed term and in exchange for the same priceplus a premium. Thepurchaser keeps the premium unless otherwise agreed.

 

Until September 30,2008, when the Financial Group acted as the seller, the repurchase agreementtransactions were recorded net and represented the difference between the fairvalue of the securities given under the repurchase agreement (asset position),which represented the securities to receive in the operation pursuant to thetrading securities valuation criteria, and the current value of the maturityprice (liability position). 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), whichare valued according to the method discussed in the preceding paragraph.

 

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Since October 1,2008, repurchase transactions are recorded as follows:

 

Repurchase transactionsare recorded according to their economic substance, which is financing withcollateral, by which the Financial Group, acting as the purchaser, gives cashas financing in exchange for financial assets as guarantee in case ofnon-compliance.

 

On the repurchaseagreement transaction contract date, the Financial Group acting as the seller,records the cash income or outlay, or a liquidating debtor account as well asreceivable or payable account at its fair value, initially at the agreed price,which represents the obligation of restoring the cash to the purchaser. Thepayable account will be valued subsequently throughout the life of the repurchaseagreement at its fair value by recognizing the repurchase agreement interest inthe earnings of the year according to the effective interest method.

 

As to the collateral, theFinancial Group classifies the financial asset in its balance sheet asrestricted, valuing it according to the criteria mentioned above in this notethrough the repurchase agreement’s maturity.

 

The Financial Group,acting as the purchaser, on the repurchase transaction contract date cash andcash equivalents are recorded or a creditor liquidating account, recording anaccount receivable at its fair value, initially at the agreed price, whichrepresents the right to recover the cash that was given. The receivable accountwill be valued subsequently throughout the life of the repurchase agreement atits fair value by recognizing the repurchase agreement interest in the earningsof the year according to the effective interest method.

 

As to the collateralreceived, the Financial Group records it in memorandum accounts through therepurchase agreement’s maturity, following the guidelines of Circular B-9, “AssetCustody and Management”, issued by the Commission.

 

**Derivativefinancial instruments**

 

The Financial Group isauthorized to perform two types of transactions involving derivative financialinstruments:

 

Transactions to hedge theFinancial Group’s exposed position: Such transactions involve purchasing or sellingderivative financial instruments to mitigate the risk resulting from a giventransaction or group thereof.

 

Transactions entered intofor trading purposes: The Financial Group enters into such transactions as a marketparticipant for reasons other than to hedge its exposed position.

 

Transactions withderivative financial instruments are presented in assets or liabilities, asapplicable, under the heading “Securities and derivative financial instruments”.

 

When entering intotransactions involving derivative financial instruments, the Financial Group’sinternal policies and procedures require an assessment and risk exposureregarding the financial institution acting as the counterparty to thetransaction and that it be authorized by the Banco de México to enter into thistype of transaction. Before entering into these types of transactions withcorporate customers, a precautionary credit line must be granted by theNational Credit Committee or liquid guarantees given through a securitizedcollateral contract. Transactions entered into with medium and small sizedcompanies and individuals provide for liquid guarantees established insecuritized collateral contracts.

 

The recognition orcancellation of assets and/or liabilities derived from transactions involvingderivative financial instruments occurs when these transactions are enteredinto to, regardless of the respective settlement or delivery date of the goods.

 

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*Forward and futures contracts*

 

Forward and futures contracts for trading purposesestablish an obligation to buy or sell an underlying at a future date in thequantity, quality and prices pre-established in the contract. Futures contractsare recorded initially by the Financial Group in the balance sheet as an assetand a liability at fair value, which represents the price agreed in thecontract in order to acknowledge the right and obligation of receivingand/delivering the underlying, as well as the right and obligation of receivingand/or delivering the cash equivalent to the underlying, object of thecontract.

 

For the purpose of financial statement presentation,for derivative financial instruments that incorporate both rights andobligations, such as futures and forwards, the asset and liability positionsare netted individually. If the net is a debit balance, the difference ispresented in the asset under “Derivative financial instruments”. If it is acredit balance, it is presented in the liability of the same line item.

 

The balance of these transactions entered into fortrading purposes represents the difference between the fair value of thecontract and the established “forward” price.

 

*Option contracts*

 

Options are contracts that, by paying a premium, grantthe right but not the obligation to buy or sell a specific number of underlyinginstruments at a given price within an established term.

 

Options are divided into: buy options (calls) and selloptions (puts). Both can be used as trading or hedging instruments.

 

Options can be executed on a specific date or within acertain period of time. The price is agreed in the option and may be exercisedat the discretion of the buyer. The instrument to which the price is linked isthe reference or underlying value.

 

The premium is the price the holder pays the issuerfor the option rights.

 

The holder of a call/put option has the right, but notthe obligation, to purchase/sell from/to the issuer a certain number ofunderlying instruments at a fixed price (transaction price) within a certainterm.

 

The Financial Group records the option premium as anasset or liability at the transaction date. The fluctuations of the option’spremium market valuation are recorded in the income statement under “Trading”thereby affecting the corresponding account’s balance.

 

Option contracts for trading purposes are recorded inmemorandum accounts at their current price, multiplied by the number ofsecurities, and distinguishing the options that are negotiable in the stockmarket from those that are not in order to control risk exposure.

 

All valuation results recorded before the option isexercised or expires are unrealized and not susceptible to capitalization ordistribution among their shareholders until they are realized in cash.

 

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*Swaps*

 

These are two-party contracts by which a bilateralobligation is established to exchange a series of cash flows for a certainperiod of time on pre-set dates at a nominal or reference value.

 

The Financial Group records the asset and liabilityportion for the rights and obligations agreed upon, valuing the future flows toreceive or give at the current value according to the forecast of futureapplicable rates, discounting the market rate on the valuation date with curvesprovided by the price provider and verified by the market risk area.

 

The balance of thesetransactions entered into for trading purposes represents the differencebetween the fair value of the asset and liability positions. Balances arepresented as assets or liabilities under the “Derivative financial instruments”heading.

 

Trading transactions arevalued at market price, and the result of each valuation is recorded in theyear’s results.

 

Management’s policy withregards to hedge contracts is to protect the Financial Group’s individualbalances and stockholders’ equity by anticipating interest rate and exchangerate fluctuations.

 

For hedging derivativefinancial instruments, the Financial Group applies in all cases the cash flowhedging method and the accumulated compensation method to measureeffectiveness. Both methods are approved by current accounting standards. Theresults of ineffective hedging are recorded in the year’s results.

 

The Financial Groupdocuments hedging transactions from the moment the derivative instruments aredesignated as hedging transactions. A file is drawn up for each transaction inorder to have documented proof as per Bulletin C-10 paragraph 51.

 

Accordingly, the FinancialGroup documents its hedging transactions based on the following guidelines:

 

·                  A fair value hedging transaction is recorded as follows:

 

a.               The gain or loss from valuing the hedginginstrument at its fair value is recognized immediately in the period’s incomestatement; and

b.              The gain or loss from valuing the hedginginstrument’s primary position attributable to the hedged risk should berestated to such position’s book value and recognized immediately in the period’sincome statement.

 

·                  A cash flow hedging transaction is recorded as follows:

 

a.               The effective portion of the hedginginstrument’s gain or loss is recorded as a component of other comprehensiveincome in stockholders’ equity using an asset or liability account called “securitiesand derivative financial instruments” as a counter-account. The ineffectiveportion of the gain or loss on the hedging instrument is recognized in currentearnings.

b.              The stockholders’ equity balance that ispart of other comprehensive income associated with the primary position isrestated at the lower value (absolute value) of:

I.                 The accumulated gain or loss on thehedging instrument; and

II.             The accumulated change in the primaryposition cash flow fair value from the beginning of the hedging transaction.

 

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Valuation methods

 

As the derivativeproducts transacted are considered conventional (“Plain Vanilla”), the standardvaluation models contained in the derivative transaction systems and the FinancialGroup’s risk management are used.

 

All valuation methodsthat the Financial Group uses result in the fair value of transactions and areperiodically adjusted. Furthermore, they are audited by internal and externalauditors, as well as by the financial authorities.

 

Valuation of thepositions is done on a daily basis and a price provider generates the inputused by the transaction and risk management systems. The price providergenerates these valuations based on daily market conditions.

 

Operating strategies

 

Trading

 

The Financial Groupparticipates in the derivative instruments market for trading purposes, and therisk exposures generated are computed within its overall VaR limit.

 

The trading strategy issubmitted on a weekly basis to the Financial Group’s Treasury Committee, whichanalyzes the current risks and makes a decision.

 

Hedging

 

The hedging strategy isdetermined annually and each time the market conditions so require. Hedgingstrategies are submitted to the Risk Policies Committee.

 

Hedging transactionscomply with the applicable standard set forth in Circular C-10 of the CNBV.This implies, among other things, that the hedge’s effectiveness is evaluatedboth prior to its arrangement (prospective) and thereafter (retrospective).These tests are performed on a monthly basis.

 

**Loanportfolio**

 

The loan portfoliorepresents the balance of amounts effectively granted to borrowers plusuncollected accrued interest minus prepaid interest received. The allowance forloan losses from credit risks is presented as a reduction of the loanportfolio.

 

The unpaid loan balanceis classified in the past-due portfolio as follows:

 

·                  Single payment loans upon the maturity ofprincipal and interest, 30 calendar days after maturity.

 

·                  Loans involving a single principalpayment at maturity, but with periodic interest payments, total principal andinterest payments 30 and 90 calendar days after maturity, respectively.

 

·                  Loans for which the payment of principaland interest is agreed based on partial periodic payments, 90 calendar daysafter the first payment is due.

 

·                  In the case of revolving loans, wheneverpayment is outstanding for two billing periods or 60 or more days have elapsedfollowing maturity.

 

·                  Overdrawn customer checking accounts areconsidered as part of the past-due portfolio when such situations arise.

 

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Interest is recognizedand accrued into income as it is earned. The accrual of interest income issuspended when loans are transferred to the past-due portfolio.

 

The fees charged for theinitial granting of loans will be recorded as a differed credit, which will beamortized as interest income, as per the straight line method during the loan’scontractual term.

 

Restructured past-dueloans are not considered in the current portfolio until evidence of sustainedpayment is obtained; this occurs when credit institutions receive three timelyconsecutive payments, or a payment is received for periods exceeding 60 days.

 

Renewed loans in whichthe borrower has not paid on time or when the accrued interest balance equalsleast 25% of the original loan amount are considered past-due until evidence ofsustained payment is obtained.

 

Accrued interest duringthe period in which the loan was included in the past-due portfolio isrecognized as income when collected.

 

**Allowance for loan losses**

 

*Application of new portfolioclassification provisions*

 

The loan portfolio isclassified according to the rules issued by the SHCP and the methodologyestablished by the Commission. Internal methodologies may be used providingthey are authorized by the Commission.

 

In the case of consumerand mortgage loans, the Financial Group applies the general provisionsapplicable to credit institutions in classifying the loan portfolio as issuedby the Commission on August 22, 2005 and December 2, 2008 and theinternal methodology authorized by the Commission for classifying commercialloans.

 

Such provisions alsoestablish general methodologies for the classification and calculation ofallowances for each type of loan, while also permitting credit institutions toclassify and calculate allowances based on internal methodologies, whenpreviously approved by the Commission.

 

As of June 2001, theFinancial Group has the Commission’s approval to apply its own methodology,called Internal Risk Classification (CIR Banorte) to commercial loans. CIRBanorte applies to commercial loans with outstanding balances equal to orgreater than 4 million UDIS or its equivalent in Mexican pesos. Loanclassification and reserve allowance are determined based on the rules setby the Commission. This methodology is explained later in this note.

 

The commercial loanportfolio classification procedure requires that credit institutions apply theestablished methodology (general or internal) based on quarterly informationfor the periods ending in March, June, September and December of eachyear, while also recording the allowances determined at the close of eachperiod in their financial statements. Furthermore, during the month followingeach quarterly close, financial institutions must apply the respectiveclassification to any loan at the close of the immediately preceding quarter,based on the outstanding balance in effect on the last day of theaforementioned months. The preventive estimates for loan risks that haveexceeded the amount required to rate the loan will be cancelled on the date ofthe following quarterly rating against the period earnings. Additionally, thepreviously written-off loan portfolio recoveries are applied against the endingbalance sheet.

 

Through its subsidiaryBanorte USA, the Financial Group acquired Inter National Bank (INB) in 2006 andcontinues to apply INB’s loan classification methodologies by adjusting theallowance for loan losses, derived from applying such methodologies.

 

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As of November 27,2008, the Commission issued Document 111-2/26121/2008, which renews for atwo-year period, as of December 1, 2008, the authorization for such internalloan classification methodology.

 

Commercial loans equal toor greater than 4 million UDIS or its equivalent in Mexican pesos areclassified according to the following criteria:

 

·                  Debtor’s credit quality

·                  The loans, in relation to the value of the guarantees or the value ofthe assets in trusts or in “structured” programs, as applicable.

 

The commercial loansegment includes loans granted to business groups and corporations, state andmunicipal governments and their decentralized agencies, as well as financing tocompanies of the financial services sector.

 

The Financial Groupapplied the internal risk classification methodology, CIR Banorte, authorizedby the Commission to rate the debtor, except in financing granted to state andmunicipal governments and their decentralized agencies, loans intended forinvestment projects with their own source of payment and financing granted totrustees that act under trusts and “structured” loan programs in which theaffected assets allow for an individual risk evaluation associated with thetype of loan, for which the Financial Group applied the procedure establishedby the Commission.

 

When evaluating a debtor’scredit quality with the CIR Banorte method, the following risks and paymentexperiences are classified 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. Positioning  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 risk factorsis analyzed using descriptive evaluation tables, the result of which indicatesthe borrower’s rating. This, in turn, is standardized with the risk degreesestablished by the Commission.

 
| **CIR Banorte** | ** ** | **Risk level  description**          | ** ** | **Commission********classification********equivalent** |
|-----------------|------------|--------------------------------------|------------|--------------------------------------------------------|
| 1               |       | Substantially  risk free             |       | A1                                                     |
| 2               |       | Below minimal  risk                  |       | A2                                                     |
| 3               |       | Minimal 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                                                      |

 

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For commercial loansunder 4 million UDIS or its equivalent in Mexican pesos, loans under 900thousand UDIS to state and municipal governments and their decentralizedagencies, mortgage loans and consumer loans, the Financial Group applied thegeneral provisions applicable to credit institutions for classifying the loanportfolio as issued by the Commission.

 

**Acquiredloan portfolios**

 

This balance isrepresented by the acquisition cost of the various loan asset packages acquiredby the Financial Group, which are subsequently valued by applying one of thethree following methods:

 

*Cost recovery method**–*Payments received are applied against theacquisition cost of the loan portfolio until the balance equals zero.Recoveries in excess of the acquisition cost are recognized in currentearnings.

 

*Interest method* - The result of multiplying the acquiredportfolio’s outstanding balance by the estimated yield is recorded in currentearnings. Differences between the Financial Group’s collection estimates andactual collections are reflected prospectively in the estimated yield.

 

*Cash basis method* - The amount resulting from multiplyingthe estimated yield times the amount actually collected is recorded in theincome statement, provided it is not greater than the amount obtained by theinterest method. The difference between the recorded amount and the amountcollected reduces the outstanding portfolio balance, once the entire initialinvestment has been amortized. Any subsequent recovery is recorded in theincome statement.

 

For its portfolios valuedusing the interest method, the Financial Company evaluates twice a year toverify if the cash flow estimate of its collection rights is consistent withactual recoveries and therefore considered to be effective. The FinancialCompany uses the cost recovery method on those collection rights in which theexpected cash flow estimate is not effective. The expected cash flow estimateis considered “highly effective” if the result of dividing the sum of the flowsactually collected by the sum of the expected cash flows is between 0.8 and1.25 when such effectiveness is evaluated.

 

**Otheraccounts receivable and payable**

 

The Financial Groupperforms a study to quantify the different future events that could affect theamount in accounts receivable over 90 days and thus determine their percentageof non-recoverability to calculate its allowance for doubtful accounts. Theremainder of the accounts receivable balances are reserved at 90 calendar daysfrom their initial recognition.

 

The balances of asset andliability settlement accounts represent transactions involving the sale andpurchase of currency and securities, which are recorded when entered into andsettled within 48 hours.

 

**Merchandiseinventory**

 

This is comprised mainlyof finished goods and prior to 2008 was restated at its replacement or marketcost, whichever is lower. In 2008 finished good are stated at the lower of costor their net realizable value.  The costof sales, recorded under “Other expenses”, is restated using the replacementcost at the time of the sale prior to 2008.

 

**Impairmentof the value of long-lived assets and their disposal**

 

The Financial Group hasestablished guidelines to identify and, if applicable, record losses derivedfrom the impairment or decrease in value of long-lived, tangible or intangibleassets, including goodwill.

 

**Foreclosedassets, net**

 

Foreclosed property orproperty 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 a judge upon foreclosure or, in the case of payments in kind, theprice agreed between the parties involved.

 

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If the book value of theloan exceeds that of the foreclosed property, the difference is recognized bycanceling the allowance for loan losses when such assets are awarded. If thecarrying value of the loan is lower than the value of the foreclosed property,the latter must be adjusted to match the loan’s carrying value.

 

The carrying value isonly modified when there is evidence that the net realizable value is lowerthan the recorded carrying value. Reductions in the carrying value of the loanare recorded in current earnings as they occur.

 

The provisions applicableto the valuation methodology for the allowance for loan losses mentioned abovedefine the valuation methodology for reserves related to either foreclosedproperty or those assets received as payment in kind, establishing thatadditional quarterly provisions must be created to recognize the potentialdecrease in value over time of property awarded under legal proceedings,out-of-court or received as payment in kind and the investments in securitiesreceived as foreclosed goods or payment in kind, based on the followingguidelines:

 

I. In the case ofcollection rights and real property, the provisions referred to by thepreceding paragraph must be treated as follows:

 

**Personal property reserves**

 
| **Time  elapsed as of award date or receipt********as payments 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                    | %          |

 

The amount of the reservesto be created will be the result of applying the reserve percentage determinedunder the preceding table to the value of collection rights or foreclosedproperty, received as payment in kind or awarded in a court proceeding.

 

II. Investments in securitiesmust be valued in accordance with the provisions of the Commission’s accountingCircular B-2, “Investments in Securities”, using annual audited financialstatements and monthly financial information of the investee.

 

Following the valuationof foreclosed assets or those received as payment in kind, the reservesresulting from applying the percentages established in the table of Section Iabove to the estimated value, must be created.

 

III. In the case of realproperty, provisions must be created as follows:

 

**Real property reserves**

 
| **Time  elapsed as of award date or receipt********as payments 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 thereserves to be created will be the result of applying the reserve percentagedetermined under the preceding table to the awarding value of the propertybased on the accounting criteria. Furthermore, when problems are identifiedregarding the realization of the value of the foreclosed property, theFinancial Group records additional reserves based on management’s bestestimates. On December 31, 2008 there are no reserves in addition to thosecreated by the percentage applied based on the accounting criteria that couldindicate realization problems on the values of the foreclosed properties.

 

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If appraisals subsequentto the foreclosure or payment in kind result in the recording of a decrease inthe value of the collection rights, securities, personal or real property, thereserve percentages contained in the preceding table can be applied to theadjusted value.

 

**Property,furniture and fixtures**

 

Property, furniture andfixtures are recorded at acquisition cost. The balances of acquisitions made upto December 31, 2007 are restated using factors derived from the value ofthe UDI of that date.

 

Depreciation iscalculated using the straight-line method based on the useful lives of theassets as estimated by independent appraisers.

 

**Permanentstock investments**

 

The Financial Grouprecognizes its investments in associated companies using the equity method,based on the book values shown in the most recent financial statements of suchentities.

 

**IncomeTaxes (“ISR”), Business Flat Tax (“IETU”) and Employee Statutory Profit Sharing(“PTU”)**

 

The provisions for ISR,IETU and PTU are recorded in the results of the year in which they areincurred. Deferred taxes are recognized if, based on financial projections theFinancial Group expects to incur ISR or IETU, and records the deferred tax itwill pay. Deferred taxes are calculated by applying the corresponding tax rateto the applicable temporary differences resulting from comparing the accountingand tax bases of assets and liabilities and including, if any, future benefitsfrom tax loss carryforwards and certain tax credits. Deferred tax assets arerecorded only when there is a high probability of recovery.

 

The net effect of theaforementioned items is presented in the consolidated balance sheet under the “Deferredtaxes, net” heading.

 

**Intangibleassets**

 

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 definite lives are amortized systematically over theperiod expected to receive benefits. The value of the intangible assets withindefinite lives is subject to annual impairment tests.

 

**Goodwill**

 

Goodwill represents theexcess of cost over the fair value of subsidiary shares, as of the date ofacquisition. At least once a year is subject to impairment tests following theprovisions of NIF C-15, “Impairment of long-life asset value and their disposal”.No impairment was detected as of December 31, 2008.

 

**Deposits**

 

Liabilities derived fromdeposits, including promissory notes, are recorded at their procurement orplacement cost plus accrued interest, determined according to the number ofdays elapsed at each monthly close and charged to results as incurred.

 

**Provisions**

 

Provisions are recognizedwhen the Financial Group has a current obligation that results from a pastevent and are likely to result in the use of economic resources and can bereasonably estimated.

 

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**Employeeretirement obligations**

 

According to MexicanFederal Labor Law, the Financial Group has obligations derived from severancepayments and seniority premiums payable to employees that cease to render theirservices under certain circumstances.

 

Defined benefit plans

 

The Financial Grouprecords a liability for seniority premiums and medical services afterretirement and severance payments for reasons other than restructuring, whichare recognized as costs over employee years of service and are calculated byindependent actuaries using the projected unit credit method at nominalinterest rates in 2008 and actual interest rates in 2007. Accordingly, theliability is being accrued which, at present value, will cover the obligationfrom benefits projected to the estimated retirement date of the Financial Group’scurrent employees, as well as the obligation related to retired personnel.

 

The Financial Groupapplies the provision of NIF D-3 related to the recognition of the liabilityfor severance payments at the end of the work relationship for reasons otherthan restructuring, which is recorded using the projected unit credit methodbased on calculations by independent actuaries.

 

Defined contribution plan

 

In January 2001 theFinancial Group provided a voluntary defined contribution pension plan toparticipating employees who were hired before such date. This pension plan isinvested in a diversified mutual fund, which is included in “Other assets”.

 

The employees who werehired before January 1, 2001 and decided to enroll voluntarily in thedefined contribution pension plan received a contribution from the FinancialGroup for prior services equivalent to the actuarial benefit accrued in theirprevious defined benefit plan that was cancelled. The initial contribution wasmade from the plan assets that had been established for the original definedbenefit plan and participants were immediately assigned 50% of such amount withthe remaining 50% to be assigned over 10 years.

 

The initial payment tothe defined contribution plan for past services was financed with fundsestablished originally for the defined benefit plan that was early extinguishedand recognized in accordance with the requirements of NIF D-3.

 

The labor obligationsderived from the defined contribution pension plan do not require an actuarialvaluation as established in NIF D-3, because the cost of this plan isequivalent to the Financial Group’s contributions made to the plan’sparticipants.

 

**Foreigncurrency transactions**

 

Foreign currencytransactions are recorded at the applicable exchange rate in effect at thetransaction 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. Exchangefluctuations are recorded in the results of operations.

 

**Interestfrom outstanding subordinated debentures**

 

Accrued interest fromoutstanding subordinated debentures is recognized as it is accrued andtranslated according to the exchange rate in effect at each monthly close.

 

**Transferof financial assets**

 

A transfer of financialassets in which the Financial Group surrenders control over those financialassets is accounted for as a sale, with the related effects subsequentlyrecognized in the financial statements. If a transfer of financial assets inexchange for cash or other consideration does not meet the criteria for a sale,the Financial Group accounts for the transfer as a secured borrowing.

 

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**Securitizations**

 

Through this type oftransaction, the Financial Group seeks to sell and transfer certain financialassets to a securitization vehicle, which in turn issues securities for sale topublic investors representing rights to the yields or proceeds derived from thesale of the transferred assets. The Financial Group as the transferor canreceive cash, securities or derivative financial instruments as payment.

 

However, if the FinancialGroup does not transfer ownership of the financial assets, i.e., if it retainsthe direct risk associated with such assets, the transaction is considered tobe a financing securitization, whereby the payment made to the transfer isguaranteed by assets for which the latter assumes the related risk.Accordingly, the Financial Group cannot derecognize such transferred assetsfrom its financial statements and accounts for the transfer as a securedborrowing with pledge of collateral.

 

**Share-basedpayments**

 

Banorte grants stockoptions to key officers who would like to acquire shares in the FinancialGroup. Banorte has established trusts to manage the plans and contributes thenecessary funds so that shares can be purchased directly from the market at theinitiation of each plan.

 

At the subsidiary level,Banorte reports the shares held by the trusts as available for sale securitiesand as of December 31, 2008 reclassifies such amounts in the FinancialGroup’s consolidation process with an effect of Ps. 63 in “Common stock” andPs. 392 in “Additional paid in capital”.

 

Banorte records its stockoption plans according to the guidelines of IFRS 2, “Share Based Payments”,which through 2008 is supplementally applied as there is no applicable standardin the Commission’s accounting criteria. According to the above and given thefeatures of Banorte’s share-based payment plans, the related compensationexpense is recorded at fair value as of the date the stock options are grantedand adjusted during the required service period established in the stock optionagreement.

 

The fair value of eachshare is estimated as of the date of grant using the Black-Scholes optionpricing model. The changes in the assumptions used may result in substantialdifferences in the fair value estimates. However, such assumptions are restated(updated) at the close of the reporting period.

 

As of December 31,2008, the market value of the shares was below the option price, andconsequently no compensation expense was recorded.

 

**5 - CASHAND CASH EQUIVALENTS**

 

As of December 31,2008 and 2007, this line item was composed as follows:

 
| ** **                          | ** ** | **2008** | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|----------|------------|------------|------------|
| Cash                                |       | Ps.      | 8,419      |       | Ps.        | 7,831 |   |
| Banks                               |       | 40,004   |       | 31,487     |       |
| Other  deposits and available funds |       | 5,979    |       | 2,292      |       |
|                                | ** ** | **Ps.**  | **54,402** | ** ** | **Ps.**    | **41,610** | ** ** |

 

On December 31,2008, the “Other” item includes Ps. 5,738 for funds due to be received in 24and 48 hours, and Ps. 25 in gold and silver coins. In 2007, it included Ps.1,456 for funds to be received in 24 and 48 hours, and Ps. 28 in gold andsilver coins.

 

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The “Banks” item isrepresented by cash in Mexican pesos and USD converted at the exchange rateissued by Banco de México at Ps. 13.8325 and Ps. 10.9157 for 2008 and 2007,respectively, and is made up as follows:

 
| ** **                                 | ** ** | **Mexican  pesos** | ** ** | **Denominated  in US  dollars** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|--------------------|------------|---------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2008**           | ** ** | **2007**                        | ** ** | **2008**   | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Call  money                                |       | Ps.                | 3,184      |                            | Ps.        | —     |       | Ps. | — |   | Ps. | 109 |   | Ps. | 3,184 |   | Ps. | 109 |   |
| Deposits  with foreign credit institutions |       | —             |       | —                          |       | 6,866      |       | 5,309 |   | 6,866 |   | 5,309 |   |
| Domestic  banks                            |       | 503                |       | 250                             |       | —     |       | — |   | 503 |   | 250 |   |
| Banco  de México                      |       | 29,405             |       | 25,782                          |       | 46         |       | 37 |   | 29,451 |   | 25,819 |   |
| ** **                                 | ** ** | **Ps.**            | **33,092** | ** **                      | **Ps.**    | **26,032** | ** ** | **Ps.** | **6,912** | ** ** | **Ps.** | **5,455** | ** ** | **Ps.** | **40,004** | ** ** | **Ps.** | **31,487** | ** ** |

 

As of December 31,2008 and 2007, the Financial Group had made monetary regulation deposits of Ps.26,394 and Ps. 25,782, respectively.

 

As of December 31,2008 and 2007, the total sum of restricted cash and cash equivalents is Ps.35,476 and Ps. 28,089, respectively. This includes monetary regulationdeposits, futures placed in the domestic and foreign market, call money andcontracted transactions pending liquidation in 24 and 48 hours.

 

**6 -INVESTMENTS IN SECURITIES**

 

**a.Trading securities**

 

As of December 31,2008 and 2007, trading securities are as follows:

 
| ** **                                                 | ** ** | **2008**              | ** ** | **2007**              | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **Acquisition  cost** | ** ** | **Accrued  interest** | ** ** | **Valuation  increase** | ** ** | **Book value** | ** ** | **Book value** | ** ** |
| Commercial paper                                           |       | Ps.                   | 114        |                  | Ps.        | — |   | Ps. | 9 |   | Ps. | 123 |   | Ps. | 1,254 |   |
| CETES                                                      |       | —                |       | —                |       | — |   | — |   | 518 |   |
| Government bonds                                           |       | —                |       | —                |       | — |   | — |   | 113 |   |
| Saving Protection Bonds (BPAS)                             |       | 101                   |       | 1                     |       | — |   | 102 |   | — |   |
| Bank securities                                            |       | 5,824                 |       | 23                    |       | — |   | 5,847 |   | 5,395 |   |
| Securitization certificates                                |       | —                |       | —                |       | — |   | — |   | 216 |   |
| Shares listed in the International Quotation System  (SIC) |       | —                |       | —                |       | — |   | — |   | 2 |   |
| Futures                                                    |       | 4                     |       | —                |       | — |   | 4 |   | 4 |   |
| Investment funds                                           |       | —                |       | —                |       | — |   | — |   | 11 |   |
| Subordinated securities                                    |       | 236                   |       | —                |       | 318 |   | 554 |   | 241 |   |
| ** **                                                 | ** ** | **Ps.**               | **6,279**  | ** **            | **Ps.**    | **24** | ** ** | **Ps.** | **327** | ** ** | **Ps.** | **6,630** | ** ** | **Ps.** | **7,754** | ** ** |

 

During 2008 and 2007, theFinancial Group recognized a valuation effect for the net amount of Ps. 109 andPs. 1, respectively, in the results of operations related to its tradingsecurities.

