Table ofContents

 

**SECURITIESAND 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, 2009**                               |
| ** ** | ** **                                                                                                                                                                          |
| **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 requiringthis shell company report ...........

 

**For the transition period from                      to                        **

 

Commissionfile 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)                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                    |
| **Rogelio Sanchez**

**Calzada del Valle, 407  Ote.**

**Colonia del Valle**

**San Pedro Garza García,  Nuevo León**

**66220, México**

**Tel: (52) 81 8399-3312**

**Facsimile: (52 81)  8399-3359**

**Email:  rsanchezm@gruma.com** |
| (Name, Telephone, E-mail and/or Facsimile number and Address of  Company Contact Person)                                                                                                                                                                |

 

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                |

 

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

 

**None**

 

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

 

**None**

 

----

Table of Contents

 

Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act:

 

**None**

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report:
|   |                                                   |
|--------|--------------------------------------------------------|
|   | 563,650,709  Series B Common Shares, without par value |

 

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

Yes o   No x

 

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

Yes o   No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

Yes x   No o

 

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

 

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

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

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

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

 

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

Item 17 o   Item18 x

 

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

Yes o   No x

 

----

*      Not for trading but only in connectionwith the registration of American Depositary Shares, pursuant to therequirements of the Securities and Exchange Commission.

 

----

Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                    | ** ** | **Page** |
|-------------------|-------------------------------------------------------------------------------|------------|----------|
| **PART I**   |                                                                          |       | 3        |
| ITEM 1.           | IDENTITY  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                        |       | 3        |
| ITEM 2.           | OFFER  STATISTICS AND EXPECTED TIMETABLE                                      |       | 3        |
| ITEM 3.           | KEY INFORMATION                                                               |       | 3        |
| ITEM 4.           | INFORMATION ON  THE COMPANY                                                   |       | 21       |
| ITEM 4A.          | UNRESOLVED  STAFF COMMENTS                                                    |       | 41       |
| ITEM 5.           | OPERATING  AND FINANCIAL REVIEW AND PROSPECTS                                 |       | 42       |
| ITEM 6.           | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   |       | 64       |
| ITEM 7.           | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |       | 71       |
| ITEM 8.           | FINANCIAL  INFORMATION                                                        |       | 74       |
| ITEM 9.           | THE  OFFER AND LISTING                                                        |       | 77       |
| ITEM 10.          | ADDITIONAL  INFORMATION                                                       |       | 79       |
| ITEM 11.          | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |       | 96       |
| ITEM 12.          | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       |       | 101      |
| **PART II**  |                                                                          |       | 102      |
| ITEM 13.          | DEFAULTS,  DIVIDEND ARREARAGES AND DELINQUENCIES                              |       | 102      |
| ITEM 14.          | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |       | 102      |
| ITEM 15.          | CONTROLS AND  PROCEDURES                                                      |       | 102      |
| ITEM 16A.         | AUDIT  COMMITTEE FINANCIAL EXPERT                                             |       | 103      |
| ITEM 16B.         | CODE  OF ETHICS                                                               |       | 103      |
| ITEM 16C.         | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       |       | 104      |
| ITEM 16D.         | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |       | 104      |
| ITEM 16E.         | PURCHASES  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |       | 104      |
| ITEM 16F.         | CHANGE IN  REGISTRANT’S CERTIFYING ACCOUNTANT                            |       | 104      |
| ITEM 16G.         | CORPORATE  GOVERNANCE                                                         |       | 104      |
| **PART III** |                                                                          |       | 106      |
| ITEM 17.          | FINANCIAL  STATEMENTS                                                         |       | 106      |
| ITEM 18.          | FINANCIAL  STATEMENTS                                                         |       | 106      |
| ITEM  19.         | EXHIBITS                                                                      |       | 106      |

 

i

----

**Table ofContents**

** **

**PRESENTATION OF FINANCIALINFORMATION**

** **

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

 

In this Annual Report on Form 20-F, referencesto “pesos” or “Ps.” are to Mexican pesos, references to “U.S. dollars,” “U.S.$,”“dollars” or “$” are to United States dollars and references to “bolívars” and “Bs.”are to the Venezuelan bolívar.  “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 isspecifically to Gruma, S.A.B. de C.V. (parent company only) or the contextotherwise requires.

 

This Annual Report contains our audited consolidatedfinancial statements as of December 31, 2008 and 2009 and for the yearsended December 31, 2007, 2008 and 2009. The consolidated financial statements have been audited byPricewaterhouseCoopers, an independent registered public accounting firm.

 

We publish our financial statements in pesos andprepare our consolidated financial statements in accordance with the *Normas de Información Financiera*(Mexican FinancialReporting Standards or “MFRS”), which are accounting principles generallyaccepted in Mexico, issued by the Mexican Financial Reporting Standards Board (“CINIF”),and are commonly referred to as “Mexican FRS.” Mexican FRS differ in certain significant respects from accountingprinciples generally accepted in the United States of America, commonlyreferred to as “U.S. GAAP.”  SeeNote 21 to our audited consolidated financial statements for informationrelating to the nature and effect of such differences and for a quantitativereconciliation of our consolidated net income and stockholders’ equity toU.S. GAAP.

 

As the Mexican economy experienced significantlevels of inflation prior to 2000, we were required under Mexican accountingBulletin B-10 “Accounting recognition of the effects of inflation on financialinformation”, in effect until December 31, 2007 to recognize the effectsof inflation in our financial statements presenting our financial informationin inflation adjusted monetary units to allow for more accurate comparisons offinancial line items over time and to mitigate the distortive effects ofinflation on our financial statements. Unless otherwise indicated, all financial information in this AnnualReport as of December 31, 2007, 2006 and 2005 has been restated in pesosof constant purchasing power as of December 31, 2007.

 

Until December 31, 2007 we were required todetermine our monetary position gain/loss to reflect the effect of inflation onour monetary assets and liabilities.  Wedetermined our net monetary position by subtracting our monetary liabilitiesfrom our monetary assets and then the resulting net monetary position wasmultiplied by the appropriate inflation rate for the period with the resultingmonetary gain or loss reflected in earnings. In so doing, we could reflect the effect inflation was having on ourmonetary items.

 

Starting January 1, 2008, we adopted theprovisions contained in the new MFRS B-10 “Effects of Inflation,” whichreplaced Mexican accounting Bulletin B-10. This standard establishes the guidelines for recognizing the effects ofinflation based on the inflationary environment of the country.  According to the provisions of MFRS B-10, aninflationary environment is present when cumulative inflation of the threepreceding 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 economic environmentin Mexico in 2008 and 2009 has been qualified as non-inflationary due to acumulative inflation for the three years preceding the years ended December 31,2009 and 2008 of 15.01% and 11.56%, respectively, and did not exceed 26%.  In addition, MFRS B-10 eliminated thereplacement cost and specific indexation methods for inventories and fixedassets, respectively, and provided an option for the accounting treatment ofthe result from holding non-monetary assets recognized by an entity asaccumulated other comprehensive income or loss under previous guidelines byeither recycling this result from stockholders’ equity to income as it isrealized, or reclassifying the outstanding balance of such result to retainedearnings in the period in which this standard became effective.  The Company elected to reclassify to retainedearnings the initial accumulated gain or loss from holding non-monetaryassets.  Accordingly, the financialstatements as of December 31, 2008 and 2009 have been prepared based onthe modified historical cost model, as described in Note 2-E to our auditedconsolidated financial statements (that is, effects of transactions recognizedas of December 31, 2007 are expressed in Mexican pesos of constantpurchasing power at that date, and the effects of transactions that occurredafter that date are expressed in nominal Mexican pesos), while prior periodsare expressed in constant Mexican pesos, as of December 31, 2007.

 

----

Table of Contents

 

The accumulated inflation of the last three years inthe countries where 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 issuedby CINIF, we translate the financial statements of each non-Mexican subsidiarydepending on the economic environment in which the subsidiary operates, whichcan be:

 

·                                          Inflationary — when theaccumulated inflation of the three prior years is equal to or greater than 26%,or

 

·                                          Noninflationary — when theaccumulated inflation of the three prior years is less than 26%.

 

When a non-Mexican subsidiary operates in an inflationaryenvironment, we apply the actual inflation rate in the relevant country of eachnon-Mexican subsidiary and then translate the inflation-adjusted financialstatements into pesos.  The figures forsubsidiaries in Central America and Venezuela are restated to period-endconstant local currencies following the provisions of MFRS B-10, applying thegeneral consumer price index from the country in which the subsidiaryoperates.  Once figures are restated,they are converted to Mexican Pesos following the provisions of MFRS B-15, byapplying the exchange rate in effect at the end of the period.  When a non-Mexican subsidiary operates in anoninflationary environment, following the provisions of MFRS B-15 the assetsand liabilities are translated to Mexican pesos using the year-end exchangerate.  The stockholders’ equity as of December 31,2007 were translated to Mexican pesos using the exchange rate at that date,whereas the transactions during 2008 and 2009 for our non-Mexican subsidiariesother than subsidiaries in Central America and Venezuela were translated byapplying the exchange rate in effect at the dates on which the stockholders’contributions were made and income was generated. Revenues, costs and expensesare translated using the historical average exchange rate.For a more detaileddiscussion of Mexican FRS inflation accounting methodologies, see “Item 5.  Operating and Financial Review andProspects—Management’s Discussion and Analysis of Financial Condition andResults of Operations—Overview of Accounting Presentation.”

 

Starting January 1, 2008, the Company began toinclude the statement of cash flows for the years ended December 31, 2008and December 31, 2009, as part of the basic financial statements.  This financial statement presents cash inflowsand outflows that show how cash is provided by, or used in, the business duringthe year, classified as operating, investing and financing activities.  The Company used the indirect method for thepresentation of the statement of cash-flows, which presents earnings or lossesbefore taxes, adjusted for the effects of operations of prior periods receivedor paid in the current period, and for operations in the current period thatwill be received or paid in the future. For the year ended December 31, 2007, the statement of changes infinancial position is presented separately as a basic financial statement,which classifies changes in financial position for operating, financing, andinvesting activities.  Pursuant toMexican accounting Bulletin B-10, the latter financial statement was expressedin Mexican pesos of constant purchasing power of December 31, 2007.

 

**MARKETSHARE AND OTHER INFORMATION**

** **

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

 

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

 

**ROUNDING**

 

Certain figures included in this Annual Report havebeen rounded for ease of presentation. Percentage figures included in this Annual Report have not in all casesbeen calculated on the basis of such rounded figures but on the basis of suchamounts prior to rounding.  For thisreason, percentage amounts in this Annual Report mayvary from those obtained by performing the samecalculations using the figures in our audited consolidated financialstatements.  Certain numerical figuresshown as totals in some tables may not be an arithmetic aggregation of thefigures that preceded them due to rounding.

 

2

----

**Table ofContents**

** **

**FORWARDLOOKING STATEMENTS**

** **

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

 

**PART I**

 

**ITEM1.**                             Identity of Directors, Senior Managementand Advisors.

** **

Not applicable.

 

**ITEM2.**                             Offer Statistics and Expected Timetable.

** **

Not applicable.

 

**ITEM3.**                             Key Information.

** **

**SELECTEDFINANCIAL DATA**

** **

The following tables present our selectedconsolidated financial data as of and for each of the years indicated.  The data as of December 31, 2008 and2009 and for the years ended December 31, 2007, 2008 and 2009 are derivedfrom and should be read together with our audited consolidated financialstatements included herein and “Item 5. Operating and Financial Review andProspects.”

 

Our consolidated financial statements are preparedin accordance with Mexican FRS, which differ in certain significant respectsfrom U.S. GAAP.  Note 21 to ouraudited consolidated financial statements provides information relating to thenature and effect of such differences, as they relate to us, and provides areconciliation to U.S. GAAP of majority net income and total stockholders’equity.

 

Pursuant to Mexican FRS, starting January 1,2008, the provisions of MFRS B-10 “Effects of inflation” establishes theguidelines for recognizing the effects of inflation based on the economicenvironment of the country, which can be:

 

·                                          Inflationary — when theaccumulated inflation of the three prior years is equal to or greater than 26%,or

 

·                                          Noninflationary — when theaccumulated inflation of the three prior years is less than 26%.

 

Since the accumulated inflation in Mexico for the threeyears ended December 31, 2008, 2007 and 2006 did not exceed 26%, theconsolidated financial statements and the selected consolidated financial dataas of December 31, 2008 and December 31, 2009 set forth below havebeen prepared based on the modified historical cost model, as described in Note2-E to our audited consolidated financial statements.  The consolidated financial statements and theselected consolidated financial data as of December 31, 2007, 2006 and2005 set forth below are 

 

3

----

Table of Contents

 

expressed in constant Mexican pesos as of December 31,2007, based on factors derived from the NCPI factors for domestic companies andGeneral Consumer Price Index, or GCPI, factors for foreign subsidiaries.  See Note 2 to our audited consolidatedfinancial statements.  Accordingly, thefinancial statements and information as of December 31, 2008 and December 31,2009 have been prepared based on the modified historical cost model and may notbe directly comparable to the information presented for prior periods.

 
| ** **                                                                                                             | ** ** | **2005**                                                   | ** **       | **2006**    | ** ** | **2007**         | ** ** | **2008**    | ** **       | **2009**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------------|-------------|------------|------------------|------------|-------------|------------------|-------------|------------|
| ** **                                                                                                             | ** ** | **(thousands of Mexican pesos, except per share amounts)** | ** **       |
| **Income Statement Data:**                                                                                        |       |                                                       |             |        |       |             |       |        |             |        |       |
| ***Mexican FRS*****:**                                                                                                 |       |                                                       |             |        |       |             |       |        |             |        |       |
| Net sales                                                                                                              |       | Ps.                                                        |  29,346,074 |        | Ps.        |  32,189,955 |       | Ps.         |  35,816,046 |        | Ps.        |  44,792,572 |   | Ps. | 50,489,048 |   |
| Cost of sales                                                                                                          |       | (19,166,333                                                | )                | (20,975,201 | )          | (24,192,290      | )          | (30,236,597 | )                | (33,100,107 | )          |
| Gross profit                                                                                                           |       | 10,179,741                                                 |             | 11,214,754  |       | 11,623,756       |       | 14,555,975  |             | 17,388,941  |       |
| Selling, general and administrative expenses                                                                           |       | (8,459,679                                                 | )                | (9,342,921  | )          | (9,749,888       | )          | (11,288,995 | )                | (13,581,969 | )          |
| Operating income                                                                                                       |       | 1,720,062                                                  |             | 1,871,833   |       | 1,873,868        |       | 3,266,980   |             | 3,806,972   |       |
| Other (expenses) income, net                                                                                           |       | (176,755                                                   | )                | (49,112     | )          | 555,743          |       | (181,368    | )                | (150,439    | )          |
| Comprehensive financing result:                                                                                        |       |                                                       |             |        |       |             |       |        |             |        |       |
| Interest expense                                                                                                       |       | (628,345                                                   | )                | (602,315    | )          | (683,578         | )          | (823,702    | )                | (1,449,601  | )          |
| (Loss) gain in derivative financial instruments                                                                        |       | —                                                     |             | (146,693    | )          | 155,456          |       | (15,056,799 | )                | (543,123    | )          |
| Interest income                                                                                                        |       | 58,706                                                     |             | 82,012      |       | 64,357           |       | 90,399      |             | 95,155      |       |
| Monetary position gain, net                                                                                            |       | 331,120                                                    |             | 336,552     |       | 558,509          |       | 446,720     |             | 209,493     |       |
| Foreign exchange gain (loss), net                                                                                      |       | (56,323                                                    | )                | (19,363     | )          | 72,129           |       | 255,530     |             | 755,188     |       |
| Total comprehensive financing result                                                                                   |       | (294,842                                                   | )                | (349,807    | )          | 166,873          |       | (15,087,852 | )                | (932,888    | )          |
| Equity in earnings of associated companies                                                                             |       | 684,844                                                    |             | 643,318     |       | 707,835          |       | 618,476     |             | 495,045     |       |
| Income (loss) before income tax, cumulative  effect of change in accounting principle and noncontrolling interest |       | 1,933,309                                                  |             | 2,116,232   |       | 3,304,319        |       | (11,383,764 | )                | 3,218,690   |       |
| Income tax (current and deferred)                                                                                      |       | (406,995                                                   | )                | (432,170    | )          | (925,710         | )          | (434,695    | )                | (1,108,346  | )          |
| Cumulative effect of change in accounting  principle                                                                   |       | (59,545                                                    | )                | —      |       | —           |       | —      |             | —      |       |
| Noncontrolling interest                                                                                                |       | (162,076                                                   | )                | (82,937     | )          | (145,288         | )          | (521,299    | )                | (581,424    | )          |
| Majority net income (loss)                                                                                             |       | 1,304,693                                                  |             | 1,601,125   |       | 2,233,321        |       | (12,339,758 | )                | 1,528,920   |       |
| Per share data(1):                                                                                                     |       |                                                       |             |        |       |             |       |        |             |        |       |
| Income (loss) before cumulative effect of  change in accounting principle                                         |       | 3.02                                                       |             | 3.34        |       | 4.63             |       | (21.84      | )                | 2.71        |       |
| Cumulative effect of change in accounting  principle                                                                   |       | (0.13                                                      | )                | —      |       | —           |       | —      |             | —      |       |
| Majority net income (loss) per share                                                                              |       | 2.89                                                       |             | 3.34        |       | 4.63             |       | (21.84      | )                | 2.71        |       |
| ***U.S. GAAP:***                                                                                                  | ** ** | ** **                                                 | ** **       | ** **  | ** ** | ** **       | ** ** | ** **  | ** **       | ** **  | ** ** |
| Net sales                                                                                                              |       | 28,578,636                                                 |             | 31,530,165  |       | 35,427,207       |       | 44,381,012  |             | 49,034,395  |       |
| Operating income                                                                                                       |       | 1,515,292                                                  |             | 1,272,683   |       | 1,655,824        |       | 3,171,353   |             | 4,020,016   |       |
| Net income (loss)                                                                                                      |       | 1,285,503                                                  |             | 1,502,867   |       | 2,107,762        |       | (11,778,940 | )                | 1,545,565   |       |
|                                                                                                                        |            |                                                            |                  |             |            |                  |            |             |                  |             |            |  |  |  |  |  |

 

4

----

Table of Contents

 
| ** **                       | ** ** | **2005**                                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|----------------------------------|------------|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                       | ** ** | **(thousands of Mexican pesos, except per share amounts)** | ** ** |
| Per share data(1):               |       |                                                       |       |     |       |     |       |     |       |     |       |
| Net income (loss) per share |       | 2.85                                                       |       | 3.13     |       | 4.37     |       | (20.85   | )          | 2.74     |       |

 
| ** **                                              | ** ** | **2005**                                                                                                                            | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                              | ** ** | **(thousands of Mexican pesos, except per share amounts**** and operating data)** | ** ** |
| **Balance Sheet Data (at period  end):**                |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| ***Mexican FRS:***                                      |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| Property, plant and equipment, net                      |       | 15,119,019                                                                                                                          |       | 15,563,733 |       | 16,274,447 |       | 20,653,274 |       | 19,958,405 |       |
| Total assets                                            |       | 29,455,279                                                                                                                          |       | 31,752,401 |       | 33,910,702 |       | 44,434,677 |       | 43,966,515 |       |
| Short-term debt(2)                                      |       | 565,685                                                                                                                             |       | 926,920    |       | 941,073    |       | 2,418,560  |       | 2,203,392  |       |
| Long-term debt(2)                                       |       | 7,035,856                                                                                                                           |       | 5,886,297  |       | 6,913,173  |       | 11,728,068 |       | 20,039,868 |       |
| Derivative financial instruments                        |       | —                                                                                                                              |       | —     |       | 25,557     |       | 11,472,292 |       | 11,935     |       |
| Total liabilities                                       |       | 13,946,499                                                                                                                          |       | 13,850,150 |       | 15,333,503 |       | 35,153,127 |       | 32,154,952 |       |
| Capital stock                                           |       | 16,965,083                                                                                                                          |       | 18,158,922 |       | 18,120,976 |       | 9,116,663  |       | 6,972,425  |       |
| Total stockholders’ equity(3)                      |       | 15,508,778                                                                                                                          |       | 17,902,251 |       | 18,577,199 |       | 9,281,550  |       | 11,811,563 |       |
| ***U.S. GAAP:***                                   |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| Total assets                                            |       | 28,373,924                                                                                                                          |       | 31,038,108 |       | 33,880,390 |       | 44,324,382 |       | 42,808,031 |       |
| Long-term debt                                          |       | 7,043,108                                                                                                                           |       | 5,924,119  |       | 6,913,173  |       | 11,728,068 |       | 20,039,868 |       |
| Capital stock                                           |       | 16,864,840                                                                                                                          |       | 18,058,698 |       | 18,020,752 |       | 9,016,439  |       | 9,016,439  |       |
| Total stockholders’ equity (4)                     |       | 14,505,097                                                                                                                          |       | 17,086,146 |       | 18,145,723 |       | 9,678,726  |       | 10,946,163 |       |
|                                                    |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| **Other Financial Information:**                        |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| ***Mexican FRS:***                                      |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| Capital expenditures                                    |       | 2,259,276                                                                                                                           |       | 2,144,056  |       | 2,222,903  |       | 2,696,744  |       | 1,168,663  |       |
| Depreciation and amortization                           |       | 1,221,689                                                                                                                           |       | 1,262,299  |       | 1,178,797  |       | 1,410,420  |       | 1,648,446  |       |
| Net cash provided by (used in) (5):                     |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| Operating activities                                    |       | —                                                                                                                              |       | —     |       | —     |       | 2,212,996  |       | 5,167,798  |       |
| Financing activities                                    |       | —                                                                                                                              |       | —     |       | —     |       | 1,410,811  |       | (3,609,027 | )          |
| Investing activities                                    |       | —                                                                                                                              |       | —     |       | —     |       | (2,958,202 | )          | (960,052   | )          |
| ***U.S. GAAP:***                                   |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| Depreciation and amortization                           |       | 1,174,020                                                                                                                           |       | 1,241,875  |       | 1,158,976  |       | 1,405,704  |       | 1,534,657  |       |
| Net cash provided by (used in):                         |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| Operating activities                                    |       | 1,519,036                                                                                                                           |       | 1,661,269  |       | (177,314   | )          | 1,655,480  |       | 4,137,042  |       |
| Investing activities                                    |       | (1,875,175                                                                                                                          | )          | (1,465,231 | )          | (558,997   | )          | (3,103,859 | )          | (702,933   | )          |
| Financing activities                                    |       | 217,354                                                                                                                             |       | 82,273     |       | 627,108    |       | 2,143,425  |       | (2,795,169 | )          |
|                                                    |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| **Operating Data:**                                     |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| ***Sales volume (thousands of  tons):***                |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| Gruma Corporation (corn flour, tortillas and  other)(5) |       | 1,275                                                                                                                               |       | 1,327      |       | 1,329      |       | 1,337      |       | 1,296      |       |
| GIMSA (corn flour, tortillas and other)(6)              |       | 1,582                                                                                                                               |       | 1,734      |       | 1,753      |       | 1,818      |       | 1,874      |       |
| Gruma Venezuela (corn flour, wheat flour and other)     |       | 480                                                                                                                                 |       | 486        |       | 480        |       | 465        |       | 459        |       |
| Molinera de México  (wheat flour)                  |       | 474                                                                                                                                 |       | 477        |       | 488        |       | 494        |       | 508        |       |
| Gruma Centroamérica (corn flour and other)(7)      |       | 178                                                                                                                                 |       | 212        |       | 220        |       | 213        |       | 208        |       |
| ***Production capacity (thousands  of tons):***         |       |                                                                                                                                |       |       |       |       |       |       |       |       |       |
| Gruma Corporation (corn flour and tortillas)            |       | 1,661                                                                                                                               |       | 2,021      |       | 2,063      |       | 2,093      |       | 2,096      |       |
| GIMSA (corn flour, tortillas and other)(7)              |       | 2,801                                                                                                                               |       | 2,797      |       | 2,954      |       | 2,954      |       | 2,846      |       |
| Gruma Venezuela (corn flour, wheat flour and  other)(8) |       | 764                                                                                                                                 |       | 764        |       | 808        |       | 823        |       | 909        |       |
| Molinera de México  (wheat flour)                  |       | 801                                                                                                                                 |       | 801        |       | 894        |       | 894        |       | 894        |       |
| Gruma Centroamérica (corn flour and other)         |       | 264                                                                                                                                 |       | 266        |       | 319        |       | 307        |       | 307        |       |
| Number of employees                                     |       | 16,582                                                                                                                              |       | 18,124     |       | 18,767     |       | 19,060     |       | 19,093     |       |

 

5

----

Table of Contents

 

----

(1) Based upon weighted average of outstandingshares of our common stock (in thousands), as follows:  451,446 shares for the year ended December 31,2005; 480,007 shares for the year ended December 31, 2006; 482,506 sharesfor the year ended December 31, 2007; 564,853 for the year ended December 31,2008; and 563,651 shares for the year ended December 31, 2009.  Each of our American Depositary Sharesrepresents four Series B Common Shares.