 

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As ofDecember 31, 2008, these investments mature as follows (stated at theiracquisition cost):

 
| ** **                     | ** ** | **From 1 to 179  days** | ** ** | **From 6 to 12  months** | ** ** | **More than 2  years** | ** ** | **Total at  acquisition cost** | ** ** |
|--------------------------------|------------|-------------------------|------------|--------------------------|------------|------------------------|------------|--------------------------------|------------|
| Commercial paper               |       | Ps.                     | 98         |                     | Ps.        | 16                     |       | Ps.                            | —     |   | Ps. | 114 |   |
| Saving Protection Bonds (BPAS) |       | 101                     |       | —                   |       | —                 |       | 101                            |       |
| Bank securities                |       | 5,824                   |       | —                   |       | —                 |       | 5,824                          |       |
| Futures                        |       | 4                       |       | —                   |       | —                 |       | 4                              |       |
| Subordinated securities        |       | —                  |       | —                   |       | 236                    |       | 236                            |       |
| ** **                     | ** ** | **Ps.**                 | **6,027**  | ** **               | **Ps.**    | **16**                 | ** ** | **Ps.**                        | **236**    | ** ** | **Ps.** | **6,279** | ** ** |

 

**b.Available for sale securities**

 

As of December 31,2008 and 2007, available for sale securities were as follows:

 
| ** **              | ** ** | **2008**              | ** ** | **2007**              | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **              | ** ** | **Acquisition  cost** | ** ** | **Accrued  interest** | ** ** | **Valuation  increase  (decrease)** | ** ** | **Book value** | ** ** | **Book value** | ** ** |
| US Government Bonds     |       | Ps.                   | 6,153      |                  | Ps.        | 26 |   | Ps. | 48 |   | Ps. | 6,227 |   | Ps. | 4,634 |   |
| UMS                     |       | 502                   |       | 13                    |       | 1 |   | 516 |   | 1,361 |   |
| Bonds                   |       | 4,086                 |       | 56                    |       | (434 | ) | 3,708 |   | 285 |   |
| VISA                    |       | 2                     |       | —                |       | 94 |   | 96 |   | — |   |
| MASTER CARD             |       | —                |       | —                |       | 21 |   | 21 |   | — |   |
| BMV Shares              |       | 234                   |       | —                |       | (90 | ) | 144 |   | — |   |
| EUROBONDS               |       | 553                   |       | 12                    |       | (1 | ) | 564 |   | 386 |   |
| PEMEX bonds             |       | 212                   |       | 2                     |       | (10 | ) | 204 |   | 3,881 |   |
| Subordinated securities |       | 21                    |       | —                |       | 221 |   | 242 |   | 330 |   |
| CYDSA shares            |       | —                |       | —                |       | — |   | — |   | 71 |   |
| ** **              | ** ** | **Ps.**               | **11,763** | ** **            | **Ps.**    | **109** | ** ** | **Ps.** | **(150** | **)** | **Ps.** | **11,722** | ** ** | **Ps.** | **10,948** | ** ** |
|                         |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31,2008, these investments mature as follows (stated at their acquisition cost):

 
| ** **               | ** ** | **From 1 to********179 days** | ** ** | **From 6 to********12 months** | ** ** | **More than********1 year** | ** ** | **Total at  acquisition cost** | ** ** |
|--------------------------|------------|-------------------------------|------------|--------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| US  Government Bonds     |       | Ps.                           | 6          |                           | Ps.        | 39                          |       | Ps.                            | 6,108      |   | Ps. | 6,153 |   |
| UMS                      |       | —                        |       | —                         |       | 502                         |       | 502                            |       |
| Bonds                    |       | —                        |       | —                         |       | 4,086                       |       | 4,086                          |       |
| VISA                     |       | —                        |       | —                         |       | 2                           |       | 2                              |       |
| BMV  Shares              |       | —                        |       | —                         |       | 234                         |       | 234                            |       |
| EUROBONDS                |       | —                        |       | —                         |       | 553                         |       | 553                            |       |
| PEMEX  bonds             |       | —                        |       | —                         |       | 212                         |       | 212                            |       |
| Subordinated  securities |       | —                        |       | —                         |       | 21                          |       | 21                             |       |
| ** **               | ** ** | **Ps.**                       | **6**      | ** **                     | **Ps.**    | **39**                      | ** ** | **Ps.**                        | **11,718** | ** ** | **Ps.** | **11,763** | ** ** |

 

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**c. Held tomaturity securities**

 

As of December 31,2008 and 2007, held to maturity securities are as follows:

 

Medium and long-term debtinstruments:

 
| ** **                                                                   | ** ** | **2008**             | ** **  | **2007**             | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|-------------|----------------------|------------|
| ** **                                                                   | ** ** | **Acquisition cost** | ** **  | **Accrued interest** | ** ** | **Book value** | ** ** | **Book value** | ** ** |
| Government bonds- support program for Special  Federal Treasury Certificates |       | Ps.                  | 684         |                 | Ps.        | 6 |   | Ps. | 690 |   | Ps. | 651 |   |
| Fiduciary rights                                                             |       | —               |        | —               |       | — |   | 8 |   |
| CETES                                                                        |       | 3                    |        | —               |       | 3 |   | — |   |
| Government bonds                                                             |       | 653                  |        | 2                    |       | 655 |   | — |   |
| Bonds                                                                        |       | 33,062               |        | —               |       | 33,062 |   | — |   |
| Saving Protection Bonds (BPAS)                                               |       | 124,691              |        | 177                  |       | 124,868 |   | — |   |
| UMS                                                                          |       | 2,541                |        | 68                   |       | 2,609 |   | — |   |
| UDIBONOS                                                                     |       | 3                    |        | —               |       | 3 |   | — |   |
| Separable securitization certificates                                        |       | 24                   |        | 9                    |       | 33 |   | — |   |
| Bank securities                                                              |       | 31,494               |        | 63                   |       | 31,557 |   | — |   |
| US Government Bonds                                                          |       | 13                   |        | —               |       | 13 |   | 10 |   |
| PEMEX bonds                                                                  |       | 5,361                |        | 102                  |       | 5,463 |   | — |   |
| Private securitization certificates                                          |       | 21,722               |        | 48                   |       | 21,770 |   | — |   |
| Strip and Myra bonds                                                         |       | —               |        | —               |       | — |   | 14 |   |
| Structured notes                                                             |       | 520                  |        | —               |       | 520 |   | — |   |
| Other debt titles                                                            |       | 349                  |        | —               |       | 349 |   | — |   |
| Subordinated securities                                                      |       | 22                   |        | —               |       | 22 |   | 77 |   |
| ** **                                                                   | ** ** | **Ps.**              | **221,142** | ** **           | **Ps.**    | **475** | ** ** | **Ps.** | **221,617** | ** ** | **Ps.** | **760** | ** ** |

 

As of December 31,2008, there is Ps 192,726 in restricted securities from the Financial Groupsrepurchasing operations.

 

As of December 31,2008, these investments mature as follows (stated at their acquisition cost):

 
| ** **                                                                   | ** ** | **From 1 to********179 days** | ** **   | **More than********2 years** | ** ** | **Total at acquisition  cost** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|--------------|------------------------------|------------|--------------------------------|------------|
| Government bonds- support program for Special  Federal Treasury Certificates |       | Ps.                           |  — |                         | Ps.        |  684                      |       | Ps. |  684 |   |
| CETES                                                                        |       | —                        |         | 3                            |       | 3                              |       |
| Government bonds                                                             |       | —                        |         | 653                          |       | 653                            |       |
| Bonds                                                                        |       | —                        |         | 33,062                       |       | 33,062                         |       |
| SAVING PROTECTION BONDS (BPAS)                                               |       | 124,691                       |         | —                       |       | 124,691                        |       |
| UMS                                                                          |       | —                        |         | 2,541                        |       | 2,541                          |       |
| UDIBONOS                                                                     |       | —                        |         | 3                            |       | 3                              |       |
| Separable securitization certificates                                        |       | —                        |         | 24                           |       | 24                             |       |
| Bank securities                                                              |       | 31,494                        |         | —                       |       | 31,494                         |       |
| US Government Bonds                                                          |       | —                        |         | 13                           |       | 13                             |       |
| PEMEX bonds                                                                  |       | —                        |         | 5,361                        |       | 5,361                          |       |
| Private securitization certificates                                          |       | —                        |         | 21,722                       |       | 21,722                         |       |
| Structured notes                                                             |       | —                        |         | 520                          |       | 520                            |       |
| Other debt titles                                                            |       | —                        |         | 349                          |       | 349                            |       |
| Subordinated securities                                                      |       | —                        |         | 22                           |       | 22                             |       |
| ** **                                                                   | ** ** | **Ps.**                       | **156,185**  | ** **                   | **Ps.**    | ** 64,957**               | ** ** | **Ps.** | ** 221,142** | ** ** |

 

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**7 -TRANSACTIONS INVOLVING SECURITIES AND DERIVATIVE FINANCIAL INSTRUMENTS**

 

As of December 31,2008 and 2007, transactions involving securities and derivative financialinstruments were as follows:

 

**a.Debtor and creditor balances derived from repurchase transactions**

 

Acting as seller of securities

 
| ** **                  | ** ** | **2008**                             | ** ** | **2007**                            | ** ** |
|-----------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **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                       |       | Ps.                                  | —     |                                | Ps.        | 3 |   | Ps. | — |   | Ps. | 3 |   | Ps. | 4,039 |   | Ps. | 4,039 |   | Ps. | — |   | Ps. | — |   |
| Development Bonds           |       | 3,987                                |       | 37,085                              |       | — |   | 33,098 |   | 25,900 |   | 25,901 |   | — |   | 1 |   |
| Bonds 182                   |       | —                               |       | 5                                   |       | — |   | 5 |   | 929 |   | 929 |   | — |   | — |   |
| Bonds IPAB                  |       | —                               |       | 351                                 |       | — |   | 351 |   | 874 |   | 879 |   | — |   | 5 |   |
| Quarterly IPAB bonds        |       | 7,102                                |       | 106,967                             |       | 1 |   | 99,866 |   | 119,370 |   | 119,739 |   | 18 |   | 387 |   |
| Semiannual IPAB bonds       |       | 26,970                               |       | 51,252                              |       | 1 |   | 24,283 |   | 13,767 |   | 13,808 |   | 4 |   | 45 |   |
| 7-year bonds                |       | —                               |       | 2                                   |       | — |   | 2 |   | 1,684 |   | 1,684 |   | — |   | — |   |
| 10-year bonds               |       | 627                                  |       | 1,275                               |       | — |   | 648 |   | 4,067 |   | 4,069 |   | 1 |   | 3 |   |
| 20-year bonds               |       | —                               |       | 5                                   |       | — |   | 5 |   | 8,758 |   | 8,780 |   | 1 |   | 23 |   |
| UDIBONOS                    |       | —                               |       | —                              |       | — |   | — |   | 102 |   | 102 |   | — |   | — |   |
| 10-year UDIBONDS            |       | —                               |       | 4                                   |       | — |   | 4 |   | 1,460 |   | 1,459 |   | 1 |   | — |   |
| **Government securities**   | ** ** | **38,686**                           | ** ** | **196,949**                         | ** ** | **2** | ** ** | **158,265** | ** ** | **180,950** | ** ** | **181,389** | ** ** | **25** | ** ** | **464** | ** ** |
| Promissory Notes            |       | 537                                  |       | 537                                 |       | — |   | — |   | 4,001 |   | 4,001 |   | — |   | — |   |
| CEDES                       |       | 716                                  |       | 10,985                              |       | — |   | 10,269 |   | 12,897 |   | 12,906 |   | 3 |   | 12 |   |
| Bank acceptances            |       | —                               |       | —                              |       | — |   | — |   | 10 |   | 10 |   | — |   | — |   |
| CEBUR Bank                  |       | —                               |       | 8,892                               |       | — |   | 8,892 |   | 2,449 |   | 2,450 |   | — |   | 1 |   |
| **Bank securities**         | ** ** | **1,253**                            | ** ** | **20,414**                          | ** ** | **—** | ** ** | **19,161** | ** ** | **19,357** | ** ** | **19,367** | ** ** | **3** | ** ** | **13** | ** ** |
| Private paper               |       | —                               |       | 11,428                              |       | — |   | 11,428 |   | 11,618 |   | 11,642 |   | 1 |   | 25 |   |
| CEBUR government            |       | —                               |       | 3,602                               |       | — |   | 3,602 |   | 4,027 |   | 4,026 |   | 4 |   | 3 |   |
| Securitization certificates |       | —                               |       | 269                                 |       | — |   | 269 |   | 281 |   | 284 |   | — |   | 3 |   |
| **Private securities**      | ** ** | **—**                           | ** ** | **15,299**                          | ** ** | **—** | ** ** | **15,299** | ** ** | **15,926** | ** ** | **15,952** | ** ** | **5** | ** ** | **31** | ** ** |
| ** **                  | ** ** | **Ps.**                              | **39,939** | ** **                          | **Ps.**    | **232,662** | ** ** | **Ps.** | **2** | ** ** | **Ps.** | **192,725** | ** ** | **Ps.** | **216,233** | ** ** | **Ps.** | **216,708** | ** ** | **Ps.** | **33** | ** ** | **Ps.** | **508** | ** ** |

 

With the Financial Groupacting as the vendor, accrued premiums were charged to the results ofoperations up to December 31, 2008 in the amount of Ps. 18,320 (Ps. 16,468in 2007).

 

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During 2008 and 2007, theperiod of repurchase transactions entered into by the Financial Group in itscapacity as vendor ranged from 1 to 177 days.

 

Acting as purchaser of securities

 
| ** **                | ** ** | **2008**                              | ** ** | **2007**                                    | ** ** |
|---------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **Liability  position**               | ** ** | **Asset  position**                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Liability  position** | ** ** | **Asset  position** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Instrument**            | ** ** | **Value of  securities  deliverable** | ** ** | **Repurchase**

**agreement  from debtors** | ** ** | **Debit  difference** | ** ** | **Credit  difference** | ** ** | **Value of  securities  deliverable** | ** ** | **Repurchase  agreement  from debtors** | ** ** | **Debit  difference** | ** ** | **Credit  difference** | ** ** |
| CETES                     |       | Ps.                                   | 1,667      |                                        | Ps.        | 1,667 |   | Ps. | — |   | Ps. | — |   | Ps. | 300 |   | Ps. | 300 |   | Ps. | — |   | Ps. | — |   |
| Development Bonds         |       | 3,992                                 |       | 3,987                                       |       | 5 |   | — |   | 3,233 |   | 3,233 |   | — |   | — |   |
| Bonds 182                 |       | —                                |       | —                                      |       | — |   | — |   | 928 |   | 928 |   | — |   | — |   |
| Bonds IPAB                |       | —                                |       | —                                      |       | — |   | — |   | 878 |   | 873 |   | 5 |   | — |   |
| Quarterly IPAB bonds      |       | 6,014                                 |       | 5,992                                       |       | 22 |   | — |   | 7,558 |   | 7,543 |   | 18 |   | 3 |   |
| Semiannual IPAB bonds     |       | 25,865                                |       | 25,751                                      |       | 115 |   | 1 |   | — |   | — |   | — |   | — |   |
| 7-year bonds              |       | 1,248                                 |       | 1,248                                       |       | — |   | — |   | 350 |   | 350 |   | — |   | — |   |
| 10-year bonds             |       | 1,193                                 |       | 1,194                                       |       | 2 |   | 3 |   | 1,092 |   | 1,093 |   | — |   | 1 |   |
| 20-year bonds             |       | 4,001                                 |       | 4,001                                       |       | — |   | — |   | 1,126 |   | 1,125 |   | 2 |   | 1 |   |
| UDIBONOS                  |       | —                                |       | —                                      |       | — |   | — |   | 102 |   | 102 |   | — |   | — |   |
| 10-year UDIBONDS          |       | —                                |       | —                                      |       | — |   | — |   | 501 |   | 501 |   | — |   | — |   |
| **Government securities** | ** ** | **43,980**                            | ** ** | **43,840**                                  | ** ** | **144** | ** ** | **4** | ** ** | **16,068** | ** ** | **16,048** | ** ** | **25** | ** ** | **5** | ** ** |
| Promissory Notes          |       | —                                |       | —                                      |       | — |   | — |   | 3,011 |   | 3,011 |   | — |   | — |   |
| CEDES                     |       | 568                                   |       | 565                                         |       | 3 |   | — |   | 1,773 |   | 1,773 |   | — |   | — |   |
| **Bank securities**       | ** ** | **568**                               | ** ** | **565**                                     | ** ** | **3** | ** ** | **—** | ** ** | **4,784** | ** ** | **4,784** | ** ** | **—** | ** ** | **—** | ** ** |
| CEBUR government          |       | —                                |       | —                                      |       | — |   | — |   | 650 |   | 652 |   | — |   | 2 |   |
| **Private securities**    | ** ** | **—**                            | ** ** | **—**                                  | ** ** | **—** | ** ** | **—** | ** ** | **650** | ** ** | **652** | ** ** | **—** | ** ** | **2** | ** ** |
| ** **                | ** ** | **Ps.**                               | **44,548** | ** **                                  | **Ps.**    | **44,405** | ** ** | **Ps.** | **147** | ** ** | **Ps.** | **4** | ** ** | **Ps.** | **21,502** | ** ** | **Ps.** | **21,484** | ** ** | **Ps.** | **25** | ** ** | **Ps.** | **7** | ** ** |

 

With the Financial Groupacting as the purchaser, accrued premiums were charged to the results ofoperations up to December 31, 2008 in the amount of Ps. 2,521 (Ps. 2,345in 2007).

 

During 2008 and 2007, theperiod of repurchase transactions entered into by the Financial Group in itscapacity as purchaser ranged from 1 to 21 days.

 

As of December 31,2008, the amount of goods corresponding to the guarantees given and received inrepurchase transactions that involved the transfer of property totaled Ps. 179and Ps. 14, respectively, and as of December 31, 2007, the totals were Ps.137 of guarantees given and Ps. 12 of guarantees received.

 

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**b.Derivative financial instruments**

 

The transactions enteredinto by the Financial Group involving derivative financial instrumentscorrespond mainly to futures, swaps and options contracts. These transactionsare entered into to hedge various risks and for trading purposes.

 

As of December 31,2008, the Financial Group has evaluated the effectiveness of transactionsentered into involving derivative financial instruments for hedging purposesand has concluded that they are highly effective.

 

As of December 31,2008 and 2007, the positions of the Financial Group’s derivative financialinstrument held for trading purposes are as follows:

 
| ** **                        | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|
| **Assets**                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Derivative  financial instruments |       | Ps.        | 8,168      |       | Ps.        | 2,302 |   |
| **Liabilities**                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Derivative  financial instruments |       | Ps.        | 10,746     |       | Ps.        | 2,435 |   |

 
| ** **                 | ** ** | **2008**           | ** **  | **2007**           | ** ** |
|----------------------------|------------|--------------------|-------------|--------------------|------------|
| **Asset position**         | ** ** | **Nominal amount** | ** **  | **Asset position** | ** ** | **Nominal amount** | ** ** | **Asset position** | ** ** |
| **Futures**                |       |               |        |               |       |   |   |   |   |
| TIIE-rate  futures         |       | Ps.                | 1,500       |               | Ps.        | — |   | Ps. | 980 |   | Ps. | — |   |
| **Forwards**               |       |               |        |               |       |   |   |   |   |
| Foreign  currency forwards |       | 1,892              |        | 40                 |       | 571 |   | 42 |   |
| **Options**                |       |               |        |               |       |   |   |   |   |
| Rate  options              |       | 9,683              |        | 76                 |       | 6,929 |   | 195 |   |
| **Swaps**                  |       |               |        |               |       |   |   |   |   |
| Rate  swaps                |       | 173,097            |        | 1,999              |       | 97,357 |   | 873 |   |
| Exchange  rate swaps       |       | 9,829              |        | 3,210              |       | 10,107 |   | 677 |   |
| **Total negotiation**      | ** ** | **196,001**        | ** **  | **5,325**          | ** ** | **115,944** | ** ** | **1,787** | ** ** |
|                       |       |               |        |               |       |   |   |   |   |
| **Options**                |       |               |        |               |       |   |   |   |   |
| Rate  options              |       | 24,200             |        | 179                |       | 16,250 |   | 100 |   |
| **Swaps**                  |       |               |        |               |       |   |   |   |   |
| Rate  swaps                |       | 19,298             |        | 10                 |       | 12,391 |   | 59 |   |
| Exchange  rate swaps       |       | 10,474             |        | 2,654              |       | 5,847 |   | 356 |   |
| **Total hedge**            | ** ** | **53,972**         | ** **  | **2,843**          | ** ** | **34,488** | ** ** | **515** | ** ** |
| **Total position**         | ** ** | **Ps.**            | **249,973** | ** **         | **Ps.**    | **8,168** | ** ** | **Ps.** | **150,432** | ** ** | **Ps.** | **2,302** | ** ** |

 

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| ** **                 | ** ** | **2008**           | ** **  | **2007**               | ** ** |
|----------------------------|------------|--------------------|-------------|------------------------|------------|
| **Liability position**     | ** ** | **Nominal amount** | ** **  | **Liability position** | ** ** | **Nominal amount** | ** ** | **Liability position** | ** ** |
| **Futures**                |       |               |        |                   |       |   |   |   |   |
| TIIE-rate  futures         |       | Ps.                | 1,500       |                   | Ps.        | — |   | Ps. | 980 |   | Ps. | — |   |
| **Forwards**               |       |               |        |                   |       |   |   |   |   |
| Foreign  currency forwards |       | 129                |        | 46                     |       | 571 |   | 46 |   |
| **Options**                |       |               |        |                   |       |   |   |   |   |
| Foreign  currency options  |       | 67                 |        | 2                      |       | 16 |   | — |   |
| Rate  options              |       | 10,827             |        | 64                     |       | 3,300 |   | 40 |   |
| **Swaps**                  |       |               |        |                   |       |   |   |   |   |
| Rate  swaps                |       | 173,114            |        | 2,024                  |       | 97,359 |   | 842 |   |
| Exchange  rate swaps       |       | 9,774              |        | 3,133                  |       | 9,794 |   | 663 |   |
| **Total negotiation**      | ** ** | **195,411**        | ** **  | **5,269**              | ** ** | **112,020** | ** ** | **1,591** | ** ** |
|                       |       |               |        |                   |       |   |   |   |   |
| **Swaps**                  |       |               |        |                   |       |   |   |   |   |
| Rate  swaps                |       | 19,298             |        | 663                    |       | 12,391 |   | 261 |   |
| Exchange  rate swaps       |       | 7,479              |        | 4,814                  |       | 8,160 |   | 583 |   |
| **Total hedge**            | ** ** | **26,777**         | ** **  | **5,477**              | ** ** | **20,551** | ** ** | **844** | ** ** |
| **Total position**         | ** ** | **Ps.**            | **222,188** | ** **             | **Ps.**    | **10,746** | ** ** | **Ps.** | **132,571** | ** ** | **Ps.** | **2,435** | ** ** |

 

Theoperated products and main underlying instruments are as follows:

 
| **Forwards** | ** ** | **Options** | ** ** | **Swaps** | ** ** | **CCS** |
|--------------|------------|-------------|------------|-----------|------------|---------|
| Fx-USD       |       | Fx-USD      |       | TIIE 28   |       | TIIE 28 |
|         |       | TIIE 28     |       | TIIE 91   |       | TIIE 91 |
|         |       |        |       | CETES 91  |       | Libor   |
|         |       |        |       | Libor     |       |    |

 

The risk managementpolicies and internal control procedures for managing risks inherent toderivative instrument operations are described in Note 32.

 

Transactions entered intofor hedging purposes have maturities from 2008 to 2018 and are intended tomitigate the financial risk derived from long-term loans offered by theFinancial Group at fixed rates, as well as the exchange rate risk generated bymarket instruments in the Financial Group’s portfolio.

 

The book value ofcollateral used to ensure compliance with obligations derived from currencyswap contracts as of December 31, 2008, is USD 876,379 thousand and EUR20,110 thousand and as of December 31, 2007 the book value is USD 413,350thousand and EUR 21,406 thousand. Futures transactions are made throughrecognized markets, and as of December 31, 2008 they represent 0.60% ofthe nominal amount of all the derivative operation contracts; the remaining99.32% correspond to options and swaps transactions in OTC markets.

 

As mentioned in Note 2f), during the first quarter of 2008, one of our counterparts failed to complywith its obligations. Therefore, steps were taken pursuant to clause VII(bankruptcy) of the ISDA Master Agreement, and the current derivativeoperations with this counterparty were offset using market quotations to valuethem. The sum of the valuation of the derivative operations with thecounterparty represents a net loss for the Financial Group in the amountmentioned in Note 2 f).

 

Furthermore, as a resultof Lehman Brothers noncompliance, cash flow hedging was ineffective, bringingabout a negative impact in the amount of USD 530 thousand.

 

The net amount ofestimated gains or losses originated by transactions or events that arerecorded in cumulative other comprehensive income as of December 31, 2008and that are expected to be reclassified to earnings within the next 12 monthstotals Ps. 2.

 

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**8 - LOANPORTFOLIO**

 

As of December 31,2008 and 2007, the loan portfolio by loan type is as follows:

 
| ** **                       | ** ** | **Current portfolio** | ** **  | **Past-due portfolio** | ** ** | **Total**   | ** ** |
|----------------------------------|------------|-----------------------|-------------|------------------------|------------|-------------|------------|
| ** **                       | ** ** | **2008**              | ** **  | **2007**               | ** ** | **2008**    | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Commercial  loans                |       |                  |        |                   |       |        |       |   |   |   |   |   |   |
| Denominated in domestic currency |       |                  |        |                   |       |        |       |   |   |   |   |   |   |
| Commercial                       |       | Ps.                   | 93,123      |                   | Ps.        | 77,312      |       | Ps. | 1,482 |   | Ps. | 900 |   | Ps. | 94,605 |   | Ps. | 78,212 |   |
| Rediscounted portfolio           |       | 6,129                 |        | 6,646                  |       | —      |       | — |   | 6,129 |   | 6,646 |   |
| Denominated in USD               |       |                  |        |                   |       |        |       |   |   |   |   |   |   |
| Commercial                       |       | 27,041                |        | 13,975                 |       | 221         |       | 27 |   | 27,262 |   | 14,002 |   |
| Rediscounted portfolio           |       | 505                   |        | 158                    |       | —      |       | — |   | 505 |   | 158 |   |
| **Total commercial loans**       | ** ** | **126,798**           | ** **  | **98,091**             | ** ** | **1,703**   | ** ** | **927** | ** ** | **128,501** | ** ** | **99,018** | ** ** |
|                             |       |                  |        |                   |       |        |       |   |   |   |   |   |   |
| Loans to financial institutions  |       | 10,860                |        | 13,158                 |       | —      |       | — |   | 10,860 |   | 13,158 |   |
| Consumer loans                   |       |                  |        |                   |       |        |       |   |   |   |   |   |   |
| Credit card                      |       | 15,067                |        | 13,881                 |       | 2,140       |       | 829 |   | 17,207 |   | 14,710 |   |
| Other consumer loans             |       | 14,302                |        | 13,344                 |       | 359         |       | 280 |   | 14,661 |   | 13,624 |   |
| Housing mortgage loans           |       | 46,282                |        | 37,216                 |       | 746         |       | 858 |   | 47,028 |   | 38,074 |   |
| Government loans                 |       | 26,989                |        | 17,948                 |       | —      |       | — |   | 26,989 |   | 17,948 |   |
| ** **                       | ** ** | **113,500**           | ** **  | **95,547**             | ** ** | **3,245**   | ** ** | **1,967** | ** ** | **116,745** | ** ** | **97,514** | ** ** |
| **Total loan portfolio:**        | ** ** | **Ps.**               | **240,298** | ** **             | **Ps.**    | **193,638** | ** ** | **Ps.** | **4,948** | ** ** | **Ps.** | **2,894** | ** ** | **Ps.** | **245,246** | ** ** | **Ps.** | **196,532** | ** ** |

 

On December 31, 2008and 2007, revenues from previously written-off loan portfolios was Ps. 687 andPs. 604, respectively.

 

The average terms of theportfolio’s main balances are: commercial, 2.8 years; b) financialinstitutions, 3.6 years; c) mortgage, 17.4 years; and d) government, 4.7 years.

 

The loans granted groupedinto economic sectors as of December 31, 2008 and 2007, are shown below:

 
| ** **                          | ** ** | **2008**   | ** **  | **2007**                      | ** ** |
|-------------------------------------|------------|------------|-------------|-------------------------------|------------|
| ** **                          | ** ** | **Amount** | ** **  | **Concentration  percentage** | ** ** | **Amount** | ** ** | **Concentration  percentage** | ** ** |
| Private (companies and individuals) |       | Ps.        | 128,501     |                          | 52.40      | % | Ps. | 99,018 |   | 50.38 | % |
| Financial institutions              |       | 10,860     |        | 4.43                          | %          | 13,158 |   | 6.70 | % |
| Credit card and consumer            |       | 31,868     |        | 12.99                         | %          | 28,334 |   | 14.42 | % |
| Housing                             |       | 47,028     |        | 19.18                         | %          | 38,074 |   | 19.37 | % |
| Government loans                    |       | 26,989     |        | 11.00                         | %          | 17,948 |   | 9.13 | % |
| ** **                          | ** ** | **Ps.**    | **245,246** | ** **                    | **100**    | **%** | **Ps.** | **196,532** | ** ** | **100** | **%** |

 

**Loan supportprograms**

 

The Financial Groupparticipates in different loan support programs established by the FederalGovernment and Mexican Bankers’ Association, as detailed below:

 

a)              Support Program for Housing Loan Debtorsand the Agreement on Benefits for Housing Loan Debtors

 

b)    Agreement on Agrarian and Fishery SectorFinancing (FINAPE)

 

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c)     Agreement on the Financial Support andPromotion of Micro, Small and Medium Companies (FOPYME)

 

d)             Additional Benefits Program for HousingLoan Debtors - FOVI-type Housing Loans

 

Furthermore, in December 1998,the Federal Government and Banking Sector published a new and definitive debtorsupport plan known as “Punto Final”, which, as of 1999, replaced the benefitsformerly granted by Housing Loan Debtor support programs. In the case of FOPYMEand FINAPE, these support plans were replaced in 1999 and 2000, respectively,and beginning in 2001 the benefits established by original support programscontinued 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 latepayment charges. In the case of FOPYME and FINAPE loans, the discount isapplied to payments and the discount percentage is determined based on therecorded loan balance at July 31 and June 30, 1996, respectively,regardless of whether the balance has been subsequently modified.

 

The Support Program forBusiness Loan Debtors (FOPYME) concluded on October 1, 2006, asestablished in Commission document 112-6/524549/2006.

 

The Additional BenefitsProgram for Housing Loan Debtors – FOVI-type housing loans expired on December 31,2007, as per Commission Circular 1461.

 

In the case of borrowersparticipating in the above restructured UDI programs, the amount of principaland accrued interest denominated in pesos is converted to the initial UDIvalue; interest is 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 FederalGovernment executes a transaction for the same amount to pay the principal andaccrued interest 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 theUDI programs were created to support debtors in compliance with theiragreements. The Financial Group continues to manage and evaluate the riskderived from any possible credit loss related to the programs. If a particularloan is fully reserved, fiduciary securities will continue to generate interestat regular rates.

 

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.

 

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As of December 31,2008 and 2007, the balances of the respective trust balances are made up asfollows:

 
| ** **                 | ** ** | **2008** | ** ** | **2007**   | ** ** |
|----------------------------|------------|----------|------------|------------|------------|
| Banks                      |       | Ps.      | 7          |       | Ps.        | 10 |   |
| Government securities      |       | 2        |       | 3          |       |
| Current loan portfolio:    |       | 622      |       | 737        |       |
| Past-due loan portfolio    |       | 35       |       | 314        |       |
| Accrued interest on loans  |       | 2        |       | 3          |       |
| Past-due accrued interest  |       | 1        |       | 12         |       |
| Allowance for loan losses  |       | (329     | )          | (582       | )          |
| **Total assets**           | ** ** | **340**  | ** ** | **497**    | ** ** |
| Investment in trust assets |       | 301      |       | 460        |       |
| Deferred tax liabilities   |       | 39       |       | 37         |       |
| **Total  liabilities**     | ** ** | **Ps.**  | **340**    | ** ** | **Ps.**    | **497** | ** ** |

 

**Policiesand procedures for granting loans**

 

The granting, control andrecovery of loans are regulated by the Financial Group’s Credit Manual, whichhas been authorized by the Board of Directors. Accordingly, administrativeportfolio control is performed in the following areas:

 

I.            Business Management (includes corporate,commercial, business, governmental and consumer banking), primarily through thebranch network

II.        Operations Management

III.    General Comprehensive Risk Management

IV.    Recovery Management

 

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)     Product design

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 promptly identified.

 

Pursuant to CommissionCircular B6, “Loan Portfolio”, distressed portfolio is defined as thecommercial loans which, based on the current information and facts as well ason the loan revision process, are very unlikely to be fully recovered (bothprincipal and interest) pursuant to the original terms and conditions. Thecurrent and past-due portfolios are susceptible to be identified as adistressed portfolio. The commercial loans with D and E risk degree ratings areas follows:

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Distressed  portfolio                       |       | Ps.      | 1,774      |     | Ps.        | 304 |   |
| Total  rated portfolio                      |       | 254,496  |       | 202,956  |       |
| Distressed  portfolio/total rated portfolio |       | 0.70     | %          | 0.15     | %          |
|                                             |            |          |            |          |            |  |  |

 

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 arbitrage strategies.

 

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**9 - LOANSRESTRUCTURED IN UDIS**

 

The loans restructured inUDIS correspond to mortgage loans. The balance on December 31, 2008 and2007, is detailed below:

 
| ** **                 | ** ** | **2008** | ** ** | **2007**   | ** ** |
|----------------------------|------------|----------|------------|------------|------------|
| Current  portfolio         |       | Ps.      | 622        |       | Ps.        |  737 |   |
| Current  accrued interest  |       | 2        |       | 3          |       |
| Past-due  portfolio        |       | 35       |       | 314        |       |
| Past-due  accrued interest |       | 1        |       | 12         |       |
| ** **                 | ** ** | **Ps.**  | **660**    | ** ** | **Ps.**    | **1,066** | ** ** |

 

**10 -ALLOWANCE FOR LOAN LOSSES**

 

The Financial Group’sportfolio classification, which serves as the basis for recording the allowancefor loan losses, is detailed below:

 
| ** **               | ** ** | **2008**           | ** **  |
|--------------------------|------------|--------------------|-------------|
| ** **               | ** ** | ** **         | ** **  | **Required allowances for losses** | ** ** |
| ** **               | ** ** | **Loan portfolio** | ** **  | **Commercial  portfolio** | ** ** | **Consumer  portfolio** | ** ** | **Mortgage  portfolio** | ** ** | **Total** | ** ** |
| Exempt  portfolio        |       | Ps.                | 76          |   | Ps. | — |   | Ps. | — |   | Ps. | — |   | Ps. | — |   |
| Risk  A                  |       | 54,333             |        | — |   | 61 |   | 148 |   | 209 |   |
| Risk  A1                 |       | 109,400            |        | 494 |   | — |   | — |   | 494 |   |
| Risk  A2                 |       | 58,784             |        | 562 |   | — |   | — |   | 562 |   |
| Risk  B                  |       | 5,800              |        | — |   | 107 |   | 168 |   | 275 |   |
| Risk  B1                 |       | 17,034             |        | 49 |   | 353 |   | — |   | 402 |   |
| Risk  B2                 |       | 1,834              |        | 58 |   | 183 |   | — |   | 241 |   |
| Risk  B3                 |       | 1,277              |        | 140 |   | — |   | — |   | 140 |   |
| Risk  C                  |       | 2,109              |        | — |   | 938 |   | 90 |   | 1,028 |   |
| Risk  C1                 |       | 358                |        | 74 |   | — |   | — |   | 74 |   |
| Risk  C2                 |       | 231                |        | 95 |   | — |   | — |   | 95 |   |
| Risk  D                  |       | 1,738              |        | 204 |   | 835 |   | 190 |   | 1,229 |   |
| Risk  E                  |       | 1,608              |        | 1,501 |   | 101 |   | — |   | 1,602 |   |
| Unclassified             |       | (87                | )           | — |   | — |   | — |   | — |   |
|                     | ** ** | **Ps.**            | **254,495** | ***** | **Ps.** | **3,177** | ** ** | **Ps.** | **2,578** | ** ** | **Ps.** | **596** | ** ** | **Ps.** | **6,351** | ** ** |
| **Recorded allowance**   |       |               |        |   |   |   |   |   | ** ** | **6,690** | ** ** |
| **Additional allowance** | ** ** | ** **         | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ps.** | **339** | ** ** |

 

The sum of the rated loanportfolio includes Ps. 5,991 in loans granted to subsidiaries whose balance waseliminated in the consolidation process.

 

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| ** **               | ** ** | **2007**           | ** **  |
|--------------------------|------------|--------------------|-------------|
| ** **               | ** ** | ** **         | ** **  | **Required allowances for losses** | ** ** |
| ** **               | ** ** | **Loan portfolio** | ** **  | **Commercial  portfolio** | ** ** | **Consumer  portfolio** | ** ** | **Mortgage  portfolio** | ** ** | **Total** | ** ** |
| Exempt  portfolio        |       | Ps.                | 97          |   | Ps. | — |   | Ps. | — |   | Ps. | — |   | Ps. | — |   |
| Risk  A                  |       | 58,639             |        | — |   | 123 |   | 119 |   | 242 |   |
| Risk  A1                 |       | 77,767             |        | 354 |   | — |   | — |   | 354 |   |
| Risk  A2                 |       | 51,158             |        | 485 |   | — |   | — |   | 485 |   |
| Risk  B                  |       | 5,441              |        | — |   | 164 |   | 142 |   | 306 |   |
| Risk  B1                 |       | 5,890              |        | 118 |   | — |   | — |   | 118 |   |
| Risk  B2                 |       | 409                |        | 22 |   | — |   | — |   | 22 |   |
| Risk  B3                 |       | 748                |        | 84 |   | — |   | — |   | 84 |   |
| Risk  C                  |       | 857                |        | — |   | 283 |   | 72 |   | 355 |   |
| Risk  C1                 |       | 146                |        | 31 |   | — |   | — |   | 31 |   |
| Risk  C2                 |       | 101                |        | 41 |   | — |   | — |   | 41 |   |
| Risk  D                  |       | 1,236              |        | 50 |   | 653 |   | 187 |   | 890 |   |
| Risk  E                  |       | 556                |        | 235 |   | 90 |   | 227 |   | 552 |   |
| Unclassified             |       | (90                | )           | — |   | — |   | — |   | — |   |
|                     | ** ** | **Ps.**            | **202,955** | ***** | **Ps.** | **1,420** | ** ** | **Ps.** | **1,313** | ** ** | **Ps.** | **747** | ** ** | **Ps.** | **3,480** | ** ** |
| **Recorded allowance**   |       |               |        |   |   |   |   |   | ** ** | **3,786** | ** ** |
| **Additional allowance** | ** ** | ** **         | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ps.** | **306** | ** ** |

 

The sum of the rated loanportfolio includes Ps. 5,381 in loans granted to subsidiaries whose balance waseliminated in the consolidation process.

 

The total portfoliobalance used as the basis for the classification above includes amounts relatedto guarantees granted and credit commitments, which are recorded in memorandumaccounts.

 

The additional allowancescomply with the general provisions applicable to credit institution and thenotices issued by the Commission to regulate debtor support programs,denominated in UDI trusts.

 

As of December 31,2008 and 2007, the estimated allowance for loan losses is determined based onportfolio balances at those dates. As of December 31, 2008 and 2007, theallowance for loan losses includes a reserve for 100% of delinquent interestowed.

 

On August 22, 2008,the Commission published in the Official Gazette of the Federation (DOF) achange in the reserve percentage for non-delinquent credit card loans.According to the second temporary article that provides the possibility ofmaking the corresponding adjustments no later than October 2008, theimpact of this change was gradually realized by Banorte. Therefore the reservepercentage applied to non-delinquent loans in September 2008 was 1.72%. October closedwith a 2.5% percentage for non-delinquent loans. The effects of applying theabove change to credit card loan loss reserves led to the creation ofpreventive loan loss reserves in Banorte in the amount of Ps. 341, of which Ps.103 was recognized as restated accumulated revenue in stockholders’ equity. Theremaining Ps. 238 was charged to the period’s results.

 

As of December 31,2008 and 2007, the allowance for loan losses represents 135% and 131%,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, 2008 and 2007.

 

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**Rollforwardof allowance for loan losses**

 

A rollforward of theallowance for loan losses is detailed below:

 
| ** **                                  | ** ** | **2008** | ** ** | **2007**   | ** ** |
|---------------------------------------------|------------|----------|------------|------------|------------|
| Balance at the beginning of the year        |       | Ps.      | 3,786      |       | Ps.        | 3,140 |   |
| Changes  in accounting policies 2007        |       | —   |       | 527        |       |
| Increase  charged to results                |       | 6,835    |       | 2,571      |       |
| Reserve  release                            |       | (16      | )          | (36        | )          |
| Debt  forgiveness and write-offs            |       | (4,085   | )          | (2,194     | )          |
| Valuation  in foreign currencies and UDIS   |       | 108      |       | 31         |       |
| Rebates  granted to housing debtors         |       | (74      | )          | (72        | )          |
| Created  with profit margin (UDIS Trusts)   |       | 48       |       | 27         |       |
| Advantages  from FOPYME and FINAPE programs |       | (3       | )          | —     |       |
| Other*                                      |       | 91       |       | (74        | )          |
| Restatement  effects                        |       | —   |       | (134       | )          |
| **Year-end balance**                        | ** ** | **Ps.**  | **6,690**  | ** ** | **Ps.**    | **3,786** | ** ** |

 

----

*In 2008, it includes Ps.103 in credit card allowances recognized against the retained earnings instockholders’ equity.

 

As of December 31,2008, the total amount of preventive loan loss reserves charged to the incomestatement totals Ps. 6,896 and Ps. 13 in other revenues. Such amount is made upof Ps. 6,835 credited directly to the estimate and Ps. 48 from UDIS trusts. Asof December 31, 2007, the total amount of preventive loan loss reservescharged to the earnings statement totals Ps. 2,646. Such amount is made up ofPs. 2,571 credited directly to the estimate, Ps. 27 from UDIS trusts and Ps. 48from the restatement.

 

**11 -ACQUIRED PORTFOLIOS**

 

As of December 31,2008 and 2007, the acquired portfolios are as follows:

 
| ** **                      | ** ** | **2008** | ** ** | **2007**   | ** ** | **Valuation Method**                                        | ** ** |
|---------------------------------|------------|----------|------------|------------|------------|-------------------------------------------------------------|------------|
| Bancomer  III                   |       | Ps.      | 141        |       | Ps.        | 164                                                         |       | Cash Basis Method |   |
| Bancomer  IV                    |       | 561      |       | 679        |       | Cash Basis Method                                           |       |
| Bital  I                        |       | 229      |       | 292        |       | Cash Basis Method                                           |       |
| Bital  II                       |       | 82       |       | 103        |       | Cash Basis Method                                           |       |
| Banamex  Mortgage               |       | 330      |       | 367        |       | Cash Basis Method                                           |       |
| GMAC  Banorte                   |       | 95       |       | 144        |       | Cash Basis Method                                           |       |
| Serfin  Commercial I            |       | 127      |       | 177        |       | Cash Basis Method                                           |       |
| Serfin  Commercial II           |       | 94       |       | 88         |       | Interest Method                                             |       |
| Serfin  Mortgage                |       | 197      |       | 247        |       | Cash Basis Method                                           |       |
| Santander                       |       | 73       |       | 84         |       | Interest Method  (Commercial); Cash Basis Method (Mortgage) |       |
| Banorte  Mortgage               |       | 234      |       | 264        |       | Interest Method                                             |       |
| Meseta                          |       | 47       |       | 70         |       | Cash Basis Method                                           |       |
| Vipesa                          |       | 6        |       | 10         |       | Cash Basis Method                                           |       |
| Goldman  Sach’s            |       | 183      |       | 226        |       | Cash Basis Method                                           |       |
| Confia  I                       |       | 93       |       | 107        |       | Interest Method                                             |       |
| Banorte  Sólida Commercial |       | 40       |       | 59         |       | Cost-Recovery Method                                        |       |
| Solida  Mortgage                |       | 517      |       | 579        |       | Interest Method                                             |       |
| ** **                      | ** ** | **Ps.**  | **3,049**  | ** ** | **Ps.**    | **3,660**                                                   | ** ** | ** ** | ** ** |

 

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As of December 31,2008, the Financial Group recognized income from credit asset portfolios of Ps.1,156, together with the respective amortization of Ps. 546, the effects ofwhich were recognized under the “Other income” heading in the consolidatedstatement of income. For the year ended December 31, 2007, the FinancialGroup recognized income of Ps. 1,326, together with the respective amortizationof Ps. 555.

 

As of this year, mortgageloans that are amortized under the interest method are evaluated jointly as asector given the feature they have in common. The loan grouping is madepursuant to the current regulations.

 

The Financial Groupperforms an analysis based on events or information to estimate the amount ofexpected cash flows to determine the estimated rate of return used in applyingthe valuation method for the amortization of the receivable. If the analysisdemonstrates that the expected future cash flows will decrease, it will make anestimate for non-recoverability or difficult collection against the year’soutstanding balance for the amount that such expected cash flows are lower thanthe book value of the receivable.

 

Assets other than cashthat the Financial Group has received as part of portfolio collection orrecovery have been mainly real property.

 

The main featureconsidered for segmenting acquired portfolios has been the type of loan.

 

**12 - OTHERACCOUNTS RECEIVABLE, NET**

 

As of December 31,2008 and 2007, the other accounts receivable balance is as follows:

 
| ** **                          | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|-----------|------------|------------|------------|
| Loans to officers and employees     |       | Ps.       | 1,162      |       | Ps.        | 1,122 |   |
| Debtors from liquidation settlement |       | 2,643     |       | 1,382      |       |
| Real property portfolios            |       | 982       |       | 1,025      |       |
| Fiduciary rights                    |       | 3,083     |       | 2,486      |       |
| Sundry debtors                      |       | 1,382     |       | 1,494      |       |
| Taxes receivable                    |       | 171       |       | 20         |       |
| Other                               |       | 203       |       | 107        |       |
|                                | ** ** | **9,626** | ** ** | **7,636**  | ** ** |
| Allowance for doubtful accounts     |       | (112      | )          | (19        | )          |
| ** **                          | ** ** | **Ps.**   | **9,514**  | ** ** | **Ps.**    | **7,617** | ** ** |

 

**13 -FORECLOSED ASSETS, NET**

 

As of December 31,2008 and 2007, the foreclosed asset balance is as follows:

 
| ** **                                | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|-------------------------------------------|------------|-----------|------------|------------|------------|
| Personal property                         |       | Ps.       | 71         |       | Ps.        | 68 |   |
| Real property                             |       | 1,100     |       | 597        |       |
| Goods pledged for sale                    |       | 26        |       | 44         |       |
|                                      | ** ** | **1,197** | ** ** | **709**    | ** ** |
| Allowance for losses on foreclosed assets |       | (334      | )          | (324       | )          |
| ** **                                | ** ** | **Ps.**   | **863**    | ** ** | **Ps.**    | **385** | ** ** |

 

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**14 -PROPERTY, FURNITURE AND FIXTURES, NET**

 

As of December 31,2008 and 2007, the property, furniture and fixtures balance is as follows:

 
| ** **                                             | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| Furniture  and equipment                               |       | Ps.        | 4,902      |       | Ps.        | 4,481 |   |
| Property  intended for offices                         |       | 5,396      |       | 5,039      |       |
| Installation  costs                                    |       | 2,407      |       | 2,360      |       |
| ** **                                             | ** ** | **12,705** | ** ** | **11,880** | ** ** |
| Less  – Accumulated depreciation and amortization |       | (4,276     | )          | (3,782     | )          |
| ** **                                             | ** ** | **Ps.**    | **8,429**  | ** ** | **Ps.**    | **8,098** | ** ** |

 

The average estimateduseful lives of the Financial Group’s assets subject to depreciation are listedbelow:

 
| ** **                | ** ** | **Useful Life**     | ** ** |
|---------------------------|------------|---------------------|------------|
| Transportation  equipment |       | 4 years             |       |
| Computer  equipment       |       | 4.7 years           |       |
| Furniture  and fixtures   |       | 10 years            |       |
| Real  estate              |       | From 4 to 99  years |       |

 

**15 -PERMANENT STOCK INVESTMENTS**

 

Investment inunconsolidated subsidiaries and associated companies are valued according tothe equity method, as detailed below:

 
| ** **                                                            | ** ** | **Share %** | ** ** | **2008** | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------------------|------------|-------------|------------|----------|------------|------------|------------|
| Seguros Banorte Generali,  S. A. de C. V.                             |       | 51.00       | %          | Ps.      | 1,086      |       | Ps.        | 932 |   |
| Fondo Solida Banorte Generali, S. A. de C. V., SIEFORE  (one and two) |       | 99.00       | %          | 558      |       | 669        |       |
| Pensiones Banorte  Generali, S. A. de C. V.                           |       | 51.00       | %          | 503      |       | 572        |       |
| Banorte Investment funds                                              |       | Various     |       | 114      |       | 112        |       |
| Controladora PROSA, S. A.  de C. V.                                   |       | 19.73       | %          | 60       |       | 50         |       |
| Bolsa Mexicana de Valores,  S. A. de C. V.                            |       | Various     |       | —   |       | 45         |       |
| Servicio Pan Americano de  Protección, S. A. de C. V.            |       | 8.50        | %          | 97       |       | 29         |       |
| Transporte Aéreo Técnico Ejecutivo, S. A. de C.  V.         |       | 45.33       | %          | 89       |       | 112        |       |
| Other                                                                 |       | Various     |       | 52       |       | 69         |       |
| ** **                                                            | ** ** | ** **  | ** ** | **Ps.**  | **2,559**  | ** ** | **Ps.**    | **2,590** | ** ** |

 

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**16 -DEFERRED TAXES, NET**

 

The tax reported by theFinancial Group is calculated based on the current tax result of the year andenacted tax regulations. However, due to temporary differences betweenaccounting and tax balance sheet accounts, the Financial Group has recognized arecoverable net deferred tax asset of Ps. 471 and Ps. 214 as of December 31,2008 and 2007, as detailed below:

 
| ** **                                                             | ** ** | **2008**                   | ** ** | **2007**            | ** ** |
|------------------------------------------------------------------------|------------|----------------------------|------------|---------------------|------------|
| ** **                                                             | ** ** | **Temporary  differences** | ** ** | **Deferred effect** | ** ** | **Temporary  differences** | ** ** | **Deferred effect** | ** ** |
| ** **                                                             | ** ** | **Base**                   | ** ** | **ISR**             | ** ** | **PTU** | ** ** | **Base** | ** ** | **ISR** | ** ** | **PTU** | ** ** |
| Temporary  Differences – Assets                                   |       |                       |       |                |       |   |   |   |   |   |   |   |   |
| Allowance  for loan losses                                             |       | Ps.                        | 196        |                | Ps.        | 68 |   | Ps. | — |   | Ps. | 174 |   | Ps. | 55 |   | Ps. | — |   |
| Tax  loss carryforwards                                                |       | 78                         |       | 22                  |       | — |   | 5 |   | 2 |   | — |   |
| Tax  loss carryforwards of Uniteller and Banorte USA                   |       | 111                        |       | 38                  |       | — |   | 37 |   | 13 |   | — |   |
| Recoverable  asset tax (IMPAC)                                         |       | —                     |       | —              |       | — |   | 2 |   | 2 |   | — |   |
| State  tax on deferred assets                                          |       | —                     |       | —              |       | — |   | 5 |   | 2 |   | — |   |
| Unrealized  loss in available for sale securities                      |       | —                     |       | —              |       | — |   | 29 |   | 10 |   | — |   |
| Surplus  preventive allowances for credit risks over the net tax limit |       | 936                        |       | 262                 |       | 94 |   | — |   | — |   | — |   |
| Excess  of tax over book value of foreclosed and fixed assets          |       | 1,160                      |       | 317                 |       | 69 |   | 802 |   | 224 |   | 48 |   |
| PTU                                                                    |       | 896                        |       | 252                 |       | 90 |   | 842 |   | 236 |   | 84 |   |
| Other                                                                  |       | 1,308                      |       | 363                 |       | 121 |   | 1,809 |   | 507 |   | 169 |   |
| **Total assets**                                                       | ** ** | **Ps.**                    | **4,685**  | ** **          | **Ps.**    | **1,322** | ** ** | **Ps.** | **374** | ** ** | **Ps.** | **3,705** | ** ** | **Ps.** | **1,051** | ** ** | **Ps.** | **301** | ** ** |
| Temporary  Differences - Liabilities                                   |       |                       |       |                |       |   |   |   |   |   |   |   |   |
| Excess  of book over tax value of fixed assets and expected expenses   |       | Ps.                        | 4          |                | Ps.        | 1 |   | Ps. | — |   | Ps. | 591 |   | Ps. | 166 |   | Ps. | 37 |   |
| Unrealized  capital gain from investments in SIEFORES                  |       | 87                         |       | 24                  |       | — |   | 146 |   | 41 |   | — |   |
| ISR  payable on UDI trusts                                             |       | 139                        |       | 39                  |       |   |   | 131 |   | 37 |   | — |   |
| Portfolios  acquired                                                   |       | 2,083                      |       | 583                 |       | 100 |   | 1,751 |   | 490 |   | 70 |   |
| Reversal  of sales costs                                               |       | 18                         |       | 5                   |       | — |   | 39 |   | 11 |   | — |   |
| Contribution  to pension fund                                          |       | 1,000                      |       | 280                 |       | 100 |   | 500 |   | 140 |   | 50 |   |
| Other                                                                  |       | 302                        |       | 93                  |       | — |   | 284 |   | 96 |   | — |   |
| **Total liabilities**                                                  | ** ** | **Ps.**                    | **3,633**  | ** **          | **Ps.**    | **1,025** | ** ** | **Ps.** | **200** | ** ** | **Ps.** | **3,442** | ** ** | **Ps.** | **981** | ** ** | **Ps.** | **157** | ** ** |
| ** **                                                             | ** ** | ** **                 | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net accumulated asset**                                              | ** ** | **Ps.**                    | **1,052**  | ** **          | **Ps.**    | **297** | ** ** | **Ps.** | **174** | ** ** | **Ps.** | **263** | ** ** | **Ps.** | **70** | ** ** | **Ps.** | **144** | ** ** |
| ** **                                                             | ** ** | ** **                 | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deferred taxes, net**                                                | ** ** | ** **                 | ** ** | ** **          | ** ** | **Ps.** | **471** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ps.** | **214** | ** ** |
|                                                                        |            |                            |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As discussed in Note 27,as of January 1, 2005, Article 10 and Temporary Article 2 of theMexican Income Tax Law were amended, whereby the income tax rate was graduallyreduced from 30% in 2005 to 29% in 2006 and 28% as of 2007 and thereafter.Pursuant to the provisions of NIF D-4, “Incomes Taxes”, and INIF 8, “Effects ofthe Business Flat Tax”, based on financial forecasts management adjusted thebalances based on the rates likely to be in effect at the time of theirrecovery. Additionally, it made forecasts for the IETU and compared it to ISR,and concluded that the Financial Group and its subsidiaries will continue topay ISR. Thus no change was made to the deferred tax calculations.

 

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Derived fromconsolidating Banorte USA, a net amount of Ps. 18 million was added to deferredtaxes determined at a rate of 35% as per the tax law of the USA. Banorte USA’sdeferred tax assets and liabilities are determined using the liability method,under which the net asset or liability for deferred taxes is determined basedon the tax effects of temporary differences between the book and tax base ofassets and liabilities.

 

**17 - OTHERASSETS**

 

As of December 31,2008 and 2007, other assets are as follows:

 
| ** **                                   | ** ** | **2008** | ** ** | **2007**   | ** ** |
|----------------------------------------------|------------|----------|------------|------------|------------|
| Plan  assets held for employee pension plans |       | Ps.      | 3,482      |       | Ps.        | 2,727 |   |
| Other  amortizable expenses                  |       | 2,352    |       | 2,642      |       |
| Accumulated  amortization of other expenses  |       | (480     | )          | (969       | )          |
| Goodwill                                     |       | 5,377    |       | 4,134      |       |
| ** **                                   | ** ** | **Ps.**  | **10,731** | ** ** | **Ps.**    | **8,534** | ** ** |

 

As of December 31,2008, goodwill was Ps. 5,377 and was comprised of the following: Ps. 32 for thepurchase of Banorte Generali, S.A. de C.V., AFORE; Ps. 3,001 for the purchaseof INB; Ps. 2,082 for the purchase option program for the remaining 30% of INBshares and Ps. 262 for the purchase of Uniteller. As of December 31, 2007,goodwill was Ps. 4,134 and was comprised as follows: Ps. 34 for the purchase ofBanorte Generali, S.A. de C.V., AFORE; Ps. 2,368 for the purchase of INB; Ps.1,525 for the purchase option program for the remaining 30% of INB shares andPs. 207 for the purchase of Uniteller. As mentioned in Note 4, goodwill is notamortized and is subject to annual impairment tests. No impairment to goodwillvalue was recorded as of December 31, 2008 or 2007.

 

**18 -DEPOSITS**

 

**Liquiditycoefficient**

 

The “Investment regimefor transactions in foreign currency and conditions to be fulfilled during theterm of transactions in such currency”, designed for credit institutions byBanco de México, establishes the mechanism for determining the liquiditycoefficient of liabilities denominated in foreign currency.

 

In accordance with suchregime, during 2008 and 2007 the Financial Group generated a liquidityrequirement of USD 412,843 thousand and USD 303,221 thousand, respectively, andheld investments in liquid assets of USD 661,959 thousand and USD 490,577thousand, representing a surplus of USD 249,116 thousand and USD 187,356thousand, respectively.

 

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**DEPOSITS**

 

The liabilities derivedfrom traditional deposits are as follows:

 
| ** **                                                                      | ** ** | **2008**    | ** **  | **2007**    | ** ** |
|---------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **Immediately due and payable deposits**                                        |       |        |        |        |       |
| **Checking accounts earning no interest:**                                      |       |        |        |        |       |
| Cash  deposits                                                                  |       | Ps.         | 56,247      |        | Ps.        | 45,518 |   |
| Checking  accounts in US dollars for individual residents of the Mexican border |       | 573         |        | 475         |       |
| Demand  deposits accounts                                                       |       | 3,433       |        | 2,865       |       |
| **Checking accounts earning interest:**                                         |       |        |        |        |       |
| Other  bank checking deposit                                                    |       | 35,471      |        | 33,918      |       |
| Savings  accounts                                                               |       | 234         |        | 167         |       |
| Checking  accounts in US dollars for individual residents of the Mexican border |       | 2,166       |        | 1,931       |       |
| Demand  deposits accounts                                                       |       | 30,212      |        | 26,197      |       |
| Tax  payments                                                                   |       | —      |        | —      |       |
| IPAB  checking accounts                                                         |       | 14          |        | 9           |       |
| ** **                                                                      | ** ** | **128,350** | ** **  | **111,080** | ** ** |
| **Time deposits**                                                               |       |        |        |        |       |
| **General public:**                                                             |       |        |        |        |       |
| Fixed-term  deposits                                                            |       | 20,681      |        | 17,462      |       |
| Over-the-counter  investments                                                   |       | 43,436      |        | 15,604      |       |
| PRLV  primary market for individuals                                            |       | 53,270      |        | 44,735      |       |
| PRLV  primary market for business entities                                      |       | 1,056       |        | 1,389       |       |
| Foreign  residents deposits                                                     |       | 78          |        | 54          |       |
| Provision  for interest                                                         |       | 219         |        | 164         |       |
| ** **                                                                      | ** ** | **118,740** | ** **  | **79,408**  | ** ** |
| **Money market:**                                                               |       |        |        |        |       |
| Fixed-term  deposits                                                            |       | 188         |        | 1,860       |       |
| Over  the counter promissory notes                                              |       | 12,323      |        | 9,881       |       |
| Provision  for interest                                                         |       | 1,168       |        | 1,078       |       |
| ** **                                                                      | ** ** | **13,679**  | ** **  | **12,819**  | ** ** |
| ** **                                                                      | ** ** | **132,419** | ** **  | **92,227**  | ** ** |
| ** **                                                                      | ** ** | **Ps.**     | **260,769** | ** **  | **Ps.**    | **203,307** | ** ** |

 

The funding rates whichthe Financial Group uses as reference are: a) for Mexican pesos, InterbankInterest Rate (TIIE), Average Cost of Funds (CCP) and; b) for foreign currency,the London Interbank Offered Rate (LIBOR).

 

These liabilities incurinterest depending on the type of instrument and average balance held in theinvestments. The average interest rates and their currency of reference areshown below:

 

**Immediatelydue and payable deposits**

** **
| **Foreign**             | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| **exchange**            | ** ** | **1Q**   | ** ** | **2Q**   | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| Mexican pesos and UDIS  |       | 0.90     | %          | 0.96     | %          | 1.04 | % | 1.13 | % | 0.88 | % | 0.87 | % | 0.86 | % | 0.86 | % |
| Foreign Currency        |       | 0.38     | %          | 0.27     | %          | 0.26 | % | 0.04 | % | 0.97 | % | 0.92 | % | 0.85 | % | 0.74 | % |
| Banorte  USA            |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand, NOW and Savings |       | 0.43     | %          | 0.28     | %          | 0.25 | % | 0.19 | % | 0.43 | % | 0.65 | % | 0.67 | % | 0.50 | % |
| Money Market            |       | 2.79     | %          | 1.88     | %          | 2.06 | % | 1.66 | % | 4.60 | % | 4.36 | % | 4.23 | % | 3.64 | % |

 

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**Timedeposits**

** **
| ** **              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| **Foreign exchange**    | ** ** | **1Q**   | ** ** | **2Q**   | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| **General public**      |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican  pesos and UDIS |       | 5.34     | %          | 5.32     | %          | 5.82 | % | 6.16 | % | 5.32 | % | 5.43 | % | 5.53 | % | 5.19 | % |
| Foreign  Currency       |       | 2.35     | %          | 1.48     | %          | 1.75 | % | 2.42 | % | 2.88 | % | 2.86 | % | 3.00 | % | 2.94 | % |
| Money  market           |       | 8.05     | %          | 7.89     | %          | 8.39 | % | 8.81 | % | 9.66 | % | 8.69 | % | 7.79 | % | 8.48 | % |
| Banorte  USA            |       | 4.82     | %          | 4.53     | %          | 4.36 | % | 4.07 | % | 5.04 | % | 5.11 | % | 5.17 | % | 5.12 | % |

 

As of December 31,2008 and 2007, the terms at which these deposits are traded are as follows:

 
| ** **                                 | ** ** | **2008**      | ** **        |
|--------------------------------------------|------------|---------------|-------------------|
| ** **                                 | ** ** | **From 1 to** | ** **        | **From 6 to** | ** ** | **More than** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **179 days**  | ** **        | **12 months** | ** ** | **1 year** | ** ** | **Total** | ** ** |
| **General public**                         |       |          |              |   |   |   |   |   |   |
| Fixed  term deposits                       |       | Ps.           |  12,643      |   | Ps. |  4,400 |   | Ps. |  3,638 |   | Ps. |  20,681 |   |
| Over  the counter investments              |       | 43,361        |              | 75 |   | — |   | 43,436 |   |
| PRLV  primary market for individuals       |       | 52,902        |              | 330 |   | 38 |   | 53,270 |   |
| PRLV  primary market for business entities |       | 1,021         |              | 26 |   | 9 |   | 1,056 |   |
| Foreign  residents deposits                |       | 29            |              | 28 |   | 21 |   | 78 |   |
| Provision  for interest                    |       | 201           |              | 18 |   | — |   | 219 |   |
| ** **                                 | ** ** | **110,157**   | ** **        | **4,877** | ** ** | **3,706** | ** ** | **118,740** | ** ** |
| **Money market:**                          |       |          |              |   |   |   |   |   |   |
| Fixed-term  deposits                       |       | —        |              | — |   | 188 |   | 188 |   |
| Money  desk promissory notes               |       | 7,972         |              | 3,000 |   | 1,351 |   | 12,323 |   |
| Provision  for interest                    |       | 32            |              | 48 |   | 1,088 |   | 1,168 |   |
|                                       | ** ** | **8,004**     | ** **        | **3,048** | ** ** | **2,627** | ** ** | **13,679** | ** ** |
| ** **                                 | ** ** | **Ps.**       | ** 118,161** | ** ** | **Ps.** | ** 7,925** | ** ** | **Ps.** | ** 6,333** | ** ** | **Ps.** | ** 132,419** | ** ** |

 
| ** **                                 | ** ** | **2007**      | ** **       |
|--------------------------------------------|------------|---------------|------------------|
| ** **                                 | ** ** | **From 1 to** | ** **       | **From 6 to** | ** ** | **More than** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **179 days**  | ** **       | **12 months** | ** ** | **1 year** | ** ** | **Total** | ** ** |
| **General public**                         |       |          |             |   |   |   |   |   |   |
| Fixed  term deposits                       |       | Ps.           |  11,746     |   | Ps. |  2,735 |   | Ps. |  2,981 |   | Ps. |  17,462 |   |
| Over  the counter investments              |       | 15,593        |             | 11 |   | — |   | 15,604 |   |
| PRLV  primary market for individuals       |       | 44,405        |             | 301 |   | 29 |   | 44,735 |   |
| PRLV  primary market for business entities |       | 1,366         |             | 19 |   | 4 |   | 1,389 |   |
| Foreign  residents deposits                |       | 27            |             | 4 |   | 23 |   | 54 |   |
| Provision  for interest                    |       | 143           |             | 21 |   | — |   | 164 |   |
| ** **                                 | ** ** | **73,280**    | ** **       | **3,091** | ** ** | **3,037** | ** ** | **79,408** | ** ** |
| **Money market:**                          |       |          |             |   |   |   |   |   |   |
| Fixed  term deposits                       |       | —        |             | — |   | 1,860 |   | 1,860 |   |
| Money  desk promissory notes               |       | 8,652         |             | — |   | 1,229 |   | 9,881 |   |
| Provision  for interest                    |       | 18            |             | 23 |   | 1,037 |   | 1,078 |   |
|                                       | ** ** | **8,670**     | ** **       | **23** | ** ** | **4,126** | ** ** | **12,819** | ** ** |
| ** **                                 | ** ** | **Ps.**       | ** 81,950** | ** ** | **Ps.** | ** 3,114** | ** ** | **Ps.** | ** 7,163** | ** ** | **Ps.** | ** 92,227** | ** ** |

 

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**19 -INTERBANK AND OTHER LOANS**

 

The loans received fromother banks as of December 31, 2008 and 2007 are as follows:

 
| ** **                   | ** ** | **Mexican pesos** | ** **       | **Denominated in US   dollars** | ** ** | **Total**        | ** ** |
|------------------------------|------------|-------------------|------------------|---------------------------------|------------|------------------|------------|
| ** **                   | ** ** | **2008**          | ** **       | **2007**                        | ** ** | **2008**         | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Immediately due**          | ** ** | ** **        | ** **       | ** **                      | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domestic  banks (Call money) |       | Ps.               |  —     |                            | Ps.        |  871        |       | Ps. |  1,245 |   | Ps. |  — |   | Ps. |  1,245 |   | Ps. |  871 |   |
| ** **                   |       | —            | ** **       | **871**                         | ** ** | **1,245**        | ** ** | **—** | ** ** | **1,245** | ** ** | **871** | ** ** |
| **Short-term**               |       |              |             |                            |       |             |       |   |   |   |   |   |   |
| Banco  de México        |       | 11,123            |             | 3                               |       | —           |       | — |   | 11,123 |   | 3 |   |
| Commercial  banking          |       | 350               |             | 211                             |       | 1,670            |       | 1,537 |   | 2,020 |   | 1,748 |   |
| Development  banking         |       | 4,755             |             | 3,869                           |       | 2,421            |       | 1,754 |   | 7,176 |   | 5,623 |   |
| Public  trusts               |       | 3,602             |             | 3,447                           |       | 514              |       | 76 |   | 4,116 |   | 3,523 |   |
| Other  agencies              |       | —            |             | —                          |       | 121              |       | 48 |   | 121 |   | 48 |   |
| Provision  for interest      |       | 228               |             | 85                              |       | 19               |       | 26 |   | 247 |   | 111 |   |
| ** **                   | ** ** | **20,058**        | ** **       | **7,615**                       | ** ** | **4,745**        | ** ** | **3,441** | ** ** | **24,803** | ** ** | **11,056** | ** ** |
| **Long-term**                |       |              |             |                            |       |             |       |   |   |   |   |   |   |
| Commercial  banking          |       | 1,081             |             | 1,084                           |       | 3,533            |       | 2,661 |   | 4,614 |   | 3,745 |   |
| Development  banking         |       | 1,335             |             | 1,381                           |       | 7                |       | 7 |   | 1,342 |   | 1,388 |   |
| Public  trusts               |       | 3,664             |             | 4,747                           |       | 139              |       | 81 |   | 3,803 |   | 4,828 |   |
| Other  agencies              |       | —            |             | —                          |       | 876              |       | 835 |   | 876 |   | 835 |   |
| ** **                   | ** ** | **6,080**         | ** **       | **7,212**                       | ** ** | **4,555**        | ** ** | **3,584** | ** ** | **10,635** | ** ** | **10,796** | ** ** |
| ** **                   | ** ** | **Ps.**           | ** 26,138** | ** **                      | **Ps.**    | ** 15,698** | ** ** | **Ps.** | ** 10,545** | ** ** | **Ps.** | ** 7,025** | ** ** | **Ps.** | ** 36,683** | ** ** | **Ps.** | ** 22,723** | ** ** |

 

These liabilities incurinterest depending on the type of instrument and average balance of the loans.The average interest rates are shown below:

 
| ** **              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| **Foreign exchange**    | ** ** | **1Q**   | ** ** | **2Q**   | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| Call  money             |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican  pesos and UDIS |       | 7.44     | %          | 7.48     | %          | 7.99 | % | 8.17 | % | 7.02 | % | 7.19 | % | 7.21 | % | 7.40 | % |
|                    |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  bank loans       |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican  pesos and UDIS |       | 7.25     | %          | 7.17     | %          | 7.17 | % | 8.41 | % | 7.47 | % | 7.41 | % | 7.26 | % | 7.94 | % |
| Foreign  currency       |       | 5.33     | %          | 4.52     | %          | 4.51 | % | 6.62 | % | 5.90 | % | 5.76 | % | 5.95 | % | 5.71 | % |

 

Banorte USA liabilitiesaccrue interest at an average rate of 1.43% and 4.55% as of December 31,2008 and 2007, respectively. Moreover, the Arrendadora y Factor Banorte,S.A. de C.V. loans accrue an average interest rate of 9.21% and 8.91% inMexican pesos and 4.44% and 5.58% in USD by December 31, 2008 and 2007,respectively.