 

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

 

(3) Total stockholders’ equity includesnoncontrolling interests as follows: Ps.3,148 million at December 31, 2005; Ps.3,069 millionat December 31, 2006; Ps.2,882 million at December 31, 2007;Ps.3,642 million at December 31, 2008; and Ps.4,110 million at December 31,2009.

 

(4) Under U.S. GAAP, starting January 1,2009, the Company adopted the provisions contained in the FASB’s revisedstandard on accounting for noncontrolling interests.  Therefore, the Company reclassifiednoncontrolling interest to a separate component of stockholders’ equity.  This reclassification applies retrospectivelyto all periods.  This practice isconsistent with Mexican FRS.  Totalstockholders’ equity under U.S. GAAP includes noncontrolling interests asfollows: Ps.3,202 million at December 31, 2005; Ps.3,156 millionat December 31, 2006; Ps.3,029 million at December 31, 2007;Ps.3,762 million at December 31, 2008; and Ps.4,052 million at December 31,2009.

 

(5) Through December 31, 2007, under MFRS,the changes in financial position for operating, financing and investingactivities were presented through the statement of changes in financialposition. On January 1, 2008, MFRS B-2 “statement of cash flows” becameefective on a prospective basis. Due to the adoption of MFRS B-2,  cash flows information for 2008 and 2009  is not directly comparable to 2007 and prioryears. Therefore, the Company has included only the statement of cash flows forthe years ended December 31, 2009 and 2008. See Note 2 to our auditedconsolidated financial statements for further details regarding this change.

 

(6) Net of intercompany transactions.

 

(7) Includes 347 thousand tons of temporarilyidled production capacity at December 31, 2009.

 

(8) Includes 71 thousand tons of temporarilyidled production capacity at December 31, 2009.

 

**Dividends**

** **

Our ability to pay dividends may be limited byMexican law, our *estatutos sociales*, or bylaws,and by financial covenants contained in some of our credit agreements.  Because we are a holding company with nosignificant operations of our own, we have distributable profits to paydividends to the extent that we receive dividends from our subsidiaries.  Accordingly, there can be no assurance thatwe will pay dividends or of the amount of any such dividends.  See “Item 5. Operating and Financial Reviewand Prospects—Liquidity and Capital Resources—Indebtedness.”

 

6

----

Table of Contents

 

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

 

In addition, under Mexican law, companies may onlypay dividends:

 

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

 

·                  after any existing losses applicable to prioryears have been made up or absorbed into capital;

 

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

 

·                  after shareholders have approved the paymentof the relevant dividends at a duly convened meeting.

 

Holders of our American Depositary Receipts, orADRs, on the applicable record date are entitled to receive dividends declaredon the shares represented by American Depositary Shares, or ADSs, evidenced bysuch ADRs.  The depositary will fix arecord date 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 depositaryfrom pesos, if not then restricted under applicable law) net of the fees,expenses, taxes and governmental charges payable by holders under the laws ofMexico and the terms of the deposit agreement.

 

The ability of our subsidiaries to makedistributions to us is limited by the laws of each country in which they wereincorporated and by their constitutive documents.  For example, our ability to repatriatedividends from Gruma Venezuela may be adversely affected by exchange controlsand other recent events.  See “Item3.  Key Information—Risk Factors—RisksRelated to Venezuela—Venezuela Presents Significant Economic Uncertainty andPolitical Risk.”  In the case of GrumaCorporation, our principal U.S. subsidiary, its ability to pay dividendsis subject to financial 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 paying dividends in cash. See “Item 5.  Operating andFinancial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”

 

During 2009 and 2008 we did not pay any dividends toshareholders.  During 2007 and 2006, wepaid dividends to shareholders, in nominal terms, of Ps.410 million andPs.410 million, respectively.  Inpesos of constant purchasing power as of December 31, 2007, the dividendspaid or payable to shareholders in 2007 and 2006 amounted toPs.424 million and Ps.440 million, respectively.

 

**Exchange Rate Information**

** **

Mexico has had a free market for foreign exchangesince 1994.  Prior to December 1994,the *Banco de México*, or Mexican CentralBank, kept the peso-U.S. dollar exchange rate within a range prescribed bythe government through intervention in the foreign exchange market.  In December 1994, the governmentsuspended intervention by the Mexican Central Bank and allowed the peso tofloat freely against the U.S. dollar. The peso declined during the period from 1994 through 1998, at times inresponse to events outside of Mexico, but was relatively stable in 1999, 2000and 2001.  In late 2001 and early 2002,the Mexican peso appreciated considerably against the U.S. dollar and, toa greater extent, against other foreign currencies.  From the second quarter of 2002 and until theend of 2003, the Mexican peso depreciated in value.  From the beginning of 2004 to August 2008,the Mexican peso was relatively stable, ranging from Ps.9.92 to Ps.11.63.  Commencing on October 1, 2008 to March 2,2009, the Mexican peso depreciated in value from Ps.10.97 to Ps.15.40.  From March 2009 to the end of March 2010,the Mexican peso appreciated in value from Ps.15.40 to Ps.12.30.  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—Risks Related toMexico—Devaluations of the Mexican Peso Affect our Financial Performance.”

 

7

----

Table of Contents

 

The following table setsforth, for the periods indicated, the high, low, average and period-end noonbuying rate in New York City for cable transfers in pesos published by theFederal Reserve Bank of New York, expressed in pesos per U.S. dollar.  The rates have not been restated in constantcurrency units.  Unless otherwise indicated, we havetranslated U.S. dollar amounts in this annual report at the exchange rate ofPs.13.07 to U.S.$1.00, which was the buying rate published by Banco de México,expressed in pesos per U.S. dollar, on December 31, 2009.

 
| ** **         | ** ** | **Noon Buying Rate (Ps. Per U.S.$)** | ** ** |
|--------------------|------------|--------------------------------------|------------|
| **Year**           | ** ** | **High (1)**                         | ** ** | **Low (1)** | ** ** | **Average (2)** | ** ** | **Period End** | ** ** |
| 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 |   |
| 2009               |       | 15.4060                              |       | 12.6318 |   | 13.4970 |   | 13.0576 |   |
| December 2009 |       | 13.0775                              |       | 12.6318 |   | 12.8622 |   | 13.0576 |   |
| January 2010  |       | 13.0285                              |       | 12.6500 |   | 12.8096 |   | 13.0285 |   |
| February 2010 |       | 13.1940                              |       | 12.7575 |   | 12.9396 |   | 12.7575 |   |
| March 2010    |       | 12.7411                              |       | 12.3005 |   | 12.5673 |   | 12.3005 |   |
| April 2010    |       | 12.4135                              |       | 12.1556 |   | 12.2396 |   | 12.2281 |   |
| May 2010      |       | 13.1398                              |       | 12.2656 |   | 12.7262 |   | 12.8633 |   |
| June 2010(3)  |       | 12.9195                              |       | 12.7534 |   | 12.8486 |   | 12.8825 |   |

 

----

(1) Rates shown are the actual low and high, ona day-by-day basis for each period.

 

(2) Average of month-end rates.

 

(3) Through June 4, 2010.

 

On June 4, 2010, the noon buying rate for pesoswas Ps. 12.8825 to U.S.$1.00.

 

**RISK FACTORS**

** **

**Risks Related to Our Company**

** **

***Our Substantial Indebtedness could Adversely Affectour Business and, Consequently, our Ability to Pay Interest and Repay ourIndebtedness***

*** ***

In 2009, in connection with the termination of ourforeign exchange derivative obligations, the Company entered into loanagreements for approximately U.S.$737 million dollars and at December 31,2009, we had total outstanding long-term debt aggregating approximatelyPs.20,039.9 million (approximately U.S.$1,533.3 million).  Our significant debt service requirements mayadversely affect our ability to finance future operations, make acquisitionsand capital expenditures, compete effectively against better-capitalizedcompetitors and withstand downturns in our business.  Our level of indebtedness could increase ourvulnerability to adverse general economic and industry conditions, including increasesin interest rates, increases in prices of raw materials, foreign currencyexchange rate fluctuations and market volatility.  Our ability to make scheduled payments on andrefinance our indebtedness when due depends on, and is subject to, several factors,including our financial and operating performance, which is subject toprevailing economic conditions and financial, business and other factors, theavailability of financing in the Mexican and international banking and capitalmarkets, and our ability to sell assets and implement operating improvements.

 

Our level of debt could adversely affect ourbusiness in a number of ways, including but not limited to, the following:

 

·                                          because we have to dedicatea substantial portion of our cash flow from operations to the payment ofinterest and principal on our debt, we have less cash available for otherpurposes including the payment of dividends;

 

·                                          our ability to obtainadditional debt financing;

 

8

----

Table of Contents

 

·                                          our ability to invest incapital expenditures projects; and

 

·                                          we could be placed at a competitivedisadvantage by our limited flexibility to react to changes in the industry andeconomic conditions since our financial resources are dedicated to payinginterest and principal on our debt instead of expanding or improving ourbusiness.  As a result, we could losemarket share and experience lower sales, which could have a material adverseeffect on our financial condition, results of operations and liquidity.

 

We may not be able to borrow additional indebtednessunless, at the time of incurrence, we satisfy certain financial covenants andother conditions.  Pursuant to thefinancial covenants in our loan agreements, we have agreed not to incur anyadditional indebtedness, other than certain indebtedness not in excess ofcertain permitted amounts and certain other limited permitted debtexceptions.  If we cannot obtain adequatefunding on favorable terms or at all, our business, operating results andfinancial condition would be adversely affected.  See “Item 5. Operating and Financial Reviewand Prospects—Liquidity and Capital Resources—Indebtedness.”

 

***We May Not Be Able to Comply***with Covenantsin the Debt Instruments Governing a Substantial Portion of our Indebtedness

*** ***

We are required to comply with certain financialcovenants and other covenants including limitations on our ability to paydividends, make certain investments, merge or consolidate with other companies,sell or pledge assets and incur additional indebtedness and are subject tovarious events of default under such instruments, including breaches ofcovenants, cross-defaults under our other debt instruments, monetary judgments,certain expropriations, insolvency proceedings and change of control.  The restrictions on our debt instrumentscould:

 

·                                          limit our flexibility toadjust to changes in our business and the industries in which we operate; and

 

·                                          limit our ability to fundfuture operations, acquisitions or meet extraordinary capital needs.

 

***We Expect to Pay Interest and Principal on ourDollar-Denominated Debt with Revenues Generated in Pesos or other Currencies,as We Will Not Generate Sufficient Revenue in Dollars from our Operations***

*** ***

We have approximately 75% of our outstanding debtdenominated in dollars as of March 31, 2010.  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 or other currencies against the dollar could adversely affect our abilityto service our debt.  Even though weintend to mitigate this risk with foreign currency hedges, we are exposed tosuch foreign currency exchange fluctuations and we cannot assure you thatmarket hedges will be available at favorable terms to us, if at all.  Fluctuations in exchange rates may resultfrom changes in economic conditions, investor sentiment, monetary and fiscalpolicies, the liquidity of global markets, international and regional politicalevents, and acts of war or terrorism.

 

***We May be Adversely Affected by Increases inInterest Rates***

*** ***

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, we have additional interest raterisk with respect to floating-rate dollar-denominated debt, which generallybears interest based on the London interbank offered rate, which we refer to as“LIBOR.” We have significant exposure to exchange rate fluctuation owing to ourfloating-rate peso and dollar-denominated debt. As a result, if the TIIE or LIBOR rates increase significantly, ourability to service our debt may be adversely affected.

 

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

*** ***

Our long-term corporate credit rating and our seniorunsecured perpetual bond are rated “B+” by Standard & Poor’s RatingsServices (“Standard & Poor’s”). Our Foreign Currency Long-Term Issuer Default Rating and our 

 

9

----

Table of Contents

 

Local Currency Long-TermIssuer Default Rating are rated “B+” by Fitch Ratings (“Fitch”).  Our U.S.$300 million perpetual bond israted “BB-” by Fitch Ratings.  Theseratings reflect the additional leverage on GRUMA’s capital structure from thetermination of GRUMA’s foreign exchange derivative positions and the subsequentconversion of the realized losses into debt.

 

On February 1, 2008, Standard & Poor’splaced our long-term corporate credit rating and our senior unsecured perpetualbond on Credit Watch with negative implications.  On March 12, 2008, Standard &Poor’s removed the Credit Watch with negative implications based on the Company’sintention to use part of the proceeds of a proposed May 2008 rightsoffering to repay debt, which improved our debt ratios.  On October 13, 2008, Standard and Poor’sreduced our long-term corporate credit rating and the credit rating on oursenior unsecured perpetual bond from “BBB-” to “BB”, and placed the ratings onCredit Watch with negative implications. On November 11, 2008, Standard and Poor’s reduced the rating againfrom “BB” to “B+” continuing the Credit Watch with negative implications.  On July 28, 2009, Standard and Poor’saffirmed the rating of “B+” with negative implications.  On December 16, 2009, Standard and Poor’saffirmed its rating of “B+” and removed the ratings from Credit Watch withnegative implications to a stable outlook following its appraisal of GRUMA’sfinancial situation under its new capital structure, its financial policies andoperating performance. We continue to have a B+ rating with a stableoutlook.  On October 13, 2008, Fitchreduced the ratings to “BB+” from “BBB-” while placing GRUMA on Rating WatchNegative.  On April 2, 2009, Fitchreduced its ratings again to “B+” from “BB+” and removed all ratings fromRating Watch Negative to Stable.  On May 18,2010, Fitch affirmed its ratings of “B+” with a stable outlook following actiontaken in respect of GRUMA’s Venezuelan assets by the government ofVenezuela.  See “—Risks Related toVenezuela—One of our Subsidiaries in Venezuela is Currently Involved inExpropriation Proceedings and our Remaining Subsidiary in Venezuela is Subjectto Expropriation,” and “Item 5. Operating and Financial Review and Prospects—Liquidity and CapitalResources—Indebtedness.”

 

If our financial condition deteriorates, we mayexperience future declines in our credit ratings, with attendantconsequences.  Our access to externalsources of financing, as well as the cost of that financing, could be adverselyaffected by 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 theprice and availability of corn, wheat and wheat flour as each of these rawmaterials represented 33%, 15% and 5%, respectively, of our cost of sales in2009.  Mexican and world markets haveexperienced periods of either over-supply or shortage of corn and wheat, someof which have caused 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.  Also, there have been increases in the priceof wheat, driven by negative weather conditions in certain regions of the worldand increased demand worldwide, especially from emerging countries. However,during 2009, prices of corn and wheat declined significantly from their peak in2008.  We believe that the demand andprice for corn will increase over the long term in connection with the expectedrising demand for bio-fuel and manufacture of corn-based ethanol.

 

To manage these price risks, we regularly monitorour risk tolerance and evaluate the possibility of using derivative instrumentsto hedge our exposure to commodity prices. We currently hedge against fluctuations in the costs of corn and wheatusing futures and options contracts according to the Company’s risk managementpolicy, but remain exposed to credit-related losses in the event ofnon-performance by counterparties to the financial instruments.  In addition, if corn or wheat prices decreasebelow the levels specified in our various hedging agreements, we would lose thevalue of a decline in these prices.

 

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 priceand availability of corn and wheat.  Anyadverse developments in domestic and 

 

10

----

Table of Contents

 

international corn and wheatmarkets could have a material adverse effect upon our business, financialcondition, results of operations and prospects.

 

***Increases in the Cost of Energy Could Affect OurProfitability***

*** ***

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 ourdomestic 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, weather conditionsor other unforeseen circumstances.  Anincrease in the price of fuel and other energy sources would increase ouroperating costs and, therefore, could affect our profitability.

 

***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 tobuy it from various producers in the United States, Mexico and elsewhere.  Although we only buy corn from farmers andgrain elevators who agree to supply us with approved varieties of corn and wehave developed a protocol 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, subject usto lawsuits, and may have a negative impact on our results of operations.

 

In the past, various allegations have been made,mostly in the United States and the European Union, that genetically modifiedfoods are unsafe for human consumption, pose risks of damage to the environmentand create legal, social and ethical dilemmas. Some countries, particularly in the European Union, as well as Australiaand some countries in Asia, have instituted a partial limitation on the importof grain produced from genetically modified seeds.  Some countries have imposed labelingrequirements and traceability obligations on genetically modified agriculturaland food products, which may affect the acceptance of these products.  To the extent that we may unknowingly buy ormay be perceived to be a seller of products manufactured with geneticallymodified corn not approved for human consumption, this may have a significantnegative impact on our financial condition and results of operation.

 

***Regulatory Developments May Adversely AffectOur 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.”

 

***Economic and Legal Risks Associated with a GlobalBusiness May Affect Our International Operations***

*** ***

We conduct our business in many countries andanticipate that revenues from our international operations will account for asignificant portion of our future revenues. There are risks inherent in conducting our business internationally, including:

 

·                                          general political andeconomic instability in international markets;

 

·                                          limitations in therepatriation, nationalization or governmental seizure of our assets, includingcash;

 

·                                          direct or indirectexpropriation of our international assets;

 

11

----

Table of Contents

 

·                                          varying prices andavailability of corn, wheat and wheat flour and the cost and practicality ofhedging such fluctuations under current market conditions;

 

·                                          different liabilitystandards and legal systems;

 

·                                          recent developments in theinternational credit markets, which could affect capital availability or cost,and could restrict our ability to obtain financing or refinance our existingindebtedness at favorable terms, if at all; and

 

·                                          intellectual property lawsof countries that do not protect our international rights to the same extent asthe laws of Mexico.

 

In addition, we haverecently expanded our operations to China, Malaysia, Australia, England andUkraine.  Our presence in these and othermarkets could present us with new and unanticipated operationalchallenges.  For example, we may encounterlabor restrictions or shortages and currency conversion obstacles, or berequired to comply with stringent local governmental and environmentalregulations.  Any of these factors couldincrease our operating expenses and decrease our profitability.

 

***We Face Risks Related to Health Epidemics and OtherOutbreaks***

*** ***

Our business could be adversely affected by theeffects of the avian flu, severe acute respiratory syndrome (SARS), InfluenzaA(H1N1) or another pandemic or outbreak. In April 2009, an outbreak of Influenza A(H1N1) occurred in Mexico,United States and Canada spreading to over 74 countries worldwide, includingthe countries where we operate our business. Any prolonged occurrence or recurrence of avian flu, SARS, InfluenzaA(H1N1) or other adverse public health developments in the countries where weoperate may have an adverse effect on our business operations.  Our operations may be impacted by a number ofhealth-related factors, including, among other things, quarantines or closuresof our facilities, which could disrupt our operations, and a general economicslowdown.  Any of the foregoing events orother unforeseen consequences of public health problems could adversely affectour business and results of operations.

 

***Our Business May Be Adversely Impacted By RisksRelated to Our Currency Derivatives Trading Activities***

*** ***

From time to time, we enter into currency derivativetransactions, pursuant to the Company’s risk management policy, that covervarying periods of time and have varying pricing provisions.  We may incur unrealized losses in connectionwith potential changes in the value of our derivative instruments as a resultof changes in economic conditions, investor sentiment, monetary and fiscalpolicies, the liquidity of global markets, international and regional politicalevents, and acts of war or terrorism. See “Item 11.  Quantitative andQualitative Disclosures About Market Risk,” “Item 5. Operating and FinancialReview and Prospects—Liquidity and Capital Resources,” and “Item 11.Quantitative and Qualitative Disclosures About Market Risk—Foreign ExchangeRate Risk.”