 

**20 - SUNDRYCREDITORS AND OTHER PAYABLES**

 

As of December 31,2008 and 2007, the sundry creditors and other payables balances are as follows:

** **
| ** **                                                     | ** ** | **2008** | ** **       | **2007**   | ** ** |
|----------------------------------------------------------------|------------|----------|------------------|------------|------------|
| Cashier  and certified checks and other negotiable instruments |       | Ps.      |  2,750      |       | Ps.        |  2,302 |   |
| Creditors  from liquidation settlement                         |       | 2,405    |             | 1,756      |       |
| Provision  for employee retirement obligations                 |       | 2,505    |             | 2,181      |       |
| Provisions  for sundry obligations                             |       | 4,510    |             | 3,742      |       |
| Others                                                         |       | 951      |             | 907        |       |
| ** **                                                     | ** ** | **Ps.**  | ** 13,121** | ** ** | **Ps.**    | ** 10,888** | ** ** |

 

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**21 -EMPLOYEE RETIREMENT OBLIGATIONS**

 

The Financial Grouprecognizes the liabilities for pension plans and seniority premium by using theprojected unit credit method, which considers the benefits accrued at thebalance sheet date and the benefits generated during the year.

 

The amount of current andprojected benefits as of December 31, 2008 and 2007, related to thedefined benefit pension plan, seniority premiums and retiree medical coverage,determined by independent actuaries, is analyzed below:

 
| ** **                          | ** ** | **2008**         | ** **    |
|-------------------------------------|------------|------------------|---------------|
| ** **                          | ** ** | **Pension plan** | ** **    | **Seniority premiums** | ** ** | **Medical services** | ** ** | **Total** | ** ** |
| Projected  benefit obligation (PBO) |       | Ps.              | (728          | ) | Ps. | (136 | ) | Ps. | (1,318 | ) | Ps. | (2,182 | ) |
| Fund  market value                  |       | 947              |          | 226 |   | 1,357 |   | 2,530 |   |
| **Funded status**                   | ** ** | **219**          | ** **    | **90** | ** ** | **39** | ** ** | **348** | ** ** |
| Transition  asset (obligation)      |       | 32               |          | (13 | ) | 328 |   | 347 |   |
| Unrecognized  prior service cost    |       | 2                |          | (3 | ) | — |   | (1 | ) |
| Unrecognized  actuarial losses      |       | 207              |          | 2 |   | 203 |   | 412 |   |
| **Net projected asset**             | ** ** | **Ps.**          | ** 460** | ** ** | **Ps.** | ** 76** | ** ** | **Ps.** | ** 570** | ** ** | **Ps.** | ** 1,106** | ** ** |

 
| ** **                                | ** ** | **2007**         | ** **    |
|-------------------------------------------|------------|------------------|---------------|
| ** **                                | ** ** | **Pension plan** | ** **    | **Seniority premiums** | ** ** | **Medical services** | ** ** | **Total** | ** ** |
| Projected  benefit obligation (PBO)       |       | Ps.              | (706          | ) | Ps. | (122 | ) | Ps. | (1,284 | ) | Ps. | (2,112 | ) |
| Fund  market value                        |       | 740              |          | 176 |   | 1,016 |   | 1,932 |   |
| **Funded status**                         | ** ** | **34**           | ** **    | **54** | ** ** | **(268** | **)** | **(180** | **)** |
| Transition  asset (obligation)            |       | 76               |          | (15 | ) | 411 |   | 472 |   |
| Unrecognized  prior service cost          |       | (31              | )             | (4 | ) | — |   | (35 | ) |
| Unrecognized  actuarial losses            |       | 167              |          | 4 |   | 190 |   | 361 |   |
| **Net projected asset**                   | ** ** | **Ps.**          | ** 246** | ** ** | **Ps.** | ** 39** | ** ** | **Ps.** | ** 333** | ** ** | **Ps.** | ** 618** | ** ** |
| **Accumulated benefit obligations (ABO)** | ** ** | **Ps.**          | ** 669** | ** ** | **Ps.** | ** 105** | ** ** | **Ps.** | ** —** | ** ** | **Ps.** | ** 774** | ** ** |

 

The Financial Group has anet accounting provision (net prepaid asset) of Ps. 4 generated by transferringpersonnel from Solida Administradora de Portafolios, S.A. de C.V. (Solida) toBanorte. Moreover, as of December 31, 2008, a separate fund amounting toPs. 2,530, (Ps. 1,932 in 2007) has been set aside to meet the above-mentionedobligations, in accordance with NIF D-3 and is recorded under “Other assets”.

 

For the years ended December 31,2008 and 2007, the net periodic pension cost is as follows:

 
| ** **                                                                   | ** ** | **2008** | ** **    | **2007**   | ** ** |
|------------------------------------------------------------------------------|------------|----------|---------------|------------|------------|
| Service  cost                                                                |       | Ps.      |  81      |       | Ps.        |  68 |   |
| Interest  cost                                                               |       | 181      |          | 100        |       |
| Expected  return on plan assets                                              |       | (216     | )             | (82        | )          |
| **Amortization of unrecognized items**                                       |       |     |          |       |       |
| Transition  obligation                                                       |       | 87       |          | 32         |       |
| Plan  amendments                                                             |       | —   |          | (2         | )          |
| Effects  of curtailment and reduction of obligations                         |       | 1        |          | —     |       |
| Variation  in assumptions recognized in “Other income or expenses” |       | 4        |          | —     |       |
| Variations  in assumptions recognized in 2008                                |       | 14       |          | —     |       |
| Variations  in assumptions                                                   |       | 7        |          | 2          |       |
| Actuarial  losses                                                            |       | —   |          | 3          |       |
| **Net periodic pension cost**                                                | ** ** | **Ps.**  | ** 159** | ** ** | **Ps.**    | ** 121** | ** ** |

 

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In January 2008 theFinancial Group recognized an effect of the curtailment and reduction of theobligations derived from the transfer of personnel under the defined benefitplan to the defined contribution plan, originating a cost of Ps. 2.

 

The rates used in thecalculation of the projected benefit obligation and return on plan assets as ofDecember 31, 2008 and 2007 are shown below:

 
| ** **                                                               | ** ** | **2008  Nominal** | ** ** | **2007  Nominal** | ** ** | **2007  Actual** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| Discount rate                                                            |       | 9.25              | %          | 8.75              | %          | 5.00             | %          |
| Rate of wage increase                                                    |       | 4.50              | %          | 4.50              | %          | 1.00             | %          |
| Rate of increase in costs and expenses of other  postretirement benefits |       | 5.57              | %          | 5.57              | %          | 2.00             | %          |
| Long-term inflation rate                                                 |       | 3.50              | %          | 3.50              | %          | —           | %          |
| Expected long-term rate of return on plan assets                         |       | 9.75              | %          | 9.75              | %          | 6.00             | %          |

 

The liability forseverance indemnities due to causes other than organization restructuring,which was also determined by independent actuaries, is comprised as follows:

 
| ** **                                 | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Defined  and projected benefit obligations |       |       |       | Ps.      | (156       | )        | Ps.        |  (155 | ) |
| **Funded status**                          | ** ** | ** ** | ** ** | **(156** | **)**      | **(155** | **)**      |
| Transition  obligation                     |       |       |       | 83       |       | 105      |       |
| Unrecognized  actuarial gains              |       |       |       | —   |       | (3       | )          |
| **Net projected liability**                | ** ** | ** ** | ** ** | **Ps.**  | **(73**    | **)**    | **Ps.**    | **(53** | **)** |

 

For the years ended December 31,2008 and 2007, the net periodic pension cost is as follows:

 
| ** **                                                                   | ** ** | ** ** | ** ** | **2008** | ** **   | **2007**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|----------|--------------|------------|------------|
| Service  cost                                                                |       |       |       | Ps.      |  25     |       | Ps.        |  24 |   |
| Interest  cost                                                               |       |       |       | 11       |         | 7          |       |
| Transition  obligation                                                       |       |       |       | 21       |         | 15         |       |
| Variation  in assumptions recognized in “Other income or expenses” |       |       |       | (2       | )            | —     |       |
| Variations  in assumptions recognized in 2008                                |       |       |       | —   |         | —     |       |
| **Net periodic pension cost**                                                | ** ** | ** ** | ** ** | **Ps.**  | ** 55** | ** ** | **Ps.**    | ** 46** | ** ** |

 

The balance of theemployee retirement obligations presented in this note refer to the FinancialGroup’s defined benefit pension plan for those employees who decided to remainenrolled.

 

The labor obligationsderived from the defined contribution pension plan do not require an actuarialvaluation as established in NIF D-3, because the cost of this plan isequivalent to the Financial Group’s contributions made to the plan. Moreover,as of December 31, 2008 this pension plan maintains a fund equivalent toPs. 958, which is recorded under “Other assets” and is equivalent to therecorded plan liability.

 

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**22 -SUBORDINATED DEBENTURES**

 
| ** **                                                                                                                                                                                                                      | ** ** | **2008** | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Preferred  subordinated debentures, maturing in April 2009, denominated in US  dollars, at an interest rate of 2.72%                                                                                                       |       | Ps.      |  143  |       | Ps.        |  113 |   |
| Senior  subordinated, nonconvertible debentures, maturing in January 2014,  denominated in US dollars, at an interest rate of 5.875%, payable  semiannually with a final principal payment at maturity (10-year term)      |       | 4,150    |       | 3,275      |       |
| Preferred  subordinated, nonconvertible debentures, maturing in April 2016,  denominated in US dollars, at an interest rate of 6.135%, payable  semiannually with a final principal payment at maturity (10-year term)     |       | 5,533    |       | 4,366      |       |
| Non  preferred subordinated nonconvertible debentures (Q BANORTE 08 debentures),  maturing in February 2018, at the 28-day TIIE rate plus 0.60%                                                                            |       | 3,000    |       | —     |       |
| Preferred  subordinated nonconvertible debentures (Q BANORTE 08-2), maturing in  June 2018, at the 28-day TIIE rate plus 0.77%                                                                                             |       | 2,750    |       | —     |       |
| Non  preferred subordinated nonconvertible debentures, maturing in  April 2021, denominated in US dollars, at an interest rate of 6.862%,  payable semiannually with a final principal payment at maturity (15-year  term) |       | 2,766    |       | 2,183      |       |
| Preferred  subordinated nonconvertible debentures (Q BANORTE 08-U), maturing inFebruary 2028, at a 4.95% annual  rate                                                                                                      |       | 1,871    |       | —     |       |
| Subordinated  debentures, maturing in June 2034, denominated in US dollars, at an  interest rate of 2.75%                                                                                                                  |       | 143      |       | 113        |       |
| Accrued  interest                                                                                                                                                                                                               |       | 257      |       | 160        |       |
|                                                                                                                                                                                                                            | ** ** | **Ps.**  | **20,613** | ** ** | **Ps.**    | ** 10,210** | ** ** |

 

The costs related tothese debentures are amortized using the straight-line method over the term ofthe debt. The amortization charged to results was Ps. 15 and Ps. 13 in 2008 and2007, respectively.

 

**23 -TRANSACTIONS AND BALANCES WITH SUBSIDIARIES AND ASSOCIATED COMPANIES**

 

The balances andtransactions with subsidiaries and associated companies as of December 31,2008, 2007 and 2006 are as follows:

 
| ** **                               | ** ** | **Revenues** | ** **    | **Accounts  receivable** | ** ** |
|------------------------------------------|------------|--------------|---------------|--------------------------|------------|
| **Institution**                          | ** ** | **2008**     | ** **    | **2007**                 | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Seguros Banorte Generali, S. A. de C. V. |       | Ps.          |  613     |                     | Ps.        |  587 |   | Ps. |  491 |   | Ps. |  19 |   | Ps. |  22 |   |
| **Total**                                | ** ** | **Ps.**      | ** 613** | ** **               | **Ps.**    | ** 587** | ** ** | **Ps.** | ** 491** | ** ** | **Ps.** | ** 19** | ** ** | **Ps.** | ** 22** | ** ** |
| ** **                               |       | ** **   | ** **    | ** **               |       |
| ** **                               |       | **Expenses** | ** **    | **Accounts payable**     |       |
| **Institution**                          |       | **2008**     |          | **2007**                 |       | **2006** |   | **2008** |   | **2007** |   |
| Seguros Banorte Generali, S. A. de C. V. |       | Ps.          |  300     |                     | Ps.        |  310 |   | Ps. |  224 |   | Ps. |  24 |   | Ps. |  8 |   |
| **Total**                                | ** ** | **Ps.**      | ** 300** | ** **               | **Ps.**    | ** 310** | ** ** | **Ps.** | ** 224** | ** ** | **Ps.** | ** 24** | ** ** | **Ps.** | ** 8** | ** ** |

 

All the balances andtransactions with the subsidiaries indicated in Note 3 have been eliminated inconsolidation.

 

Pursuant to article 73 ofthe LIC (Credit Institutions Law), loans granted by Banorte to any relatedparty may not exceed 50% and 75% of the basic portion of their net capital forthe years ended December 31, 2008 and 2007, respectively. For the yearsended December 31, 2008 and 2007, the amount of the loans granted torelated parties is Ps. 8,216 and Ps. 5,041, respectively, representing 54% and27%, respectively, of the limit established by the LIC.

 

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**Loanportfolio sales**

 

Sale of loan portfolio packages between related parties (nominal values)

 

In February 2003Banorte sold Ps. 1,925 of its own portfolio (with interest) to its subsidiarySólida at a price of Ps. 378. Of this transaction, Ps. 1,891 related topast-due amounts and Ps. 64 to the current portfolio. The transaction wasrecorded based on figures as of August 2002, for which reason the finalamount affecting the February 2003 balance sheet was Ps. 1,856,considering the collections made since August 2002. In conjunction withthe sold loan portfolio, Ps. 1,577 of the associated allowance for loan losseswas transferred as well.

 

In official letter601-II-323110 dated November 5, 2003, the Commission set forth theaccounting criteria to be applied to this transaction and issued a series ofrulings whereby Banorte must provide detailed information on the activities ofthis transaction throughout its duration, in the understanding that thistransaction was a one-time event and not a recurring portfolio transferprocedure.

 

Pursuant to theforegoing, below is a summary of the activity of the loan portfolio sold toSólida since August 2002 and for the years of 2007 and 2008:

 
| ** **                          | ** ** | **Mexican  pesos** | ** **      | **Foreign  currency** | ** ** | **Total**     | ** ** |
|-------------------------------------|------------|--------------------|-----------------|-----------------------|------------|---------------|------------|
| **Type of portfolio**               | ** ** | **Aug 02**         | ** **      | **Dec 07**            | ** ** | **Dec 08**    | ** ** | **Aug 02** | ** ** | **Dec 07** | ** ** | **Dec 08** | ** ** | **Aug 02** | ** ** | **Dec 07** | ** ** | **Dec 08** | ** ** |
| **Current portfolio**               |       |               |            |                  |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                          |       | Ps.                |  5         |                  | Ps.        |  —  |       | Ps. |  — |   | Ps. |  5 |   | Ps. |  — |   | Ps. |  — |   | Ps. |  10 |   | Ps. |  — |   | Ps. |  — |   |
| Housing mortgage                    |       | 54                 |            | 77                    |       | 34            |       | — |   | — |   | — |   | 54 |   | 77 |   | 34 |   |
| **Total**                           | ** ** | **59**             | ** **      | **77**                | ** ** | **34**        | ** ** | **5** | ** ** | **—** | ** ** | **—** | ** ** | **64** | ** ** | **77** | ** ** | **34** | ** ** |
| **Past-due portfolio**              |       |               |            |                  |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                          |       | 405                |            | 375                   |       | 367           |       | 293 |   | 112 |   | 116 |   | 698 |   | 487 |   | 483 |   |
| Consumer                            |       | 81                 |            | 73                    |       | 72            |       | — |   | — |   | — |   | 81 |   | 73 |   | 72 |   |
| Housing mortgage                    |       | 1,112              |            | 458                   |       | 393           |       | — |   | — |   | — |   | 1,112 |   | 458 |   | 393 |   |
| **Total**                           | ** ** | **1,598**          | ** **      | **906**               | ** ** | **832**       | ** ** | **293** | ** ** | **112** | ** ** | **116** | ** ** | **1,891** | ** ** | **1,018** | ** ** | **948** | ** ** |
| **Total portfolio**                 | ** ** | **Ps.**            | ** 1,657** | ** **            | **Ps.**    | ** 983** | ** ** | **Ps.** | ** 866** | ** ** | **Ps.** | ** 298** | ** ** | **Ps.** | ** 112** | ** ** | **Ps.** | ** 116** | ** ** | **Ps.** | ** 1,955** | ** ** | **Ps.** | ** 1,095** | ** ** | **Ps.** | ** 982** | ** ** |
| **Allowance for loan losses (1)**   |       |               |            |                  |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                          |       | 326                |            | 363                   |       | 355           |       | 246 |   | 112 |   | 116 |   | 572 |   | 475 |   | 471 |   |
| Consumer                            |       | 77                 |            | 73                    |       | 72            |       | — |   | — |   | — |   | 77 |   | 73 |   | 72 |   |
| Housing mortgage                    |       | 669                |            | 433                   |       | 369           |       | — |   | — |   | — |   | 669 |   | 433 |   | 369 |   |
| **Total allowance for loan losses** | ** ** | **Ps.**            | ** 1,072** | ** **            | **Ps.**    | ** 869** | ** ** | **Ps.** | ** 796** | ** ** | **Ps.** | ** 246** | ** ** | **Ps.** | ** 112** | ** ** | **Ps.** | ** 116** | ** ** | **Ps.** | ** 1,318** | ** ** | **Ps.** | ** 981** | ** ** | **Ps.** | ** 912** | ** ** |

 

----

(1) Allowancesrequired based on the classification methodology applied in Banorte that held99.99% of the stockholders’ equity of Sólida during 2008 and 2007.

 

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Asof December 31, 2008 and 2007, the composition of the Banorte’s loanportfolio, including the loan portfolio sold to Sólida, is as follows:

 
| ** **                    | ** ** | **Mexican pesos** | ** **        | **Foreign currency** | ** ** | **Total**         | ** ** |
|-------------------------------|------------|-------------------|-------------------|----------------------|------------|-------------------|------------|
| **Type of portfolio**         | ** ** | **Dec 08**        | ** **        | **Dec 07**           | ** ** | **Dec 08**        | ** ** | **Dec 07** | ** ** | **Dec 08** | ** ** | **Dec 07** | ** ** |
| Commercial loans              |       | Ps.               |  129,995     |                 | Ps.        |  99,311      |       | Ps. |  15,377 |   | Ps. |  21,791 |   | Ps. |  145,372 |   | Ps. |  121,102 |   |
| Consumer loans                |       | 29,116            |              | 27,045               |       | —            |       | 175 |   | 29,116 |   | 27,220 |   |
| Housing mortgage loans        |       | 43,784            |              | 35,602               |       | —            |       | 1,691 |   | 43,784 |   | 37,293 |   |
| **Current portfolio**         | ** ** | **202,895**       | ** **        | **161,958**          | ** ** | **15,377**        | ** ** | **23,657** | ** ** | **218,272** | ** ** | **185,615** | ** ** |
|                          |       |              |              |                 |       |              |       |   |   |   |   |   |   |
| Commercial loans              |       | 1,738             |              | 1,060                |       | 153               |       | 204 |   | 1,891 |   | 1,264 |   |
| Consumer loans                |       | 2,570             |              | 1,182                |       | —            |       | — |   | 2,570 |   | 1,182 |   |
| Housing mortgage loans        |       | 1,098             |              | 1,299                |       | —            |       | 16 |   | 1,098 |   | 1,315 |   |
| **Past-due portfolio**        | ** ** | **5,406**         | ** **        | **3,541**            | ** ** | **153**           | ** ** | **220** | ** ** | **5,559** | ** ** | **3,761** | ** ** |
| ** **                    | ** ** | ** **        | ** **        | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total portfolio**           | ** ** | **208,301**       | ** **        | **165,499**          | ** ** | **15,530**        | ** ** | **23,877** | ** ** | **223,831** | ** ** | **189,376** | ** ** |
| Allowance for loan losses     |       | 6,950             |              | 4,319                |       | 285               |       | 369 |   | 7,235 |   | 4,688 |   |
| **Net portfolio**             | ** ** | **Ps.**           | ** 201,351** | ** **           | **Ps.**    | ** 161,180** | ** ** | **Ps.** | ** 15,245** | ** ** | **Ps.** | ** 23,508** | ** ** | **Ps.** | ** 216,596** | ** ** | **Ps.** | ** 184,688** | ** ** |
| **Allowance for loan losses** | ** ** | ** **        | ** **        | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | **130.15** | **%** | **124.64** | **%** |
| **% of past-due portfolio**   | ** ** | ** **        | ** **        | ** **           | ** ** | ** **        | ** ** | ** ** | ** ** | **2.48** | **%** | **1.98** | **%** |

 

**24 -INFORMATION BY SEGMENT**

 

To analyze the financialinformation of the Financial Group, the data of the most representativesegments as of December 31, 2008, 2007 and 2006 is presented.

 

a. The balances byservice sector of the Financial Group, without considering the eliminationsrelative to the consolidation of the financial statements, are as follows:

 
| ** **                                | ** ** | **2008**   | ** **   | **2007**   | ** ** | **2006**     | ** ** |
|-------------------------------------------|------------|------------|--------------|------------|------------|--------------|------------|
| **Banking sector**                        | ** ** | ** ** | ** **   | ** ** | ** ** | ** **   | ** ** |
| Net  income                               |       | Ps.        |  6,543  |       | Ps.        |  6,151  |       | Ps. |  5,382 |   |
| Stockholders’  equity:               |       | 35,526     |         | 30,440     |       | 24,690       |       |
| Total  portfolio                          |       | 236,236    |         | 188,235    |       | 143,992      |       |
| Past-due  portfolio                       |       | 4,836      |         | 2,743      |       | 2,037        |       |
| Allowance  for loan losses                |       | (6,582     | )            | (3,707     | )          | (3,578       | )          |
| Total  net assets                         |       | 562,433    |         | 274,361    |       | 189,546      |       |
|                                      |       |       |         |       |       |         |       |
| **Brokerage sector**                      |       |       |         |       |       |         |       |
| Net  income                               |       | 183        |         | 288        |       | 191          |       |
| Stockholders’  equity:               |       | 1,143      |         | 1,020      |       | 736          |       |
| Portfolio  balance                        |       | 119,286    |         | 180,972    |       | 168,949      |       |
| Total  net assets                         |       | 1,662      |         | 1,333      |       | 971          |       |
|                                      |       |       |         |       |       |         |       |
| **Savings sector**                        |       |       |         |       |       |         |       |
| Net  income                               |       | 579        |         | 736        |       | 1,067        |       |
| Stockholders’  equity:               |       | 4,216      |         | 3,962      |       | 3,607        |       |
| Total  net assets                         |       | 27,789     |         | 23,701     |       | 18,193       |       |
| ** **                                |       |       |         |       |       |         |       |
| **Auxiliary credit organizations sector** |       |       |         |       |       |         |       |
| Net  income                               |       | 336        |         | 271        |       | 256          |       |
| Stockholders’  equity:               |       | 1,308      |         | 1,092      |       | 1,133        |       |
| Total  portfolio                          |       | 13,874     |         | 12,222     |       | 7,708        |       |
| Past-due  portfolio                       |       | 74         |         | 37         |       | 42           |       |
| Allowance  for loan losses                |       | (79        | )            | (339       | )          | (73          | )          |
| Total net assets                          |       | Ps.        |  14,322 |       | Ps.        |  12,587 |       | Ps. |  8,547 |   |

 

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b. The trading resultsfor the years ended on December 31, 2008 and 2007, are as follows:

 
| ** **                           | ** ** | **2008**  | ** **      | **2007**   | ** ** |
|--------------------------------------|------------|-----------|-----------------|------------|------------|
| **Valuation results**                |       |      |            |       |       |
| Trading  securities                  |       | Ps.       |  109       |       | Ps.        |  1 |   |
| Securities  repurchase agreement     |       | 49        |            | 82         |       |
| Derivative  financial instruments    |       | (172      | )               | 234        |       |
| Futures                              |       | (1        | )               | 1          |       |
| **Total valuation results**          | ** ** | **(15**   | **)**           | **318**    | ** ** |
| ** **                           |       |      |            |       |       |
| **Dividends received**               | ** ** | **1**     | ** **      | **—** | ** ** |
| ** **                           |       |      |            |       |       |
| **Purchase-sale results**            |       |      |            |       |       |
| Trading  securities                  |       | 26        |            | 503        |       |
| Available  for sale securities       |       | (178      | )               | (36        | )          |
| Derivative  financial instruments    |       | 428       |            | 46         |       |
| Total securities purchase sale       |       | 276       |            | 513        |       |
|                                 |       |      |            |       |       |
| Spot  foreign currency               |       | 712       |            | 454        |       |
| Foreign  currency forwards           |       | 48        |            | —     |       |
| Foreign  currency futures            |       | 1         |            | —     |       |
| Foreign  currency valuation          |       | 6         |            | (15        | )          |
| Minted  metals purchase sales        |       | 5         |            | 1          |       |
| Minted  metals valuation             |       | 6         |            | (2         | )          |
| Total foreign currency purchase sale |       | 778       |            | 438        |       |
| Restatement                          |       | —    |            | 23         |       |
| **Total purchase-sale results**      | ** ** | **1,054** | ** **      | **974**    | ** ** |
| **Total trading results**            | ** ** | **Ps.**   | ** 1,040** | ** ** | **Ps.**    | ** 1,292** | ** ** |

 

c. The current loanportfolio, grouped by economic sector and geographical location, is as follows

 
| ** **                           | ** ** | **2008**                  | ** **       |
|--------------------------------------|------------|---------------------------|------------------|
| ** **                           | ** ** | **Geographical location** | ** **       |
| **Economic sector**                  | ** ** | **North**                 | ** **       | **Central** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
| Agriculture                          |       | Ps.                       |  2,576      |   | Ps. |  1,317 |   | Ps. |  571 |   | Ps. |  737 |   | Ps. |  5,201 |   |
| Mining                               |       | 58                        |             | 20 |   | 11 |   | 30 |   | 119 |   |
| Manufacturing                        |       | 8,502                     |             | 5,159 |   | 1,879 |   | 874 |   | 16,414 |   |
| Construction                         |       | 6,819                     |             | 6,215 |   | 870 |   | 971 |   | 14,875 |   |
| Public  utilities                    |       | 48                        |             | 154 |   | 2 |   | 1 |   | 205 |   |
| Commerce                             |       | 13,870                    |             | 9,345 |   | 3,477 |   | 6,359 |   | 33,051 |   |
| Transportation                       |       | 1,464                     |             | 6,724 |   | 126 |   | 201 |   | 8,515 |   |
| Financial  services                  |       | 9,319                     |             | 13,385 |   | 242 |   | 1,713 |   | 24,659 |   |
| Communal,  social services           |       | 2,904                     |             | 3,728 |   | 1,651 |   | 822 |   | 9,105 |   |
| Business  groups                     |       | 22                        |             | 56 |   | 2 |   | 23 |   | 103 |   |
| Public  administration and services  |       | 14,668                    |             | 8,382 |   | 1,626 |   | 2,413 |   | 27,089 |   |
| International  organization services |       | 1                         |             | — |   | — |   | — |   | 1 |   |
| USA                                  |       | —                    |             | — |   | — |   | — |   | 15,618 |   |
| Credit  card                         |       | —                    |             | — |   | — |   | — |   | 15,067 |   |
| Consumer                             |       | —                    |             | — |   | — |   | — |   | 14,053 |   |
| Housing  mortgage                    |       | —                    |             | — |   | — |   | — |   | 43,750 |   |
| Other                                |       | —                    |             | — |   | — |   | — |   | 47 |   |
| Arrendadora  y Factor Banorte        |       | —                    |             | — |   | — |   | — |   | 12,194 |   |
| Créditos  Pronegocio            |       | —                    |             | — |   | — |   | — |   | 232 |   |
| **Current loan portfolio**           | ** ** | **Ps.**                   | ** 60,251** | ** ** | **Ps.** | ** 54,485** | ** ** | **Ps.** | ** 10,457** | ** ** | **Ps.** | ** 14,144** | ** ** | **Ps.** | ** 240,298** | ** ** |