 

***We Cannot Predict the Impact that Changing ClimateConditions, Including Legal, Regulatory and Social Responses Thereto, May Haveon Our Business***

 

Variousscientists, environmentalists, international organizations, regulators andother commentators believe that global climate change has added, and willcontinue to add, to the unpredictability, frequency and severity of naturaldisasters (including, but not limited to, hurricanes, tornadoes, freezes, otherstorms and fires) in certain parts of the world.  In response to this belief, a number of legaland regulatory measures as well as social initiatives have been introduced inan effort to reduce greenhouse gas and other carbon emissions which somebelieve may be chief contributors to global climate change. We cannot predictthe impact that changing climate conditions, if any, will have on our resultsof operations or our financial condition. Moreover, we cannot predict howlegal, regulatory and social responses to concerns about global climate changewill impact our business in the future.

 

12

----

***Table of Contents***

*** ***

***Our Business and Operations May Be AdverselyAffected by the Current Global Economic Crisis***

*** ***

The recent global economic crisis has adverselyaffected the economy in the United States, Europe and many other parts of theworld, including Mexico, and the slow-down has been exacerbated by the recentglobal crisis in the financial services and credit markets, which has resultedin significant volatility and dislocation in the global capital markets.  These risks are exacerbated by concerns over thelevels of public debt of, and the weakness of the economies in, Italy, theRepublic of Ireland, Greece, Portugal, and Spain, in particular.  It is uncertain how long theeffects of the global economic crisis will continue and how much of an impactit will have on the global economy in general, or the economies in which weoperate in particular, and whether slowing economic growth in any suchcountries could result in our customers’ reducing their spending.  As a result, we may need to lower the pricesof certain of our products and services in order to maintain the attractivenessof our products and services, which could lead to reduced turnover andprofit.  If economic conditions do notimprove, our business, results of operations and financial condition could bematerially adversely affected.  Theadverse impact of this downturn on some of our customers may lead to a furtherdecline in demand for our products.  Ifthis were to occur, it could harm our business, results of operations andfinancial condition and lead to a drop in the trading price of our shares.

 

**Risks Related to Mexico**

** **

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

 

We are a Mexican company with 39% of ourconsolidated assets located in Mexico and 27% of our consolidated net salesderived from our Mexican operations as of and for the year ended December 31,2009.  As a result, Mexican economicconditions could impact our results of operations.

 

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 “—Developments in Other Countries CouldAdversely Affect the Mexican Economy, the Market Value of our Securities andOur Results of Operations.”

 

Mexico has experienced a prolonged period of slowgrowth since 2001, primarily as a result of the downturn in theU.S. economy.  The Mexican economygrew by 3.2% in 2005, by 4.9% in 2006, by 3.3% in 2007 and by 1.5% in2008.  For 2009, the Mexican economycontracted by 6.5%.  In the first quarterof 2010, the Mexican economy grew by 4.3%.

 

Developments and trends in the world economyaffecting Mexico may have a material adverse effect on our financial conditionand results of operations.  The Mexicaneconomy is tightly connected to the U.S. economy through internationaltrade (approximately 85 percent of Mexican exports are directed to theUnited States), international remittances (billions of dollars from Mexicanworkers in the United States are the country’s second-largest source of foreignexchange), foreign direct investment (approximately 50 percent of Mexicanforeign direct investment comes from U.S.-based investors), and financialmarkets (the U.S. and Mexican financial systems are highlyintegrated).  As the U.S. economycontracts, U.S. citizens consume fewer Mexican imports, Mexican workers inthe United States send less money to Mexico, U.S. firms with businesses inMexico make fewer investments, U.S.-owned banks in Mexico make fewer loans, andthe quality of U.S. financial assets held in Mexico deteriorates.  Moreover, the collapse in confidence in theU.S. economy may spread to other economies closely connected to it,including Mexico’s.  The result may be apotentially deep 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 toexert, significant influence over the Mexican economy.  Mexican governmental actions concerning theeconomy could have a significant effect on Mexican private sector entities, aswell as on market conditions, prices and returns on securities of Mexicanissuers, including 

 

13

----

Table of Contents

 

our securities.  Governmental policies have negativelyaffected our sales of corn flour in the past and may continue to do so in thefuture.

 

Following the election in 2006 of Felipe CalderónHinojosa, of the political party *Partido Acción Nacional*(“PAN”), the Mexican Congress became politically divided, as the PAN does nothave majority control.  Elections for theMexican Senate and House of Representatives and for the governorship of certainstates took place on July 5, 2009, giving the *PartidoRevolucionario Institucional* (“PRI”), a relative majority of thelegislature.  The lack of alignmentbetween the legislature and the President could result in politicaluncertainty, or deadlock and prevent the timely implementation of political andeconomic reforms, which in turn could have a material adverse effect on Mexico’seconomic situation and on our business.

 

Until 2007 we depended on corn import permits toensure an adequate supply of corn in low-corn producing regions of Mexico.  Commencing on January 1, 2008 pursuantto the NAFTA agreement, the import of grains, including corn, no longerrequires import permits.  Nevertheless,we cannot assure that the Mexican government will continue to comply with theterms of the NAFTA agreement, nor take actions that could adversely affectus.  See “Item 4.  Information on the Company—Regulation.”

 

The Mexican government supports thecommercialization of corn for Mexican corn growers through the AgriculturalIncentives and Services Agency (*Apoyos y Servicios a laComercialización Agropecuaria*, or ASERCA).  To the extent that this or other similarprograms are cancelled by the Mexican government, we may be required to incuradditional costs in purchasing corn for our operations, and therefore we mayneed to increase the prices of our products to reflect such additionalcosts.  See “Item 4.  Information on the Company—Regulation.”

 

In 2008, the Mexican government created a program tosupport the corn flour industry (*Programa de Apoyo a laIndustria de la Harina de Maíz* or PROHARINA).  This program aimed to mitigate the impact ofthe rise in international corn prices through price supports designed to aidthe consumer and provided through the corn flour industry.  However, the Mexican government cancelled thePROHARINA program in December 2009. As a result of the cancellation of this program by the Mexicangovernment in December of 2009, we were required to increase the prices ofour products to reflect such additional costs. In addition, there can be no assurance that we will maintain oureligibility for other programs similar to PROHARINA that may be implemented, orthat the Mexican government will not institute price controls or other actionson the products we sell, which could adversely affect our financial conditionand results of operations.  See “Item4.  Information on theCompany—Regulation—Corn Flour Consumer Aid Program.”

 

The level of environmental regulations andenforcement in Mexico has increased in recent years. We expect the trend towardgreater environmental regulation and enforcement to continue and to beaccelerated as a result of international agreements between Mexico and theUnited States.  The promulgation of new environmentalregulations or higher levels of enforcement may adversely affect us.  See “Item 8. Financial Information—Legal Proceedings” and “Item 4.  Information on the Company—Regulation.”

 

***Devaluations of the Mexican Peso May Affect ourFinancial Performance***

*** ***

Since we do not generate sufficient revenue indollars from our operations, we anticipate having  to pay interest and principal on ourdollar-denominated debt with revenues generated in pesos or othercurrencies.  Furthermore, because we havesignificant international operations, we remain exposed to foreign exchangerisks that could affect our ability to meet our obligations and result inforeign exchange losses on our dollar-denominated obligations.  We posted a net foreign exchange gain ofPs.72 million in 2007, a gain of Ps.256 million in 2008 and a gain ofPs.755 million in 2009.  Majordevaluation or depreciation of the Mexican peso may limit our ability totransfer or to convert such currency into U.S. dollars for the purpose ofmaking timely payments of interest and principal on our indebtedness.  The Mexican government does not currentlyrestrict, and for many years has not restricted, the right or ability ofMexican or foreign persons or entities to convert pesos into U.S. dollarsor to transfer other currencies out of Mexico. The government could, however, institute restrictive exchange ratepolicies in the future.

 

14

----

***Table of Contents***

*** ***

***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 inthe past.  The annual rate of inflation,as measured by changes in the NCPI, was 3.76% for 2007 6.53% for 2008 and 3.57%for 2009.  From January through March 2010,the inflation rate was 2.39%.  On May 5,2010, the 28-day CETES rate was 4.49%. 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 ourfinancial condition and results of operations.

 

***Developments in Other Countries Could AdverselyAffect the Mexican Economy, the Market Value of Our Securities and Our Resultsof Operations***

*** ***

The Mexican economy may be, to varying degrees,affected by economic and market conditions in other countries.  Although economic conditions in othercountries 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 slow recoveryof the economy in the United States, and the uncertainty of the impact it couldhave on the general economic conditions in Mexico and the United States couldhave a significant adverse effect on our businesses and results ofoperations.  See “—Our Results ofOperations Could Be Affected by Economic Conditions in Mexico,” and “—RisksRelated to the United States—Unfavorable General Economic Conditions in the UnitedStates Could Negatively Impact Our Financial Performance.”  In addition, economic crises in Asia, Russia,Brazil, Argentina and other emerging market countries have adversely affectedthe Mexican economy in the past.

 

Our financial performance may also be significantlyaffected by general economic, political and social conditions in the emergingmarkets where we operate, particularly Mexico, Venezuela and Asia.  Many countries in Latin America, includingMexico and Venezuela, have suffered significant economic, political and socialcrises in the past, and these events may occur again in the future.  See also “—Risks Related toVenezuela—Venezuela Presents Significant Economic Uncertainty and PoliticalRisk.”  Instability in Latin America hasbeen caused by many different factors, including:

 

·                                          significant governmentalinfluence over local economies;

 

·                                          substantial fluctuations ineconomic growth;

 

·                                          high levels of inflation;

 

·                                          changes in currency values;

 

·                                          exchange controls orrestrictions on expatriation of earnings;

 

·                                          high domestic interestrates;

 

·                                          wage and price controls;

 

·                                          changes in governmentaleconomic or tax policies;

 

·                                          imposition of tradebarriers;

 

·                                          unexpected changes inregulation; and

 

·                                          overall political, socialand economic instability.

 

Adverse economic, political and social conditions inLatin America may create uncertainty regarding our operating environment, whichcould have a material adverse effect on our company.

 

15

----

Table of Contents

 

We cannot assure you that the events in otheremerging market countries, in the United States, Europe, or elsewhere will notadversely affect our business, financial condition and results of operations.

 

***You May BeUnable to Enforce Judgments Against Us in Mexican Courts***

*** ***

We area Mexican publicly held corporation (*Sociedad Anónima Bursátilde Capital Variable*).  Most ofour directors and executive officers are residents of Mexico, and a significantportion of the assets of our directors and executive officers, and asignificant portion of our assets, are located in Mexico.  You may experience difficulty in effectingservice of process upon our company or our directors and executive officers inthe United States, or, more generally, outside of Mexico and in enforcing civiljudgments of non-Mexican courts in Mexico, including judgments predicated oncivil liability under U.S. federal securities laws, against us, or our directorsand executive officers.  We have beenadvised by our General Counsel that there is doubt as to the enforceability oforiginal actions in Mexican courts of liabilities predicated solely on theU.S. federal securities laws.

 

**Risks Related to Venezuela**

** **

***One of our Subsidiaries inVenezuela is Currently Involved in Expropriation Proceedings and our RemainingSubsidiary in Venezuela is Subject to Expropriation***

 

Since2006, the Government of Venezuela has undertaken efforts to nationalize and/orexpropriate foreign and local-owned companies in key industries such asfinancial services, oil and gas, steel, hospitality, retail (includingsupermarkets), electricity distribution, telecommunications and cement.  In some cases, the Government of Venezuela’sactions have resulted in expropriation of business and private enterpriseswithout fair and just compensation, which has led to prolonged and costly legaldisputes.  In certain industries, theGovernment of Venezuela has expropriated foreign companies and created jointventures, or “mixed enterprises” between private enterprises and state-ownedcompanies.  We do not maintain insurancefor the risk of expropriation of our investments.

 

On May 12,2010, the Venezuelan government issued decree number 7.394, published in theOfficial Gazette of Venezuela (the “Expropriation Decree”), announcing theforced acquisition of all goods, movables and real estate of our Venezuelansubsidiary Molinos Nacionales, C.A., or MONACA (the “MONACA Expropriation”).  Pursuant to the Expropriation Decree,the government of Venezuela has instructed government officials to undertakethe necessary actions to execute the MONACAExpropriation.  As ofthe date of this annual report, the Venezuelan government has not yet takenoperational or managerial control of MONACA. Pending theresolution of our negotiations with the government of Venezuela, MONACAcontinues to operate in the ordinary course of business.  TheCompany and the Venezuelan government are in preliminary negotiations todetermine the compensation to be paid for the expropriated assets.  We are participating in these negotiationswith a view to obtaining just and reasonable compensation for the assetssubject to the MONACA Expropriation. However, we cannot assure you that these negotiations will besuccessful.   At this preliminary stage, we areunable to estimate the likely range of potential recovery or determine whatposition Venezuela will take in these negotiations and the difficulties ofcollection, among other matters.

 

Additionally,the People’s Defense Institute for the Access of Goods and Services ofVenezuela (INDEPABIS) has also initiated an investigation of our Venezuelansubsidiary, Derivados de Maíz Seleccionado, C.A. (“DEMASECA”), and issued anorder authorizing the temporary occupation and operation of DEMASECA for aperiod of 90 calendar days from May 25, 2010.  DEMASECA continues to operate in the ordinarycourse of business.  We cannot assure youthat the governmentof Venezuela will not continue to expropriate our remaining operations inVenezuela.

 

We reserve and will continue to reserve the right toseek full compensation for any and all expropriated assets and investmentsunder all applicable legal regimes, including investment treaties and customaryinternational law.  GRUMA’s interest in MONACA is held through Valores Mundiales, S.L., a companyorganized under the laws of the Kingdom of Spain.  Venezuela and Spain are parties to abilateral investment treaty (the “InvestmentTreaty”).  Under the Investment Treaty,companies subject to expropriation are entitled to certain rights, includingthe right to arbitrate disputes before the International Centre for Settlementof Investment Disputes (“ICSID”) in Washington, D.C.

 

16

----

Table of Contents

 

While the ultimate outcome of this matter is presentlyuncertain, it is reasonably possible that the expropriation may result in aloss of control of the Company’s Venezuelan business. However, at this time, we cannot predict the results ofany proceedings related to the Expropriation Decree, whether we are likely toprevail in such proceedings, or the ramifications that costly and prolongedlegal disputes could have on our results of operations or financialposition.  As a result, the net impact of this matter on theCompany’s consolidated financial results cannot be reasonably estimated.  See Note 20-B to our consolidated financialstatements.

 

***Venezuela Presents Significant Economic Uncertaintyand Political Risk***

*** ***

Our operations in Venezuela through MONACA andDEMASECA accounted for approximately 18% of our net sales in 2009.  In recent years, political and socialinstability has prevailed in Venezuela. This unrest presents a risk to our operations in Venezuela which cannotbe controlled or accurately measured or estimated.

 

Inrecent years, Venezuelan authorities have imposed foreign exchange and pricecontrols that apply to products such as corn flour and wheat flour, which havelimited our ability to increase our prices in order to compensate for highercosts in raw materials and to convert bolívars into other currencies andtransfer funds out of Venezuela. Pursuant to the foreign exchange controls, the purchase and sale offoreign currency is required to be made at an official rate of exchange, asdetermined by the Venezuelan government (the “Official Rate”).  In addition, U.S. dollars may be acquired inorder to settle certain U.S. dollar-denominated debt incurred pursuant toimports and royalty agreements, and for payment of dividends, capital gains,interest payments or private debt only after proper submission and approval bythe Foreign Exchange Administration Board (CADIVI).  In October of 2005, the VenezuelanGovernment enacted the Criminal Exchange Law that provided for an exemption forthe purchase and sale of securities. This exemption has resulted in the creation of a parallel foreigncurrency exchange market through which companies may obtain foreign currencywithout submitting such a request to the CADIVI for approval.  The average rate of exchange in the parallelmarket is variable, and may differ significantly from the official rate.  Publicly available quotes do not exist forthe foreign exchange rates in this parallel market, but such rates may beobtained from brokers or by other means.  

 

In addition, as described in Note 20 to ourconsolidated financial statements, the Venezuelan government devalued itscurrency andestablished a two tier exchange structure on January 11, 2010. As a result ofthe devaluation and based on the Company’s foreign currency position as of December 31,2009 and management interpretations, the estimated financial effect for thoseitems that management expects will be settled using the new exchange rates willbe an increase of  the monetary assetsdenominated in foreign currency (other than bolívars) of Bs.8,083 and anestimated increase of the monetary liabilities denominated in foreign currency(other than bolívars) of Bs.29,674, resulting in an estimated net exchange lossof Bs.21,592, which was recognized in January of 2010.  At December 31, 2009, our investments incertain debt instruments generate income, after taking into account the newexchange rate, of Bs.4,383, which was also recognized in January 2010.Additionally, the conversion of the financial position and results ofoperations of our Venezuelan subsidiaries will result in a decrease ofapproximately 50% of the value in Mexican pesos of these subsidiaries forconsolidation purposes  We cannotguarantee that the Venezuelan government will not impose price controls,devalue its currency or make similar decisions in the future.

 

Additionally, our Venezuelan operations could beadversely affected since, among other reasons: (i) 100% of the sales of our operations in Venezuela aredenominated in bolívars; (ii) Gruma Venezuela produces products that aresubject to price controls; (iii) part of Gruma Venezuela’s sales depend oncentralized government 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) Gruma Venezuela may face increasing costs insome of our raw materials due to the implementation of import tariffs.

 

**Risks Related to theUnited States**

 

***Unfavorable General Economic Conditions in theUnited States Could Negatively Impact Our Financial Performance***

*** ***

Net sales in the U.S. constituted approximately47% of our total sales in 2009. Unfavorable general economic conditions, such as the current recessionand economic slowdown in the United States could negatively affect theaffordability of and consumer demand for some of our products.  Under difficult economic conditions,consumers may seek to forego purchases of our products or, if available, shiftto lower-priced products offered by other companies.  Softer consumer demand for our products inthe United States or in other major markets could reduce our profitability andcould negatively affect our financial performance.

 

Additionally, as the retail grocery trade continuesto consolidate 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 Stateseconomy.  See also “—Risks Related toMexico—Our Results of Operations Could Be Affected by Economic Conditions inMexico.”

 

17

----

**Table of Contents**

** **

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

 

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

*** ***

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

 

***Holders of ADSs May Not Be Able to Participatein Any Future Preemptive Rights Offering and as a Result May Be Subject toa Dilution of Equity Interest***

*** ***

Under Mexican law, if we issue new shares for cashas a part of a capital increase, other than in connection with a publicoffering of newly issued shares or treasury stock, we must generally grant ourshareholders the right to purchase a sufficient number of shares to maintaintheir existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptiverights.  We may not legally be permittedto allow holders of our shares through ADSs in the United States to exerciseany preemptive rights in any future capital increases unless (i) we file aregistration statement with the U.S. Securities and Exchange Commission,or SEC, with respect to that future issuance of shares or (ii) theoffering qualifies for an exemption from the registration requirements of theSecurities Act.  At the time of anyfuture capital increase, we will evaluate the costs and potential liabilitiesassociated with filing a registration statement with the SEC, as well as thebenefits of preemptive rights to holders of our shares through ADSs in theUnited States and any other factors that we consider important in determiningwhether to file a registration statement.

 

We are under no obligationto, and there can be no assurance that we will, file a registration statementwith the SEC to allow holders of our shares through ADSs in the United Statesto participate in a preemptive rights offering. In addition, under current Mexican law, sales by the ADS depositary ofpreemptive rights and distribution of the proceeds from such sales to theholders of our shares through ADSs is not possible.  As a result, the equity interest of holdersof our shares through ADSs would be diluted proportionately and such holdersmay not receive any economic compensation. See “Item 10.  AdditionalInformation—Bylaws—Preemptive Rights.”

 

***The Protections 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 AffiliatesThat Could Create Potential Conflicts of Interest***

*** ***

As of December 31, 2009, 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, we may obtain 

 

18

----

Table of Contents

 

financing from GFNorte’ssubsidiaries at market rates and terms. For the past seven and one-half years, the highest outstanding loanamount was Ps.162 million (in nominal terms) with an interest rate of 8.9%in December 2003.  As of December 31,2009 there were no outstanding loan amounts with GFNorte’s subsidiaries.

 

We purchase some of our inventory ingredients fromour shareholder and associate Archer-Daniels-Midland Company, orArcher-Daniels-Midland, at market rates and terms.  During 2007, 2008 and 2009, we purchasedU.S.$133 million, U.S.$183 million and U.S.$159 million of inventoryingredients, respectively, from Archer-Daniels-Midland.  Transactions with affiliates may create thepotential for conflicts of interest.  See“Item 7.  Major Shareholders and RelatedParty Transactions—Related Party Transactions.”

 

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

*** ***

Fluctuations in the exchange rate between the pesoand the U.S. dollar will affect the U.S. dollar value of aninvestment in our shares and of dividend and other distribution payments onthose shares.  See “Item 3.  Key Information—Selected FinancialData—Exchange Rate Information” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Foreign ExchangeRate 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 theU.S. securities laws, with respect to their investment in us.

 

***Our Controlling Shareholder Exerts SubstantialControl Over Our Company***

*** ***

As of April 29, 2010, Roberto González Barreraand his family controlled approximately 54.56% of our outstanding shares.  See “Item 10. Additional Information—Bylaws—Changes in Capital Stock.”  Consequently, Mr. González Barrera andhis family have the power to elect the majority of our directors and todetermine the outcome of most actions requiring approval of our stockholders,including the declaration of dividends. The interests of Mr. González Barrera and his family may differfrom those of our other shareholders.  Mr. GonzálezBarrera and his family’s holdings are described under “Item 7.  Major Shareholders and Related PartyTransactions—Major Shareholders.”

 

Mr. González Barrera has pledged and may berequired to further pledge part of his shares in us to secure some of hisborrowings.  If there is a default andthe 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, a change of controlcould trigger a default in some of our credit agreements and have a materialadverse effect upon our business, financial condition, results of operationsand prospects.  For more informationabout this 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 sole authorityto determine how those shares are voted. Thus, Archer-Daniels-Midland only has the right to vote 18.87% of ouroutstanding shares.  In addition,Archer-Daniels-Midland has the right to nominate 2 of the 15 members of ourboard 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. 

 

19

----

Table of Contents

 

González Barrera andArcher-Daniels-Midland have also granted each other rights of first refusal inrespect of their shares in our company, subject to specified conditions.

 

Additionally, subject 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,a 40% 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 38% 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 DeterPotential Acquirors***

*** ***

Certain provisions of our bylaws could make itsubstantially more difficult for a third party to acquire control of us.  These provisions in our bylaws may discouragecertain types of transactions involving the acquisition of our securities.  These provisions could discouragetransactions in which our shareholders might otherwise receive a premium fortheir shares over the then current market price.  Holders of our securities who acquire sharesin violation of these provisions will not be able to vote, or receivedividends, distributions or other rights in respect of, these securities andwould be obligated to pay us a penalty. For a description of these provisions, see “Item 10.  Additional Information—Bylaws—OtherProvisions—Antitakeover Protections.”

 

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

*** ***

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

 

·                                          from earnings included inyear-end financial statements that are approved by shareholders at a dulyconvened meeting;

 

·                                          after any existing lossesapplicable to prior years have been made up or absorbed into capital;

 

·                                          after at least 5% of netprofits for the relevant fiscal year have been allocated to a legal reserveuntil the amount of the reserve equals 20% of a company’s paid-in capitalstock; and

 

·                                          after shareholders haveapproved the payment of the relevant dividends at a duly convened meeting.

 

In addition, Gruma Corporation is subject tocovenants in some of its debt agreements which require the maintenance ofspecified financial ratios and balances and, upon an event of default, prohibitthe payment of cash dividends.  Foradditional information concerning these restrictions on inter-companytransfers, see “Item 3.  Key 

 

20

----

Table of Contents

 

Information—SelectedFinancial Data—Dividends” and “Item 5. Operating and Financial Review and Prospects—Liquidity and CapitalResources.”

 

We own approximately 83% of the outstanding sharesof Grupo 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, 2009, 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 dividendsfrom Gruma Venezuela may be adversely affected by exchange controls and otherrecent events.  See “Item 3.  Key Information—Risk Factors—Risks Related toVenezuela—Venezuela Presents Significant Economic Uncertainty and PoliticalRisk.”

 

**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 in Monterrey, 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, San Pedro Garza García, NuevoLeón, 66220 México and our telephone number is (52 81) 8399-3300.  Our legal domicile isMonterrey, Nuevo León, México.

 

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

 

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

 

The following are some significant historicalhighlights:

 

·                                          **In 1949**, RobertoGonzález Barrera and a group of predecessor Mexican corporations founded GIMSA,which is engaged principally in the production, distribution and sale of cornflour in Mexico.

 

·                                          **In 1972**, we enteredthe Central American market with our first operation in Costa Rica.  Today, we have operations in Costa Rica,Guatemala, Honduras, El Salvador and Nicaragua, as well as Ecuador, which weinclude as part of our Central American operations.

 

·                                          **In 1977**, we enteredthe U.S. market.  Our operationshave grown to include products such as tortillas, corn flour and other tortillarelated products.

 

·                                          **From1989 to 1995**, we significantly increased our installedmanufacturing capacity in the United States and in Mexico.

 

·                                          **In 1993**, we enteredthe Venezuelan corn flour market through an investment in DEMASECA, a Venezuelancorporation producing corn flour.

 

21

----

Table of Contents

 

·                                          **In 1994**, we began ourpackaged tortilla operations in Mexico as part of our strategy to broaden ourproduct lines in Mexico, achieve vertical integration of our corn flouroperations and capitalize upon our experience in producing and distributingpackaged tortillas in the United States. We were focused only on the northern part of Mexico.  In addition, in 1994 GRUMA became a publiclylisted company in both Mexico and the U.S.

 

·                                          **In 1996**, westrengthened our position in the U.S. corn flour market through anassociation with Archer-Daniels-Midland, which currently owns approximately23.22% of our outstanding shares. Through this association we combined our existing U.S. corn flouroperations and strengthened our position in the U.S. corn flourmarket.  This association also allowed usto enter the Mexican wheat flour market by acquiring a 60% ownership interestin Archer-Daniels-Midland’s Mexican wheat flour operations.

 

·                                          **From 1997through 2000**, we initiated a significant plant expansionprogram.  During this period, we acquiredor built wheat flour plants, corn flour plants, bread plants and/or tortillaplants in the United States, Mexico, Central America, Venezuela (acquisition ofMONACA) and Europe.

 

·                                          **From2001 to 2003**, as a result of a comprehensive review of ourbusiness portfolio and our focus on our core businesses, we sold our breadbusiness, under the Breddy brand.

 

·                                          **In 2004**, we acquiredOvis Boske, a tortilla company based in Holland, Nuova De Franceschi &Figli, S.P.A., or Nuova De Franceschi & Figli, a corn flour companybased in Italy and a small tortilla plant in Las Vegas, Nevada.  We continued to expand capacity and upgradeseveral of our U.S. operations, the most relevant of which was theexpansion of a corn mill in Indiana. This expansion was completed during the second half of 2005.

 

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

 

·                                          **In 2006**, during thefirst quarter, we concluded the acquisitions of two small tortilla plants inAustralia (Rositas Investments and Oz-Mex Foods), which strengthened ourpresence in the Asian and Oceania markets. In September 2006, we opened our first tortilla plant in Asia,located in Shanghai, China.  We believethe plant has allowed us to strengthen our presence in the Asian markets byimproving our service to customers and consumers, allowing us to introduce newproducts to the Asian market and offer fresher products.  In October 2006, we concluded theacquisition of Pride Valley Foods, a company based in Newcastle, England, thatproduces tortillas, pita bread, naan, and chapatti.  We believe the acquisition will strengthenour presence in the European market and will provide an opportunity to expandour product portfolio to products similar to tortillas.

 

·                                          **In2007,** we entered into a contract to sell a 40% stake in MONACA to our formerpartner in DEMASECA.  In conjunction withthis transaction, we also agreed to purchase an additional 10% ownershipinterest in DEMASECA from our former partner. We also purchased the remaining49% ownership interest in Nuova De Franceschi & Figli, a corn flourcompany based in Italy, in which we previously held a 51% ownershipinterest.  In 

 

22

----

Table of Contents

 

addition, we made major investments in capacity expansions and upgradesin Gruma Corporation, started the construction of a new tortilla plant inEpping, Australia for Gruma Asia and Oceania, and expanded two of GIMSA’splants.

 

·                                          **In 2008**, most of ourcapital expenditures were applied to Gruma Corporation for the construction ofa tortilla plant in southern California and capacity expansions at existingfacilities, and to Gruma Asia and Oceania for the construction of a tortillaplant in Epping, Australia.

 

·                                          **In 2009**, major capitalexpenditures were applied to capacityexpansions and upgrades in Gruma Corporation and GIMSA, the completion of atortilla plant in California and the construction of a wheat mill in Venezuela.

 

·                                          **In 2010**, major capitalexpenditures have been applied to general manufacturing upgrades in GrumaCorporation and the acquisition ofAltera I and Altera II, the leading producer of corn grits in Ukraine.

 

23

----

Table of Contents

 

**ORGANIZATIONAL STRUCTURE**

 

We are a holding company andconduct our operations through subsidiaries. The table below sets forth our principal subsidiaries as of December 31,2009.

 
| **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 and Europe                                               |       | Nevada                                                                 |       | 100%                     |       | Packaged tortillas, Other tortilla related products, Corn flour,  Other |
|                                                                                                                                                                                                                                                                                                                                                 |       |                                                                   |       |                                                                   |       |                     |       |                                                                    |
| Azteca  Milling, LP.**(4)**                                                                                                                                                                                                                                                                                                                          |       | United States                                                          |       | Texas                                                                  |       | 80%                      |       | Corn flour                                                              |
|                                                                                                                                                                                                                                                                                                                                                 |       |                                                                   |       |                                                                   |       |                     |       |                                                                    |
| **Central  American Operations(5)**                                                                                                                                                                                                                                                                                                                  |       |                                                                   |       |                                                                   |       |                     |       |                                                                    |
| ** **                                                                                                                                                                                                                                                                                                                                           |       |                                                                   |       |                                                                   |       |                     |       |                                                                    |
| Gruma de Guatemala, S.A., Derivados de   Maiz Alimenticio, S.A., Industrializadora y   Comercializadora de Palmito, S.A.,  Derivados de Maiz de Guatemala, S.A.,  Tortimasa, S.A., Derivados de Maiz de El  Salvador, S.A., Derivados de Maiz de   Honduras, S.A, and Maiz Industrializado De   Centroamerica, S.A.(“Gruma Centroamerica”) |       | Costa Rica, Honduras,  Guatemala, El Salvador, Nicaragua, Ecuador |       | Costa Rica, Honduras,  Guatemala, El Salvador, Nicaragua, Ecuador |       | 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                       |

 

----

(1)  Percentage of equity capital owned by usdirectly or indirectly through subsidiaries.

 

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

 

(3)  Since 2007, the Asia and Oceania operationshave been presented as a separate business unit from Gruma Corporation.

 

24

----

Table of Contents

 

(4)  Archer-Daniels-Midland indirectly holds theremaining 20% interest.

 

(5)  As part of a corporate restructuring of ourCentral American operations, on January 1, 2009, all subsidiaries of GrumaCentroamérica, LLC were transferred to Gruma International Foods, S.L.

 

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

 

(7)  Archer-Daniels-Midland holds a 3% indirectinterest in both companies and Banco Interacciones, S.A. Trust No. 6460holds a 24.14% indirect interest in MONACA and 40% in DEMASECA.  See “Item 3. Key Information—Risk Factors—Risks Related to Venezuela—One of ourSubsidiaries in Venezuela is Currently Involved in Expropriation Proceedingsand our Remaining Subsidiary in Venezuela is Subject to Expropriation,” “—RisksRelated to Our Controlling Shareholders and Capital Structure—Archer-Daniels-Midland,Our Strategic Partner, Has Influence Over Some Corporate Decisions; OurRelationship With Archer-Daniels-Midland Could Become Adverse and Hurt OurPerformance,” and “Item 10.  AdditionalInformation—Material Contracts—Archer-Daniels-Midland.”

 

Our subsidiaries accounted for the followingpercentages and amount of our net sales in millions of pesos for the yearsended December 31, 2007, 2008 and 2009.

 
| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **2007**                         | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **               | ** ** | **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.                              | 17,406     |   | 49 | % | Ps. | 19,356 |   | 43 | % | Ps. | 23,567 |   | 47 | % |
| GIMSA                    |       | 9,012                            |       | 25 |   | 9,142 |   | 20 |   | 10,348 |   | 20 |   |
| Gruma Venezuela          |       | 3,862                            |       | 11 |   | 8,727 |   | 19 |   | 9,025 |   | 18 |   |
| Molinera de México  |       | 2,694                            |       | 7 |   | 3,598 |   | 8 |   | 3,484 |   | 7 |   |
| Gruma Centroamérica |       | 2,076                            |       | 6 |   | 2,949 |   | 7 |   | 2,777 |   | 6 |   |
| Others and eliminations  |       | 766                              |       | 2 |   | 1,021 |   | 3 |   | 1,288 |   | 2 |   |
| Total                    |       | Ps.                              | 35,816     |   | 100 |   | Ps. | 44,793 |   | 100 |   | Ps. | 50,489 |   | 100 |   |
|                          |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Associationwith Archer-Daniels-Midland**

** **

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

 

As a result of this association, we andArcher-Daniels-Midland combined our U.S. corn flour operations toform Azteca Milling, L.P., a limited partnership in which we hold indirectly,80% and Archer-Daniels-Midland holds indirectly, 20%.  We and Archer-Daniels-Midland agreed toproduce and distribute corn flour in the United States through AztecaMilling.  In addition, we acquired 60% ofthe capital stock of Archer-Daniels-Midland’s wholly-owned Mexican wheatmilling operations, Molinera de México, S.A. de C.V. Archer-Daniels-Midlandretained the remaining 40%.  We andArcher-Daniels-Midland agreed to produce and distribute wheat flour in Mexicothrough Molinera de México.  As part ofthis agreement, we also received U.S.$258.0 million in cash and gainedexclusivity rights from Archer-Daniels-Midland in specified corn flour andwheat flour markets.  In return,Archer-Daniels-Midland received 74,696,314 of our then newly issued shares,which represented at that time approximately 22% of our total outstandingshares and the right to designate two of the 15 members of our board ofdirectors 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 “Item3. Key Information—Risk Factors—Risks Related to Our Controlling Shareholdersand Capital Structure—Archer-Daniels-Midland, Our Strategic Partner, HasInfluence Over Some Corporate Decisions; Our Relationship WithArcher-Daniels-Midland Could Become Adverse and Hurt Our Performance” and “Item10.  Additional Information—MaterialContracts—Archer-Daniels-Midland.”

 

**CapitalExpenditures**

** **

Our capital expenditure program continues to beprimarily focused on our core businesses and markets.  Capital expenditures for 2007, 2008 and 2009were U.S.$204 million, U.S.$235 million and U.S.$87 million,  

 

25

----

Table of Contents

 

respectively. Our capital expenditures include investments in property, plant andequipment, acquisitions of new plants and brands and capital investments.  Major capital expenditures in 2007 werefocused on expanding and upgrading capacity at Gruma Corporation, capacityexpansions at GIMSA and Gruma Centroamérica, and the construction of a tortillaplant in Australia.  During 2008, GRUMA’scapital expenditures totaled U.S.$235 million, most of which were appliedto the construction of tortilla plants in California and Australia, capacityexpansions and upgrades in Gruma Corporation. During 2009, our capital expenditurestotaled U.S.$86.9 million, most of which was applied to capacityexpansions and upgrades in Gruma Corporation and GIMSA, the completion of atortilla plant in California and the construction of a wheat mill in Venezuela.

 

In light of the increase in our debt resulting fromlosses on derivative instruments during 2009, we anticipate that our capitalexpenditures during 2010 will be oriented exclusively to the most materialprojects and therefore will be lower than what we have invested in recentyears.  See “Item 5. Operating andFinancial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”  We have budgeted approximately U.S.$98million for capital expenditures in 2010, which we intend to use mainly forupgrades at existing plants in Gruma Corporation and GIMSA, including approximatelyU.S.$18 million which were budgeted for capital expenditures in Gruma Venezuelaand expected to be paid for with funds generated from our Venezuelanoperations.  We anticipate financingthese expenditures throughout the year through internally generated funds.  This capital expenditures budget does notinclude any potential acquisitions. During the first quarter of 2010, we spent approximatelyU.S.$11 million on capital expenditures which were applied mainly togeneral manufacturing upgrades in Gruma Corporation.  U.S.$2.2 million were applied to capitalexpenditures in Gruma Venezuela during the first quarter of 2010.  In addition, on April 13, 2010, weacquired Altera I and Altera II, the leading producer of corn grits in Ukrainefor U.S.$9 million.

 

The following table setsforth the aggregate amount of our capital expenditures during the periodsindicated.

 
| ** **               | ** ** | **Year ended December 31,**       | ** ** |
|--------------------------|------------|----------------------------------------|------------|
| ** **               | ** ** | **2007(1)**                            | ** ** | **2008(2)** | ** ** | **2009** | ** ** |
| ** **               | ** ** | **(in millions of U.S. dollars)** | ** ** |
| Gruma Corporation        |       | $                                      | 96.1       |   | $ | 120.7 |   | $ | 30.9 |   |
| GIMSA                    |       | 23.6                                   |       | 12.2 |   | 22.6 |   |
| Gruma Venezuela          |       | 6.7                                    |       | 22.0 |   | 22.8 |   |
| Molinera de México  |       | 3.6                                    |       | 3.4 |   | 3.4 |   |
| Gruma Centroamérica |       | 13.1                                   |       | 23.6 |   | 3.7 |   |
| Others and eliminations  |       | 60.5                                   |       | 53.4 |   | 3.5 |   |
| Total consolidated       |       | $                                      | 203.6      |   | $ | 235.3 |   | $ | 86.9 |   |

 

----

(1) Amounts in respect of some of the capitalexpenditures were paid for in currencies other than the U.S. dollar.  These amounts were translated intoU.S. dollars at the exchange rate in effect at the end of each year onwhich a given capital expenditure was made. As a result, U.S. dollar amounts presented in the table above maynot be comparable to data contained elsewhere in this Annual Report, which isexpressed on the basis of the peso/dollar exchange rate as of December 31,2009, unless otherwise specified.

 

(2) These amounts were translated intoU.S. dollars at the exchange rate in effect at the end of each month onwhich a given capital expenditure was made. As a result, U.S. dollar amounts presented in the table above maynot be comparable to data contained elsewhere in this Annual Report, which isexpressed on the basis of the peso/dollar exchange rate as of December 31,2009, unless otherwise specified.

 

For more information on capital expenditures foreach subsidiary, please see the sections entitled “Operation and Capital Expenditures”under the relevant sections below.

 

**BUSINESSOVERVIEW**

** **

We believe we are one of the largest corn flour andtortilla producers and distributors in the world based on revenue and salesvolume.  We also believe we are one ofthe leading producers and distributors of corn flour and 

 

26

----

Table of Contents

 

tortillas in the United States, one of theleading producers of corn flour and wheat flour in Mexico, and one of theleading producers of corn flour and wheat flour in Venezuela based on revenueand sales volume.  We believe that we arealso one of the largest producers of corn flour and tortillas in CentralAmerica, and one of the largest tortilla producers in Europe, Asia and Oceania,based upon revenue and sales volume.

 

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

 

The following table setsforth our revenues by geographic market for years ended December 31, 2007,2008 and 2009.

 
| ** **               | ** ** | **Year  ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **               | ** ** | **(in millions of pesos)**        | ** ** |
| United States and Europe |       | Ps.                               | 17,403     |   | Ps. | 19,332 |   | Ps. |  23,523 |   |
| Mexico                   |       | 11,652                            |       | 12,784 |   | 13,844 |   |
| Venezuela                |       | 3,862                             |       | 8,727 |   | 9,025 |   |
| Central America          |       | 2,076                             |       | 2,949 |   | 2,777 |   |
| Asia and Oceania         |       | 823                               |       | 1,001 |   | 1,320 |   |
| Total                    |       | Ps.                               | 35,816     |   | Ps. |  44,793 |   | Ps. |  50,489 |   |

 

**Strategy**

** **

Our strategy for growth is to focus on our corebusiness—corn flour, tortilla, and wheat flour production—and to capitalizeupon our leading positions in the corn flour and tortilla industries.  We have taken advantage of the increasingpopularity of Mexican food and, more importantly, tortillas, in the U.S.,European and Asia and Oceania markets. We have also taken advantage from the adoption of tortillas by theU.S. general market and by Europeans for the preparation of differentrecipes other than Mexican food, and from the flexibility of our wraps and newproduct concepts we have launched such as low-fat, carb-balance andmultigrain.  Our strategy includes thefollowing key elements:

 

*Expand in the Growing Retail and Food Service Tortilla Markets in NewRegions in the United States*:  We believe that the size and growth of theU.S. retail and food service tortilla markets offer significantopportunities for expansion.

 

*Enter and Expand in the Tortilla Markets in Other Regions of the World*:  We believe that new markets in othercontinents such as Europe, Asia and Oceania offer us significantopportunities.  We believe our currentoperations in Europe will enable us to better serve markets in Europe and inthe Middle East through stronger vertical integration, improvements inlogistical efficiencies, and enhanced knowledge of our local markets.  Our presence in China and Oceania will enableus to offer our customers fresh products and respond more quickly to theirneeds.  We will continue to evaluate waysto profitably expand into these rapidly growing markets.

 

*Continue the Process of Establishing Gruma Corporation’s MISSION**®** and GUERRERO**®** Tortilla Brands as the First and SecondNational Brands in the United States*:  We intend to achieve this by increasing ourefforts at building brand name recognition, and by further expanding andutilizing Gruma Corporation’s distribution network, first in Gruma Corporation’sexisting markets, where we believe there is potential for further growth, andsecond, in regions where Gruma Corporation currently does not have asignificant presence but where we believe strong demand for tortillas alreadyexists.

 

27

----

Table of Contents

 

*Encourage Transition in All Our Markets from Traditional Cooked-CornMethod to Corn Flour Method as Well as New Uses for Corn Flour, and Continue toEstablish MASECA as a Leading Brand*:  We pioneered the dry corn flour method oftortilla production, which offers several advantages over the centuries-oldtraditional wet corn dough method.  Wecontinue to view the transition from the traditional method to the corn flourmethod of making tortillas and tortilla chips as the primary opportunity forincreased corn flour sales.  We willcontinue to encourage this transition through improving customer service,advertising and promoting principally our MASECA® brand cornflour, as well as leveraging off of our manufacturing capacity and distributionnetworks.  We also see an opportunity forfurther potential growth in the fact that the dry corn flour method is moreenvironmentally friendly 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.

 

*Continually Improve Service and Quality of Our Products to Customersand Consumers*:  We continueto develop customer relationships by ensuring that our customer-service andsales representatives develop an intimate knowledge of their clients’businesses and by working with clients to help them improve their products,services, and sales to their consumers. We continuously work to improve service and the quality of our productsto consumers, raise consumer awareness of our products, and stay informed ofour consumers’ preferences.

 

*Leverage Our Existing Available Production Capacity and Focus onOptimizing Operational Matters*:  Our investment program during recent years inplants and operations has resulted in sufficient existing capacity to meetcurrent and foreseeable demand.  Webelieve that we have the capacity to operate at optimal levels and that oureconomies of scale and existing operating synergies permit us to remaincompetitive without additional capital expenditures.

 

**U.S. andEuropean Operations**

** **

***Overview***

*** ***

We conduct our United States and European operationsprincipally through our subsidiary, Gruma Corporation, which manufactures anddistributes corn flour, packaged tortillas, corn chips and relatedproducts.  The Asia and Oceaniaoperations were reported in our financial statements under Gruma Corporationthrough December 2006, but since 2007 the Asia and Oceania operations havebeen reported under the line item “Other and eliminations.”  Gruma Corporation commenced operations in theUnited States in 1977, initially developing a presence in certain majortortilla consumption markets by acquiring small tortilla manufacturers andconverting their production processes from the traditional “wet corn dough”method to our dry corn flour method. Eventually, we began to build our own state-of-the-art tortilla plantsin certain major tortilla consumption markets. We have vertically integrated our operations by (i) building cornflour and tortilla manufacturing facilities; (ii) establishing cornpurchasing operations; (iii) launching marketing and advertising campaignsto develop brand name recognition; (iv) expanding distribution networksfor corn flour and tortilla products, and; (v) using our technology todesign and build proprietary corn flour, tortilla and tortilla chipmanufacturing machinery.