 

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| ** **                           | ** ** | **2007**                  | ** **       |
|--------------------------------------|------------|---------------------------|------------------|
| ** **                           | ** ** | **Geographical location** | ** **       |
| **Economic sector**                  | ** ** | **North**                 | ** **       | **Central** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
| Agriculture                          |       | Ps.                       |  2,430      |   | Ps. |  1,260 |   | Ps. |  575 |   | Ps. |  681 |   | Ps. |  4,946 |   |
| Mining                               |       | 117                       |             | 29 |   | 11 |   | 30 |   | 187 |   |
| Manufacturing                        |       | 5,822                     |             | 4,506 |   | 1,660 |   | 819 |   | 12,807 |   |
| Construction                         |       | 4,537                     |             | 3,366 |   | 459 |   | 361 |   | 8,723 |   |
| Public  utilities                    |       | 41                        |             | 4 |   | 1 |   | 1 |   | 47 |   |
| Commerce                             |       | 7,415                     |             | 7,207 |   | 2,909 |   | 5,020 |   | 22,551 |   |
| Transportation                       |       | 1,164                     |             | 5,085 |   | 110 |   | 205 |   | 6,564 |   |
| Financial  services                  |       | 11,040                    |             | 13,259 |   | 249 |   | 2,362 |   | 26,910 |   |
| Communal,  social services           |       | 2,128                     |             | 3,757 |   | 1,724 |   | 621 |   | 8,230 |   |
| Business  groups                     |       | 52                        |             | 173 |   | 3 |   | 23 |   | 251 |   |
| Public  administration and services  |       | 7,195                     |             | 4,606 |   | 1,589 |   | 4,461 |   | 17,851 |   |
| International  organization services |       | 1                         |             | — |   | — |   | — |   | 1 |   |
| USA                                  |       | —                    |             | — |   | — |   | — |   | 10,776 |   |
| Credit  card                         |       | —                    |             | — |   | — |   | — |   | 13,882 |   |
| Consumer                             |       | —                    |             | — |   | — |   | — |   | 13,169 |   |
| Housing  mortgage                    |       | —                    |             | — |   | — |   | — |   | 35,525 |   |
| Others                               |       | —                    |             | — |   | — |   | — |   | 54 |   |
| Arrendadora  y Factor Banorte        |       | —                    |             | — |   | — |   | — |   | 10,692 |   |
| Créditos  Pronegocio            |       | —                    |             | — |   | — |   | — |   | 472 |   |
| **Current loan portfolio**           | ** ** | **Ps.**                   | ** 41,942** | ** ** | **Ps.** | ** 43,252** | ** ** | **Ps.** | ** 9,290** | ** ** | **Ps.** | ** 14,584** | ** ** | **Ps.** | ** 193,638** | ** ** |

 

d. The past-due loanportfolio, grouped by economic sector and geographical location, is summarizedas follows

 
| ** **                    | ** ** | **2008**                  | ** **    |
|-------------------------------|------------|---------------------------|---------------|
| ** **                    | ** ** | **Geographical location** | ** **    |
| **Economic sector**           | ** ** | **North**                 | ** **    | **Central** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
| Agriculture                   |       | Ps.                       |  30      |   | Ps. |  80 |   | Ps. |  16 |   | Ps. |  19 |   | Ps. |  145 |   |
| Mining                        |       | 4                         |          | 2 |   | 1 |   | 6 |   | 13 |   |
| Manufacturing                 |       | 72                        |          | 129 |   | 57 |   | 43 |   | 301 |   |
| Construction                  |       | 24                        |          | 73 |   | 4 |   | 23 |   | 124 |   |
| Commerce                      |       | 214                       |          | 206 |   | 95 |   | 122 |   | 637 |   |
| Transportation                |       | 19                        |          | 14 |   | 9 |   | 10 |   | 52 |   |
| Financial  services           |       | 2                         |          | 11 |   | — |   | 3 |   | 16 |   |
| Communal,  social services    |       | 39                        |          | 31 |   | 13 |   | 33 |   | 116 |   |
| Business groups               |       | —                    |          | 1 |   | — |   | — |   | 1 |   |
| USA                           |       | —                    |          | — |   | — |   | — |   | 225 |   |
| Credit card                   |       | —                    |          | — |   | — |   | — |   | 2,140 |   |
| Consumer                      |       | —                    |          | — |   | — |   | — |   | 359 |   |
| Housing mortgage              |       | —                    |          | — |   | — |   | — |   | 705 |   |
| Other                         |       | —                    |          | — |   | — |   | — |   | 2 |   |
| Arrendadora  y Factor Banorte |       | —                    |          | — |   | — |   | — |   | 74 |   |
| Créditos  Pronegocio     |       | —                    |          | — |   | — |   | — |   | 38 |   |
| **Past-due loan portfolio**   | ** ** | **Ps.**                   | ** 404** | ** ** | **Ps.** | ** 547** | ** ** | **Ps.** | ** 195** | ** ** | **Ps.** | ** 259** | ** ** | **Ps.** | ** 4,948** | ** ** |

 

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| ** **                    | ** ** | **2007**                  | ** **    |
|-------------------------------|------------|---------------------------|---------------|
| ** **                    | ** ** | **Geographical location** | ** **    |
| **Economic sector**           | ** ** | **North**                 | ** **    | **Central** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
| Agriculture                   |       | Ps.                       |  19      |   | Ps. |  56 |   | Ps. |  7 |   | Ps. |  6 |   | Ps. |  88 |   |
| Mining                        |       | 2                         |          | 1 |   | — |   | 2 |   | 5 |   |
| Manufacturing                 |       | 23                        |          | 100 |   | 42 |   | 10 |   | 175 |   |
| Construction                  |       | 7                         |          | 56 |   | 1 |   | 13 |   | 77 |   |
| Commerce                      |       | 87                        |          | 111 |   | 59 |   | 37 |   | 294 |   |
| Transportation                |       | 4                         |          | 6 |   | 6 |   | 3 |   | 19 |   |
| Financial  services           |       | 2                         |          | 2 |   | — |   | 1 |   | 5 |   |
| Communal,  social services    |       | 27                        |          | 14 |   | 2 |   | 4 |   | 47 |   |
| USA                           |       | —                    |          | — |   | — |   | — |   | 83 |   |
| Credit card                   |       | —                    |          | — |   | — |   | — |   | 829 |   |
| Consumer                      |       | —                    |          | — |   | — |   | — |   | 280 |   |
| Housing mortgage              |       | —                    |          | — |   | — |   | — |   | 841 |   |
| Other                         |       | —                    |          | — |   | — |   | — |   | 1 |   |
| Arrendadora  y Factor Banorte |       | —                    |          | — |   | — |   | — |   | 38 |   |
| Créditos  Pronegocio     |       | —                    |          | — |   | — |   | — |   | 112 |   |
| **Past-due loan portfolio**   | ** ** | **Ps.**                   | ** 171** | ** ** | **Ps.** | ** 346** | ** ** | **Ps.** | ** 117** | ** ** | **Ps.** | ** 76** | ** ** | **Ps.** | ** 2,894** | ** ** |

 

e. Deposit accountsgrouped by product and geographical location are as follows:

 
| ** **                                  | ** ** | **2008**                  | ** **       |
|---------------------------------------------|------------|---------------------------|------------------|
| ** **                                  | ** ** | **Geographical location** | ** **       |
| **Product**                                 | ** ** | **Monterrey**             | ** **       | **Mexico City** | ** ** | **West** | ** ** | **Northwest** | ** ** | **Southeast** | ** ** | **Treasury  and other** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
| Non-interest bearing checking accounts      |       | Ps.                       |  14,364     |   | Ps. |  18,134 |   | Ps. |  5,506 |   | Ps. |  6,334 |   | Ps. |  7,625 |   | Ps. |  72 |   | Ps. |  — |   | Ps. |  52,035 |   |
| Interest-bearing checking accounts          |       | 7,550                     |             | 21,108 |   | 2,546 |   | 6,157 |   | 7,554 |   | 145 |   | — |   | 45,060 |   |
| Savings accounts                            |       | 1                         |             | 1 |   | — |   | — |   | 1 |   | — |   | — |   | 3 |   |
| Current account in pesos and preestablished |       | 3,392                     |             | 4,275 |   | 1,328 |   | 2,236 |   | 2,247 |   | 149 |   | — |   | 13,627 |   |
| Non-interest bearing demand deposits, USD   |       | 585                       |             | 480 |   | 69 |   | 957 |   | 227 |   | 1 |   | 3,507 |   | 5,826 |   |
| Interest bearing demand deposits, USD       |       | 2,390                     |             | 1,634 |   | 359 |   | 2,136 |   | 242 |   | — |   | 4,792 |   | 11,553 |   |
| Savings accounts in USD                     |       | —                    |             | — |   | — |   | — |   | — |   | — |   | 231 |   | 231 |   |
| Over the counter promissory notes           |       | 11,852                    |             | 22,783 |   | 5,671 |   | 5,570 |   | 8,450 |   | 1,387 |   | — |   | 55,713 |   |
| Time deposits, USD                          |       | 2,199                     |             | 3,804 |   | 1,677 |   | 1,595 |   | 931 |   | 18 |   | 10,535 |   | 20,759 |   |
| Money desk customers                        |       | 14,949                    |             | 15,738 |   | 4,987 |   | 3,531 |   | 3,918 |   | 23 |   | — |   | 43,146 |   |
| Financial intermediaries                    |       | —                    |             | — |   | — |   | — |   | — |   | 12,802 |   | — |   | 12,802 |   |
| FOBAPROA checking accounts bearing interest |       | 14                        |             | — |   | — |   | — |   | — |   | — |   | — |   | 14 |   |
| **Total deposits**                          | ** ** | **Ps.**                   | ** 57,296** | ** ** | **Ps.** | ** 87,957** | ** ** | **Ps.** | ** 22,143** | ** ** | **Ps.** | ** 28,516** | ** ** | **Ps.** | ** 31,195** | ** ** | **Ps.** | ** 14,597** | ** ** | **Ps.** | ** 19,065** | ** ** | **Ps.** | ** 260,769** | ** ** |

 

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| ** **                                  | ** ** | **2007**                  | ** **       |
|---------------------------------------------|------------|---------------------------|------------------|
| ** **                                  | ** ** | **Geographical location** | ** **       |
| **Product**                                 | ** ** | **Monterrey**             | ** **       | **Mexico  City** | ** ** | **West** | ** ** | **Northwest** | ** ** | **Southeast** | ** ** | **Treasury  and other** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
| Non-interest bearing checking accounts      |       | Ps.                       |  11,579     |   | Ps. |  14,424 |   | Ps. |  4,359 |   | Ps. |  5,381 |   | Ps. |  5,988 |   | Ps. |  137 |   | Ps. |  — |   | Ps. |  41,868 |   |
| Interest-bearing checking accounts          |       | 8,051                     |             | 19,999 |   | 3,061 |   | 4,507 |   | 5,528 |   | 80 |   | — |   | 41,226 |   |
| Savings accounts                            |       | 2                         |             | 1 |   | — |   | — |   | — |   | — |   | — |   | 3 |   |
| Current account in pesos and preestablished |       | 3,077                     |             | 3,859 |   | 1,224 |   | 2,028 |   | 2,145 |   | 102 |   | — |   | 12,435 |   |
| Non-interest bearing demand deposits, USD   |       | 442                       |             | 349 |   | 73 |   | 797 |   | 262 |   | (3 | ) | 3,106 |   | 5,026 |   |
| Interest bearing demand deposits, USD       |       | 2,263                     |             | 937 |   | 304 |   | 2,056 |   | 320 |   | (1 | ) | 4,471 |   | 10,350 |   |
| Savings accounts in USD                     |       |                      |             |   |   |   |   |   |   |   |   |   |   | 164 |   | 164 |   |
| Over the counter promissory notes           |       | 10,741                    |             | 18,845 |   | 4,743 |   | 4,830 |   | 6,962 |   | 1,243 |   | — |   | 47,364 |   |
| Time deposits, USD                          |       | 2,326                     |             | 3,401 |   | 1,563 |   | 1,521 |   | 1,115 |   | 14 |   | 7,577 |   | 17,517 |   |
| Money desk customers                        |       | 5,516                     |             | 5,131 |   | 1,806 |   | 1,392 |   | 1,217 |   | — |   | — |   | 15,062 |   |
| Financial intermediaries                    |       | —                    |             | — |   | — |   | — |   | — |   | 12,283 |   | — |   | 12,283 |   |
| FOBAPROA checking accounts bearing interest |       | 9                         |             | — |   | — |   | — |   | — |   | — |   | — |   | 9 |   |
| **Total deposits**                          | ** ** | **Ps.**                   | ** 44,006** | ** ** | **Ps.** | ** 66,946** | ** ** | **Ps.** | ** 17,133** | ** ** | **Ps.** | ** 22,512** | ** ** | **Ps.** | ** 23,537** | ** ** | **Ps.** | ** 13,855** | ** ** | **Ps.** | ** 15,318** | ** ** | **Ps.** | ** 203,307** | ** ** |

 

**25 - TAXENVIRONMENT**

 

In 2008 the FinancialGroup is subject to ISR and IETU and in 2007 and 2006 to ISR and IMPAC.

 

**Incometax**

 

Income tax (ISR) iscalculated considering as taxable or deductible certain inflation effects. Asof 2007 the ISR rate was 28% and in 2006 it was 29%. The Financial Groupobtained a tax credit in 2007 for Ps. 42, equivalent to 0.5% of the tax resultas it complied with the requirements set forth the in the Federal Income Law.

 

**Book totax reconciliation**

 

The principal itemsaffecting the determination of the current tax expense of the Financial Groupwere the annual adjustment for inflation, the non-deductible amount of theallowance for loan losses that was over 2.5% of the average loan portfolio andthe valuation of financial instruments.

 

**PTU**

 

The Financial Groupdetermine employee statutory profit sharing based on the criteria establishedin the guidelines set forth by the Mexican Constitution.

 

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**BusinessFlat Tax**

 

On October 1, 2007,the Business Flat Tax Law (“LIETU”) was enacted and went into effect on January 1,2008. In addition, the Tax Benefits Decree and the Third Omnibus Tax Bill werepublished on November 5 and December 31, 2007, respectively and on May 27,2008 the Omnibus Tax Bill for 2008 went into effect, clarifying or expandingthe transitory application of the law regarding transactions carried out in2007 that will have an impact in 2008. IETU applies to the sale of goods, theprovision of independent services and the granting of use or enjoyment ofgoods, according to the terms of the LIETU, less certain authorized deductions.IETU payable is calculated by subtracting certain tax credits from the taxdetermined. Revenues, as well as deductions and certain tax credits, aredetermined based on cash flows generated beginning January 1, 2008. Forthe financial system, revenues subject to IETU include the financial tradingmargin which is composed of the net accrued interest. LIETU establishes thatthe IETU rate will be 16.5% in 2008, 17% in 2009, and 17.5% as of 2010. TheAsset Tax Law was repealed upon enactment of LIETU; however, under certaincircumstances, IMPAC paid in the ten years prior to the year in which ISR ispaid, may be refunded, according to the terms of the law.

 

Based on financialprojections, pursuant to the provisions in INIF 8, the Financial Group hasdetermined that it will essentially pay ISR and therefore only recognizesdeferred ISR.

 

**26 -STOCKHOLDERS’ EQUITY**

 

At the Stockholders’Ordinary General Meetings held on April 29 and October 6, 2008, thefollowing resolutions were adopted, among others:

 

a)              To transfer the profits from 2007 equalto Ps. 6,810 to earnings from prior years and increase the legal reserve by Ps.340.

 

b)             Declare cash dividends for Ps. 949,equivalent to Ps. 0.47 pesos per share.

 

The Financial Group’scommon stock as of December 31, 2008, 2007 and 2006, is comprised asfollows:

 
| ** **                                         | ** ** | **Number of shares with a nominal value of Ps. 3.50** | ** **  |
|----------------------------------------------------|------------|-------------------------------------------------------|-------------|
| ** **                                         | ** ** | **2008**                                              | ** **  | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **Paid-in Capital**                                   | ** **  | **Paid-in Capital** | ** ** | **Paid-in Capital** | ** ** |
| “O” Series                               |       | 2,013,997,548                                         |        | 2,002,718,738 |   | 2,018,347,548 |   |
|                                               |       |                                                  |        |   |   |   |   |
| ** **                                         | ** ** | **Historical  amounts**                               | ** **  |
| ** **                                         | ** ** | **2008**                                              | ** **  | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **Paid—in  Capital**                             | ** **  | **Paid—in  Capital** | ** ** | **Paid—in  Capital** | ** ** |
| “O” Series                               |       | Ps.                                                   |  6,986 |   | Ps. |  7,009 |   | Ps. |  7,064 |   |
| Restatement in Mexican pesos of December 2007 |       | 4,955                                                 |        | 4,956 |   | 4,956 |   |
|                                               |       | 11,941                                                |        | Ps. |  11,965 |   | Ps. |  12,020 |   |
|                                                    |            |                                                       |             |  |  |  |  |  |  |  |

 

**Restrictionson profits**

 

Stockholders’ equitydistribution, except restated paid-in capital and tax retained earnings, willbe subject to a tax payable by the Financial Group at the rate in effect whenthe dividend is distributed. Any tax paid on such distribution may be creditedagainst the income tax payable of the year in which the tax on the dividend ispaid and the two fiscal years following such payment against the year’s tax andits partial payments.

 

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The Financial Group’s netprofit is subject to the requirement that at least 5% of net income of eachyear be transferred to the legal reserve until the reserve equals 20% ofcapital stock at par value. The legal reserve may not be distributed to thestockholders during the life of the Financial Group, except in the form of astock dividend.

 

**Capitalization ratio (regardingBanorte, the Financial Group’s main subsidiary)**

 

The capitalization rules forfinancial institutions establish requirements for specific levels of netcapital, as a percentage of assets subject to both market and credit risk.

 

The information for December 31,2008 submitted to Banco de México for review is shown below.

 

The capitalization ratioof Banorte as of December 31, 2008 was 14.31% of total risk (market andcredit), and 21.11% of credit risk, which in both cases exceed the currentregulatory requirements.

 

The amount of netcapital, divided by basic and complementary capital, is detailed below (thesefigures may differ from those in the basic financial statements):

 
| **Net capital as of  December 31**                       | ** ** | **2008**   | ** **       |
|---------------------------------------------------------------|------------|------------|------------------|
|                                                          |       |       |             |
| **Stockholders’ equity**                                 | ** ** | **Ps.**    | ** 35,129** | ** ** |
| **Subordinated debentures and capitalization  instruments**   | ** ** | **3,691**  | ** **       |
|                                                          |       |       |             |
| Deduction  of investment in securitized instruments           |       | 371        |             |
| Deduction  of investments in shares of financial entities     |       | 7,690      |             |
| Deduction  of investments in shares of non-financial entities |       | 2,074      |             |
| Deduction  of intangibles and expenses or deferred costs      |       | 385        |             |
| **Basic capital**                                             | ** ** | **28,300** | ** **       |
| Debentures  and capitalization instruments                    |       | 14,150     |             |
| Allowance  for loan losses reserves                           |       | 1,169      |             |
| Deduction  of investment in securitized instruments           |       | 371        |             |
| **Complementary capital**                                     | ** ** | **14,948** | ** **       |
|                                                          |       |       |             |
| **Net capital**                                               | ** ** | **Ps.**    | ** 43,248** | ** ** |

 

Characteristics of thesubordinated debentures:

 
| **Concept**                             | ** ** | **Issuance  amount** | ** **  | **Maturity** | ** ** | **Basic capital  proportion** | ** ** | **Complementary  capital  proportion** | ** ** |
|-----------------------------------------|------------|----------------------|-------------|--------------|------------|-------------------------------|------------|----------------------------------------|------------|
| Complementary capital debentures 2004   |       | Ps.                  |  4,240 |         | 17/02/2014 |                          | 0          | %                                      | 100        | % |
| Complementary capital debentures 2006   |       | Ps.                  |  5,606 |         | 13/10/2016 |                          | 0          | %                                      | 100        | % |
| Basic capital debentures 2006           |       | Ps.                  |  2,807 |         | 13/10/2021 |                          | 100        | %                                      | 0          | % |
| Basic capital debentures 2008           |       | Ps.                  |  3,012 |         | 27/02/2018 |                          | 29         | %                                      | 71         | % |
| Complementary capital debentures 2008   |       | Ps.                  |  1,900 |         | 15/02/2028 |                          | 0          | %                                      | 100        | % |
| Complementary capital debentures 2008-2 |       | Ps.                  |  276   |         | 15/06/2018 |                          | 0          | %                                      | 100        | % |

 

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Assets subject to riskare detailed below:

 

**Assets subject to market risk**

 
| **Concept**                                                                                 | ** ** | **Positions  weighted by  risk** | ** **       | **Capital  requirement** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------------|--------------------------|------------|
| Transactions  in Mexican pesos with nominal interest rate                                   |       | Ps.                              |  62,670     |                     | Ps.        |  5,014 |   |
| Transactions  with debt instruments in Mexican pesos with interest and reset rates          |       | 16,092                           |             | 1,287                    |       |
| Transactions  in Mexican pesos with real interest rates or in UDIS                          |       | 1,352                            |             | 108                      |       |
| Transactions  in UDIS or with yields referenced to the National Consumer Price Index (INPC) |       | 7                                |             | 1                        |       |
| Transaction  in Mexican pesos with nominal interest rates                                   |       | 4,080                            |             | 326                      |       |
| Exchange  transactions                                                                      |       | 1,288                            |             | 103                      |       |
| Transactions  involving shares                                                              |       | 83                               |             | 7                        |       |
| **Total**                                                                                   | ** ** | **Ps.**                          | ** 85,572** | ** **               | **Ps.**    | ** 6,846** | ** ** |

 

**Assets subject to credit risk**

** **
| **Concept**                                                                                    | ** ** | **Assets  weighted by  risk** | ** **        | **Capital  requirement** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------------|-------------------|--------------------------|------------|
| Group  III (weighted at 10%)                                                                   |       | Ps.                           |  58          |                     | Ps.        |  5 |   |
| Group  III (weighted at 20%)                                                                   |       | 8,066                         |              | 645                      |       |
| Group  III (weighted at 23%)                                                                   |       | 809                           |              | 65                       |       |
| Group  III (weighted at 50%)                                                                   |       | 2,235                         |              | 179                      |       |
| Group  IV (weighted at 20%)                                                                    |       | 6,735                         |              | 539                      |       |
| Group  V (weighted at 10%)                                                                     |       | 19                            |              | 1                        |       |
| Group  V (weighted at 20%)                                                                     |       | 759                           |              | 61                       |       |
| Group  V (weighted at 50%)                                                                     |       | 675                           |              | 54                       |       |
| Group  V (weighted at 150%)                                                                    |       | 2,762                         |              | 221                      |       |
| Group  VI (weighted at 50%)                                                                    |       | 6,027                         |              | 482                      |       |
| Group  VI (weighted at 75%)                                                                    |       | 5,103                         |              | 408                      |       |
| Group  VI (weighted at 100%)                                                                   |       | 52,176                        |              | 4,174                    |       |
| Group  VII (weighted at 20%)                                                                   |       | 895                           |              | 72                       |       |
| Group  VII (weighted at 50%)                                                                   |       | 47                            |              | 4                        |       |
| Group  VII (weighted at 100%)                                                                  |       | 58,386                        |              | 4,671                    |       |
| Group  VII (weighted at 115%)                                                                  |       | 7,044                         |              | 563                      |       |
| Group  VII (weighted at 150%)                                                                  |       | 648                           |              | 52                       |       |
| Group  VIII (weighted at 125%)                                                                 |       | 2,064                         |              | 165                      |       |
| Group  IX (weighted at 100%)                                                                   |       | 37,400                        |              | 2,992                    |       |
| **Subtotal**                                                                                   | ** ** | **191,908**                   | ** **        | **15,353**               | ** ** |
| For  permanent shares, furniture and real property, and advance payments and  deferred charges |       | 12,976                        |              | 1,038                    |       |
| **Total**                                                                                      | ** ** | **Ps.**                       | ** 204,884** | ** **               | **Ps.**    | ** 16,391** | ** ** |

 

Assets subject to creditrisk:

 
| **Concept** | ** ** | **Assets  weighted by  risk** | ** **      | **Capital  requirement** | ** ** |
|-------------|------------|-------------------------------|-----------------|--------------------------|------------|
| **Total**   | ** ** | **Ps.**                       | ** 8,669** | ** **               | **Ps.**    | ** 694** | ** ** |
|             |            |                               |                 |                          |            |  |  |

 

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** **

**27 -FOREIGN CURRENCY POSITION**

 

As of December 31,2008 and 2007, the Financial Group holds certain assets and liabilities inforeign currency, mainly USD, converted to the exchange rate issued by Banco deMéxico of Ps. 13.8325 and Ps. 10.9157 per USD 1.00, respectively, as shownbelow:

 
| ** **                              | ** ** | **Thousands of US dollars** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **2008**                    | ** ** | **2007** | ** ** |
| Assets                                  |       | 5,179,560                   |       | 4,946,554 |   |
| Liabilities                             |       | 4,894,904                   |       | 4,563,009 |   |
| **Net asset position in US dollars**    | ** ** | **284,656**                 | ** ** | **383,545** | ** ** |
| **Net asset position in Mexican pesos** | ** ** | **Ps.**                     | **3,938**  | ** ** | **Ps.** | **4,187** | ** ** |
|                                         |            |                             |            |  |  |  |  |

 

**28 -POSITION IN UDIS**

 

As of December 31,2008 and 2007, the Financial Group holds certain assets and liabilitiesdenominated in UDIS, converted to Mexican pesos based on the currentequivalency of Ps. 4.184316 and Ps. 3.932983, per UDI, respectively, as shownbelow:

 
| ** **                                          | ** ** | **Thousands of UDIS** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Assets                                              |       | 152,453               |       | 171,932 |   |
| Liabilities                                         |       | 548,366               |       | 94,163 |   |
| **Net (liability) asset position in UDIS**          | ** ** | **(395,913**          | **)**      | **77,769** | ** ** |
| **Net (liability) asset position in Mexican pesos** | ** ** | **Ps.**               | **(1,657** | **)** | **Ps.** | **306** | ** ** |
|                                                     |            |                       |            |  |  |  |  |

 

**29 -EARNINGS PER SHARE**

 

Earnings per share is theresult of dividing the net income by the weighted average of the FinancialGroup’s shares in circulation during the year.

 

Earnings per share forthe years ended December 31, 2008, 2007 and 2006 are shown below:

 
| ** **            | ** ** | **2008**       | ** ** | **2007**                     | ** **    | **2006**                | ** ** |
|-----------------------|------------|----------------|------------|------------------------------|---------------|-------------------------|------------|
| ** **            | ** ** | **Net Income** | ** ** | **Weighted  share  average** | ** **    | **Earnings per  share** | ** ** | **Earnings per  share** | ** ** | **Earnings per  share** | ** ** |
| Net  income per share |       | Ps.            | 7,014      |                         | 2,016,959,232 |                    | Ps.        | 3.4775 |   | Ps. | 3.3744 |   | Ps. | 3.0981 |   |
|                       |            |                |            |                              |               |                         |            |  |  |  |  |  |  |  |  |

 

**30 -MANAGEMENT RISK (unaudited)**

 

**Authorizedbodies**

 

To ensure adequate riskmanagement of the Financial Group, as of 1997 the Financial Group’s Board ofDirectors created the Risk Policy Committee (CPR), whose purpose is to managethe risks to which the Financial Group is exposed, and ensure that theperformance of operations adheres to the established risk managementobjectives, guidelines, policies and procedures.

 

Furthermore, the CPRprovides oversight on the global risk exposure limits approved by the Board ofDirectors, and also approves the specific risk limits for exposure to differenttypes of risk.

 

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The CPR is composed ofregular members of the Board of Directors, the Managing Director of theFinancial Group, the General Director of Comprehensive Risk Management, theGeneral Director of Banking, Savings and Welfare, and the General Director ofthe Brokerage House, as well as the General Director of Internal Audits, whohas the right to speak but not to vote.

 

To adequately carry outits duties, the CPR performs the following functions, among others:

 

1.               Propose for the approval of the Board of Directors:

 

·                  The objectives, guidelines and policies forcomprehensive risk management

·                  The global limits for risk exposure

·                  The mechanisms for implementing corrective measures

·                  The special cases or circumstances in which the globaland specific limits may be exceeded

 

2.               Approve and review at least once a year:

 

·                  The specific limits for discretionary risks, as wellas tolerance levels for nondiscretionary risks

·                  The methodology and procedures to identify, measure,oversee, limit, control, report and disclose the different kinds of risks towhich the Financial Group is exposed

·                  The models, parameters and scenarios used to performthe valuation, measurement and control of risks proposed by the ComprehensiveRisk Management Unit

 

3.               Approve:

 

·                  The methodologies for identification, valuation,measurement and control of risks of the new operations, products and serviceswhich the Financial Group intends to introduce into the market

·                  The corrective measures proposed by the ComprehensiveRisk Management Unit

·                  The manuals for comprehensive risk management

 

4.               Appoint and remove the personresponsible for the Comprehensive Risk Management Unit, who is ratified by theBoard of Directors.

 

5.               Inform the Board, at leastevery quarter, of the exposure to risk and its possible negative effects, aswell as follow up on limits and tolerance levels.

 

6.               Inform the Board of thecorrective measures implemented.

 

**31 –COMPREHENSIVE RISK MANAGEMENT UNIT (UAIR) (unaudited, regarding Banorte, theFinancial Group’s main subsidiary)**

 

The function of the UAIRis to identify, measure, oversee, limit, control, report and disclose thedifferent kinds of risk to which the Financial Group is exposed, and it is theresponsibility of the Office of Risk Management (DGAR).

 

The DGAR reports to theCPR in compliance with the requirements set forth in the Commission’s circular,the “General Risk Management Rules Applicable to Credit Financial Groups”,in relation to the independence of the different business areas.

 

The DGAR focusesComprehensive Risk Management efforts through four different departments

 

·                  Credit Risk Management

·                  Market Risk Management

·                  Operating Risk Management, and

·                  Risk Policy Management

 

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The Financial Groupcurrently has methodologies for managing risk in its different phases, such ascredit, market, liquidity and operating risk.

 

The primary objectives ofthe DGAR are summarized as follows:

 

·                  Provide the different business areas with clear rules thatfacilitate their understanding so as to minimize risks and ensure that they arewithin the parameters established and approved by the Board of Directors andthe Risk Policy Committee.

·                  Establish mechanisms that provide for follow-up onrisk-taking within the Financial Group, ensuring that they are preventive asmuch as possible, and supported by advanced systems and processes.

·                  Standardize risk measurement and control.

·                  Protect the Financial Group’s capital againstunexpected losses from market movements, credit losses and operating risks.

·                  Develop valuation methods for the different types ofrisks.

·                  Establish procedures for portfolio optimization andloan portfolio management.

 

The Financial Group hassegmented risk assessment and management into the following headings:

 

Credit Risk: Volatility of revenues due to thecreation of provisions for impairment of credits and potential credit lossesdue to nonpayment by a borrower or counterpart.

 

Market Risk: Volatility of revenues due to changes inthe market, which affect the valuation of the positions from operationsinvolving assets, liabilities or generating contingent liabilities, such as:interest rates, exchange rates, price indexes, etc.

 

Liquidity Risk: Potential loss derived from theimpossibility of renewing debts or contracting others under normal conditionsfor the Financial Group, due to the anticipated or forced sale of assets atunusual discounts to meet its obligations.

 

Operating Risk: Loss resulting from lack of adaptationor failure in processes, personnel, internal systems or external events. Thisdefinition includes Technological Risk and Legal Risk. Technological Riskgroups includes all potential losses from damage, interruption, alteration orfailures derived from the use of or dependence on hardware, software, systems,applications, networks and any other information distribution channel, whileLegal Risk involves the potential loss from penalties for noncompliance withlegal and administrative regulations or the issuance of adverse final courtrulings in relation to the operations performed by the Financial Group.

 

**Credit risk**

 

Credit Risk is the riskthat the customers will not comply with their payment obligations; therefore,adequate risk management is essential to maintain a high quality loanportfolio.

 

The Financial Group’smanagement credit risk objectives are as follows:

 

·                  Improve the quality, diversification andcomposition of the loan portfolio to optimize the risk-return ratio.

·                  Provide senior management with reliableand timely information to support decision-making in credit matters.

·                  Provide the business departments withclear and sufficient tools to support credit placement and follow up.

·                  Support the creation of economic valuefor shareholders by means of efficient credit risk management.

·                  Define and constantly update theregulatory framework for credit risk management.

·                  Comply with the credit risk managementreporting requirements established by the relevant authorities.

·                  Perform risk management in accordancewith best practices; implementing models, methodologies, procedures and systemsbased on the latest international advances.

 

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**Individual credit risk**

 

The Financial Group’sbanks segment the loan portfolio into two large groups: the consumer andcorporate portfolios.

 

Individual credit riskfor the consumer portfolio is identified, measured and controlled by means of aparametric system (scoring) which includes models for each of the consumerproducts: mortgage, automotive, payroll credit, personal and credit card.

 

Individual risk for thecorporate portfolio is identified, measured and controlled by means of theTarget Markets, the Risk Acceptance Criteria and the Banorte Internal RiskClassification (CIR Banorte).

 

The Target Markets andRisk Acceptance Criteria are tools which, together with the Internal RiskRating CIR, form part of the credit strategy of the Financial Group and supportthe estimate of the credit risk level.

 

The Target Markets areactivities selected by region and economic activity - supported by economicstudies and portfolio behavior analyses - in which the Financial Group wishesto place credits.

 

The Risk AcceptanceCriteria are parameters which describe the risks identified by industries,facilitating an estimate of the risk involved for the Financial Group ingranting a credit to a customer depending on the economic activity which itperforms 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.

 

Early Warnings are a setof criteria based on information and indicators of the borrowers and theirenvironment that have been set forth for timely prevention and identificationof likely impairment in the loan portfolio, in order to take credit riskmitigating preventive actions in a timely manner.

 

The CIR Banorte is inline with the “General Regulations Applicable to the Classification Methodologyfor the Loan Portfolio of Credit Institutions” issued by the Commission on December 2,2005. The CIR Banorte has been certified by the Commission and by aninternational external auditor since 2001.

 

The CIR Banorte isapplied to a commercial portfolio equal to or exceeding an amount equivalent inMexican pesos to four million UDIS at the classification date.

 

**Portfolio credit risk**

 

The Financial Group hasdesigned a portfolio credit risk methodology which, while also including thebest and most current international practices with regard to identification,measurement, control and follow up, has been adapted to function within thecontext of the Mexican financial system.

 

The credit riskmethodology identifies the exposure of all the loan portfolios of the FinancialGroup, overseeing risk concentration levels based on risk classifications,geographical regions, economic activities, currencies and type of product, forthe purpose of ascertaining the portfolio profile and taking actions todiversify it and maximize profit with the lowest possible risk.

 

The calculation of loanexposure involves the generation of the cash flow from each of the loans, bothin terms of principal and interest, for their subsequent discount. Thisexposure is sensitive to market changes, and facilitates the performance ofcalculations under different economic scenarios.

 

Apart from consideringloan exposure, the methodology takes into account the probability of default,the recovery level associated with each customer and the sorting of theborrowers based on the Merton model. Theprobability of default is the probability that a borrower will not comply withits debt obligation to the Financial Group on the terms and conditionsoriginally agreed. The probability of default is based on the transitionmatrixes which the Financial Group calculates as of the migration of theborrowers 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 borrowers based on the Merton model is intendedto tie the future behavior of the borrower to credit and market factors onwhich, using statistical techniques, the borrower’s “credit health” depends.

 

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The primary resultsobtained are the expected loss and unexpected loss over a one-year timehorizon. 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 an indicator of the loss expected underextreme circumstances, and is measured as the difference between the maximumloss based on the distribution of losses, at a specific confidence level, whichin the case of the Financial Group is 95%, and the expected loss.

 

The results obtained areused as a tool for better decision-making in granting loans and portfoliodiversification, in accordance with the global strategy of the Financial Group.The individual risk identification tools and the portfolio credit riskmethodology are reviewed and updated periodically to incorporate new techniquesthat can support or strengthen them.

 

Asof December 31, 2008, the total portfolio of Banorte is Ps. 222,849million. The expected loss represents 2.6% and the unexpected loss represents4.4% of the total operating portfolio. The average expected loss was 2.4% forthe period between October and December 2008.

 

**Risk Diversification**

 

In December 2005,the CNBV issued the “General Rules for Risk Diversification in PerformingAsset and Liability Transactions Applicable to Credit Institutions”.

 

These regulations requirethat the Financial Group perform an analysis of the borrowers and/or loans theyhold to determine the amount of their “Common Risk”. Also, the Financial Groupmust have the necessary documentation to support that a person or group ofpersons represents a common risk in accordance with the assumptions establishedunder such rules.

 

In compliance with therisk diversification rules for asset and liability transactions, thefollowing information is provided below:

 
| **Basic capital as of September 30, 2008**                                        | ** ** | **Ps.**    | **30,538** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|
|                                                                                   |       |       |       |
| **I. Financing whose individual amount represents  more than 10% of basic capital:**   | ** ** | ** ** | ** ** |
|                                                                                   |       |       |       |
| Credit  transactions                                                                   |       |       |       |
| Number  of financings                                                                  |       | 1          |       |
| Amount  of financings taken as a whole                                                 |       | Ps.        | 4,542      |       |
| % in  relation to basic capital                                                        |       | 15         | %          |
|                                                                                   |       |       |       |
| Money  market transactions                                                             |       |       |       |
| Number  of financings                                                                  |       | 1          |       |
| Amount  of financings taken as a whole                                                 |       | Ps.        | 3,491      |       |
| % in  relation to basic capital                                                        |       | 11         | %          |
|                                                                                   |       |       |       |
| Overnight  transactions                                                                |       |       |       |
| Number  of financings                                                                  |       | 1          |       |
| Amount  of financings taken as a whole                                                 |       | Ps.        | 6,294      |       |
| % in  relation to basic capital                                                        |       | 21         | %          |
|                                                                                   |       |       |       |
| **II. Maximum amount of financing with the 3  largest debtors and common risk groups** | ** ** | **Ps.**    | **31,710** | ** ** |

 

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**Marketrisk**

 

Value at risk

 

The exposure to marketrisk is determined through the calculation of the Value at Risk (“VaR”). Themeaning of the VaR under this method is the potential one day loss which couldbe generated in the valuation of the portfolios at a given date. Thismethodology is used both for the calculation of market risk and for theestablishment and control of internal limits.

 

The Financial Groupapplies the nonparametric historical simulation method to calculate the VaR,considering for such purpose a 99% confidence level, using the 500 immediatehistorical scenarios, multiplying the result by a security factor thatfluctuates between 3 and 4 depending on the annual Back Testing resultscalculated on the previous quarter, considering 10 days to dispose of the riskportfolio in question. These measures insure that unforeseen volatiles areconsidered in the main risk factors that affect such portfolios.

 

Such methodology isapplied to all financial instrument portfolios within and beyond the scope ofthe Financial Group, including money market and treasury transactions, capital,foreign-exchange and derivatives held for trading and hedging purposes, whichare exposed to variations in their value due to changes in the risk factorsaffecting their market valuation (domestic and foreign interest rates, exchangerates and indexes, among others).

 

The average VaR forfinancial instruments portfolio was Ps 2,430 for the last quarter 2008.

 
| **Millions of pesos**      | ** ** | **4Q07** | ** ** | **1Q08** | ** ** | **2Q08** | ** ** | **3Q08** | ** ** | **4Q08** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| VaR  Banorte*              |       | Ps.      | 2,168      |     | Ps.        | 2,199    |       | Ps.      | 2,269      |     | Ps.        | 2,198 |   | Ps. | 2,430 |   |
| Banorte  net capital***    |       | 33,710   |       | 39,052   |       | 43,788   |       | 45,361   |       | 43,248   |       |
| VaR  / net capital Banorte |       | 6.43     | %          | 5.63     | %          | 5.18     | %          | 4.85     | %          | 5.62     | %          |
|                            |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

----

* Quarterly Average

*** Sum of net capital atthe close of the quarter

 

Also, the average of theVaR for the risk factor of the portfolio of instrument described for theFinancial Group behaved as follows during the fourth quarter of 2008:

 
| **Risk factor**               | ** ** | **VaR** | ** ** |
|-------------------------------|------------|---------|------------|
| Domestic  interest rate       |       | Ps.     | 2,680      |   |
| Foreign  interest rate        |       | 167     |       |
| Exchange  rate                |       | 872     |       |
| Capital                       |       | 53      |       |
| Foreign  currency bond prices |       | 357     |       |
| Total  VaR                    |       | Ps.     | 2,430      |   |

 

The VaRfor each of the risk factors presented is determined by simulating 500historical scenarios of the variables comprising each of such factors,maintaining constant the variables that affect the other risk factors shown. Bythe same token, the consolidated VaR for the Financial Group considers thecorrelations of all the risk factors influencing the valuation of theportfolios, for which reason the arithmetical sum of the VaR Factor does notmatch.

 

**Retrospective analysis**

 

To validate theeffectiveness of the measurements of the calculation of the daily VaR as ameasurement of market risk, the retrospective analysis is updated each week.This analysis makes it possible to compare the estimated results through theVaR with the actual results generated.

 

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**Sensitivity analysis and testsunder extreme conditions**

 

To improve analysis andobtain the impact of any movements in risk factors, sensitivity analyses andtests under extreme conditions are performed periodically. These analysesforesee potential situations in which the Financial Group might sufferextraordinary losses from the valuation of the financial instruments in whichit holds positions.

 

**Liquidityand balance sheet risk**

 

In order to provide ameasurement of liquidity risk in the Financial Group and provide follow-upconsistently, the Financial Group relies on the use of financial ratios, whichinclude the Liquidity Ratio (Current Assets/Liquid Liabilities), which consideramong the liquid assets the cash and cash equivalents, trading securities andavailable for sale securities, whereas the liquid liabilities include immediatedemand deposits, immediate demand interbank loans and short-term loans. Theliquidity ratio at the end of the fourth quarter of 2008 is 49.2%, while theaverage during the quarter is 48.1%, as shown below:

 
| ** **          | ** ** | **End of quarter** | ** ** |
|---------------------|------------|--------------------|------------|
| ** **          | ** ** | **4Q07**           | ** ** | **1Q08** | ** ** | **2Q08** | ** ** | **3Q08** | ** ** | **4Q08** | ** ** |
| Liquid  assets      |       | Ps.                | 59,540     |   | Ps. | 62,818 |   | Ps. | 66,756 |   | Ps. | 71,045 |   | Ps. | 72,557 |   |
| Liquid  liabilities |       | Ps.                | 116,879    |   | Ps. | 123,114 |   | Ps. | 116,697 |   | Ps. | 115,100 |   | Ps. | 147,498 |   |
| Liquidity  ratio    |       | 50.9               | %          | 51.0 | % | 57.2 | % | 61.7 | % | 49.2 | % |

 
| ** **          | ** ** | **Average** | ** ** |
|---------------------|------------|-------------|------------|
| ** **          | ** ** | **4Q07**    | ** ** | **1Q08** | ** ** | **2Q08** | ** ** | **3Q08** | ** ** | **4Q08** | ** ** |
| Liquid  assets      |       | Ps.         | 56,520     |   | Ps. | 59,777 |   | Ps. | 59,543 |   | Ps. | 61,285 |   | Ps. | 64,453 |   |
| Liquid  liabilities |       | Ps.         | 98,706     |   | Ps. | 108,939 |   | Ps. | 108,798 |   | Ps. | 105,771 |   | Ps. | 127,061 |   |
| Liquidity  ratio    |       | 57.3        | %          | 54.9 | % | 54.7 | % | 57.9 | % | 48.1 | % |

 

Averagecalculation considering the Liquidity Ratio’s weekly estimates

 

To quantify and follow upon the liquidity risk for its dollar portfolio, the Financial Group uses thecriteria established by Banco de México for the determination of the LiquidityRatio. It facilitates an evaluation of the differences between the flows ofassets and liabilities in different time periods. The above promotes ahealthier distribution of terms for these assets.

 

Also, to preventconcentration risks in relation to payment terms and dates for the FinancialGroup, gap analysis is performed to match the resources with the fundingsources, which detects any concentration in a timely fashion. These analysesare performed separately by currency (Mexican pesos, foreign currency andUDIS).

 

Furthermore, balancesheet simulation analyses are prepared for the Financial Group, which provideseither a systematic or dynamic evaluation of the future behavior of the balancesheet. The base scenario is used to prepare sensitivity analyses for movementsin domestic, foreign and real interest rates. Also, tests are performed underextreme conditions to evaluate the result of extreme changes in interest,funding and exchange rates.

 

As an evaluation measureof the effectiveness of the simulation model, the projections are periodicallycompared with actual data. Using these tests, the assumptions and methodologyused can be evaluated and, if necessary, adjusted.

 

**Operatingrisk**

 

As of January 2003,the Financial Group established a formal operating risk department denominated “OperatingRisk Management Department” as part of its Risk Management Strategy.

 

The Financial Groupdefines operating risk as the potential loss due to failures or deficiencies ininternal controls because of operation processing and storing or in datatransfer, and adverse administrative and judicial rulings, frauds or theft(this definition includes technology and legal risk).

 

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Operating Risk Management’sobjectives are: a) to enable and support the organization to reach itsinstitutional objectives through operating risk prevention and management; b)to insure that the existing operating risks and the required controls are dulyidentified, evaluated and aligned with the organization’s risk strategy; and c)to insure that operating risks are duly quantified in order to assign theproper capital for operating risk.

 

**Operating risk management’scornerstones**

 

**I.  Policies, objectives and guidelines**

 

The Financial Group hasdocumented the operating risk policies, objectives, guidelines, methodologiesand responsible areas.

 

The Operating RiskDepartment works closely with the Controllership Department to promoteeffective Internal Control that defines the proper procedures and controls tomitigate operating risk. The Internal Audit department follows up oncompliance.

 

Regulations Control, aspart of the Internal Control System, performs the following risk-mitigatingactivities: a) internal control validation; b) institutional regulationsmanagement and control; c) monitoring of operating process internal control bymeans of control indicator reports submitted by the process controllers in thevarious areas; d) money-laundering prevention process management; e) regulatoryprovisions controls and follow-up; and f) analysis and assessment of operatingprocesses and projects with the participation of the directors in each processin order to insure proper internal control.

 

**II. Quantitative and qualitativemeasuring tools**

 

OperatingLosses Database

 

To record operating lossevents, a system has been developed internally known as the “Operating Loss andEvents Capture System” (SCERO). This system enables the central informationsupplier areas to directly record such events online, which are classified bytype of event in accordance with the following categories (in line with theBasle II Agreement proposals):

** **
| **Types of events**                         | ** ** | **Description**                                                                                                                                                                                                               |
|---------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Internal fraud                              |       | Losses derived from  actions intended to defraud, illegally seize ownership or evade the  regulations, law or policies of the Institution (excluding  diversity/discrimination events) involving at least one internal party. |
| External fraud                              |       | Losses derived from  actions taken by third parties intended to defraud, illegally seize ownership  or evade the law.                                                                                                         |
| Labor relations and job  safety             |       | Losses derived from  actions inconsistent with laws or employment, health or safety agreements, or  which result in the payment of claims for damages to personnel or  diversity/discrimination claims.                       |
| Customers, products and  business practices |       | Losses derived from  negligence or unintentional breaches which prevent compliance with professional  obligations with customers (including trust and adaptation requirements or  due to the nature or design of a product.   |
| Natural disasters and other events          |       | Losses due to damage or harm to physical assets due  to natural disasters or other events.                                                                                                                                    |
| Business incidences and  system failures    |       | Losses derived from  incidences in the business and system failures.                                                                                                                                                          |
| Process execution,  delivery and management |       | Losses derived from  errors in transaction processing or in process management, as well as  relations with counterparties and suppliers.                                                                                      |

 

This historical databaseprovides the statistics of the operating events experienced by the FinancialGroup in order to be able to determine the respective trends, frequency, impactand distribution. Furthermore, the database will serve to calculate capitalrequirements for advanced models in the future.

 

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Legaland tax contingencies database

 

For the recording andfollow-up of legal, administrative and tax issues that may arise from adverseunappealable ruling, an internal system called “Legal Risk Issues MonitoringSystem” (SMARL) was developed. This system enables the central data supplyingareas to record such events directly and on-line, which are then classified bycompany, sector and legal issue, among others.

 

As part of the FinancialGroup’s legal risk management initiative, legal and tax contingencies areestimated by the attorneys that process the issues based on an internalmethodology. This makes it possible to create the necessary book reserve toface such estimated contingencies.

 

Riskmanagement model

 

The Financial Group andits subsidiaries have defined objectives, which are achieved through differentplans, programs and projects. Compliance with such objectives may be adverselyaffected due to operating risks, for which reason a methodology must be inplace to manage them within the organization. Consequently, operating riskmanagement is now an institutional policy defined and supported by seniormanagement.

 

To perform operating riskmanagement, each of the operating risks involved in the processes must beidentified in order to analyze them. In this regard, the risks identified byRegulations Control are recorded in a risk matrix and processed to eliminate ormitigate them (trying to reduce their severity or frequency) and to define thetolerance levels, as applicable. A new Operating Risk Management Model and thetechnology tool for its implementation are currently being developed.

 

**III. Calculating capitalrequirement**

 

On November 23,2007, the Official Gazette of the Federation published the Operating RiskCapitalization Rules that set forth a basic model, which is calculated andreported periodically to the authorities.

 

**IV. Information and reporting**

 

The information generatedby the databases and Management’s Model is processed regularly in order toreport the main operating events detected, trends, identified risks (riskmatrix) and the mitigating strategies to the Risk Policy Committee and theBoard of Directors. The status of the principal initiatives for operating riskmitigation implemented by the different areas of the organization is alsoreported.

 

**Technologyrisk**

 

It is defined as thepotential loss due to damage, interruption, alteration or failures in the useof or dependence on hardware, software, IT systems, applications, networks andany other data distribution channel for rendering services to customers.Technology risk forms an inherent part of operating risk, for which reason itsmanagement is performed throughout the entire organization

 

To address operating riskassociated with data integrity, the “Integrity Committee” was created. Itsobjectives include aligning data security and control efforts to a preventionapproach, defining new strategies, policies, processes or procedures andsolving data security issues that affect or may affect the Financial Group’sassets.

 

The Financial Groupperforms the functions for technology risk management set forth by theCommission under the guidelines established by the institutional regulationsand the Integrity Committee.

 

To address the operatingrisk caused by high impact external events, the Financial Group has a BusinessContinuity Plan (BCP) and Business Recovery Plan (BRP) based on a same-timedata replication system at an alternate computer site. This guarantees theback-up and recovery of critical applications in the event of an operatingcontingency.

 

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**Legalrisk**

 

Legal risk is defined asthe potential loss due to noncompliance with applicable legal andadministrative provisions, adverse administrative and judicial rulings, andimposed penalties.

 

The legal risk must bemeasured as an inherent part of operating risk in order to understand andestimate its impact. Therefore, those legal issues which result in actualoperating losses in the SMARL system are recorded in the SCERO in accordancewith a predetermined classification.

 

Based on the statisticsof the current legal issues and real loss events, the Financial Group canidentify specific legal or operating risks, which are analyzed in order toeliminate or mitigate them in an attempt to reduce or limit their futureoccurrence or impact.

 

**32 -MEMORANDUM ACCOUNTS**

** **
| ** **                                                         | ** ** | **2008** | ** **  | **2007**   | ** ** |
|--------------------------------------------------------------------|------------|----------|-------------|------------|------------|
| Banks  customers (current accounts)                                |       | Ps.      | 74          |       | Ps.        | 11 |   |
| Settlement  of customer transactions                               |       | 35       |        | 58         |       |
| Customer  valuables received in custody                            |       | 118,537  |        | 180,385    |       |
| Customer  repurchase agreements                                    |       | 35,688   |        | 21,803     |       |
| Customer  call options transactions                                |       | 274      |        | 146        |       |
| Managed  trusts                                                    |       | 2,378    |        | 3,048      |       |
| ** **                                                         | ** ** | **Ps.**  | **156,986** | ** ** | **Ps.**    | **205,451** | ** ** |
| Other  contingent assets and liabilities                           |       | Ps.      |  266   |       | Ps.        |  279 |   |
| Credit  commitments                                                |       | 2,793    |        | 2,365      |       |
| Deposits  of assets                                                |       | 3,006    |        | 1,541      |       |
| Financial  Group securities delivered into custody                 |       | 886      |        | 610        |       |
| Financial  Group government securities held in custody             |       | 101      |        | 147        |       |
| Assets  in trusts or under mandate                                 |       | 90,469   |        | 101,632    |       |
| Managed  assets in custody                                         |       | 131,886  |        | 117,167    |       |
| Investment  banking transactions on account of third parties (net= |       | 84,615   |        | 91,329     |       |
| Collateral  received by the institution                            |       | 31,567   |        | —     |       |
| Past-due  loan portfolio accrued but not charged interest          |       | 137      |        | 102        |       |
| ** **                                                         | ** ** | **Ps.**  | **345,726** | ** ** | **Ps.**    | **315,172** | ** ** |
| Securities  to be received in repurchase agreements                |       | Ps.      | 39,939      |       | Ps.        | 216,233 |   |
| Less:  Creditor repurchase agreement                               |       | (40,176  | )           | (216,708   | )          |
| ** **                                                         | ** ** | **Ps.**  | **(237**    | **)**      | **Ps.**    | **(475** | **)** |
| Repurchase  agreement from debtors                                 |       | Ps.      | 35,054      |       | Ps.        | 21,502 |   |
| Less:  Securities to be received in repurchase agreements          |       | (34,908  | )           | (21,484    | )          |
| ** **                                                         | ** ** | **Ps.**  | **146**     | ** ** | **Ps.**    | **18** | ** ** |
|                                                                    |            |          |             |            |            |  |  |  |  |

 

**33-COMMITMENTS**

 

Asof December 31, 2008 and 2007, the Financial Group had the followingcontingent obligations and commitments:

 

·                  Other contingent obligations andopening of credits totaling Ps. 3,059 (Ps. 2,644 in 2007), which are recordedin memorandum accounts.

 

·                  Certain real property andoperating equipment are leased. Total property lease payments for the periodsended December 31, 2008 and 2007, were Ps. 159 and Ps. 195, respectively.

 

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**34 -CONTINGENCIES**

 

As of December 31,2008, there are lawsuits filed against the Financial Group in civil andbusiness court cases. However, the Financial Group’s attorneys consider thatthe claims filed are unsubstantiated and, in the event of an adverse ruling,they would not significantly impact the Financial Group’s consolidatedfinancial position. A reserve of Ps. 120 is recorded for such contentiousmatters.

 

Furthermore,contingencies may arise due to differences in taxes derived from a potentialreview of the tax returns filed by the Financial Group and differences in theinterpretation of legal provisions between the Financial Group and the taxauthorities.

 

**35 -SAVINGS PREVENTIVE AND PROTECTION MECHANISM**

 

The objective of theInstitute for the Protection of Bank Savings (IPAB) is to protect the depositsof small customers and thereby contribute to maintaining the financial system’sstability and the proper functioning of the payments systems.

 

According to the Law ofBank Savings Protection (LPAB), the IPAB manages a bank savings protectionsystem that guarantees the payment of bank deposits or loans or credits to FullService Banking Institution up to an amount equivalent to 400 thousand UDIS perindividual or business entity, regardless of the number or type of suchobligations in the customer’s favor and charged to a single bank.

 

On July 30, 2007,general rules were issued for addressing joint accounts or those in whichthere is more than one account holder, referred to in art.14 of the LPAB, aswell as the rules banks must observe for classifying information relativeto transactions associated with guaranteed obligations.

 

The IPAB plays a majorrole in the implementation of the LPAB resolutions methods and the Law ofCredit Institutions (LIC) as timely and adequate mechanisms for salvaging andliquidating Full Service Banking Institutions in financial trouble that mayaffect their solvency. The purpose is to provide maximum protection to thepublic while minimizing the negative impact that salvaging an institution mayhave on others in the banking system.

 

During 2008 and 2007, theamount of contributions to the IPAB payable by Banorte for fees amounted to Ps.938 and Ps. 774, respectively.

 

**36 – NEW ACCOUNTING PRINCIPLES**

 

The following are some ofthe principal changes derived from the new standards or modifications issued bythe Commission and the CINIF effective as of January 1, 2009:

 

·                  Circular C-2 “Securitization Transactions” states thatin securitization transactions the assignor may or may not transfer the risksand benefits on the financial assets to the assignee, and may or may nottransfer control over such assets.

 

It also establishes thatthe benefits on the assignee’s remainder shall be recognized as “Benefits toreceive in securitization transactions” and valuated at its fair value from theonset. Valuation adjustments are recognized in the year’s results. Thisvaluation shall be consistent with the accounting policies of the SpecialPurpose Entity (SPE), established as a securitizing vehicle.

 

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If the assignor rendersadministration services of the transferred assets, an asset or liability fortransferred asset administration should be recognized initially at its fairvalue, pursuant to Circular C-1 as follows:

 

a)              An asset is recorded if the consideration exceeds thecosts and expenses incurred in rendering the service, otherwise a liability isrecorded.

b)             Then such asset or liability will be valued at itsfair value, recognized its valuation effects in the year’s results.

 

The benefits on thesecuritization transactions’ remnant and the transferred financial assetsadministration asset will be presented under “Benefits to receive insecuritization transactions.”

 

The valuation of thereceivable benefits as well as of the administration asset or liability will bepresented on “Other income” or “Other expenses”, as applicable.

 

The effects of suchCircular, if applied to securitizations in effect by December 31, 2008 aredetailed below:

 

For realizedsecuritization transactions, the financial assets were removed from the balancesheet based on the accounting criteria in effect at that date, C-1, “Transferof Financial Assets”, and C-2, “Securitizations”. As the new accountingcriteria that replaced the previous ones are prospectively applied, retroactiverecords will not be realized for transactions made before its application.Therefore, previously recognized transfers of financial assets don’t have to bereevaluated.

 

However, according tothese new accounting criteria, the securitized loans of the mortgage can stateand municipal government loans that Banorte made during 2006 and 2007,respectively had not met the requirements of the new accounting criteria to beremoved from the balance sheet, as in both transactions most of the inherentrisks and/or benefits are substantially retained.

 

On December 31,2008, the outstanding balance of the securitized loans of the mortgage andstate and municipal government loans that were including in the balance sheetwas Ps. 6,475. Moreover, the impact accumulated in their results that wouldhave been recorded is (Ps. 103).

 

·                  Circular C-5, “Consolidation of Special PurposeEntities”, defines the special standards relative to the consolidation of theSPE. It establishes that an entity should consolidate an SPE when the economicsubstance of the relationship between both entities indicates control over suchSPE.

 

·                  NIF B-7, “Business Acquisitions”, establishes the “purchasemethod” as the method for recognizing business acquisitions. It does not allowthe recognition of earning in an acquisition process.

 

The value of the netacquired assets should be adjusted to a value that is equal to the sum of theconsideration and the value of the non-controlling share valued in proportionto this consideration.

 

Goodwill should berecognized when the sum of the consideration paid in the acquisition and thenon-controlling share valued at their fair value is greater than the amount ofthe net acquired assets valued at fair value according to this NIF.

 

·                  NIF B-8, “Consolidated and Combined FinancialStatements”, separates consolidation and permanent investment valuation.

a)              It requires that the noncontrolling interest be valuedin the consolidated financial statements based on the fair value of the subsidiary’snet assets and the goodwill determined with the purchase method at the time ofthe acquisition of such subsidiary.

b)             It states that at the purchase date of a subsidiarythe purchase method should be applied, therefore the assets and liabilities arevalued at their fair value at such date as per NIF B-7.

c)              The above causes adjustments to its book value,nevertheless it clarifies such adjustments should not be recognized in thesubsidiary but instead in the controlling share as part of its permanentinvestment in the subsidiary.

d)             The consolidation process is defined in greaterdetail.

 

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·                  The objective of issuing NIF C-7, “Investments inAssociates and Other Permanent Investments”, separating the financialstatements’ consolidation and permanent investments’ valuation under the equitymethod, establishes the standards to recognize investments as associated, aswell as the other permanent investments over which it has no control, jointcontrol or significant influence.

 

·                  The new NIF C-8, “Intangible Assets”, define them asnon-monetary identifiable assets, without physical substance that will generatefuture financial benefits controlled by the entity.

 

·                  According to NIF D-8, “Share-based Payments”, theentities that realize share-based payment transactions and grant share purchaseoptions to employees, should recognize the cost or expense incurred, either innet income or as a capitalizable item, and the corresponding effect in theliability or asset. This NIF eliminates the use of the International FinancialReporting Standard 2 that has been applicable in Mexico on a supplementarybasis in lieu of a Mexican standard that would cover share-based payments andshare purchase options.

 

The Financial Group’smanagement is studying the possible effect these standards will have on itsconsolidated financial position and results of operations.

 

**37 -SUBSEQUENT EVENTS**

 

**Prepayment of subordinated debentures**

 

Banorteexercised the prepayment option of its non-convertible subordinated debenturesissued in 2004 maturing in 2014 for USD 300 million, which were listed on theLuxemburg Stock Exchange. The settlement was made on February 17, 2009.This subordinated debt was issued in February 2004 with a 10-year term andincluded a prepayment option as of the fifth year. The main reasons forprepaying this debentures were: i) the actual capital base is strengthenedbased on recent local subordinated debenture issues; ii) maintain Banorte’scredibility as an international issuer in this type of market; iii) liquidatedebentures whose effectiveness will gradually diminish for the purpose of beingconsidered as regulatory capital pursuant to the Commission regulations; andiv) as part of Banorte’s strategy to maintain proper regulatory capital levels.

 

**Merger of Créditos Pronegocio, S.A.de C.V.**

 

At the Board of Directors’ Meeting held on January 29,2009, the merger of Banorte, as the merging entity, with Créditos Pronegocio,S.A. de C.V., as the merged entity, was approved.

 

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**38 –DIFFERENCES BETWEEN MEXICAN BANKING GAAP AND MEXICAN FINANCIAL REPORTINGSTANDARDS**

 

TheFinancial Group’s consolidated financial statements are prepared in accordancewith the AccountingPractices established by the Commission (“Mexican Banking GAAP”), which differin certain respects from Mexican Financial Reporting Standards (“MFRS”).

 

The principal differences and the effecton consolidated net income and consolidated stockholders’ equity are presentedbelow with an explanation of the adjustments:

 

**Reconciliationof stockholders’ equity:**

 
| ** **                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Stockholders’ equity under Mexican Banking GAAP** |       | Ps.                   | 39,746     |   | Ps. | 34,156 |   |
|                                                     |       |                  |       |   |   |
| Adjustments:                                             |       |                  |       |   |   |
| Loan  loss reserves (See B)                              |       | (97                   | )          | (192 | ) |
| Loan  origination fees and costs (See A)                 |       | 149                   |       | 176 |   |
| Foreclosed  assets (See C)                               |       | (45                   | )          | 164 |   |
| Insurance  and postretirement activities (See A)         |       | 1,738                 |       | 1,453 |   |
| Derivatives  (See A)                                     |       | (75                   | )          | 19 |   |
| Business  combinations (See D)                           |       | (2,035                | )          | (1,478 | ) |
| Purchased  loan portfolio (See A)                        |       | (383                  | )          | (661 | ) |
| Securitizations  (See E)                                 |       | (331                  | )          | (267 | ) |
| Repurchase  agreements (See A)                           |       | (24                   | )          | (69 | ) |
| Investment  valuation (See A)                            |       | (11                   | )          | 21 |   |
| Capitalized  costs (See A)                               |       | (53                   | )          | (93 | ) |
| Total  adjustments                                       |       | (1,167                | )          | (927 | ) |
| Tax  effect on adjustments (See G)                       |       | (176                  | )          | (94 | ) |
| Minority  interest attributable to adjustments (See H)   |       | (513                  | )          | (422 | ) |
| ** **                                               |       |                  |       |   |   |
| **Stockholders’ equity under MFRS**                 |       | Ps.                   | 37,890     |   | Ps. | 32,713 |   |

 

**Reconciliationof net income:**

 
| ** **                                             | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Net income under Mexican Banking GAAP**              |       | Ps.                              | 7,014      |   | Ps. | 6,810 |   |
|                                                   |       |                             |       |   |   |
| Adjustments:                                           |       |                             |       |   |   |
| Loan  loss reserves (See B)                            |       | 95                               |       | (55 | ) |
| Loan  origination fees and costs (See A)               |       | 4                                |       | 438 |   |
| Foreclosed  assets (See C)                             |       | (210                             | )          | (95 | ) |
| Insurance  and postretirement activities (See A)       |       | 286                              |       | 139 |   |
| Derivatives  (See A)                                   |       | (93                              | )          | (31 | ) |
| Purchased  loan portfolio (See A)                      |       | 278                              |       | 343 |   |
| Securitizations  (See E)                               |       | (149                             | )          | 45 |   |
| Repurchase  agreements (See A)                         |       | 46                               |       | (19 | ) |
| Investment  valuation (See A)                          |       | (16                              | )          | 149 |   |
| Capitalized  costs (See A)                             |       | 68                               |       | 125 |   |
| Sale  of subsidiary (See F)                            |       | —                           |       | (63 | ) |
| Total  adjustments                                     |       | 309                              |       | 976 |   |
| Tax  effect on adjustments (See G)                     |       | (150                             | )          | (312 | ) |
| Minority  interest attributable to adjustments (See H) |       | (91                              | )          | (129 | ) |
| ** **                                             |       |                             |       |   |   |
| **Net income under MFRS**                              |       | Ps.                              | 7,082      |   | Ps. | 7,345 |   |

 

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***Explanation of reconciling items:***

 

**A)General**

 

This difference between MexicanBanking GAAP and MFRS is explained further in Note 39, as the accountingtreatment under MFRS and U.S. GAAP are the same for this item.