 

In September 1996, we combined ourU.S. corn flour milling operations with Archer-Daniels-Midland’s cornflour milling operations into a newly formed limited partnership, known asAzteca Milling, L.P., in which Gruma Corporation holds an 80% interest.  See “Item 10. Additional Information—Material Contracts.”

 

During2000, Gruma Corporation opened its first European tortilla plant in England,initiating our entry into the European market. During 2004 Gruma Corporation concluded two small acquisitions inEurope, a tortilla plant in Holland and a 51% ownership of a corn flour plantin Italy in an effort to strengthen our presence in that region.  During 2006, Gruma Corporation acquired acompany in England, which we believe will allow us to expand our productportfolio with new types of flat breads. In addition, Gruma Corporation also purchased the remaining 49%ownership interest in Nuova De Franceschi & Figli, a corn flourcompany based in Italy, in which we previously held a 51% ownershipinterest.  In April of 2010, weacquired 100% of the share capital of Altera I and Altera II, the leading producer of corn grits in Ukrainefor U.S.$9 million.  We believe thatthis acquisition in eastern Europe will enable GRUMA to continue its growthstrategy in emerging markets while securing future corn supply in that region.

 

28

----

Table of Contents

 

***Gruma Corporation***

 

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

 

*Principal Products*.  Mission Foods manufactures and distributes packaged corn and wheat tortillas and related products (which include tortilla chips) under the MISSION® and GUERRERO® brand names in the United States, as well as other minor regional brands.  By continuing to build MISSION® into a strong national brand for the general consumer market and GUERRERO® into a strong Hispanic consumer focused brand, Mission Foods expects to increase market penetration, brand awareness and profitability.  Azteca Milling manufactures and distributes corn flour in the United States under the MASECA® brand.

 

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

 

In the tortilla market, Mission Foods’ current marketing strategy is to increase market penetration by increasing consumer awareness of tortilla products in general, to expand into new regions and to focus on product innovation and customer needs.  Mission Foods promotes its products primarily through cooperative advertising programs with supermarkets as well as radio and television advertising, targeting both Hispanic and non-Hispanic populations.  We believe these efforts have contributed to greater consumer awareness.  Mission Foods also targets food service companies and works with restaurants, institutions and distributors to address their individual needs and provide them with a full line of products.  Mission Foods continuously attempts to identify new customers and markets for its tortillas and related products in the United States and, more recently, in Europe.

 

Azteca Milling distributes approximately 35% of the corn flour it produces to Mission Foods’ plants throughout the United States and Europe.  Azteca Milling’s third-party customers consist largely of other tortilla manufacturers, corn chip producers, retail customers and wholesalers.  Azteca Milling sells corn flour in various quantities, ranging from four-pound retail packages to bulk railcar loads.

 

We anticipate continued growth in the U.S. market for corn flour, tortillas, and related products.  We believe that the growing consumption of Mexican-style foods by non-Hispanics will continue to increase demand for tortillas and tortilla related products, particularly flour tortillas.  Also influential is the fact that tortillas are no longer solely used as ingredients in Mexican food; for example, the use of tortillas for wraps, which will continue to increase demand for tortillas.  Growth in recent years in the corn flour market is attributable to this increase of corn tortilla and tortilla chip consumption in the U.S. market as well as the conversion of tortilla and tortilla chip producers from the wet corn dough process to our dry corn flour method, the increase of Hispanic population, the consumption of tortillas and tortilla chips by the general consumer market, and stronger and increased distribution.

 

*Competition and Market Position*.  We believe the tortilla market is highly fragmented, regional in nature and extremely competitive.  Mission Foods’ main competitors are hundreds of tortilla producers who manufacture locally or regionally and tend to be sole proprietorships.  However, a few competitors have a presence in several U.S. regions.  In addition, a few large companies have tortilla manufacturing divisions that compete with Mission Foods, for example, Tyson, Bimbo, Hormel Foods, Olé Mexican Foods and General Mills.  We believe Mission Foods is one of the leading manufacturers and distributors of packaged tortillas and related products throughout the United States and Europe.

 

Competitors within the corn flour milling industry include Minsa and the corn flour milling divisions of Cargill.  Azteca Milling competes with these corn flour manufacturers in the United States primarily on the basis of superior quality, technical support, customer service and brand recognition.  However, we believe there is great potential for growth by converting tortilla and tortilla chip manufacturers that still use the traditional method to our corn flour method.  We believe Azteca Milling is one of the leading producers of corn flour in the United States.

 

29

----

Table of Contents

 

We believe there is a significant growth potential for tortillas in Europe, both in the retail and food service segments.  Approximately two-thirds of our production is allocated to food service providers and food processors, while the remaining one-third is for retail sales.  We believe we are one of the largest tortilla producers in Europe, and our main competitors in Europe are General Mills and Santa Maria.  Two or three new smaller players have entered tortilla production in Europe, operating in Germany, Benelux and the United Kingdom.

 

*Operation and Capital Expenditures*.  Annual total production capacity for Gruma Corporation is estimated at 2.1 million metric tons as of December 31, 2009, with an average utilization of 75% in 2009.  The average size of our plants measured in square meters is approximately 9,700 (about 105,000 square feet) as of December 31, 2009.  Capital expenditures for the past three years were U.S.$248 million, mostly for expansion and upgrades of existing facilities and the construction of a new tortilla plant in southern California.   In April of 2010, Gruma Internationl Foods acquired 100% of the share capital of Altera I and Altera II, the leading producer of corn grits in Ukraine for U.S.$9 million.  We believe that this acquisition in eastern Europe will enable GRUMA to continue its growth strategy in emerging markets while securing future corn supply in that region.  Gruma Corporation’s capital expenditures projected for 2010 will be approximately U.S.$39 million for maintenance of existing facilities and  manufacturing and technology upgrades.  These budgeted capital expenditures do not include any potential acquisitions.  Mission Foods produces its packaged tortillas and other related products at 18 manufacturing facilities worldwide.  Sixteen of these facilities are located in large population centers throughout the United States.  During the first quarter of 2009, Mission Foods closed three manufacturing facilities located in Las Vegas, Ft. Worth and El Paso.  Mission Foods has shifted production to other plants to achieve savings in overhead costs.  Mission Foods will consider reopening the Las Vegas and/or Ft. Worth plants should market demands require additional capacity.  During 2009, Mission Foods completed construction of an additional plant in Los Angeles, California that began production during 2010.  During the first quarter of 2010, Mission Foods closed an additional manufacturing facility located in Phoenix, Arizona.  Outside the United States, Mission Foods has two plants in England and one plant in The Netherlands.

 

Mission Foods is committed to offering the best quality products to its customers and uses the American Institute of Baking (AIB) food safety standards to measure and ensure food compliance with this commitment.  AIB is a corporation founded in 1919 by the North American wholesale and retail baking industries that is dedicated to protecting the safety of the food supply chain.  All of the Mission Foods manufacturing facilities worldwide have earned either a superior or excellent category rating from the AIB.  Most of Mission Foods’ U.S. plants have earned the AIB’s highest award, the combined AIB-HAACP certification, with the exception of the recently acquired plants in  Minnesota and California.  We anticipate these plants will complete their HAACP certification during the next year.  Besides the AIB, Mission Foods plants are regularly evaluated by other third party organizations, including the British Retail Consortium as well as customers.  Our plants in England and The Netherlands are also evaluated by other third party organizations such as the AIB, International Food Standards and British Retail Consortium.

 

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

 

*Seasonality*.  We believe there is no significant seasonality in our products, however part of our products tend to experience a slight volume increase during the summer months.  Tortillas and tortilla chips sell year round, with special peaks during the summer, when we increase our promotion and advertising taking advantage of several holidays and major sporting events.  Tortilla and tortilla chip sales decrease slightly towards the end of the year when many Mexicans go back to Mexico for the holidays.  Sales of corn flour fluctuate seasonally as demand is higher in the fourth quarter during the holidays because of the preparation of Mexican food recipes that are very popular during this time of the year.

 

*Raw Materials*.  Corn is the principal raw material used in the production of corn flour, which is purchased from local producers.  Azteca Milling buys corn only from farmers and grain elevators that agree to supply varieties of corn approved for human consumption.  Azteca Milling tests and monitors its raw material purchases for corn not 

 

30

----

Table of Contents

 

approved for human consumption, for certain strains of bacteria, fungi metabolites and chemicals.  In addition, Azteca Milling applies certain testing protocols to incoming raw materials to identify genetically modified products not approved for human consumption.

 

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

 

Corn flour for Mission Foods’ products is supplied by Azteca Milling and, 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 of wheat flat breads is purchased from third party producers at prices prevailing in the commodities markets.  Mission Foods believes the market for wheat flour is sufficiently large and competitive to ensure that wheat flour will be available at competitive prices to supply our needs.  Contracts for wheat flour supply are made on a short-term basis.

 

*Distribution*.  An important element of Mission Foods’ sales growth has been the expansion and improvement of its tortilla distribution network, including a direct-store-delivery system to distribute most of its products.  Tortillas and other freshly made products are generally delivered daily to customers, especially in retail sales and in regions where we have plants.  In regions where we do not have plants, there is no daily distribution and tortillas are sometimes sold refrigerated.  In keeping with industry practice, Mission Foods generally does not have written sales agreements with its customers.  Nevertheless, from time to time, Mission Foods enters into consumer marketing agreements with retailers, in which certain terms on how to market our products are agreed.  Mission Foods has also developed a food service 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 Azteca Milling is sold to tortilla and tortilla chip manufacturers and is delivered directly from the plants to the customer.  Azteca Milling’s retail customers are primarily serviced by a network of distributors, although a few large retail customers have their corn flour delivered directly to them from the plants.

 

**Mexican Operations**

** **

***Overview***

 

Our largest business in Mexico is the manufacture and sale of corn flour, which we conduct through our subsidiary GIMSA.  Through our association with Archer-Daniels-Midland, we have also entered the wheat milling business in Mexico through Molinera de México.  Our other subsidiaries engage in the manufacturing and distribution of packaged tortillas and other related products in northern Mexico, conduct research and development regarding corn flour and tortilla manufacturing equipment, produce machinery for corn flour and tortilla production and construct our corn flour manufacturing facilities.

 

***GIMSA—Corn Flour Operation***

 

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

 

In 2009, GIMSA had net sales of Ps.10,348 million.  We believe GIMSA is one of the largest corn flour producers in Mexico.  GIMSA estimates that its corn flour is used in one third of the corn tortillas consumed in Mexico.  It sells corn flour in Mexico mainly under the brand name MASECA®.  MASECA®, a standard fine-textured, white corn flour is a ready-mixed corn flour that becomes a dough when water is added.  This corn dough 

 

31

----

Table of Contents

 

can then be pressed to an appropriate thickness, cut to shape and cooked to produce tortillas and similar food products.

 

GIMSA produces over 40 varieties of corn flour for the manufacture of different food products which are developed to meet the requirements of our different types of customers according to the kind of tortillas they produce and markets they serve.  It sells corn flour to tortilla and tortilla chip manufacturers as well as in the retail market.  GIMSA’s principal corn flour product is MASECA®.

 

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

 

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

 

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

 
| ** ** | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2007**                         | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** ** | ** ** | **Tons**                         | ** ** | **%** | ** ** | **Tons** | ** ** | **%** | ** ** | **Tons** | ** ** | **%** | ** ** |
| Corn Flour |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Bulk       |       | 1,352,109                        |       | 77 |   | 1,417,550 |   | 78 |   | 1,451,014 |   | 77 |   |
| Retail     |       | 265,825                          |       | 15 |   | 268,091 |   | 15 |   | 289,731 |   | 15 |   |
| Tortillas  |       | 3,710                            |       | — |   | — |   | — |   | — |   | — |   |
| Other      |       | 131,716                          |       | 8 |   | 131,930 |   | 7 |   | 133,556 |   | 7 |   |
| Total      |       | 1,753,360                        |       | 100 |   | 1,817,571 |   | 100 |   | 1,874,301 |   | 100 |   |

 

Retail sales of corn flour are channeled to two distinct markets:  urban centers and rural areas.  Sales to urban consumers are made mostly through supermarket chains that use their own distribution networks to distribute MASECA® flour or through wholesalers who sell the product to smaller grocery stores throughout Mexico.  Sales to rural consumers are made principally through the Mexican government’s social and distribution program *Distribuidora Conasupo, S.A.*, or DICONSA, which consists of a network of small government-owned stores and which supplies rural areas with basic food products.

 

Mexico’s tortilla industry is highly fragmented, consisting mostly of *tortillerías*, many of which continue to utilize, what is in our opinion, the relatively inefficient wet corn dough method of tortilla production.  We estimate that the traditional wet corn dough method accounts for approximately half of all tortillas produced in Mexico.  Tortilla producers that do not utilize corn flour buy the wet dough from dough producers or buy and mill their own corn and produce tortillas themselves.

 

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

 

32

----

Table of Contents

 

We believe in the benefits of our dry corn flour method and also believe that we have substantial opportunities for growth by encouraging a transition to our method.  Corn flour is primarily used to produce corn tortillas, a principal staple of the Mexican diet.  The tortilla industry is one of the largest industries in Mexico as tortillas constitute the single largest component of Mexico’s food industry.  However, there is still reluctance to abandon the traditional practice, particularly in central and southern Mexico, because corn dough producers and/or tortilla producers using the traditional method incur lower expenses by working in an informal economy.  Additionally, such producers are generally not required to comply with environmental regulations, which also represent savings for them.  To the extent regulations in Mexico are enforced and we and our competitors are on the same footing, we expect to benefit from these developments.

 

GIMSA has embarked on several programs to promote corn flour sales to tortilla producers and consumers.  GIMSA offers incentives to potential customers, such as small independent *tortillerías*, to convert to the corn flour method from the traditional wet corn dough method.  The incentives GIMSA offers include new, easy to use equipment designed specifically for small-volume users, financing, and individualized training.  For example, in order to assist traditional tortilla producers in making the transition to corn flour, GIMSA also sells specially designed mixers made by Tecnomaíz, S.A. de C.V., or Tecnomaíz, one of our research and development subsidiaries.  For more information about our research and development department, see “—Miscellaneous—INTASA—Technology and Equipment Operations.”  GIMSA also helps its *tortillería* customers to improve sales by directing consumer promotions to heighten the desirability of their products and increase consumption, which, in turn, should increase corn flour sales and our brand equity.  These efforts to improve sales and strengthen our brand equity by better positioning us among consumers, include prime time advertising on television as well as radio, magazine and billboard advertising.  From time to time, the Company undertakes the following ongoing initiatives in an effort to improve operational efficiency, increase consumption of corn flour, and improve on its successful business model to attract new customers:

 

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

 

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

 

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

 

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

 

GIMSA engages in an ongoing national marketing campaign in Mexico to emphasize the benefits and nutritional value of tortillas made with 100% MASECA® corn flour.  This campaign targets both consumption of tortillas made by GIMSA’s customers and consumption of its retail corn flour packages sold directly to consumers by repositioning the use of corn flour not only for making tortillas but for a wide variety of foods which are part of the Mexican diet.  We believe this campaign has helped to increase the recognition of the MASECA® brand, created a greater awareness about tortillas made with 100% MASECA® corn flour and created a greater awareness of the nutritional value of tortillas made of natural ingredients.  We believe this campaign has also helped us to position MASECA® corn flour as a nutritional product which can be used in the production of tortillas and other foods.  In addition, we believe that this campaign has also helped contribute to the perception that tortillas are a healthy alternative 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 from the many *tortillerías* that produce their own wet corn dough on their premises.  Our estimates indicate that about half of tortilla producers continue to use the traditional wet corn dough method.

 

GIMSA’s biggest challenge in increasing its market share is the prevalence of the traditional method.  In the corn flour industry, GIMSA’s principal competitors are Grupo Minsa, S.A. de C.V. and a few regional corn flour producers.  OPTIMASA, a subsidiary of Cargill de México, built a corn flour plant and began to offer corn flour in the central region of Mexico, therefore becoming a new competitor for GIMSA since 2005.  We compete against 

 

33

----

Table of Contents

 

other corn flour manufacturers on the basis of quality, brand recognition, technology, customer service and nationwide coverage.  We believe that GIMSA has certain competitive advantages resulting from its proprietary technology, greater economies of scale and broad geographic coverage, which may provide it with opportunities to more effectively source raw materials and reduce transportation costs.

 

*Operations and Capital Expenditures*.  GIMSA currently owns 19 corn flour mills, all of which are located throughout Mexico, typically within corn growing regions and those of large tortilla consumption.  In 2007, GIMSA decided to divest its small tortilla operations and sold it to third parties.  One of GIMSA’s plants (Chalco) is temporarily closed.  The Chalco plant has been inactive since October 1999.  GIMSA has temporarily shifted production to other plants to achieve savings in overhead costs.  These idled assets are not being depreciated since the carrying value is expected to be recovered and the remaining useful life is maintained.  GIMSA will consider reopening this plant should market demands require additional capacity.

 

In recent years, GIMSA’s capital expenditures were primarily used to update technology and corn flour production processes and to a lesser extent for acquisitions.  In 2006, GIMSA began capacity expansions at its Mérida and Mexicali plants.  GIMSA spent U.S.$58 million, for these purposes from 2007 to 2009.  GIMSA currently projects total capital expenditures during 2010 of approximately U.S.$20 million, which will be used primarily for upgrading production equipment and acquiring transportation equipment.  As of December 31, 2009, on average, the size of our plants measured in square meters was approximately 20,315 (approximately 218,700 square feet).

 

Pursuant to an agreement between GIMSA and *Investigación de Tecnología Avanzada*, or INTASA, our wholly-owned subsidiary, INTASA provides technical assistance to each of GIMSA’s operating subsidiaries for which each pays to INTASA a fee equal to 0.5% of its consolidated net sales.  Each of GIMSA’s corn flour facilities uses proprietary technology developed by our technology and equipment operations.  For more information about our in-house technology and design initiatives, see “—Miscellaneous—INTASA—Technology and Equipment Operations.”

 

*Seasonality*.  The demand for 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 more inclined to purchase corn and use the traditional method.  In the months immediately preceding such harvests, corn is more costly and in shorter supply and more tortilla producers then employ the corn flour method of production.

 

*Raw Materials*.  Corn is the principal raw material required for the production of corn flour, and constituted approximately 62% of GIMSA’s cost of sales for 2009.  We purchase corn primarily from Mexican growers and grain elevators, and from world markets at international prices under import permits granted by the Mexican government.  All of our domestic corn purchases are made on a spot basis pursuant to short-term contractual arrangements, some of which are in the form of oral agreements entered into at the beginning of the harvest.  Compañía Nacional Almacenadora, S.A. de C.V., a subsidiary of GIMSA, contracts for and purchases the corn, and also monitors, selects, handles and ships the corn.

 

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

 

Traditionally, domestic corn prices in Mexico tend to be higher than those abroad, and typically follow trends in the international market only when corn prices are increasing.  During most periods, the price at which GIMSA purchases corn depends on the price of corn in the international market.  As a result, corn prices are sometimes unstable and volatile.  For more information regarding the government’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 of Trade and the average price of Mexican corn increased dramatically due to a number of factors, including the increased use of corn in the manufacture of ethanol, a substitute for gasoline, as well as other bio-fuels.  Consequently, the price of corn flour and corn tortillas, the main food staple in Mexico, increased due to such increases in international and domestic 

 

34

----

Table of Contents

 

prices of corn.  In order to stabilize the price of tortillas and provide Mexican families with a consistent supply of corn, corn flour and tortillas at a reasonable price, the Mexican government promoted two agreements among the various 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 the provisions of the first agreement through August 15, 2007.  The term of the second agreement was extended subsequently through December 31, 2007.  Although the second agreement expired at the end of 2007, the parties to that agreement voluntarily continued to operate under its terms until October 2008.

 

Upon the expiration of the abovementioned agreements, the Mexican government created a program to support the corn flour industry (*Programa de Apoyo a la Industria de la Harina de Maíz or PROHARINA*) published in October of 2008.  This program aimed to mitigate the impact of the rise in international corn prices through price supports provided through the corn flour industry designed to aid the consumer.  The total amount of subsidized funds allotted to the Company by the Mexican government under this program in 2009 totaled Ps.1,465 million.  The Mexican government cancelled the PROHARINA program in December 2009.  As a result of the cancellation of this program, we were required to increase the prices of our products to reflect such additional costs.  **  **There can be no assurance that we will maintain our eligibility for other programs like PROHARINA subsidies, or that the Mexican government will not institute price controls or other actions on the products we sell, which could adversely affect our financial condition 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 and resources used in the production of corn flour are packaging materials, water, lime, additives and energy.  GIMSA believes that its sources of supply for these materials and resources are adequate, although energy, additives and packaging costs tend to be volatile.

 

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

 

***Molinera de México—Wheat Flour Operation***

 

*Principal Products*.  In 1996, in connection with our association with Archer-Daniels-Midland, we entered the wheat milling market in Mexico by acquiring a 60% ownership interest in Archer-Daniels-Midland’s wheat flour operation, Molinera de México.  See “Item 10.  Additional Information—Material Contracts.”  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 2009, approximately 88% of Molinera’s wheat flour production was sold in bulk and 12% was sold for the retail segment.  Most of the bulk sales are made to thousands of bakeries and, to a lesser extent, to cookie and pasta manufacturers.  Most of the retail sales are made to large supermarkets and wholesalers throughout Mexico.  Through wholesalers, our products are distributed to small grocery stores.

 

Our marketing strategy depends on the type of customer and region.  Overall, our aim is to offer products according to customers’ specifications as well as technical support.  We are trying to increase our market share in bakeries by offering products with consistent quality.  In the retail segment we target small grocery stores through wholesalers, and supermarkets through centralized and national level negotiations.  We are focusing on improving customer service, continuing to increase our distribution of products to supermarkets’ in-store bakeries, and developing new types of pre-mixed flours for the supermarket in-store bakery segment.  We provide direct delivery to supermarkets, supermarkets’ in-store bakeries, wholesalers, industrial customers and some large bakeries.  Most small bakeries and small grocery stores are served by wholesalers.