 

**B) LoanLoss Reserves**

 

Mexican Banking GAAP establishes rules forloan portfolio ratings and general methodologies for the rating andconstitution of preventive allowances for loan losses for each type of loan andallows credit institutions to rate and develop preventive allowances based oninternal methodologies, previously authorized by the Commission.

 

According to Circular B-6, “LoanPortfolio”, additional reserves may be recorded to cover risks that are notforeseen by the existing loan portfolio rating methodologies. Before doing so,the Financial Group must report the following to the Commission: a) the originof the estimates; b) the methodology applied; c) the amount of the estimates;and d) the period over which they are considered to be necessary. Prior to2007, specific provisions were calculated when it was determined to be probablethat the Financial Group would not recover the full contractual principal andinterest on a loan (impaired loan).

 

Under Mexican Banking GAAP debtorsupport program allowances were canceled during the first quarter of 2007 asthey did not meet the requirements mentioned above and additional allowancesrelated to UDI Trusts are recorded in accordance with accounting circularsprescribed by the Commission. Under MFRS, additional reserves are not recordedand reserves for debtor support programs must be established and additionalallowances related to UDI Trusts allowances must be reversed.

 

**C) Foreclosed Assets**

 

Under Mexican Banking GAAP, reservesfor foreclosed assets are required based on their nature and number of monthsoutstanding. Under MFRS, these assets are recognized at the lower of thecorresponding loan’s book value or the fair value of the foreclosed asset.Potential impairment should also be evaluated and recognized, as necessary, onthese assets.

 

**D) Business Combinations**

 

Under Mexican Banking GAAP,the Financial Group recorded the put option held by the shareholders’ of INB atits contractual value, which increased the amount of goodwill recorded in thepurchase price allocation. Under MFRS, the put option represents a transactionbetween shareholders and is therefore reflected in stockholders’ equity.Changes in the recorded value of the liability do not affect net income foreither Mexican Banking GAAP or MFRS; as such no adjustment to net income isreflected in the reconciliation for this item.

 

**E)Securitizations**

 

Under Mexican BankingGAAP, the Financial Group accounts for its securitization transactions asdisclosed in Note 4. If it has transferred a financial asset, MFRS requires theFinancial Group to assess whether it has transferred substantially all therisks and rewards of ownership of the transferred asset. If it has retainedsubstantially all such risks and rewards, it continues to recognize thetransferred asset. If it has transferred substantially all such risks andrewards, it derecognizes the transferred asset. If the Financial Group concludes that it has neither transferred norretained substantially all the risks and rewards of ownership of thetransferred asset, it assesses whether it has retained control over thetransferred asset. If it has retained control, it continues to recognize thetransferred asset to the extent of its continuing involvement in thetransferred asset. If it has not retained control, it derecognizes thetransferred asset.

 

**F) Saleof subsidiaries**

 

The basis of assets andliabilities under MFRS of Fianzas Banorte at the time of its sale weredifferent from the basis of such assets and liabilities under Mexican BankingGAAP; accordingly, the disposal under MFRS resulted in a loss, whereas underMexican Banking GAAP the Financial Group recognized a gain.

 

**G) IncomeTaxes**

 

MFRS differences asdescribed above, to the extent taxable, are reflected in the MFRS deferred taxbalances.

 

**H)Minority Interest**

 

The effects of the MFRSdifferences as described in this note reflect the amounts assigned to theminority interests.

 

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**39 –DIFFERENCES BETWEEN MEXICAN BANKING GAAP AND U.S. GAAP**

 

The Financial Group’sconsolidated financial statements are prepared in accordance with MexicanBanking GAAP, which differ in certain significant respects from accountingprinciples generally accepted in the United States of America (“U.S. GAAP”).Prior to 2008, the Mexican Banking GAAP consolidated financial statementsinclude the effects of inflation as provided for under Bulletin B-10, “Recognitionof the Effects of Inflation in Financial Information”, whereas financialstatements prepared under U.S. GAAP are presented on a historical cost basis.The application of Bulletin B-10 represented a comprehensive measure of theeffects of price level changes in the inflationary Mexican economy and, assuch, was considered a more meaningful presentation than historical cost-basedfinancial reporting for both Mexican and U.S. accounting purposes.  Beginning on January 1, 2008, inaccordance with new NIF B-10, “Effects of Inflation”, the Financial Groupdiscontinued the recognition of inflation in its financial statements underMexican Banking GAAP as the cumulative inflation for the preceding three yearswas less than 26%.  Notwithstanding theprior comments, the following reconciliation to U.S. GAAP for the years ended December 31,2007 and 2006 does not include the reversal of the adjustments required underBulletin B-10, as permitted by the rules and regulations of the Securitiesand Exchange Commission (the “SEC”).

 

The principal differencesas they relate to the Financial Group between Mexican Banking GAAP and U.S.GAAP and the effect on consolidated stockholders’ equity and consolidated netincome are presented below, with an explanation of the adjustments.

 

**Reconciliationof stockholders’ equity:**

 
| ** **                                                       | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Stockholders’ equity under Mexican Banking GAAP**         |       | Ps.                   | 39,746     |   | Ps. | 34,156 |   |
|                                                             |       |                  |       |   |   |
| U.S. GAAP adjustments:                                           |       |                  |       |   |   |
| Loan loss reserves (See A)                                       |       | 1,366                 |       | 1,141 |   |
| Loan origination fees and costs (See B)                          |       | 149                   |       | 176 |   |
| Purchased loan portfolio (See C)                                 |       | (383                  | )          | (661 | ) |
| Derivatives (See D)                                              |       | (75                   | )          | 19 |   |
| Foreclosed assets (See E)                                        |       | (45                   | )          | 164 |   |
| Insurance and postretirement activities (See F)                  |       | 1,738                 |       | 1,453 |   |
| Business combinations (See G)                                    |       | 25                    |       | 371 |   |
| Employee retirement obligations (See H)                          |       | (848                  | )          | (898 | ) |
| Capitalized costs (See I)                                        |       | (53                   | )          | (93 | ) |
| Securitizations (See J)                                          |       | (136                  | )          | (3 | ) |
| Other adjustments (See L)                                        |       | 86                    |       | (121 | ) |
| Fair value measurements (See III C)                              |       | (137                  | )          | — |   |
| Income taxes (See M)                                             |       | (1,614                | )          | (1,645 | ) |
| Total U.S. GAAP adjustments                                      |       | 73                    |       | (97 | ) |
| Tax effect on U.S. GAAP adjustments (See M)                      |       | (491                  | )          | (463 | ) |
| Minority interest under Mexican Banking GAAP (See N)             |       | (1,945                | )          | (1,667 | ) |
| Minority interest attributable to U.S. GAAP  adjustments (See N) |       | (539                  | )          | (428 | ) |
| **Stockholders’ equity under U.S.  GAAP**                   |       | Ps.                   | 36,844     |   | Ps. | 31,501 |   |

 

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**Reconciliationof net income:**

 
| ** **                                                       | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                       | ** ** | **2008**                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net income under Mexican Banking  GAAP**                       |       | Ps.                               | 7,014      |   | Ps. | 6,810 |   | Ps. | 6,255 |   |
| U.S. GAAP adjustments:                                           |       |                              |       |   |   |   |   |
| Loan loss reserves (See A)                                       |       | 225                               |       | (245 | ) | (338 | ) |
| Loan origination fees and costs (See B)                          |       | 4                                 |       | 438 |   | 680 |   |
| Purchased loan portfolio (See C)                                 |       | 278                               |       | 343 |   | (251 | ) |
| Derivatives (See D)                                              |       | (93                               | )          | (31 | ) | (276 | ) |
| Foreclosed assets (See E)                                        |       | (210                              | )          | (95 | ) | (74 | ) |
| Insurance and postretirement activities (See F)                  |       | 286                               |       | 139 |   | (319 | ) |
| Business combinations (See G)                                    |       | (318                              | )          | 229 |   | 15 |   |
| Employee retirement obligations (See H)                          |       | 55                                |       | 8 |   | (40 | ) |
| Capitalized costs (See I)                                        |       | 68                                |       | 125 |   | 230 |   |
| Securitizations (See J)                                          |       | (134                              | )          | — |   | 358 |   |
| Share-based payment (See K)                                      |       | —                            |       | — |   | (19 | ) |
| Other adjustments (See L)                                        |       | (814                              | )          | 60 |   | (180 | ) |
| Fair value measurements (See III C)                              |       | (137                              | )          | — |   | — |   |
| Income taxes (See M)                                             |       | 11                                |       | 62 |   | (410 | ) |
| Total U.S. GAAP adjustments                                      |       | (779                              | )          | 1,033 |   | (624 | ) |
| Tax effect on U.S. GAAP adjustments (See M)                      |       | 362                               |       | (390 | ) | (18 | ) |
| Minority interest attributable to U.S. GAAP  adjustments (See N) |       | (121                              | )          | (90 | ) | 207 |   |
| **Net income under U.S. GAAP**                                   |       | Ps.                               | 6,476      |   | Ps. | 7,363 |   | Ps. | 5,820 |   |

 

A rollforwardof the Financial Group’s U.S. GAAP stockholders’ equity balance is as follows:

** **
| ** **                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Balance at the beginning of the year |       | Ps.      | 31,501     |     | Ps.        | 25,526 |   |
| Net income under U.S. GAAP           |       | 6,476    |       | 7,363    |       |
| Dividends declared                   |       | (949     | )          | (917     | )          |
| Issuance (repurchase) of shares      |       | 103      |       | (639     | )          |
| Other comprehensive (loss) income    |       | (287     | )          | 168      |       |
| ** **                           |       |     |       |     |       |
| **Balance at the end of the year**   |       | Ps.      | 36,844     |     | Ps.        | 31,501 |   |

 

***I              Explanation of reconciling items:***

 

**A)****          ****Loan loss reserves**

 

Mexican Banking GAAPestablishes rules for loan portfolio ratings and general methodologies forthe rating and constitution of preventive allowances for loan losses for eachtype of loan and allows credit institutions to rate and develop preventiveallowances based on internal methodologies, previously authorized by theCommission. Prior to 2007, specific provisions were calculated when it wasdetermined to be probable that the Financial Group would not recover the fullcontractual principal and interest on a loan (impaired loan).

 

The Financial Groupassigns an individual risk category to each commercial loan based on theborrower’s financial and operating risk level, its credit experience and thenature and value of the loans’ collateral. A loan loss reserve is determinedfor each loan based on a prescribed range of reserves associated to each riskcategory. In the case of the consumer and mortgage loan portfolio, the riskrating procedure and the establishment of loan reserves considers theaccounting periods reporting past-due, the probability of noncompliance, andthe severity of the loss in proportion to its amount and the nature of loanguarantees.

 

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The U.S. GAAP methodologyfor recognition of loan losses is provided by Statement of Financial AccountingStandards (“SFAS”) No. 5, “Accounting for Contingencies”, and SFAS No. 114,“Accounting by Creditors for Impairment of a Loan”, which establish that anestimated loss should be accrued when, based on information available prior tothe issuance of the financial statements, it is probable that a loan has beenimpaired at the date of the financial statements and the amount of the loss canbe reasonably estimated.

 

For larger nonhomogeneousloans, the Financial Group assesses all individual loans with an outstandingbalance greater than 4 million UDI for impairment. Under U.S. GAAP, estimatedlosses on impaired loans, which are individually assessed, are required to bemeasured at the present value of expected future cash flows discounted at theloan’s effective rate, the loan’s observable market price or at the fair valueof the collateral if the loan is collateral dependent.

 

To calculate theallowance required for smaller-balance impaired loans and unimpaired loans,historical loss ratios are determined by analyzing historical trends. Theseratios are determined by loan type to obtain loss estimates for homogeneousgroups of clients. Such historical ratios are updated to incorporate the mostrecent data reflective of current economic conditions, in conjunction withindustry performance trends, geographic or obligor concentrations within eachportfolio segment, and any other pertinent information, resulting in theestimation of the allowance for loan losses.

 

Under Mexican BankingGAAP, loans may be charged-off when collection efforts have been exhausted orwhen they have been fully provisioned. On the other hand for U.S. GAAP, loans(or portions of particular loans) should be written-off in the period that theyare deemed uncollectible.

 

U.S. GAAP loan lossreserves are as follows:

 
| **Loan loss  reserves**                                                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Loan loss reserves for SFAS No. 114                                         |       | Ps.      | 523        |     | Ps.        | 3        |       | Ps. | 45 |   |
| Loan loss reserves for SFAS No. 5                                           |       | 4,728    |       | 2,569    |       | 2,124    |       |
| Total loan loss reserves US GAAP                                                 |       | 5,251    |       | 2,572    |       | 2,169    |       |
| Loan loss reserves Mexican Banking GAAP prior to  change in accounting principle |       | 6,690    |       | 3,786    |       | 3,667    |       |
| (Less)                                                                           |       |     |       |     |       |     |       |
| Change in accounting principle (1)                                               |       | —   |       | —   |       | (527     | )          |
| Mexican Banking GAAP loan loss reserves                                          |       | 6,690    |       | 3,786    |       | 3,140    |       |
| Adjustment to INB reserves (2)                                                   |       | (73      | )          | (73      | )          | (112     | )          |
| Adjusted loan loss reserves                                                      |       | 6,617    |       | 3,713    |       | 3,028    |       |
|                                                                             |       |     |       |     |       |     |       |
| Stockholders’ equity adjustment after changes in  accounting principles     |       | 1,366    |       | 1,141    |       | 859      |       |
| Net Income adjustment after changes in accounting  principles                    |       | Ps.      | 225        |     | Ps.        | (245     | )          | Ps. | (338 | ) |

 

----

1) Retrospective application of the change inaccounting principle.

 

2) In 2006, as a result of the Financial Group’sacquisition of INB as disclosed in Note 39 G), additional reserves were recordedwith an offset to goodwill in its Mexican Banking GAAP consolidated financialstatements. As of December 31, 2008, 2007 and 2006 the additional reservesrecorded under Mexican Banking GAAP are Ps. 73, Ps. 73 and Ps. 112,respectively.

 

**Rollforward of loan loss reserves:**

** **
| ** **                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Beginning of the year         |       | Ps.      | 2,572      |     | Ps.        | 2,169    |       | Ps. | 2,119 |   |
| Charge-offs net of recoveries |       | (4,002   | )          | (2,341   | )          | (1,151   | )          |
| Charges                       |       | 6,681    |       | 2,823    |       | 1,287    |       |
| Restatement effect            |       | —   |       | (79      | )          | (86      | )          |
|                          |       |     |       |     |       |     |       |
| End of the year               |       | Ps.      | 5,251      |     | Ps.        | 2,572    |       | Ps. | 2,169 |   |

 

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**Ratios:**

** **
| **Loan loss  reserves for**         | ** ** | **December 31,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------|------------|
| **SFAS No. 114**               | ** ** | **2008**              | ** ** | **2007**       | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                |       |                  |       |           |       |   |   |   |   |   |   |   |   |
| Total reserves                      |       | Ps.                   | 523        |           | Ps.        | 3 |   | Ps. | 45 |   |   |   |   |   |   |   |
| Total balances of impaired loans    |       | Ps.                   | 153        |           | Ps.        | 87 |   | Ps. | 210 |   | 341.83 | % | 3.45 | % | 21.43 | % |
| Total balances of outstanding loans |       | Ps.                   | 1,256      |           | Ps.        | 87 |   | Ps. | 322 |   | 41.64 | % | 3.45 | % | 13.98 | % |

 
| **Loan loss  reserves for**             | ** ** | **December 31,** | ** ** | **Percentage** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|----------------|------------|
| **SFAS  No. 5**                    | ** ** | **2008**              | ** ** | **2007**       | ** ** | **2006** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |                  |       |           |       |   |   |   |   |   |   |   |   |
| Total reserves                          |       | Ps.                   | 4,728      |           | Ps.        | 2,569 |   | Ps. | 2,124 |   |   |   |   |   |   |   |
| Total balances of impaired loans        |       | Ps.                   | 4,548      |           | Ps.        | 2,637 |   | Ps. | 1,788 |   | 103.96 | % | 97.42 | % | 118.79 | % |
| Total balances of outstanding loans (1) |       | Ps.                   | 243,990    |           | Ps.        | 196,445 |   | Ps. | 149,179 |   | 1.94 | % | 1.31 | % | 1.42 | % |

 

----

(1) The Financial Group has alsorecorded loan loss reserves in accordance with SFAS No. 5 related to itemssuch as guarantees and other off-balance sheet liabilities. Such balances,which are not included in the total balance of outstanding loans, amounted toPs. 2,793, Ps. 2,365 and Ps. 2,368 as of December 31, 2008, 2007 and 2006,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 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 in 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.

 

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 expected reduction on the future cash flows.

 

**B)****          ****Loan origination fees and costs**

 

Under Mexican Banking GAAP, fees charged in connection with the issuance of loans are recorded as a deferred credit, which is amortized into interest income over the loan’s term and loan origination costs are expensed as incurred. Prior to 2007, loan origination fees were recognized on a cash basis. This change in accounting principle was applied retrospectively. 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.

 

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**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 were 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 guidance found in U.S. GAAP 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.

 

In 2007, the Financial Group adopted the Commission’s new Circular B-11, “Collection Rights”; therefore under Mexican Banking GAAP purchased portfolios are valued using one of the following methods: cash basis method, interest method, and cost recovery method, established in such circular.

 

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 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 collectability of the acquisition amount of the loan and the discount is probable. If these criteria are not satisfied, the loan should be accounted for using the cost-recovery 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.

 

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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 under** | ** ** |
| **Portfolio**       | ** ** | **2008**                       | ** ** | **2007**                         | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** | **U.S. GAAP** | ** ** |
|                |       |                           |       |                             |       |                          |       |   |   |   |   |   |   |
| Bancrecer I         |       | Ps.                            | (155       | )                                | Ps.        | (167                          | )          | Ps. | 13 |   | Ps. | (28 | ) | Ps. | (80 | ) | Cost-recovery method |   |
| Serfin Santander    |       | (60                            | )          | (70                              | )          | 10                            |       | 21 |   | (28 | ) | Cost-recovery method |   |
| Meseta              |       | (15                            | )          | (38                              | )          | 23                            |       | 34 |   | 51 |   | Cost-recovery method |   |
| Bancrecer II        |       | (2                             | )          | (1                               | )          | —                        |       | 6 |   | 8 |   | Cost-recovery method |   |
| Goldman Sachs       |       | (186                           | )          | (227                             | )          | 42                            |       | 81 |   | 109 |   | Cost-recovery method |   |
| Cremi               |       | (49                            | )          | (63                              | )          | 13                            |       | (2 | ) | (8 | ) | Cost-recovery method |   |
| Banorte Sólida |       | (151                           | )          | (198                             | )          | 46                            |       | 11 |   | 30 |   | Cost-recovery method |   |
| Bancrecer III       |       | —                         |       | (1                               | )          | —                        |       | 8 |   | 12 |   | Cost-recovery method |   |
| Banco Industrial    |       | —                         |       | —                           |       | —                        |       | — |   | 19 |   | Cost-recovery method |   |
| Bancomer I          |       | (136                           | )          | (109                             | )          | (27                           | )          | (32 | ) | (39 | ) | Cost-recovery method |   |
| Bancomer II         |       | 9                              |       | 11                               |       | (2                            | )          | (3 | ) | — |   | Interest method |   |
| Banco Unión    |       | 6                              |       | 11                               |       | (5                            | )          | (3 | ) | (58 | ) | Interest method |   |
| Bital I             |       | (47                            | )          | (66                              | )          | 19                            |       | (8 | ) | (130 | ) | Interest method |   |
| Serfin              |       | —                         |       | —                           |       | —                        |       | — |   | (6 | ) | Interest method |   |
| Bancomer III        |       | 34                             |       | 27                               |       | 6                             |       | 28 |   | 7 |   | Interest method |   |
| Bancomer IV         |       | 175                            |       | 104                              |       | 71                            |       | 104 |   | 91 |   | Interest method |   |
| Bital II            |       | 14                             |       | 20                               |       | (6                            | )          | 20 |   | (21 | ) | Interest method |   |
| Banamex Hipotecario |       | 82                             |       | 62                               |       | 20                            |       | 62 |   | 5 |   | Interest method |   |
| GMAC Banorte        |       | 25                             |       | 18                               |       | 7                             |       | 18 |   | (32 | ) | Interest method |   |
| Serfin Comercial I  |       | 16                             |       | (11                              | )          | 27                            |       | (11 | ) | (27 | ) | Interest method |   |
| Serfin Hipotecario  |       | 60                             |       | 43                               |       | 17                            |       | 43 |   | — |   | Interest method |   |
| Vipesa              |       | (3                             | )          | (6                               | )          | 4                             |       | (6 | ) | — |   | Interest method |   |
| Confia I            |       | —                         |       | —                           |       | —                        |       | — |   | (75 | ) | Interest method |   |
| Confia II           |       | —                         |       | —                           |       | —                        |       | — |   | (15 | ) | Interest method |   |
| Confia III          |       | —                         |       | —                           |       | —                        |       | — |   | (2 | ) | Interest method |   |
| Serfin Comercial II |       | —                         |       | —                           |       | —                        |       | — |   | (62 | ) | Interest method |   |
|                |       |                           |       |                             |       |                          |       |   |   |   |   |   |   |
|                |       | Ps.                            | (383       | )                                | Ps.        | (661                          | )          | Ps. | 278 |   | Ps. | 343 |   | Ps. | (251 | ) |   |   |
|                     |            |                                |            |                                  |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**D)****          ****Derivatives**

 

Beginning in 2007, underMexican Banking GAAP, trading instruments are carried at fair value in thebalance sheet, and changes in fair value are recognized in current earnings. Inaddition, the Financial Group applied the provisions of Bulletin C-10 as of thebeginning of 2005 in accordance with instructions received from the Commissionas follows:

 

·                  For fair value hedges, the transactions are recorded as follows: thefair value of the derivative instrument is recorded in the balance sheet, andchanges in the fair value of both the derivative instrument and the hedged itemare recognized in current earnings.

 

·                  For cash flow hedges, the transactions are recorded as follows: thefair value of the derivative instrument is recorded in the balance sheet andchanges in the effective portion are temporarily recognized as a component ofother comprehensive income in stockholders’ equity and subsequentlyreclassified to current earnings when affected by the hedged item. Theineffective portion of the gain or loss on the hedging instrument is recognizedin current earnings.

 

Under Mexican BankingGAAP, the Financial Group is not required to bifurcate its embedded derivativesrelated to service contracts and purchase and sale transactions from their hostcontracts and record them at their fair value for financial statement purposes.

 

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Under Mexican BankingGAAP, the designation of a derivative instrument as a hedge of a net position (“macrohedging”) is allowed. However, macro hedging is not permitted under U.S. GAAP.

 

SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities”, of U.S. GAAP 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

 

·                  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 othercomprehensive income (“OCI”) in stockholders’ equity. Once the effects of theunderlying hedged transaction are recognized in earnings, the correspondingamount in OCI is reclassified to the statement of income to offset the effectof the hedged transaction. All derivative instruments that qualify as hedgesare subject to periodic effectiveness testing. Effectiveness is the derivativeinstrument’s ability to generate offsetting changes in the fair value or cashflows of the underlying hedged item. The ineffective portion of the change infair value for a hedged derivative is immediately recognized in earnings,regardless of whether the hedged derivative is designated as a cash flow orfair value hedge.

 

Under U.S. GAAP, prior toJanuary 1, 2007, the Financial Group’s derivative contracts are notaccounted for as hedges for accounting purposes and 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.

 

Under U.S. GAAP, certainembedded terms included in host contracts that affect some or all of the cashflows or the value of other exchanges required by the contract in a mannersimilar to a derivative instrument must be separated from the host contract andaccounted for at fair value.

 

**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.

 

Prior to 2007, in accordance with Mexican Banking GAAP foreclosed assets were considered to be monetary assets, while for U.S. GAAP these were treated as non-monetary assets. As a result of the change in the accounting for foreclosed assets under Mexican Banking GAAP, in 2007 the Financial Group no longer calculated REPOMO related to these assets as they were considered to be non-monetary assets.

 

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.

 

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**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, 2008, 2007 and 2006 under U.S. GAAP are as follows:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                   |       |                  |       |   |   |   |   |
| Life                                   |       | Ps.                   | 20         |   | Ps. | 20 |   | Ps. | 17 |   |
| P&C                                |       | 255                   |       | 225 |   | 222 |   |
| Health                                 |       | 197                   |       | 30 |   | 21 |   |
| Afore                                  |       | 1,397                 |       | 1,223 |   | 812 |   |
| Total accumulated DAC                  |       | Ps.                   | 1,869      |   | Ps. | 1,498 |   | Ps. | 1,072 |   |
| DAC - net amount charged to net income |       | Ps.                   | 371        |   | Ps. | 426 |   | Ps. | 55 |   |

 

Under Mexican Insurance GAAP, certain reserves (disaster) are calculated using internal models previously approved by the Mexican National Insurance and Surety Commission. Generally pension reserves are based on the present value of benefits to be paid together with fees suggested by this Commission. U.S. GAAP establishes the use of a fee that allows policy benefits to be covered through premiums collected for pension reserves. Under U.S. GAAP, provisions for disaster reserves are based on actuarial calculations for losses incurred using the experience of the Financial Group.

 

The Financial Group recorded a reserve for catastrophic events under Mexican GAAP as a liability which is not allowed by U.S. GAAP.

 

**Loss reserves and unearned premiums**:

 
| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                   |       |                  |       |   |   |
| Life                   |       | Ps.                   | 93         |   | Ps. | 19 |   |
| P&C                |       | (273                  | )          | (300 | ) |
| Health                 |       | (290                  | )          | (80 | ) |
| LAE                    |       | (98                   | )          | (76 | ) |
| Afore                  |       | (381                  | )          | (391 | ) |
| Pensions               |       | 611                   |       | 576 |   |
| Total                  |       | (338                  | )          | (252 | ) |
|                   |       |                  |       |   |   |
| Catastrophic reserve:  |       |                  |       |   |   |
| P&C                |       | 185                   |       | 144 |   |
|                   |       | 185                   |       | 144 |   |
|                   |       |                  |       |   |   |
| Reinsurance activities |       | 22                    |       | 63 |   |
|                   |       |                  |       |   |   |
| Total reserves         |       | Ps.                   | (131       | ) | Ps. | (45 | ) |

 

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**Summary:**

 
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2008**              | ** ** | **2007** | ** ** |
|              |       |                  |       |   |   |
| DAC               |       | Ps.                   | 1,869      |   | Ps. | 1,498 |   |
| Total reserves    |       | (131                  | )          | (45 | ) |
| Total adjustments |       | Ps.                   | 1,738      |   | Ps. | 1,453 |   |

 

**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, except as it relates to transactions between shareholders, 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.

 

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.

 

The Financial Group’s subsidiary Banorte, 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 USD 176 million, of which approximately USD 16 million was assigned to an identifiable intangible asset with the remaining 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 are expected to complement and create synergies with the Financial Group’s existing service locations. 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 goodwill recorded in the acquisition of INB is being accounted for in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. Accordingly, goodwill will not be amortized; rather it is being tested annually for impairment. In addition, goodwill is not deductible for tax purposes.

 

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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. In subsequent periods, the obligation will be revised based on the contractual amount established in the purchase agreement with changes in the value recognized in goodwill. 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.

 

**H)****          ****Employee retirementobligations**

 

Under Mexican BankingGAAP Bulletin D-3requires the recognition of a severance indemnity liability calculated based onactuarial computations. Similar recognition criteria under U.S. GAAP areestablished in SFAS No. 112, “Employers’ Accounting for PostemploymentBenefits”, which requires that a liability for certain termination benefitsprovided under an ongoing benefit arrangement such as these statutorilymandated severance indemnities, be recognized when the likelihood of futuresettlement is probable and the liability can be reasonably estimated. Prior to2008, 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. Beginning in 2008, an amendment to Bulletin D-3 requires theamortization of the unrecognized transition as of January 1, 2008 over thelesser of the expected remaining service period of employees or over fiveyears. However, U.S. GAAP required the Financial Group to recognize such effectupon initial adoption and does not permit an entity to reduce the accruedliability by any unrecognized items, which results in a difference in theamount recorded under the two accounting principles.

 

Under Mexican Banking GAAP, pension and seniority premiumobligations are determined in accordance with Bulletin D-3. For U.S. GAAP, such costs areaccounted for in accordance with SFAS No. 87, “Employers’ Accounting forPensions*”*, whereby the liability is measured,similar to Mexican Banking GAAP, using the projected unit credit method at netdiscount rates. SFAS No. 87 became effective on January 1, 1989whereas Bulletin D-3became 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.

 

Postretirement benefits are accounted for under U.S. GAAP inaccordance with SFAS No. 106, *“*Employers’Accounting for Postretirement Benefits Other Than Pension*s”,*which applies to all post-retirement benefits, such as life insurance providedoutside a pension plan or other postretirement health care and welfare benefitsexpectedto beprovided by an employer to current and former employees. The cost ofpostretirement benefits is recognized over the employees’ service periods andactuarial assumptions are used to project the cost of health care benefits andthe present value of those benefits. For Mexican Banking GAAP purposes asrequired by Bulletin D-3,the Financial Group accounts for such benefits in a manner similar to U.S.GAAP. SFAS No. 106 became effective on January 1, 1993 whereas Bulletin D-3 became effective on January 1,2003. Therefore, a difference between Mexican Banking GAAP and U.S. GAAP existsdue to the accounting for the transition obligation at different implementationdates.

 

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The Financial Group has adopted the provisions of SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans - an amendment of FASB Statements No. 87, 88, 106, and 132(R. Thisstatement requires the Financial Group to (1) fully recognize, as an assetor liability, the overfunded or underfunded status of defined pension and otherpostretirement benefit plans; (2) recognize changes in the funded statusthrough other comprehensive income in the year in which the changes occur; and (3) measurethe funded status of defined pension and other postretirement benefit plans asof the date of the its fiscal year-end.

 

**I)****               ****Capitalizedcosts**

 

Under Mexican Banking 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 forResearch and Development Costs,” and SOP 98-5, “Reporting on the Costs of Start-UpActivities”, such research and preoperating expenses are expensed as incurred.

 

Under Mexican Banking GAAP, the Financial Group has capitalizedcertain significant costs related to implementation projects. For U.S. GAAPpurposes, the Financial Group follows the guidance established by SOP 98-1, “Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use”.  This standard establishes that computersoftware costs incurred in the preliminary project stage should be expensed asincurred. Once the capitalization criteria of the SOP have been met, externaldirect costs of materials and services consumed in developing or obtaininginternal-use computer software; payroll and payroll-related costs for employeeswho are directly associated with and who devote time to the internal-usecomputer software project (to the extent of the time spent directly on theproject); and interest costs incurred when developing computer software forinternal use should be capitalized. Generally, training costs and dataconversion costs should be expensed as incurred. As the U.S. GAAP standard ismore stringent, the reconciling item represents an adjustment for items thathave been capitalized for Mexican Banking GAAP purposes that do not qualify forcapitalization under U.S. GAAP.