 

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

 

35

----

Table of Contents

 

*Operations and Capital Expenditures*.  We own and operate nine wheat flour plants, including one of which we hold only a 40% ownership interest.  The facilities’ average utilization is estimated at 77% for 2009.  On average, the size of our plants measured in square meters is approximately 11,300 (approximately 121,200 square feet) as of December 31, 2009.

 

Capital expenditures from 2007 through 2009 amounted to U.S.$10 million.  Molinera de México’s capital expenditures in 2010 are projected to be U.S.$4 million, which will be used primarily for general upgrades.

 

*Seasonality*.  Molinera’s sales are subject to seasonality.  Higher sales volumes are achieved in the fourth and first quarters during the winter, when we believe per capita consumption of wheat-based products, especially bread and cookies, increases due in part to the celebration of holidays occurring during these quarters.

 

*Raw Materials*.  Wheat is the principal raw material required for the production of wheat flour.  Molinera de México purchases approximately 53% of its wheat from Mexican growers, and 47% from world markets.  Molinera de México purchases from local farmers, farmers associations and trading companies.  In the case of domestic wheat, purchases are made pursuant to short-term oral arrangements, the terms of which are negotiated at the time of execution.  These arrangements are usually made approximately two months in advance of the beginning of the harvest.  In the case of imported wheat, which we import from the United States and Canada through several trading companies, purchases are made based on short-term requirements, with the aim of maintaining low levels of inventories.

 

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

 

**Central American Operations**

 

***Overview***

 

In 1972, we entered the Costa Rican market.  Our operations since then have expanded into Guatemala, Honduras, El Salvador and Nicaragua, as well as Ecuador,  which we include as part of our Central American operations.

 

***Gruma Centroamérica***

 

*Principal Products*.  Gruma Centroamérica produces corn flour, and to a lesser extent tortillas and snacks.  We also cultivate and sell hearts of palm and process and sell rice.  We believe we are one of the largest corn flour producers in the region.  We sell corn flour under the MASECA®, TORTIMASA®, MASARICA® and MINSA® brands.  In Costa Rica, we sell packaged tortillas under the TORTI RICA® and MISIÓN® brands.  We operate a Costa Rican snack operation which manufactures tortilla chips, potato chips and similar products under the TOSTY®, RUMBA® , and LA TICA® brand.  Hearts of palm are exported to numerous European countries as well as the United States, Canada, Chile and México.

 

*Sales and Marketing*.  The largest portion, 169,353 tons or 82%, of Gruma Centroamérica’s sales volume in 2009 derived from the sale of corn flour.

 

Gruma Centroamérica corn flour bulk sales are oriented predominantly to small tortilla manufacturers through direct delivery and wholesalers.  Supermarkets make up the customer base for retail corn flour.  Bulk sales volume represented approximately 68% and retail sales represented approximately 32% of Gruma Centroamérica’s corn flour sales volume during 2009.

 

*Competition and Market Position*.  We believe that we are one the largest corn flour producers in Central America based on revenues and sales volume.  We believe that there is significant potential for growth in Central America as corn flour is used in only approximately 19% of all tortilla production; the majority of tortilla manufacturers use the wet corn dough method.  Additionally, we believe we are one of the largest producers of tortillas, and snacks in Costa Rica.

 

36

----

Table of Contents

 

Within the corn flour industry, the brands of our main competitors are: Del Comal, Doña Blanca, Selecta,  Bachoza and Instamasa.  However, one of our main growth potentials is to convert tortilla manufacturers that still use the traditional method to our corn flour method.

 

*Operations and Capital Expenditures*.  We had an annual installed production capacity of 307,000 tons for corn flour and other products as of December 31, 2009, with an average utilization of approximately 60% during 2009.  We operate one corn flour plant in Costa Rica, Honduras, El Salvador, and Guatemala for a total of four plants throughout the region.  In Costa Rica, we also have one plant producing tortillas, one plant producing snacks, one plant processing hearts of palm and one plant processing rice.  In Nicaragua and Honduras we have small tortilla plants, in Guatemala we have a small plant that produces snacks and in Ecuador we lease a facility which processes hearts of palm.  On average, the size of our plants measured in square meters is approximately 73,900 (approximately 243,000 square feet) as of December 31, 2009.

 

During 2007, 2008 and 2009 most of our capital expenditures were oriented to the expansion of a corn flour plant in Honduras and the construction of corn silos in Guatemala.  Total capital expenditures for the past three years was approximately U.S.$40 million.  Capital expenditures for 2010 are projected to be U.S.$4 million, which will be used primarily for general manufacturing upgrades .

 

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

 

*Raw Materials*.  Corn is the most important raw material needed in our operations and is obtained primarily from imports from the United States and from local growers.  All countries in which we have corn flour plants do not restrict corn import permits granted by the United States.  Price fluctuation and volatility are subject to domestic conditions, such as annual crop results and international conditions.

 

**Gruma Venezuela**

** **

***Overvie***w

 

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

 

***In April of 2006, we entered into a series of transactions to: (i) purchase an additional 10% ownership interest in DEMASECA at a price of U.S.$2.6 million; (ii) purchase a 2% stake in MONACA from Archer-Daniels-Midland at a price of U.S.$3.28 million, and; (iii) sell a 3% interest in DEMASECA to Archer-Daniels-Midland at a price of U.S.$780,000.***

 

***Additionally, in April of 2006, we also entered into a contract to sell a 40% stake in MONACA to Rotch Energy Holdings, N.V. (“Rotch”), a controlled entity of our former indirect partner in DEMASECA, Ricardo Fernández Barrueco, at a price of U.S.$65.6 million.  Pursuant to this agreement, Rotch would not receive title, or have voting or other corporate rights with respect to any unpaid equity interests until the purchase price was paid.  The last payment made by Rotch under this agreement was in April of 2007.  The transaction was expected to be completed in December of 2009.  However, as of December 31, 2009, we had only received U.S.$39.6 million dollars corresponding to a 24.14% indirect interest in MONACA.  Consequently, the Company decided to terminate the transaction.  As a result, the Company will not receive any additional payments or sell additional equity interests in connection with this transaction beyond the 24.14% interest in MONACA that was purchased and paid for by Rotch.***

 

***In June of 2008, Rotch provided notice to the Company that it had transferred its equity interest in MONACA and DEMASECA, including all economic rights to distibutions and voting rights (the “Venezuelan Equity Interests”), to Banco Interacciones, S.A. Trust No. 6460 (the “Interacciones Trust”) for the benefit of a Mexican financial institution (the “Rotch Lender”). The interest was transferred in connection with a***

 

37

----

Table of Contents

 

***credit facility provided to a controlled entity of Rotch by an affiliate of the Rotch Lender.  Pursuant to the Interacciones Trust, the Rotch Lender retains the right to exercise and freely transfer the Venezuelan Equity Interests in the event of a default under the credit facility.***

 

As a result of the aforementioned transactions, we currently own 72.86% in MONACA, the Interacciones Trust indirectly owns 24.14% and Archer-Daniel-Midland owns the remaining 3% in MONACA.  In addition, we own 57% in DEMASECA, the Interacciones Trust indirectly owns 40% and Archer-Daniels-Midland owns the remaining 3% in DEMASECA. MONACA and DEMASECA are collectively referred to as “Gruma Venezuela.”

 

On May 12, 2010 the Venezuelan government announced the MONACA Expropriation through the Expropriation Decree.  Pursuant to the Expropriation Decree, the government of Venezuela has instructed government officials to undertake the necessary actions to execute the MONACA Expropriation.  As of this date,  the Venezuelan government has not yet taken operational or managerial control of MONACA.  Pending the resolution of our negotiations with the government of Venezuela, Gruma Venezuela continues to operate in the ordinary course of business. See “Item 3.  Key Information Risk Factors—Risks Related to Venezuela—One of our Subsidiaries in Venezuela is Currently Involved in Expropriation Proceedings and our Remaining Subsidiary in Venezuela is Subject to Expropriation

 

***DEMASECA and MONACA***

 

*Principal Products*.  Gruma Venezuela produces and distributes corn flour as well as wheat flour, rice, oats and other products.  We sell corn flour under the brand names JUANA® and DEMASA®.  We sell wheat flour under the ROBIN HOOD®, FLOR DE TRIGO® and POLAR® brand, rice under the MONICA® brand and oats under the LASSIE® brand.

 

*Sales and Marketing*.  Venezuelans use corn flour to produce and consume *arepas*, which are made at home or in restaurants for household consumption rather than manufactured by specialty shops or other large manufacturers.  In 2009, we sold corn flour only in the retail market in one kilogram bags to independent distributors, supermarkets, wholesalers, and governmental social welfare and distribution programs.  We also sell wheat flour both in bulk and retailer, distributing it in 45 kilogram bags and in one kilogram bags, respectively.  Bulk sales to customers such as bakeries made up approximately 74.2% of our total wheat flour sales volume in 2009.  The remaining 25.8% of sales in 2009 were in the retail market, which includes independent distributors, supermarkets and wholesalers.

 

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

 

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

 

*Operation and Capital Expenditures*.  We operate five corn flour plants, six wheat flour plants, three rice plants, one pasta plant, and two plants that produce oats and spices in Venezuela with a total annual production capacity of 909,307 tons as of December 31, 2009 and an average utilization of approximately 67% during 2009.  The corn flour plant, which was considered as temporarily idle as of December 31, 2007, was used for the construction of a wheat flour mill.  However, two rice plants, representing 70,890 tons, are temporarily idle.  On average, the size of our plants measured in square meters is approximately 9,080 (approximately 97,700 square feet) as of December 31, 2009.

 

Capital expenditures for the past three years were U.S.$51 million.  Capital expenditures for 2010 were budgeted to be U.S.$18 million and expected to be focused on upgrades for manufacturing and distribution facilities and information technologies, to be paid for with funds generated from our Venezuelan subsidiaries.  U.S.$2.2 million were applied to capital expenditures during the first quarter of 2010.

 

*Seasonality*.  Sales fluctuate seasonally as demand for flour-based products is lower during those months when most schools are closed for vacation.  In addition, sales are higher in November as customers build inventory to satisfy increased demand during the holiday season in December.

 

38

----

Table of Contents

 

*Raw Materials*.  Cornand wheat 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 98.6% of our wheat is purchased from the U.S. andCanada, and the remaining 1.4% from México, with its availability and pricevolatility dependent upon those markets. We do not engage in any type of hedging activity for our supplies sinceexchange rate policies and country risk for Venezuela constrain our capacity totransfer funds abroad in order to fund any hedging strategy.

 

**Miscellaneous—INTASA—Technologyand Equipment Operations**

** **

We have developed our own technology operationssince our founding.  Since 1976 ourtechnology and equipment operations have been conducted principally throughINTASA, which has two subsidiaries:  Tecnomaíz,S.A. de C.V., or Tecnomaíz, and Constructora Industrial Agropecuaria, S.A. deC.V., or CIASA.  The principal activityof these subsidiaries 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 the tortilla industry includes a range ofcapacities, from machines that make 15 to 300 corn tortillas per minute todough mixers. The equipment is sold under the TORTEC® and BATITEC® trademarksin Mexico.  Tecnomaíz also manufactureshigh volume energy efficient corn tortilla, wheat tortilla and tortilla chipsystems that can produce up to 1,200 corn tortillas per minute, 600 wheattortillas per minute and 3,000 pounds of chips per hour.

 

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.

 

***GFNorte Investment***

*** ***

As of December 31, 2009, 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 8.7% or Ps.3,837 millionof our total assets.  GFNorte’s resultsof operations are accounted for in our consolidated results of operations usingthe equity method of accounting.  For theperiod ended December 31, 2009, we received Ps.32 million in dividends inrespect of our investment in GFNorte.

 

**REGULATION**

** **

**MexicanRegulation**

** **

***Corn CommercializationProgram***

*** ***

To support the commercialization of corn for Mexicancorn growers, Mexico’s Secretary of Agriculture, Livestock, Rural Development,Fisheries and Food Ministry (*Secretaría de Agricultura,Ganadería, Desarrollo Rural, Pesca y Alimentación*, or SAGARPA),through the Agricultural Incentives and Services Agency (*Apoyos yServicios a la Comercialización Agropecuaria*, or ASERCA), agovernment agency founded in 1991, implemented a program designed to promotecorn sales in certain regions of Mexico. The program includes the following objectives:

 

·                  Support corn growers by setting target pricesand paying the difference versus market price.

 

·                  Support corn growers by providing a varietyof economic supports to reduce the cost of producing corn crops.

 

·                  Support a portion of the freight expensesrelated to the distribution of corn surpluses to regions away from the corngrowing 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 in 

 

39

----

Table of Contents

 

regions where there is not enough corn available and that are distantfrom the regions where corn is grown.

 

To the extent that this or other similar programsare canceled by the Mexican government, we may be required to incur additionalcosts in purchasing corn for our operations, and therefore we may need toincrease the prices of our products to reflect such additional costs.

 

***Corn Flour Consumer AidProgram***

*** ***

Since the end of 2006, the price of corn set by theChicago Board of Trade and the average price of Mexican corn increaseddramatically due to a number of factors, including the increased use of corn inthe manufacture of ethanol, a substitute for gasoline, as well as otherbio-fuels.  Consequently, the price ofcorn flour and corn tortillas, the main food staple in Mexico, increased due tosuch increases in 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 January 15, 2007 through April 30, 2007.  On April 25, 2007, the Mexicangovernment announced a second agreement that extended the provisions of thefirst agreement through August 15, 2007. The term of the second agreement was extended subsequently through December 31,2007.  Although the second agreementexpired at the end of 2007, the parties to that agreement voluntarily continuedto operate under its terms until October  2008.

 

Upon the expiration of the abovementionedagreements, the Mexican government created a program to support the corn flourindustry (*Programa de Apoyo a la Industria de la Harina deMaíz or PROHARINA*) in October of 2008.  This program aimed to mitigate the impact ofthe rise in international corn prices through price supports designed to aidthe consumer and provided through the corn flour industry.  Flour manufacturers were entitled to receivea subsidy conditioned on selling the corn flour below a maximum price set bythe Mexican government.  Beginning in June 2009,the maximum price per kilogram of corn flour established to receive thegovernment subsidy was Ps.5.875.  Thetotal amount of subsidized funds allotted to the Company by the Mexicangovernment under this program in 2009 totaled Ps.1,465 million.  However, the Mexican government cancelled thePROHARINA program in December 2009.

 

As a result of the cancellation of this program bythe Mexican government in December of 2009, we were required to increasethe prices of our products to reflect such additional costs.  In addition, there can be no assurance thatwe will maintain our eligibility for other programs similar to PROHARINA thatmay be implemented, or that the Mexican government will not institute pricecontrols or other actions on the products we sell, which could adversely affectour financial condition and results of operations.

 

***Environmental Regulations***

*** ***

Our Mexican operations are subject to Mexicanfederal, state and municipal laws and regulations relating to the protection ofthe environment.  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 Medio Ambiente y RecursosNaturales, or Ministry of the Environment and Natural Resources, or SEMARNATand the *Ley Federal de Derechos* or the MexicanFederal Law of Governmental Fees.  Underthe Mexican Environmental Law, each of our facilities engaged in the productionof corn flour, wheat flour, and packaged tortillas is required to obtain anoperating license from state environmental regulations upon initiatingoperations, and then periodically submit a certificate of operation to maintainthe operating license.  Furthermore, theMexican Federal Law of Governmental Fees requires that Mexican manufacturingplants pay a fee for water consumption and the discharge of residual wastewater to drainage, whenever the quality of such water exceeds mandatedthresholds.  Rules have been issuedconcerning 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.

 

40

----

Table of Contents

 

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

 

***Competition Regulations***

*** ***

The *Ley Federal de CompetenciaEconómica* or 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 through Presidential decree, andestablished the *Comisión Federal de Competencia*,or Federal Competition Commission, to enforce the law.  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, and we do not believe that this legislation will have amaterial adverse effect on our business operations.

 

**U.S. Federaland State Regulations**

** **

Gruma Corporation is subject to regulation byvarious federal and state agencies, including the Food and Drug Administration,the Occupational Safety and Health Administration, the Federal TradeCommission, the Environmental Protection Agency and the Texas Department ofAgriculture.  We believe that we are incompliance in all material respects with all environmental and other legalrequirements.  Our food manufacturing anddistribution facilities are subject to periodic inspection by various public healthagencies, and the equipment utilized in these facilities must generally begovernmentally approved prior to operation.

 

**EuropeanRegulation**

** **

We are subject to regulation in each country inwhich we operate in Europe.  We believethat we are currently in compliance with all applicable legal requirements inall material respects.

 

**CentralAmerican and Venezuelan Regulation**

** **

Gruma Centroamérica and Gruma Venezuela are subjectto regulation 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.  See “Item 3. RiskFactors—Risks Related to Venezuela—Venezuela Presents Significant EconomicUncertainty and Political Risk, Which May in the Future Have an AdverseImpact on Our Operations and Financial Performance,” and “—One of ourSubsidiaries in Venezuela is Currently Involved in Expropriation Proceedingsand our Remaining Subsidiary in Venezuela is Subject to Expropriation.”

 

**Asiaand Oceania Regulation**

** **

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

 

**ITEM4A.       Unresolved Staff Comments.**

** **

**Notapplicable.**

 

41

----

Table of Contents

 

**ITEM5.**                             Operating and Financial Review andProspects.

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.**

** **

*You should read the following discussion in conjunction with ouraudited consolidated financial statements and the notes thereto containedelsewhere herein.  Our auditedconsolidated financial statements have been prepared in accordance with MexicanFRS, which differ in some significant respects from U.S. GAAP.  See Note 21 to our audited consolidatedfinancial statements for information related to the nature and effect of suchdifferences and a quantitative reconciliation to U.S. GAAP of our majoritynet income and stockholders’ equity.  Formore information about our financial statements in general, see “Presentationof Financial Information” and “—Liquidity and Capital Resources—Indebtedness.”*

 

**Overviewof Accounting Presentation**

** **

Mexican FRS require that financial statementsrecognize the effects of inflation based on the economic environment of thecountries where the Company and its subsidiaries operate, in accordance withMFRS B-10 issued by CINIF.  Unlessotherwise stated herein, the consolidated financial statements and otherfinancial data in this Annual Report as of December 31, 2008 and 2009 havebeen prepared based on the modified historical cost model, as described in Note2-E to our audited consolidated financial statements, while prior periods havebeen restated in pesos of constant purchasing power as of December 31,2007.

 

***Effects of Inflation***

*** ***

As the Mexican economy experienced significantlevels of inflation prior to 2000, we were required under Mexican accountingBulletin B-10 “Accounting recognition of the effects of inflation on financialinformation”, in effect until December 31, 2007 to recognize the effectsof inflation in our financial statements presenting our financial informationin inflation adjusted monetary units to allow for more accurate comparisons offinancial line items over time and to mitigate the distortive effects ofinflation on our financial statements.

 

Starting January 1, 2008, we adopted theprovisions contained in the new MFRS B-10 “Effects of Inflation,” whichreplaced Mexican accounting Bulletin B-10. This standard establishes the guidelines for recognizing the effects ofinflation based on the inflationary environment of the country.  According to the provisions of MFRS B-10, aninflationary environment is present when cumulative inflation of the threepreceding 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 economic environmentin Mexico in 2008 and 2009 has been qualified as non-inflationary due to acumulative inflation for the three years preceding the years ended December 31,2009 and 2008 of 15.01% and 11.56%, respectively, and did not exceed 26%.  In addition, MFRS B-10 eliminates thereplacement cost and specific indexation methods for inventories and fixedassets, respectively, and provided an option for the accounting treatment ofthe result from holding non-monetary assets recognized by an entity asaccumulated other comprehensive income or loss under previous guidelines byeither recycling this result from stockholders’ equity to income as it isrealized, or reclassifying the outstanding balance of such result to retainedearnings in the period in which this standard became effective.  The Company elected to reclassify to retainedearnings the initial accumulated gain or loss from holding non-monetaryassets.  Accordingly, the financialstatements as of December 31, 2008 and 2009 have been presented based onthe modified historical cost model, as described in Note 2-E to our auditedconsolidated financial statements (that is, effects of transactions recognizedas of December 31, 2007 are expressed in Mexican pesos of constantpurchasing power at that date, and the effects of transactions that occurredafter that date are expressed in nominal Mexican pesos), while prior periodsare expressed in constant Mexican pesos, as of December 31, 2007.

 

Starting January 1, 2008, the Company adoptedthe provisions contained in the new MFRS B-15 “Foreign Currency Translation.”  Based on the new standard, the financialstatements of the foreign subsidiaries are translated to Mexican pesosdepending on the economic environment in which the subsidiary operates, asfollows:

 

42

----

Table of Contents

 

Non-inflationary economicenvironment:

 

·                                          As of December 31, 2008and 2009, assets and liabilities are translated to Mexican pesos using theyear-end exchange rate of Ps. 13.83 and Ps.13.07 to the U.S. dollar,respectively.

 

·                                          As of December 31,2007, stockholders’ equity was translated to Mexican pesos using the exchangerate at that 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 as of December 31,2008 and 2009 was Ps.11.21 and Ps.13.57, respectively.

 

·                                          Revenues, costs and expensesfor the years 2008 and 2009 are translated to Mexican pesos using thehistorical average exchange rate.  Theaverage exchange rates were Ps.11.21 and Ps.13.57, respectively.

 

·                                          The effects of translationare recognized as a component of stockholders’ equity entitled “Foreigncurrency translation adjustments.”

 

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 financialstatements are translated to Mexican pesos as follows:

 

·                                          As of the years ended December 31,2008 and December 31, 2009, assets, liabilities and stockholders’ equityare translated to Mexican pesos using the year-end exchange rate of Ps.13.83and Ps.13.07, respectively.

 

·                                          Revenues, costs and expensesfor the year 2008 and 2009 are translated to Mexican pesos using the year-endexchange rates of Ps.13.83 and Ps.13.07, respectively.

 

·                                          The changes are recognizedby the Company as a component of stockholders’ equity entitled “Foreigncurrency translation adjustments”

 

***Effects of Devaluation***

*** ***

Because a significant portion of our net sales aregenerated in U.S. dollars, changes in the peso/dollar exchange rate canhave a significant effect upon our results of operations as reported inpesos.  When the peso depreciates againstthe U.S. dollar, Gruma Corporation’s net sales in U.S. dollarsrepresent a larger portion of our net sales in peso terms than when the pesoappreciates against the U.S. dollar. And when the peso appreciates against the dollar, Gruma Corporation’snet sales in U.S. dollars represent a smaller portion of our net sales inpeso terms than when the peso depreciates against the dollar.  For a description of the peso/dollar exchangerate see “Item 3.  KeyInformation—Exchange Rate Information.”

 

On January 8, 2010, theVenezuelan government announced the devaluation of its currency and established a two tier exchangestructure.  Pursuant to ExchangeAgreement No.14, the official exchange rate of the Venezuelan bolívar (“Bs.”) has been devalued from Bs.2.15 to eachU.S. dollar to 4.30 for non-essential goods and services and to 2.60 foressential goods.  The exchangerate of Bs.2.60 per U.S. dollar applies to imports of certain essential goods,including food, health care items, books and supplies for schools, machinery,equipment, scientific and technological items, in accordance with thecommercial policy established by the President of Venezuela.  Given that there was no indication of a lackof exchangeability of the bolívar at December 31, 2009 the devaluation,which became effective on January 11, 2010, is considered a subsequentevent for purposes of the 2009 financial statements.  As described in Note 20 to our auditedconsolidated financial statements, based on the Company’s foreign currencyposition as of December 31, 2009, the new exchange rates and managementinterpretations, the estimated financial effect resulting from the issuance ofthis exchange agreement for those items that management expects will be settledusing the new exchange rates will be an increase of the monetary assetsdenominated in foreign currency (other than bolívars) of Bs.8,083 and anestimated increase of the monetary liabilities denominated 

 

43

----

Table of Contents

 

in foreign currency (otherthan bolívars) of Bs.29,674, resulting in an estimated net exchange loss ofBs.21,592, which was recognized in January 2010. At December 31,2009, our investments in certain debt instruments generate income, after takinginto account the new exchange rate of Bs.2.60 per U.S. dollar, of Bs.4,383,which was also recognized in January 2010. Additionally, the conversion ofthe financial position and results of operations of our Venezuelan subsidiariesusing the exchange rate of Bs.4.30 per U.S. dollar will result in a decrease ofapproximately 50% of the value in Mexican pesos of these subsidiaries forconsolidation purposes.

 

In addition to the above, our net income may be affectedby changes in our foreign exchange gain or loss, which may be impacted bysignificant variations in the peso/dollar exchange rate.  During 2007, we recorded a net foreignexchange gain of Ps.72 million. During 2008, we recorded a net foreign exchange gain ofPs.256 million.  During 2009, werecorded a net foreign exchange gain of Ps.755 million.

 

**CriticalAccounting Policies**

** **

Management’s Discussion and Analysis of FinancialCondition and Results of Operations discusses our consolidated financial statements,which have been prepared in accordance with Mexican FRS as issued by theMexican Financial Reporting Standards Board. A reconciliation from Mexican FRS to U.S. GAAP of majority netincome and total stockholders’ equity is included in Note 21 to our auditedconsolidated financial statements.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements, as well as the reported amounts of revenues and expensesduring the reporting period.

 

We have identified below the most criticalaccounting principles that involve a higher degree of judgment and complexityand that management believes are important to a more complete understanding ofour financial position and results of operations.  These policies are outlined below.

 

Additional accounting policies that are also used inthe preparation of our financial statements are outlined in the notes to ourconsolidated financial statements included in this Annual Report.

 

***MonacaConsolidation***

 

Under both Mexican FRSand U.S. GAAP, we consolidate all subsidiaries in which the company, directlyor indirectly, owns the majority of the common shares, has control, or is theprimary beneficiary of the subsidiary’s risks and rewards.

 

It is reasonably possible that the ExpropriationDecree may result in a loss of control in MONACA, which may require that oursubsidiary be accounted for as a discontinued operation in future periods,together with a retrospective restatement of prior years’ financial statementsto reflect the presentation of MONACA as a discontinued operation.  However, as of June 11, 2010, theVenezuelan government has not yet taken operational or managerial control ofMONACA or taken any actions which preclude the Company from operating MONACA inthe ordinary course of business.  Thedate on which the actions necessary to execute the MONACA Expropriation will occuris uncertain at this time.

*** ***

***Accordingly,we have consolidated the balance sheet and income statement of MONACA as ofDecember 31, 2009.***

*** ***

***Pendingthe resolution of this matter, we are unable to estimate the value of anyfuture impairment charge, if any, or to determine whether MONACA will need tobe accounted for as a discontinued operation. ***See Note 20-B to our audited consolidatedfinancial statements.

*** ***

***Currency issues in Venezuela***

*** ***

***Historically. wehave been able to convert bolívars into U.S. dollars at the Official Rate inorder to settle certain U.S. dollar-denominated debt incurred pursuant toimports and royalty agreements and to pay dividends from our business inVenezuela.  We expect to continue to beable to convert bolívars into U.S. dollars for these purposes.  Accordingly, as of December 31, 2009,for both Mexican FRS and U.S. GAAP, the Company’s Venezuelan subsidiariesaccounted for and re-measured U.S. dollar-denominated transactions, monetaryassets and liabilities into bolívars using the Official Rate, which may notreflect economic reality.  See “Item3.  Key Information—Risk Factors—RisksRelated to Venezuela—Venezuela Presents Significant Economic Uncertainty andPolitical Risk.”  In addition, theCompany’s Venezuelan subsidiaries’ bolívar-denominated financial statementswere translated into Mexican pesos using the buying rate published by Banco deMéxico on the applicable balance sheet dates.***

*** ***

Beginning January 1,2010, the Company’s Venezuelan subsidiaries are deemed highly inflationary forU.S. GAAP purposes, which considers an economy to be highly inflationary whencumulative three-year inflation exceeds 100%. As a result, under U.S. GAAP, the Company’s Venezuelan subsidiaries’functional currency will change from the bolívar to the Mexican peso.  See Notes 2-D, 2-E, 17 and 21-M to ouraudited consolidated financial statements.

 

Two different inflationindices exist for determining highly inflationary status in Venezuela; theVenezuelan Consumer Price Index, or VCPI, and the National Venezuelan ConsumerPrice Index, or VNCPI.  The VCPI, whichonly includes the metropolitan areas of Caracas and Maracaibo, has beenavailable since 1984.  The VNCPI, whichincludes the entire country of Venezuela, has only been available since January 1,2008.  Under U.S. GAAP, either the VCPIor a blended VCPI/VNCPI index is acceptable for determining the highlyinflationary status of Venezuela. However, once three years of data is available for the VNCPI, theVNCPIwill be the appropriate index for this purpose.

 

The Company measuresinflation pursuant to the blended VCPI/VNCPI index, which reached cumulativethree-year inflation in excess of 100% on November 30, 2009.

 

***Property, Plant andEquipment***

*** ***

We depreciate our property, plant and equipment overtheir respective estimated useful lives. Useful lives are based on management’s estimates of the period that theassets will remain in service and generate revenues.  Estimates are based on independent appraisalsand the experience of our technical personnel. To the extent that our estimates are incorrect, our periodicdepreciation expense or carrying value of our assets may be impacted.

 

                Weevaluate any event or change in circumstances that indicate that the book valueof our property, plant and equipment will not be recovered.  When applicable, we perform impairment testsas follows:

 

Under Mexican FRS, we perform a one-step impairmenttest by which the carrying amount of a long-lived asset (asset group) iscompared with its recoverable amount. When the carrying amount exceeds the recoverable amount, the differenceis accounted for as an impairment loss. The recoverable amount is the higher of (1) the long-lived asset’s(asset group) fair value less costs to sell, representing the amount obtainablefrom the sale of the long-lived asset (asset group) in an arm’s lengthtransaction between knowledgeable, willing parties less the costs of disposaland (2) the long-lived asset’s (asset group) value in use, representingits future cash flows discounted to present value by using a rate that reflectsthe current assessment of the time value of money and the risks specific to thelong-lived asset (asset group) for which the cash flow estimates have not beenadjusted.

 

For U.S. GAAP purposes, we perform a two-stepimpairment test and measurement model as follows:  1) the carrying amount of the long-livedasset (asset group) is first compared with the undiscounted cash flows, and ifthe carrying amount is lower than the undiscounted cash flows, no impairmentloss is recognized, although it may be necessary to review depreciation (oramortization) estimates and methods for the related long-lived asset (group ofassets); and  2) if the carrying amountis higher than the undiscounted cash flows, an impairment loss is measured asthe difference between the carrying amount and fair value.  See Notes 21-L and 21-N to our auditedconsolidated financial statements.

 

44

----

Table of Contents

 

The estimates of cash flows take into considerationexpectations of future macroeconomic conditions as well as our internalstrategic plans.  Therefore, inherent tothe estimated future cash flows is a certain level of uncertainty which we haveconsidered in our valuation; nevertheless, actual future results may differ.

 

Primarily as a result of plant rationalization,certain facilities and equipment 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.

 

***Goodwill and Other IntangibleAssets***

*** ***

Under both Mexican FRS and U.S. GAAP, intangibleassets with definite lives are amortized on a straight-line basis overestimated useful lives.  Goodwill andindefinite-lived intangible assets are not amortized, but are subject toimpairment tests either annually or earlier in the case of a triggering event.

 

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

 

These estimates and assumptions could have asignificant impact on whether or not an impairment charge is recognized andalso the magnitude of any such charge. We perform internal valuation analyses and consider relevant internaldata as well as other market information that is publicly available.

 

This approach uses significant estimates andassumptions including projected future cash flows (including timing), adiscount rate reflecting the risk inherent in future cash flows and a perpetualgrowth rate.  Inherent in these estimatesand assumptions is a certain level of risk which we believe we have consideredin our valuation.  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.  Asof December 31, 2009, there are no reporting units that have a reasonablelikelihood of a material impairment of goodwill or other intangible assets.

 

***Deferred Income Tax and FlatRate Business Tax***

*** ***

Under both Mexican FRS and U.S. GAAP, we recorddeferred income tax and flat rate business tax assets and liabilities usingenacted tax rates for the effect of temporary differences between the book andtax basis of assets and liabilities.  Ifenacted tax rates change, we adjust the deferred tax assets and liabilitiesthrough the provision for income tax and flat rate business tax in the periodof change, to reflect the enacted tax rate expected to be in effect when thedeferred tax items reverse.  We alsorecord a valuation allowance to reduce our deferred tax assets to the amountthat is more likely than not to be realized. While we have considered future taxable income and ongoing prudent andfeasible tax planning strategies in assessing the need for the valuationallowance, in the event we were to determine that we would be able to realizeour deferred tax assets in the future in excess of the net recorded amount, anadjustment to the deferred tax asset would increase income in the period suchdetermination was made.  Should we determinethat we would not be able to realize all or part of our net deferred tax assetin the future, an adjustment to the deferred tax asset would be charged toincome in the period such determination was made.

 

***Derivative FinancialInstruments***

*** ***

We use derivative financial instruments in thenormal course of business, primarily to hedge certain operational and financialrisks to which we are exposed, 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 debt; and (iii) exchangerate contracts (mainly Mexican peso — U.S. dollar and in othercurrencies).

 

45

----

Table of Contents

 

Under both Mexican FRS and U.S. GAAP, we account forderivative financial instruments used for hedging purposes either as cash-flowhedges or fair value hedges with changes in fair value reported in othercomprehensive income and earnings, respectively.  Derivative financial instruments notdesignated as an accounting hedge are recognized at fair value, with changes infair value recognized currently in income.

 

When available, we measure the fair value of thederivative financial instruments based on quoted market prices.  If quoted market prices are not available, weestimate the fair value of derivative financial instruments using industrystandard valuation models.  Whenapplicable, these models project future cash flows and discount the futureamounts to a present value using market observable inputs, including interestrates, currency rates,  etc. Alsoincluded in the determination of the fair value of the Company’s liabilitypositions is the Company’s own credit risk, which has been classified as anunobservable input.

 

Many of the factors used in measuring fair value areoutside the control of management, and these assumptions and estimates maychange in future periods.  Changes inassumptions or estimates may materially affect the fair value measurement ofderivative financial instruments.

 

**Factors Affecting FinancialCondition and Results of Operations**

** **

In recent years, ourfinancial condition and results of operations have been significantlyinfluenced by some or all of the following factors:

 

·                                          the level of demand fortortillas, corn flour and wheat flour;

 

·                                          the effects of governmentpolices on imported and domestic corn prices in Mexico;

 

·                                          the cost and availability ofcorn and wheat;

 

·                                          the cost of energy and otherrelated products;

 

·                                          our acquisitions, plantexpansions and divestitures;

 

·                                          the effect of governmentinitiatives and policies, in particular on price controls and cost of grains inVenezuela; and

 

·                                          the effect from variationson interest rates and exchange rates.

 

**RESULTSOF OPERATIONS**

** **

The following table sets forth our consolidatedincome statement data on a Mexican FRS basis for the years ended December 31,2007, 2008 and 2009, expressed as a percentage of net sales.  All financial information has been preparedin accordance with MFRS.  For adescription of the method, see “Presentation of Financial Information” and “—Overviewof Accounting Presentation.”

 
| ** **                                   | ** ** | **Year  Ended December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|
| **Income Statement Data**          | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net sales                                    |       | 100                               | %          | 100 | % | 100 | % |
| Cost of sales                                |       | 67.5                              |       | 67.5 |   | 65.6 |   |
| Gross profit                                 |       | 32.5                              |       | 32.5 |   | 34.4 |   |
| Selling, general and administrative expenses |       | 27.2                              |       | 25.2 |   | 26.9 |   |
| Operating income                             |       | 5.2                               |       | 7.3 |   | 7.5 |   |
| Net comprehensive financing cost             |       | 0.5                               |       | (33.7 | ) | (1.8 | ) |
| Other income (expenses), net                 |       | 1.6                               |       | (0.4 | ) | (0.3 | ) |
| Income taxes (current and deferred)          |       | 2.6                               |       | 1.0 |   | 2.2 |   |
| Other items                                  |       | 2.0                               |       | 1.4 |   | 1.0 |   |
| Minority interest                            |       | 0.4                               |       | 1.2 |   | 1.2 |   |
| Majority net (loss) income              |       | 6.2                               |       | (27.5 | ) | 3.0 |   |

 

46

----

Table of Contents

 

The following table sets forth our net sales andoperating income as represented by our principal subsidiaries for 2007, 2008and 2009.  Net sales and operating incomeof our subsidiary PRODISA are part of “others and eliminations”.  Financial information with respect to GIMSAincludes sales of, Ps.404 million, Ps.433 million, and Ps. 436million in 2007, 2008, and 2009, respectively, in corn flour to GrumaCorporation, Gruma Centroamérica, Molinera de México and PRODISA.  Financial information with respect toMolinera de México includes sales of Ps.55 million, Ps.72 million andPs.71 million in 2007, 2008 and 2009, respectively, to GIMSA, Gruma Corporationand PRODISA; financial information with respect to PRODISA includes sales ofPs.65 million, Ps.77 million and Ps.99 million in 2007, 2008 and2009, respectively, in tortilla related products to Gruma Corporation.

 

Financial information with respect to INTASAincludes sales of, Ps.794 million, Ps.869 million andPs.523 million in 2007, 2008 and 2009, respectively, in technologicalsupport to certain subsidiaries of Gruma, S.A.B. de C.V. In the process of consolidation,all the aforementioned intercompany transactions are eliminated from thefinancial statements.

 
| ** **               | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| ** **               | ** ** | **Net  Sales**                    | ** ** | **Operating  Income** | ** ** | **Net  Sales** | ** ** | **Operating  Income** | ** ** | **Net  Sales** | ** ** | **Operating  Income** | ** ** |
| ** **               | ** ** | **(in millions of pesos)**        | ** ** |
| Gruma Corporation        |       | Ps.                               | 17,406     |   | Ps. | 919 |   | Ps. |  19,356 |   | Ps. |  984 |   | Ps. | 23,567 |   | Ps. | 1,952 |   |
| GIMSA                    |       | 9,012                             |       | 786 |   | 9,142 |   | 1,318 |   | 10,348 |   | 1,268 |   |
| Gruma Venezuela          |       | 3,862                             |       | 58 |   | 8,727 |   | 830 |   | 9,025 |   | 957 |   |
| Molinera de México  |       | 2,694                             |       | 84 |   | 3,598 |   | 296 |   | 3,484 |   | 93 |   |
| Gruma Centroamérica |       | 2,076                             |       | 91 |   | 2,949 |   | 59 |   | 2,777 |   | (92 | ) |
| Asia and Oceanía    |       | 823                               |       | (33 | ) | 1,001 |   | (152 | ) | 1,346 |   | (266 | ) |
| Others and eliminations  |       | (57                               | )          | (31 | ) | 20 |   | (68 | ) | (58 | ) | (105 | ) |
| Total                    |       | Ps.                               | 35,816     |   | Ps. | 1,874 |   | Ps. |  44,793 |   | Ps. |  3,267 |   | Ps. | 50,489 |   | Ps. | 3,807 |   |

 

**Year Ended December 31, 2009 Compared with YearEnded December 31, 2008**

** **

***Consolidated Results***

*** ***

GRUMA’s sales volume increased by 1% to 4,341thousand metric tons compared with 4,287 thousand metric tons in 2008.  This increase was driven mainly by GIMSA and,to a lesser extent, Molinera de México. Net sales increased by 13% to Ps.50,489 million compared with Ps.44,793million in 2008.  The increase was dueprimarily to Gruma Corporation, and, to a lesser extent, GIMSA.  Sales from non-Mexican operations constituted74% of consolidated net sales in 2009 compared to 71% of consolidated net salesin 2008.

 

**Net Sales by Subsidiary**:  By major subsidiary, the percentages ofconsolidated net sales in 2009 and 2008 were as follows:

 
| ** **               | ** ** | **Percentage of Consolidated Net Sales** | ** ** |
|--------------------------|------------|------------------------------------------|------------|
| **Subsidiary**           | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Gruma Corporation        |       | 47                                       | %          | 43 | % |
| GIMSA                    |       | 20                                       |       | 20 |   |
| Gruma Venezuela          |       | 18                                       |       | 19 |   |
| Molinera de México  |       | 7                                        |       | 8 |   |
| Gruma Centroamérica |       | 6                                        |       | 7 |   |
| Asia and Oceanía    |       | 3                                        |       | 3 |   |

 

47

----

Table of Contents

 

Cost of sales increased by 9% to Ps.33,100 millioncompared with Ps.30,237 million in 2008, due primarily to Gruma Corporation,and, to a lesser extent, GIMSA.  Cost ofsales as a percentage of net sales improved to 65.6% from 67.5% in 2008 due toGruma Corporation and Gruma Venezuela.

 

Selling, general, and administrative expenses(SG&A) increased by 20% to Ps.13,582 million compared with Ps.11,289million in 2008, due primarily to Gruma Corporation, and, to a lesser extent,Gruma Venezuela and GIMSA. SG&A as a percentage of net sales increased to26.9% from 25.2% in 2008, driven mainly by Gruma Venezuela, and, to a lesserextent, to Gruma Centroamérica, Molinera de México, and GIMSA.

 

GRUMA’s operating income increased by 17% toPs.3,807 million compared with Ps.3,267 in 2008. Operating margin improved to7.5% from 7.3% in 2008, due primarily to Gruma Corporation.

 

Other expense, net, was Ps.150 million compared withPs.181 million in 2008.

 

Net comprehensive financing cost was Ps.933 millioncompared with Ps.15,088 million in 2008. The decrease resulted mainly from the losses on currency derivativeinstruments registered in 2008.  See “—Liquidityand Capital Resources—Indebtedness,” and “—Liquidity and CapitalResources—Market Risk.”

 

GRUMA’s equity in earnings of associated companies,net, primarily GFNorte, represented income of Ps.495 million compared withincome of Ps.618 million in 2008 also primarily derived from GFNorte.

 

Taxes increased 155% to Ps.1,108 million comparedwith Ps.435 million in 2008 primarily as a result of an increase in our pre-taxnet income compared with a pre-tax loss in 2008.

 

GRUMA’s net income was Ps.2,110 million comparedwith a loss of Ps.11,818 million in 2008. Majority net income was Ps.1,529 million compared with a loss ofPs.12,340 million in 2008.  Bothimprovements came mainly from the aforementioned losses on currency derivativeinstruments in 2008.

 

***Subsidiary Results***

*** ***

***Gruma Corporation***

*** ***

Sales volume decreased 2% to 1,296 thousand metrictons compared with 1,321 thousand metric tons in 2008.  This reduction was due mainly to lower U.S.tortilla sales volume in connection with our decision to reduce the number oftortillas included per stock keeping unit (“SKU”) in the retail segment and, toa lesser extent, lower sales in the food service segment driven mostly by ageneral decline in the industry as well as our decision to discontinuesupplying low-margin products to some customers.

 

Net sales increased by 22% to Ps.23,567 millioncompared with Ps.19,356 million in 2008. The increase was due to the effects of the devaluation of the Mexicanpeso resulting from comparing the average of the month-end exchange rates for 2009versus the average of the month-end exchange rates for 2008.  Measured in U.S. dollar terms, net sales wereflat despite the reduction in sales volume due to price increases per unit ofour tortillas as a result of the product-count reduction in our tortilla SKUsand price increases in corn flour during the fourth quarter of 2008.

 

Cost of sales increased by 16% to Ps.13,782 millioncompared with Ps.11,875 million in 2008 due to the effects of the devaluationof the Mexican peso resulting from comparing the average of the month-endexchange rates for 2009 versus the average of the month-end exchange rates for2008.  As a percentage of net sales, costof sales improved to 58.5% from 61.4% in connection with the aforementionedprice increases related to product-count reduction in our SKUs and priceincreases in corn flour.  The improvementwas also driven by (i) lower raw-material cost, in particular wheat pricesand an optimization in the mix of wheat types and oils as well as lower naturalgas cost, and (ii) lower fixed costs stemming from our decision to closethree tortilla plants.  Measured indollar terms, cost of sales declined 4% due to the aforementioned costreductions.