 

**J)****            ****Securitizations**

 

**UMS BondSecuritization**

 

During the first quarter of 2006, the Financial Group securitizedUMS bonds in the amount of Ps. 5,097. The Financial Group retainedapproximately 99% of the Securitization Certificates issued by the trust andimmediately subsequent to the securitization, sold them under repurchaseagreements. The Financial Group recorded this transaction as a sale forpurposes of its Mexican Banking GAAP financial statements. For US GAAP purposes,in accordance with SFAS No. 140, “Accounting for Transfers and Servicingof Financial Assets and Extinguishments of Liabilities a replacement of FASBStatement 125”, the transfer was accounted for as a secured borrowing.

 

In 2006, the Financial Group’s subsidiary Banorte transferred itsUMS bonds from the held-to-maturity category to available-for-sale. For US GAAPpurposes, such reclassification tainted Banorte’s portfolio and therefore allheld-to-maturity securities were reclassified to available-for-sale at fairvalue in accordance with the criteria established by SFAS No. 115, “Accountingfor Certain Investments in Debt and Equity Securities”.

 

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**Bondsecuritization**

 

During the third quarter of 2007, the Financial Group securitized UMS,PEMEX, CFE and BANCOMEXT bonds in the amount of Ps. 2,027. The Financial Group retainedapproximately 76% of the Securitization Certificates issued by the trust andimmediately subsequent to the securitization, sold them under repurchaseagreements. The Financial Group recorded this transaction as a sale forpurposes of its Mexican Banking GAAP financial statements.

 

Under Mexican Banking GAAP, based on instructions from theCommission in their letter DGSIF “A”-601-II-52006 dated on February 11,2005, the Financial Group recorded both transactions as a sale and repurchaseagreement.

 

For U.S. GAAP purposes, the transactions did not meet the salescriteria established by SFAS No. 140 and as a result were accounted for assecured borrowings.

 

**MortgageLoan Securitization**

 

During December 2006, the Financial Groupsecuritized mortgage loans in the amount of Ps. 2,147, by transferring suchloans to a qualifying special purpose entity (the “Trust”) created specificallyfor purposes of this transaction. The Trust issued certificates that trade onthe Mexican Stock Exchange and guarantees its holders with a specific rate ofreturn. The Financial Group received a subordinated certificate from the Trust,which entitles the Financial Group to retain the excess cash flows in theTrust, after reimbursing the holders of the certificates, which has wasrecorded at its nominal value and classified as an available-for-sale security.Under Mexican Banking GAAP, this securitization was accounted for as a sale andas a result of recognizing the retained interest represented by thesubordinated certificate at nominal value no gain or loss on the sale wasrecognized. As of January 2007, subsequent increases or decreases in thefair value of the subordinated certificate are reflected by an adjustment, netof taxes, being charged or credited to the other comprehensive income portionof stockholders’ equity, which conforms to the accounting established by U.S.GAAP.

 

Under US GAAP, the securitization met the criteriaestablished by SFAS No. 140 for sale accounting and the securitized loanswere derecognized by the Financial Group as of the date of sale.  The Financial Group allocated the previousbook carrying amount between the loans sold and the subordinated certificate(the retained interest) in proportion to their relative fair values on the dateof transfer.  The Financial Grouprecognized a gain on the sale of Ps. 358 by comparing the net sale proceeds(after transaction costs) to the allocated book value of the loans sold. Thesubordinated certificate was recorded at its relative book value at the date ofsale and has been classified as an available-for-sale security under SFAS No. 115.  Subsequent increases or decreases in the fairvalue of the subordinated certificate are reflected by an adjustment, net oftaxes, being charged or credited to the other comprehensive income portion ofstockholders’ equity.

 

**State andMunicipal Government Loans Securitization**

 

During November 2007,the Financial Group securitized state and municipal government loans in theamount of Ps. 5,599 by transferring such loans to a qualifying special purposeentity (the “Trust”) created specifically for purposes of this transaction. TheTrust issued certificates that trade on the Mexican Stock Exchange andguarantees its holders with a specific rate of return. The Financial Groupretained the 100% of the securitization certificates issued by the Trust andimmediately subsequent to the securitization sold them under repurchaseagreements. The Financial Group received a subordinated certificate from theTrust, which entitles the Financial Group to retain the excess cash flows inthe Trust, after reimbursing the holders of the certificates, which has wasrecorded at its fair value and classified as a trading security. Under MexicanBanking GAAP, this securitization was accounted for as a sale and generated again, resulting from the difference between the fair value of the assetsreceived and the carrying value of the transferred assets.

 

For U.S. GAAP purposes, given that the Financial Group repurchased100% of the certificates issued by the Trust, the transactions did not meet thesales criteria established by SFAS No. 140 and as a result were accountedfor as secured borrowings.

 

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**K)****          ****Share-based payment**

 

Beginning in 2007, the Financial Group accounts forits share-based compensation plans according to IFRS 2, “Share-Based Payment”,which is supplemental guidance to Mexican Banking GAAP given that no localstandard exists that addresses this topic. As a result, the Financial Group’saccounting treatment for its particular share-based payment transactionsconforms to the requirements established by U.S. GAAP. As a result, beginningin 2007, the Financial Group does not have a reconciling item related to itsshare-based payment plans. Prior to 2007, the Financial Group accounted forthese plans as prepaid expenses, based on instructions received from theCommission in its letter 601-II-9477.

 

Under U.S. GAAP, prior to January 1, 2006, theFinancial Group applied Accounting Principles Board Opinion (“APB”) No. 25,“Accounting for Stock Issued to Employees”, which requires an entity to use anintrinsic value method to determine the value of equity instruments.

 

Under U.S. GAAP, the Financial Group adopted SFAS No. 123(R),“Share-Based Payment”, effective January 1, 2006, using the modifiedprospective application method. The modified prospective application methodapplies to new awards, to any outstanding liability awards, and to awardsmodified, repurchased, or cancelled after January 1, 2006. For all awardsgranted prior to January 1, 2006, compensation cost has been recognized onthe portion of awards for which service has been rendered. SFAS No. 123(R) requiresall stock-based compensation awards, including stock options, to be accountedfor at fair value and to be recognized as compensation expense over therequisite service period.

 

**L)****           ****Other adjustments**

 

These include thefollowing:

 
| ** **                   | ** ** | **Stockholders’  equity****December 31,** | ** ** | **Net income****Year ended December 31,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                            | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                         |       |                                                |       |                                           |       |   |   |   |   |   |   |
| 1) Non-accrual loans         |       | Ps.                                                 | 168        |                                           | Ps.        | 26 |   | Ps. | 142 |   | Ps. | 64 |   | Ps. | 36 |   |
| 2) Guarantees                |       | 6                                                   |       | (23                                            | )          | 29 |   | (7 | ) | (4 | ) |
| 3) Repurchase agreements     |       | (24                                                 | )          | (69                                            | )          | 46 |   | (19 | ) | (1 | ) |
| 4) Investment valuation      |       | (11                                                 | )          | 21                                             |       | (1,121 | ) | 62 |   | (234 | ) |
| 5) Equity method investments |       | (53                                                 | )          | (76                                            | )          | 90 |   | 23 |   | 2 |   |
| 6) Discontinued operations   |       | —                                              |       | —                                         |       | — |   | (63 | ) | 21 |   |
|                         |       | Ps.                                                 | 86         |                                           | Ps.        | (121 | ) | Ps. | (814 | ) | Ps. | 60 |   | Ps. | (180 | ) |

 

These other adjustmentsare related to the following differences between Mexican Banking GAAP 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 make 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.

 

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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 U.S. 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 39 J), in 2006, as a result of tainting its portfolio all of Banorte’s held-to-maturity securities under Mexican Banking GAAP were 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, unless it can demonstrate that it has significant influence.

 

6)              This adjustment is the result of selling On March 31, 2007, 100% of the shares of Fianzas Banorte.

 

Mexican Banking GAAP as defined by Bulletin C-15, “Impairment of Long-lived Assets and their Disposal”, requires the asset group being disposed of to be presented as a discontinued operation only if its operations are individually significant to the consolidated operations. Bulletin C-15 defines the discontinuance of an operation as the process of final interruption of a significant business activity of an entity and establishes that the discontinuation of an operation implies the final interruption of a significant activity of the entity that leads to the sale, abandonment, exchange or return to stockholders of long-lived assets originally intended for use, in addition to other assets and liabilities related to the operation. Therefore, the analysis of the significance of the disposed business is performed without considering the eventual gain or loss on sale or aggregating each business being disposed with other businesses sold, and instead considers only the significance of the business activity of the relevant business being sold.

 

U.S. GAAP as defined by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, requires that an entity report as discontinued operations those components of its business that have been classified as held for sale. A component of an entity is defined as comprising operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the business. Individually insignificant disposals of a component of an entity should be aggregated for purposes of assessing materiality for all periods presented. Therefore, individually insignificant dispositions should be aggregated and reported as discontinued operations under SFAS No. 144 beginning in the period the impact of the dispositions is material to the financial statements of any period presented. This evaluation should also include the effect of the gain or loss on sale of the component.

 

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The basis of the assets and liabilities under U.S. GAAP of Fianzas Banorte at the time of its sale was different from the basis of such assets and liabilities under Mexican Banking GAAP; accordingly, the disposal under U.S. GAAP resulted in a loss, whereas under Mexican Banking GAAP the Financial Group recognized a gain.

 

**M)****        ****Income taxes**

 

Under Mexican Banking GAAP as required by Bulletin D-4, “Accounting for Income Tax, Tax on Assets and Employee Statutory Profit Sharing,” income tax and employee statutory profit sharing (PTU) are charged to results as they are incurred and the Financial Group recognizes deferred income tax 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 bases, measured using enacted rates. The effects of changes in the statutory rates are accounted for in the period that includes the enactment date. The Financial Group recognizes the benefits related to tax loss carryforwards and asset tax credit carryforwards when such amounts are realized. Deferred tax assets are recognized only when it is highly probable that sufficient future taxable income will be generated to recover such deferred tax assets.

 

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)****          ****Minority interest**

 

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.

 

The effects of the U.S. GAAP differences as described in this note reflect the amounts assigned to the minority interests.

 

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***II******                                     ******Significant disclosures:***

 

Consolidation

 

Under Mexican Banking GAAP, the Financial Group’s consolidated financial statements include all subsidiaries under the control of financial holding companies, except those in the insurance and pension sector. Prior to 2007, all subsidiaries not within the financial sector were accounted for under the equity method. The determination of which companies are deemed to be within the insurance and pension 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 insurance and pension sector, and therefore is required to be consolidated. Companies that may seem to fall within the insurance and pension sector based on their operations may not be consolidated due to decisions of the SHCP.

 

Under U.S. GAAP, the basic principle 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 consolidated net income or consolidated stockholders’ equity result due to the different consolidation principles disclosed above.

 

***III******                                ******Additional Disclosures:***

 

##### **A)    Earnings per common share (“EPS”) inaccordance 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, 2,016,959,232, 2,018,167,791 and 2,019,019,115 weighted-average shares outstanding for 2008, 2007 and 2006, respectively. Potentially dilutive common shares for all periods presented are not significant. Basic and diluted net income per common share computed in accordance with U.S. GAAP is presented below:

 
| ** **                            | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                  |       |                             |       |   |   |   |   |
| Basic and  diluted earnings per share |       | Ps.                              | 3.2112     |   | Ps. | 3.6483 |   | Ps. | 2.8827 |   |
|                                       |            |                                  |            |  |  |  |  |  |  |  |

 

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##### **B)    Cash flow information**

##### ** **

Mexican Banking GAAPestablishes presentation requirements related to the statement of changes infinancial position. This statement presents the sources and uses of fundsduring the period measured as the differences, in constant pesos, between thebeginning and ending balances of balance sheet items adjusted by the excess(shortfall) in restatement of capital. The monetary effect and the effect ofchanges in exchange rates are considered cash items in the determination ofresources generated from operations due to the fact that they affect thepurchasing power of the entity. The following price-level adjusted consolidatedstatement of cash flows presented for the years ended December 31, 2008,2007 and 2006, includes the impact of U.S. GAAP adjustments in conformity withrecommendations established by the American Institute of Certified PublicAccountants, SEC Regulations Committees’ International Practices Task Force.

 

**GrupoFinanciero Banorte, S.A.B. de C.V. and Subsidiaries**

 

**Consolidated Statements of CashFlows**

** **

**For the years ended December 31,2008, 2007 and 2006**

**(Inmillions of Mexican pesos)**

** **
| ** **                                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from operating activities:                        |       |     |       |     |       |     |       |
| Net income under U.S. GAAP                                   |       | Ps.      | 6,476      |     | Ps.        | 7,363    |       | Ps. | 5,820 |   |
|                                                         |       |     |       |     |       |     |       |
| Unrealized  investment loss (income)                         |       | 1,171    |       | (204     | )          | 329      |       |
| Allowance  for loan losses                                   |       | 6,625    |       | 2,830    |       | 1,857    |       |
| Depreciation  and amortization                               |       | 1,450    |       | 702      |       | 697      |       |
| Deferred  income taxes and employee profit sharing           |       | (652     | )          | (173     | )          | 775      |       |
| Provision  for miscellaneous obligations                     |       | 8        |       | 2,369    |       | (43      | )          |
| Minority  interest                                           |       | 753      |       | 721      |       | 484      |       |
| Equity  in earnings of subsidiaries and associated companies |       | (125     | )          | (66      | )          | (115     | )          |
| Allowance  for doubtful accounts                             |       | 59       |       | (89      | )          | 20       |       |
| Periodic  pension cost                                       |       | 199      |       | 205      |       | 350      |       |
| Gain  on sale of property                                    |       | —   |       | (22      | )          | (15      | )          |
| Loss  on sale of foreclosed assets                           |       | 273      |       | 208      |       | 96       |       |
| (Gain)  loss on sale of trading securities                   |       | (116     | )          | 338      |       | 776      |       |
| (Gain)  loss on sale of available for sale securities        |       | (53      | )          | (36      | )          | 52       |       |
| Amortization  of purchased portfolios                        |       | 680      |       | 679      |       | 1,598    |       |
| Loss  from monetary position                                 |       | —   |       | 1,298    |       | 1,129    |       |
| Insurance  and postretirement reserves                       |       | (286     | )          | (139     | )          | 319      |       |
| Amortization  of debt issuance fees and costs                |       | (4       | )          | (439     | )          | (679     | )          |
| Income  recognition of purchased portfolios                  |       | (278     | )          | (343     | )          | 251      |       |
| Other  non-cash items                                        |       | (2,014   | )          | (334     | )          | (28      | )          |
| Changes in operating assets and liabilities:                 |       |     |       |     |       |     |       |
| Trading  securities                                          |       | (1,455   | )          | 4,868    |       | (13,538  | )          |
| Trading  derivative financial instruments                    |       | 2,435    |       | (2,463   | )          | 3,354    |       |
| Decrease  in settlement accounts payable                     |       | (649     | )          | (226     | )          | (1,082   | )          |
| Decrease  in settlement accounts receivable                  |       | 1,262    |       | 2,263    |       | 2,935    |       |
| Increase  in other accounts receivable                       |       | (4,286   | )          | (2,233   | )          | (8,518   | )          |
| Increase  in other accounts payable                          |       | 5,709    |       | 5,231    |       | 7,242    |       |
| Increase  in deferred charges                                |       | (1,560   | )          | (2,115   | )          | (2,500   | )          |
| Increase  (decrease) in deferred credits                     |       | 242      |       | (210     | )          | 164      |       |
| Net cash provided by operating activities                    |       | 15,864   |       | 19,983   |       | 1,730    |       |
|                                                              |            |          |            |          |            |          |            |  |  |  |

 

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|                                                                                        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Cash flows from investing activities:                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds  from sale of property, furniture and equipment                                    |       | 123        |       | 21         |       | 31         |       |
| Acquisitions  of property, furniture and equipment                                          |       | (1,345     | )          | (1,843     | )          | (907       | )          |
| Cash  paid for acquisition of subsidiaries                                                  |       | —     |       | (200       | )          | (2,724     | )          |
| Proceeds  from sale of foreclosed assets                                                    |       | 758        |       | 369        |       | 136        |       |
| Treasury  transactions - held to maturity securities                                        |       | (219,851   | )          | 16,087     |       | 18,528     |       |
| Treasury  transactions - available for sale securities                                      |       | (4,430     | )          | (3,328     | )          | (3,097     | )          |
| Issuance  of loans                                                                          |       | (48,294    | )          | (55,758    | )          | (19,717    | )          |
| Purchased  credit portfolios                                                                |       | (302       | )          | 169        |       | (553       | )          |
| Repurchase  agreements – purchases                                                     |       | (90        | )          | (15,545    | )          | (13,298    | )          |
| Net cash used in investing activities                                                       |       | (273,431   | )          | (60,028    | )          | (21,601    | )          |
| Cash flows from financing activities:                                                       |       |       |       |       |       |       |       |
| Proceeds  from (repayments of) subordinated liabilities                                     |       | 10,343     |       | (1,131     | )          | 6,899      |       |
| Issuance  (repurchase) of shares                                                            |       | 103        |       | (639       | )          | 31         |       |
| Dividends  paid                                                                             |       | (949       | )          | (917       | )          | (792       | )          |
| Deposits  received                                                                          |       | 53,319     |       | 34,044     |       | 21,327     |       |
| Repayments  of bank debt and other loans                                                    |       | 9,037      |       | 3,909      |       | (5,108     | )          |
| Repurchase  agreements – sales                                                         |       | 196,368    |       | 2,949      |       | 2,274      |       |
| Debt  issue costs of subordinated liabilities                                               |       | —     |       | (9         | )          | (31        | )          |
| Net cash provided by financing activities                                                   |       | 268,221    |       | 38,206     |       | 24,600     |       |
|                                                                                        |       |       |       |       |       |       |       |
| Effects  of inflation accounting and exchange rate                                          |       | 2,026      |       | (1,610     | )          | (1,723     | )          |
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  increase (decrease) in cash and cash equivalents                                       |       | 12,680     |       | (3,449     | )          | 3,006      |       |
|                                                                                        |       |       |       |       |       |       |       |
| Cash  and cash equivalents at the beginning of the year                                     |       | 41,716     |       | 45,165     |       | 42,159     |       |
|                                                                                        |       |       |       |       |       |       |       |
| Cash  and cash equivalents at the end of the year                                           |       | 54,396     |       | 41,716     |       | 45,165     |       |
|                                                                                        |       |       |       |       |       |       |       |
| Supplemental  disclosure of cash flow information:                                          |       |       |       |       |       |       |       |
| Cash  paid during the year for:                                                             |       |       |       |       |       |       |       |
| Income  taxes                                                                               |       | 4,013      |       | 2,419      |       | 2,882      |       |
| Interest                                                                                    |       | 44,630     |       | 33,168     |       | 26,719     |       |
|                                                                                        |       |       |       |       |       |       |       |
| Supplemental  schedule of non-cash investing activities:                                    |       |       |       |       |       |       |       |
| Transfers  from loans to foreclosed assets                                                  |       | 542        |       | 342        |       | 108        |       |
| Transfers  from (to) purchased credit portfolio to (from) foreclosed assets                 |       | 233        |       | 109        |       | (124       | )          |
| Transfers  to (from) foreclosed assets from (to) loans and purchased credit portfolio,  net |       | Ps.        | (775       | )          | Ps.        | 451        |       | Ps. | (16 | ) |
|                                                                                             |            |            |            |            |            |            |            |  |  |  |

 

Cash and cashequivalents - Cash and cash equivalents include all cash balances and highlyliquid instruments purchased with an original maturity of three months or less.In addition, the Financial Group maintains a minimum capital requirement asrequired by the Commission (regulatory monetary fund), which is included as acash equivalent.

 

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**C) New accountingpronouncements**

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *FairValue Measurements*(“SFAS 157”). SFAS 157 establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements. SFAS 157 clarifies the definition of exchange price as the pricebetween market participants in an orderly transaction to sell an asset ortransfer a liability in the market in which the reporting entity would transactfor the asset or liability, that is, the principal or most advantageous marketfor the asset or liability. The changes to current practice resulting from theapplication of this statement relate to the definition of fair value, themethods used to measure fair value, and the expanded disclosures about fairvalue measurements. SFAS 157 was effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years for financial assets andliabilities.  On October 10, 2008,the FASB issued Staff Position (“FSP”) FAS No. 157-3 (“FSP 157-3”), *Determining the Fair Value of a Financial Asset Whenthe Market for That Asset is Not Active*. FSP 157-3 is effective uponissuance.  SFAS 157 has been deferreduntil fiscal years beginning after November 15, 2008 for nonfinancialassets and liabilities. Theadoption of this new accounting principle as it relates to the Financial Group’sfinancial assets and financial liabilities that are measured at fair value on arecurring basis had a negative impact of approximately Ps. 137 on the FinancialGroup’s consolidated financial position and results of operations.  Additionally, the Financial Group hasincluded additional disclosures regarding the fair value hierarchy of itsfinancial instruments for the year ended December 31, 2008. The FinancialGroup is in the process of determining the impact of adopting this newaccounting principle on its consolidated financial position and results ofoperations as it relates to its nonfinancial assets and nonfinancialliabilities.

 

According to SFAS157, fair value is defined as the price expected to receive when selling theasset or to pay when transferring a liability in an orderly transaction betweenmarket participants at the measurement date. The Financial Group applied thefollowing hierarchy for fair value.

 

Level 1. - Assets andliabilities for which an identical instrument is negotiated in an activemarket, such as publicly negotiated instruments or futures contracts

 

Level 2.- Assets andliabilities valued using information observable in the market for similarinstruments; prices quoted in inactive markets; or other observable assumptionsthat can be evidenced with available information in the market forsubstantially the entire terms of the asset and liability.

 

Level 3. - Assetsand liabilities whose significant valuation assumptions are not readilyobservable in the market; instruments valued using the best informationavailable, some of which is developed internally, considering the risk premiumthat a market participant would need.

 

The Financial Groupconsiders the primary or the best market where the transaction can take placeand the assumptions that a market participant would use to value the asset orliability. When possible, the Financial Group uses active markets andobservable market prices for identical assets and liabilities. When theidentical assets and liabilities are not negotiated in active markets, theFinancial Group uses observable market information for similar assets andliabilities. However, certain assets and liabilities are not activelynegotiated in observable markets, so the Financial Group has to use alternatevaluation methods to measure fair value.

 

Many over thecounter (“OTC”) contracts have bid and ask prices that can be observed in themarketplace. Bid prices reflect the highest price that a party is willing topay for an asset. Ask prices represent the lowest price that a party is willingto accept for an asset. For financial instruments whose inputs are based onbid-ask prices, the Financial Group does not require that the fair valueestimate always be a predetermined point in the bid-ask range. The FinancialGroup’s policy is to allow for mid-market pricing and adjusting to the pointwithin the bid-ask range that meets the Financial Group’s best estimate of fairvalue. For offsetting positions in the same financial instrument, the sameprice within the bid-ask spread is used to measure both the long and shortpositions.

 

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Fair value for manyOTC contracts is derived using pricing models. Pricing models take into accountthe contract terms (including maturity) as well as multiple inputs, including,where applicable, commodity prices, equity prices, interest rate yield curves,credit curves, correlation, creditworthiness of the counterparty, optionvolatility and currency rates. In accordance with SFAS No. 157, the impactof the Financial Group’s own credit spreads is also considered when measuringthe fair value of liabilities, including OTC derivative contracts. Whereappropriate, valuation adjustments are made to account for various factors suchas liquidity risk (bid-ask adjustments), credit quality and model uncertainty.These adjustments are subject to judgment, are applied on a consistent basisand are based upon observable inputs where available. The Financial Groupgenerally subjects all valuations and models to a review process initially andon a periodic basis thereafter.

 

Fair value is amarket-based measure considered from the perspective of a market participantrather than an entity-specific measure. Therefore, even when market assumptionsare not readily available, the Financial Group’s own assumptions are set toreflect those that the Financial Group believes market participants would usein pricing the asset or liability at the measurement date.  As a result of adopting SFAS No. 157 in2008, the Financial Group recorded a loss in its U.S. GAAP income statement asa result of adjusting the fair value of its financial instruments.

 

Below is adescription of the valuation methods used for the instruments measured at fairvalue on a recurring basis, including the general classification of suchinstruments according to their fair value hierarchy.

 

Investments insecurities

When referenceprices are available in an active market, they are considered level 1 in thefair value hierarchy. If market price is not available or is available solelyin inactive markets, fair value is estimated using valuation methods, pricesestablished for other instruments with similar characteristics or usingdiscounted cash flows that include assumptions prepared by management. Thistype of securities is classified in Level 2, and in the event the modelincludes assumptions prepared by management, the securities are classified inlevel 3, following the fair value hierarchy.

 

Derivative financialinstruments

Derivatives quotedon stock exchanges whose fair value is based on quoted market prices areclassified in fair value hierarchy level 1. However, for those derivativecontracts quoted over the counter, their fair value is based on widely acceptedvaluation methods in the market using observable inputs that can be evidencedwith information available in the market. Such derivatives are classified in fair value hierarchy level 2.

 

INB put right

Under U.S. GAAP, theINB put right is recorded at fair value using a lattice model.  The Financial Group utilizes level 2 andlevel 3 inputs in order to determine its fair value.

 

The following fairvalue hierarchy table presents information regarding the Financial Group’sfinancial assets and liabilities measured at fair value on a recurringbasis as of December 31, 2008:

** **
| ** **                     | ** ** | **Fair value measurements as of December ****31,  2008**                 | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Quoted prices In  active markets for  identical  instruments****(Level 1)** | ** ** | **Significant other  observable  inputs****(Level 2)** | ** ** | **Significant  unobservable  inputs****(Level 3)** | ** ** | **December 31, 2008  Fair value** | ** ** |
| Trading securities             |       | Ps.                                                                           | 6,076      |   | Ps. | — |   | Ps. | 554 |   | Ps. | 6,630 |   |
| Available for sale securities  |       | 11,480                                                                        |       | — |   | 242 |   | 11,722 |   |
| Derivative asset position      |       | —                                                                        |       | 8,168 |   | — |   | 8,168 |   |
| Derivative liability  position |       | —                                                                        |       | (10,821 | ) | — |   | (10,821 | ) |
| INB put right                  |       | —                                                                        |       | — |   | (937 | ) | (937 | ) |
|                                |            |                                                                               |            |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                       | ** ** | **Fair value measurements using significant  unobservable inputs (Level 3)****Securities** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| Beginning  balance                               |       | Ps.                                                                                        | (30        | ) |
| Total  gains or losses (realized/unrealized)     |       |                                                                                       |       |
| Included  in earnings (or changes in net assets) |       | (24                                                                                        | )          |
| Included  in other comprehensive income          |       | (87                                                                                        | )          |
| Ending  balance                                  |       | Ps.                                                                                        | (141       | ) |

 

The definition offair value under U.S. GAAP, which is based on an exit price notion, differsfrom the definition established by Mexican Banking GAAP, which is based on asettlement price notion.  Therefore, theFinancial Group has included a reconciling item in U.S. GAAP reconciliation asa result of adopting this new accounting pronouncement.

 

SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities, including an amendment of FASB Statement No. 115”was issued in February 2007. SFAS No. 159, permits expanded use offair value accounting but does not affect existing standards that requirecertain assets or liabilities to be carried at fair value. The objective ofSFAS No. 159 is to improve financial reporting by providing companies withthe opportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. Under SFAS No. 159, an entity may choose, atspecified election dates, to measure eligible items at fair value and reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007.  The Financial Group has not elected tomeasure any financial assets or financial liabilities at fair value which werenot previously required to be measured at fair value.

 

SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB No. 51”was issued in December 2007. SFAS No. 160 amends ARB 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and the deconsolidation of a subsidiary, including: (a) changesthe way the consolidated balance sheet and consolidated income statement arepresented; (b) establishes a single method of accounting for changes in aparent’s ownership interest in a subsidiary that do not result in a change ofcontrol or deconsolidation; (c) requires that a parent recognize a gain orloss in net income when a subsidiary is deconsolidated; and (d) requiresexpanded disclosures in the consolidated financial statements that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners of a subsidiary. SFAS No. 160 must be appliedprospectively but to apply the presentation and disclosure requirements must beapplied retrospectively to provide comparability in the financial statements.SFAS No. 160 is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2008. Earlyadoption is prohibited. However, the Financial Group is in the process ofdetermining the impact of adopting the accounting provisions of this newaccounting principle on its consolidated financial position, results ofoperations and cash flows.

 

SFAS No. 141(R), BusinessCombinations, a replacement of FASB No. 141 was issued in December 2007.SFAS No. 141(R) requires (a) an entity to recognize 100% of theassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree at fair value as of the acquisition date; and (b) an acquirerin preacquisition periods to expense all acquisition-related costs, amongvarious other modifications to SFAS No. 141. SFAS No. 141(R) alsoamends SFAS No. 109, “Accounting for Income Taxes”, to require that any reductionsto an acquired entity’s valuation allowances on deferred taxes and acquired taxcontingencies that occur after the measurement period be recorded as acomponent of income tax expense. SFAS No. 141(R) must be appliedprospectively to all business combinations for which the acquisition dateoccurs during fiscal years beginning on or after December 15, 2008, withthe exception of the amendments to SFAS No. 109, which will also beapplied to business combinations with acquisition dates prior to the effectivedate of this standard. Early adoption is prohibited.  The impact of this standard is dependent uponthe level of future acquisitions.

 

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SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities, an Amendment of FASB Statement No. 133” wasissued in March 2008. SFAS No. 161 requires companies to providequalitative disclosures about the objectives and strategies for usingderivatives, quantitative data about the fair value of and gains and losses onderivative contracts, and details of credit-risk-related contingent features intheir hedged positions. The statement also requires companies to disclose moreinformation about the location and amounts of derivative instruments infinancial statements; how derivatives and related hedges are accounted forunder SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities”; and how the hedgesaffect the entity’s financial position, financial performance and cash flows.SFAS No. 161 is effective for periods beginning after November 15,2008.

 

FSP FAS No. 142-3, “Determination of the Useful Life ofIntangible Assets”, was issued in April 2008. FSP 142-3 amends thefactors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwilland Other Intangible Assets”. The objective of the FSP is to improve theconsistency between the useful life of a recognized intangible asset underSFAS No. 142 and the period of expected cash flows used to measurethe fair value of the asset under SFAS No. 141(R). FSP FAS No. 142-3is effective for fiscal years beginning after December 15, 2008. Earlyapplication is not permitted. The Financial Group is in the process ofdetermining the impact of adopting this new accounting principle on itsconsolidated financial position, results of operations and cash flows.

 

In January 2008, theFASB unveiled the FASB Accounting Standards Codification (the “Codification”)for a one-year verification period by constituents. While the Codification doesnot change U.S. GAAP, it does combine all authoritative accounting standardsissued by bodies such as the FASB, AICPA, and EITF into a topically organizedcomprehensive online database. The Codification will (a) reduce the amountof time and effort required to solve an accounting research issue; (b) improveusability of the literature thereby mitigating the risk of noncompliance withthe standard; (c) provide real-time updates as new standards are released;(d) assist the FASB with the research and convergence efforts requiredduring the standard-setting process; and (e) become the authoritativesource of literature for the completed XBRL taxonomy. The Codification does not represent authoritativeguidance until after the verification period, at which time the Codificationwill supersede all existing accounting literature (other than guidance issuedby the SEC). Such Codification will apply for calendar year companies beginningin 2009.

 

In January 2009, theMexican Banking and Securities Commission published amendments to the MexicanSecurities Law, making it compulsory for public entities (financial servicesentities such as the Financial Group are currently exempt under thisrequirement) to prepare and present their financial statements usingInternational Financial Reporting Standards beginning 2012 (early adoption is permitted).The Financial Group could be required through the Gruma, S.A.B. de C.V. whoholds an equity investment in its shares to prepare financial information inaccordance with IFRS. Management is currently assessing the impact that thispotential change would have on the Financial Group’s consolidated financialstatements, and will continue to monitor the development of the potentialimplementation of IFRS.

 

* * * * *

 

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