 

SG&A increased by 21% to Ps.7,833 millioncompared with Ps.6,497 million in 2008 due to the effects of the devaluation ofthe Mexican peso resulting from comparing month-end exchange rates for 2009versus month-end exchange rates for 2008.** **SG&A as a percentage of netsales improved to 33.2% from 33.6% in 2008 due to better expense absorption;that is, the increase in our net sales was proportionally larger than increasesin our expenses due 

 

48

----

Table of Contents

 

to higher prices for our products.  In addition, we had lower transportation anddistribution expenses resulting from lower cost of fuel and optimizationprograms implemented during 2009 and lower fixed expenses resulting from ourdecision to close three tortilla plants. Measured in dollar terms, SG&A declined 1% due to the aforementionedexpense reductions.

 

***Operating income increased by 98% to Ps.1,952 million, andoperating margin increased to 8.3% from 5.1% in 2008, as a result of theforegoing factors.***

*** ***

***GIMSA***

*** ***

Sales volume increased by 3% to 1,874 thousandmetric tons compared with 1,818 thousand metric tons in 2008.  The increase was a result of the conversionamong tortilla makers from the traditional method to the corn flour method,several commercial initiatives designed to expand coverage and improve customerservice, the increase of in-store tortillerías in supermarkets, and increasedsales to supermarkets.

 

Net sales rose by 13% to Ps.10,348 million comparedwith Ps.9,142 million in 2008.  Theincrease was due mainly to price increases implemented during the year,especially during the fourth quarter of 2009, and to a lesser extent, to theaforementioned higher sales volume.

 

Cost of sales increased by 16% to Ps.7,345 millioncompared with Ps.6,354 million in 2008. This increase was due to higher cost of corn in connection with theelimination of government support to the tortilla industry, which led toincreases in the price of corn flour.  Toa lesser extent, higher sales volume also drove the higher cost of sales.** **As a percentage ofnet sales, cost of sales increased to 71.0% from 69.5% as a result of theaforementioned reasons.

 

SG&A increased by 18% to Ps.1,735 millioncompared with Ps.1,470 million in 2008. The increase was due mainly to higher selling expenses resulting frompromotion and advertising related to the 2010 FIFA World Cup, and fromcommercial initiatives designed to increase coverage and improve customerservice.  SG&A as a percentage of netsales increased to 16.8% from 16.1% in 2008 due to the aforementioned expenseincreases.

 

Operating income decreased by 4% to Ps.1,268 millionfrom Ps.1,318 million in 2008, and operating margin decreased to 12.3% from14.4%, as a result of the foregoing factors.

 

***Gruma Venezuela***

*** ***

Sales volume decreased 1% to 459 thousand metrictons compared with 464 thousand metric tons in 2008 due to lower sales of (i) cornflour to the Venezuelan government and increased competition from the marketleader and, to a lesser extent, (ii) lower wheat flour sales stemming fromshipping delays of wheat imports during September of 2009 which resultedin a temporary lack of wheat.

 

Net sales increased by 3% to Ps.9,025 millioncompared with Ps.8,727 million in 2008. The increase was due mainly to the effects of inflation in Venezuelaresulting from comparing constant currencies as of December 2009 versusconstant currencies as of December 2008.

 

Cost of sales decreased by 4% to Ps.6,177 millionfrom Ps.6,424 million in 2008.  Thisdecrease was primarily due to the appreciation of the peso relative to the U.S.dollar, as measured by the exchange rate in effect at the end of 2009.  To a lesser extent, lower prices for wheatcontributed to the decrease. ** **As a percentage of net sales, costof sales improved to 68.4% from 73.6% for the aforementioned reasons.

 

SG&A increased by 28% to Ps.1,891 millioncompared with Ps.1,474 million in 2008. The increase was due primarily to general salary increases, higherfreight tariffs, higher advertising expenses and the effects of inflationresulting from comparing constant currencies as of December 2009 versusconstant currencies as of December 2008.** **SG&A as a percentage of netsales increased to 21.0% from 16.9% in 2008 due to the aforementioned higherexpenses.

 

Operating income increased by 15% to Ps.957 million,and operating margin improved to 10.6% from 9.5%, as a result of the foregoingfactors.

 

49

----

Table of Contents

 

***Molinera de México***

 

Sales volume increased by 3% to 508 thousand metrictons compared with 494 thousand metric tons in 2008.  This increase was driven by a decline inwheat flour prices, increased market coverage, and expansion in the number ofsupermarkets that carry our products.

 

Net sales decreased by 3% to Ps.3,484 millioncompared with Ps.3,598 million in 2008. The decrease resulted from lower prices in connection with lower cost ofwheat, which was partially offset by the increase in sales volume.

 

Cost of sales increased by 1% to Ps.2,871 millioncompared with Ps.2,840 million in 2008 in connection with higher salesvolume.  As a percentage of net sales,cost of sales increased to 82.4% from 78.9% due mainly to increased cost of salesrelated to higher sales volume in conjunction with lower net sales as a resultof lower wheat flour prices.

 

SG&A increased by 13% to Ps.520 million comparedwith Ps.462 million in 2008.  Theincrease was due to higher freight expenses related to higher sales volume, andto higher advertising expenses.  SG&Aas a percentage of net sales increased to 14.9% from 12.8% in 2008 due to lowerabsorption of fixed expenses because of the reduction of net sales as a resultof lower wheat flour prices.

 

Operating income decreased by 69% to Ps.93 millionfrom Ps.296 million in 2008, and operating margin decreased to 2.7% from 8.2%in 2008.

 

***Gruma Centroamérica***

*** ***

Sales volume decreased by 3% to 208 thousand metrictons compared with 213 thousand metric tons in 2008.  The decrease was due mainly to lower cornflour sales volume in Honduras as a result of: (i) a corn surplus,increased competition from other corn flour producers, and distribution anddelivery difficulties stemming from the country’s constitutional crisis; and (ii) certainchanges to our shipping and distribution system in Honduras designed to make usless dependent on third parties.** **To a lesser extent, lower salesvolume for hearts of palm contributed to the decrease.

 

Net sales decreased by 6% to Ps.2,777 million fromPs.2,949 million in 2008.  The decreasewas due to the aforementioned lower sales volume, the appreciation of theMexican peso relative to the U.S. dollar as measured by the exchange rate ineffect at the end of 2009, and the effects of inflation resulting fromcomparing constant currencies as of December 2009 versus constantcurrencies as of December 2008.

 

Cost of sales decreased by 3% to Ps.2,068 millioncompared with Ps.2,134 million in 2008, due mainly to the aforementioned lowersales volume.  Increases in cost of saleswere offset by the appreciation of the Mexican peso relative to the U.S dollarand the effect of inflation resulting from comparing constant currencies as of December 2009versus constant currencies as of December 2008.  Cost of sales as a percentage of net salesincreased to 74.5% from 72.4% due to higher fixed costs stemming from theintroduction of a new corn flour unit and higher fuel costs, which were notfully absorbed through price increases.

 

SG&A increased by 6% to Ps.801 million comparedwith Ps.756 million in 2008.  Theincrease was due to lower expense absorption in connection with lower netsales, higher selling expenses in connection with investments in our shippingand distribution system in Honduras designed to make us less dependent on thirdparties, and higher promotion and advertising expenses stemming from theimplementation of a new advertising campaign. The increases were partially offset by the appreciation of the Mexicanpeso against the U.S. dollar and the effects of inflation resulting fromcomparing constant currencies as of December 2009 versus constantcurrencies as of December 2008.  Asa percentage of net sales, SG&A rose to 28.8% from 25.6% in 2008 due to theaforementioned factors.

 

Operating loss was Ps.92 million compared withincome of Ps.59 million in 2008, and operating margin decreased to negative3.3% from positive 2.0% as a result of the foregoing factors.

 

50

----

Table of Contents

 

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

*** ***

***Consolidated Results***

*** ***

GRUMA’s sales volume increased by 1% to 4,287thousand metric tons in 2008 compared with 4,243 thousand metric tons in2007.  This increase was driven mainly byGIMSA and, to a lesser extent, Molinera de México.  Net sales increased by 25% to Ps.44,793million in 2008 compared with Ps.35,816 million in 2007.  The increase was due primarily to GrumaVenezuela, Gruma Corporation, and, to a lesser extent, Molinera de México andGruma 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 ofconsolidated net 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 |   |

 

Cost of sales increased by 25% to Ps.30,237 millionin 2008 compared with Ps.24,192 million in 2007, due primarily to GrumaVenezuela, Gruma Corporation, and, to a lesser extent, Molinera de México andGruma 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.11,289 million in 2008 compared with Ps.9,750million in 2007, due primarily to Gruma Venezuela, Gruma Corporation, and, to alesser extent, Gruma Centroamérica. SG&A as a percentage of net sales improved to 25.2% in 2008 from27.2% in 2007, driven mainly by Gruma Venezuela, Gruma Corporation, andMolinera de México.

 

GRUMA’s operating income increased by 74% toPs.3,267 million in 2008 compared with Ps.1,874 in 2007.  Operating margin improved to 7.3% in 2008from 5.2% in 2007, due primarily to Gruma Venezuela, GIMSA, and, to a lesserextent, Molinera de México and Gruma Corporation.

 

Other expense, net, was Ps.181 million in 2008compared with income of Ps.556 million in 2007, which resulted primarily from again on the sale of Banorte shares during 2007.

 

Net comprehensive financing cost was Ps.15,088million in 2008 compared with income of Ps.167 million in 2007.  The increase resulted mainly from losses oncurrency derivative instruments of Ps.14,710 million.  Out of this amount, Ps.3,480 million was paidduring 2008, and Ps.11,230 million is the non-cash loss that relates to themark-to-market valuation of positions that were still open as of December 31,2008.  Please also see “—Liquidity andCapital Resources—Indebtedness,” and “—Liquidity and Capital Resources—MarketRisk.”

 

GRUMA’s equity in earnings of associated companies,net, primarily GFNorte, represented income of Ps.618 million in 2008 comparedwith income of Ps.708 million in 2007.

 

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

 

GRUMA’s net loss was Ps.11,818 million in 2008compared with income of Ps.2,379 million in 2007.  Majority net loss was Ps.12,340 million in2008 compared with income of Ps.2,233 million in 2007.  These results were attributable to theaforementioned losses on currency derivative instruments.

 

51

----

Table of Contents

 

***Subsidiary Results***

*** ***

***Gruma Corporation***

 

Sales volume decreased 1% to 1,321 thousand metrictons in 2008 compared with 1,329 thousand 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 in Europe,mainly within the food service segment, as a result of the economic downturn.

 

Net sales increased by 11% to Ps.19,356 million in2008 compared with Ps.17,406 million in 2007. The rise was due to price increases implemented during the later part of2007 in the U.S. corn flour and tortilla businesses and price increasesimplemented during all of 2008 in the U.S corn flour business.

 

Cost of sales increased by 14% to Ps.11,875 millionin 2008 compared with Ps.10,461 million in 2007.  As a percentage of net sales, cost of salesincreased 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&A increased by 8% to Ps.6,497 millioncompared with Ps.6,026 million in 2007. The increase was due to higher commissions paid to distributors inconnection with higher prices, increased promotion and advertising expenses,additional distribution routes, and higher fuel prices.  SG&A as a percentage of net salesimproved to 33.6% in 2008 from 34.6% in 2007 due to better expense absorptionas a result of higher prices.

 

Operating income increased by 7% to Ps.984 millionin 2008, and operating margin decreased to 5.1% from 5.3% in 2007 as a resultof the foregoing factors.

 

***GIMSA***

*** ***

Sales volume increased by 4% to 1,818 thousandmetric tons in 2008 compared with 1,753 thousand metric tons in 2007.  The increase in sales volume was a result ofthe 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.

 

Net sales increased by 1% to Ps.9,142 million in2008 compared with Ps.9,012 million in 2007. The increase was due to the aforementioned sales volume growth.

 

Cost of sales decreased by 7% to Ps.6,354 million in2008 compared with Ps.6,839 million 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&A increased by 6% to Ps.1,470 million in 2008compared with Ps.1,386 million in 2007. The increase was due mainly to higher commissions from higher salesvolume, higher advertising expenses, and higher wages.  SG&A as a percentage of net salesincreased to 16.1% from 15.4% in 2007 due to the aforementioned expenseincreases and lower average prices.

 

Operating income increased by 68% to Ps.1,318million in 2008, and operating margin improved to 14.4% from 8.7% as a resultof the foregoing factors.

 

***Gruma Venezuela***

*** ***

Sales volume decreased 3% to 464 thousand metrictons compared with 480 thousand metric tons in 2007 due mainly to lower salesvolume in rice, in connection with a shortage of raw materials, and oil, due toa temporary shutdown of the business.

 

Net sales increased by 126% to Ps.8,727 millioncompared with Ps.3,862 million in 2007. 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% ofthe increase in net sales was attributable to the increase in prices and theremaining 90% of the increase in net sales was attributable to the effects ofinflation in Venezuela and the devaluation of the Mexican peso relative to theUS dollar.

 

Cost of sales increased by 114% to Ps.6,424 millionin 2008 from Ps.3,007 million in 2007. This increase was due to the aforementioned higher raw-material costs,higher packaging costs, general salary increases, and the 

 

52

----

Table of Contents

 

effect of inflation resulting from thecomparison of constant currencies as of December 2008 versus constantcurrencies as of December 2007, together with the devaluation of theMexican peso.  As a percentage of netsales, cost of sales improved to 73.6% from 77.9% due to higher prices, whichhelped to offset higher raw-material costs and improve cost absorption.

 

SG&A increased by 85% to Ps.1,474 million in2008 compared with Ps.797 million in 2007. 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 constantcurrencies as of December 2008 versus constant currencies as of December 2007.  SG&A as a percentage of net salesimproved to 16.9% from 20.6% in 2007 due to better absorption.

 

Operating income increased by 1,329% to Ps.830million as compared to Ps.58 million in 2007, and operating margin improved to 9.5%from 1.5% in 2007.

 

***Molinera de México***

*** ***

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

 

Net sales increased by 34% to Ps.3,598 million in2008 compared with Ps.2,694 million in 2007. The increase was due mainly to price increases implemented to offsethigher wheat costs.

 

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

 

SG&A increased by 7% to Ps.462 million in 2008compared with Ps.430 million in 2007. The increase was due to higher freight expenses, increased expensesrelated to the strengthening of our sales force, and higher advertisingexpenses.  SG&A as a percentage ofnet sales improved to 12.8% in 2008 from 16.0% in 2007 due to better expenseabsorption as a result of higher prices.

 

Operating income increased by 254% to Ps.296million, and operating margin improved to 8.2% from 3.1% in 2007.

 

***Gruma Centroamérica***

*** ***

Sales volume decreased by 3% to 213 thousand metrictons in 2008 compared with 220 thousand metric tons in 2007.  The decrease was mainly due to lower cornflour sales volume in connection with intensified price aggressiveness fromcompetitors, and changes in the distribution system towards company-ownedroutes, which should result in future benefits.

 

Net sales increased by 42% to Ps.2,949 million in2008 from Ps.2,076 million in 2007.  Theincrease was due to higher prices of corn flour, snacks, rice, and tortillas,which were implemented to compensate partially for higher raw-material costsespecially, corn, rice and hearts of palm. In addition, the effects of inflation resulting from comparing constantcurrencies as of December 2008 versus constant currencies as of December 2007,together with the devaluation of the Mexican peso, contributed to the increase.

 

Cost of sales as a percentage of net sales increasedto 72.4% in 2008 from 71.5%, due to higher raw-material costs, which were notfully absorbed through prices.  Cost ofsales increased by 44% to Ps.2,134 million compared with Ps.1,484 million in2007, due to the aforementioned cost increases.

 

SG&A increased by 51% to Ps.756 million in 2008compared with Ps.501 million in 2007.  Asa percentage of net sales, SG&A rose to 25.6% from 24.1.% in 2007.  The increase was due to extraordinaryadministrative expenses, higher commissions in connection with higher prices,the effect of inflation resulting from comparing constant currencies as of December 2008versus constant currencies as of December 2007, and the devaluation of theMexican peso.

 

Operating income was Ps.59 million compared withPs.91 million in 2007, and operating margin decreased to 2.0% from 4.4%.

 

53

----

**Table of Contents**

** **

**LIQUIDITY AND CAPITAL RESOURCES**

** **

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

 

·                  cash generated from operations;

 

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

 

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

 

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

 

Our significant debt service requirements may adversely affect our ability to finance future operations, make acquisitions and capital expenditures, compete effectively against better-capitalized competitors and withstand downturns in our business.

 

Our long-term corporate credit rating and our senior unsecured perpetual bond are rated “B+” with a stable outlook by Standard & Poor’s Ratings Services.  Our Foreign Currency Long-Term Issuer Default Rating and our Local Currency Long-Term Issuer Default Rating are rated “B+” by Fitch Ratings.  Additionally, our U.S.$300 million perpetual bond is rated “BB-” by Fitch Ratings.  These ratings reflect the additional leverage on GRUMA’s capital structure from the termination of GRUMA’s foreign exchange derivative positions and the subsequent conversion of the realized losses into debt.

 

On February 1, 2008, Standard & Poor’s placed our long-term corporate credit rating and our senior unsecured perpetual bond on Credit Watch with negative implications.  On March 12, 2008, Standard & Poor’s removed the Credit Watch with negative implications based on the Company’s intention to use part of the proceeds of a proposed May 2008 rights offering to repay debt, which improved our debt ratios.  On October 13, 2008, Standard and Poor’s reduced our long-term corporate credit rating and the credit rating on our senior unsecured perpetual bond from “BBB-” to “BB”, and placed the ratings on Credit Watch with negative implications.  On November 11, 2008, Standard and Poor’s reduced the rating again from “BB” to “B+” continuing the Credit Watch with negative implications.  On July 28, 2009, Standard and Poor’s affirmed the rating of “B+” with negative implications.  On December 16, 2009, Standard and Poor’s affirmed its rating of “B+” and removed the ratings from Credit Watch with negative implications to a stable outlook following its appraisal of GRUMA’s financial situation under its new capital structure, its financial policies and operating performance. We continue to have a B+ rating with a stable outlook.  On October 13, 2008, Fitch reduced the ratings to “BB+” from “BBB-” while placing GRUMA on Rating Watch Negative.  On April 2, 2009, Fitch reduced its ratings again to “B+” from “BB+” and removed all ratings from Rating Watch Negative to Stable.  On May 18, 2010, Fitch affirmed its ratings of “B+” with a stable outlook following action taken in respect of GRUMA’s Venezuelan assets by the government of Venezuela.  See “Item 3.  Key Information—Risks Related to Venezuela—One of our Subsidiaries in Venezuela is Currently Involved in Expropriation Proceedings and our Remaining Subsidiary in Venezuela is Subject to Expropriation.”

 

If our financial condition deteriorates, we may experience future declines in our credit ratings, with attendant consequences.  Our access to external sources of financing, as well as the cost of that financing, has been and may continue to be adversely affected by a deterioration of our long-term debt ratings.  A downgrade in our credit ratings may continue 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 on favorable terms, or at all, our business, operating results and financial condition would be adversely affected. However, management believes that its working capital and available external sources of financing are sufficient for our present requirements.

 

The reduction in our credit rating and the liquidity scarcity experienced in the global financial markets resulted in a reduction in our ability to issue new debt and reduced the availability of our uncommitted short-term 

 

54

----

Table of Contents

 

lines of credit during most of 2009.  However, since the refinancing of the majority of our outstanding debt in October of 2009, our ability to access some of our uncommitted short-term credit lines has improved.

 

The following is a summary of the principal sources and uses of cash for the three years ended December 31, 2009.

 
| ** **                           | ** ** | **2007**                         | ** **    | **2008**   | ** ** | **2009**        | ** ** |
|--------------------------------------|------------|----------------------------------|---------------|------------|------------|-----------------|------------|
| ** **                           | ** ** | **(thousands of Mexican pesos)** | ** **    |
| Resources provided by (used in) (1): |       |                             |          |       |       |            |       |
| Operating activities                 |       | Ps.                              |  267,347 |       | Ps.        |  2,212,996 |       | Ps. |  5,167,798 |   |
| Financing activities                 |       | 208,003                          |          | 1,410,811  |       | (3,609,027      | )          |
| Investing activities                 |       | (593,808                         | )             | (2,958,202 | )          | (960,052        | )          |
|                                      |            |                                  |               |            |            |                 |            |  |  |  |

 

----

(1) As a result of MFRS B-2 “Statement of Cash Flows”, effective starting January 1, 2008, the Company has included the statement of cash flows for the years ending December 31, 2008 and December 31, 2009 and for the years ended December 31, 2005, 2006 and 2007, the Company has included the statement of changes in financial position.  As a result, the Cash Flow figures for 2008 and 2009 may not be directly comparable to those presented for the previous four years.

 

During 2009, net cash generated from operations was Ps.5,168 million after changes in working capital of Ps.610 million of which Ps.87 million was due to an increase in accounts receivable, Ps.346 million reflected a decrease in inventory and Ps.47 million reflected an increase in accounts payable.  Net cash generated from financing activities during 2009 was Ps.3,609 million of which Ps.9,311 million reflected proceeds from borrowings, Ps.1,237 million in cash interest payments, Ps.175 million in dividend payments and Ps.11,486 million in cash payment in respect of derivative instruments.  Cash used by investment activities during 2009 reflected cash expenditures for new plants and capacity expansion as well as improvements of existing plants.  As of December 31, 2008 and 2009, there were no significant restricted net assets of the consolidated subsidiaries of the Company, as defined by Rule 4-08(e)(3) of Regulation S-X.

 

Extreme exchange rate volatility in the financial markets during the last two quarters of 2008 and the first quarter of 2009 resulted in significant fluctuations in the mark-to-market value of GRUMA’s foreign exchange derivative instruments.  As of October 28, 2008, GRUMA’s foreign exchange derivative instruments represented an aggregate negative mark-to-market non-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. 3,367 million and applied the proceeds to terminate our commitments arising under all the currency derivative instruments that we had entered into with one of our derivative counterparties and to pay other commitments arising under the currency derivative instruments maturing from the date of such loan agreement with Bancomext.  In addition, we entered into agreements on October 16, 2009 with our remaining derivative counterparties to convert a total of approximately U.S.$738.3 million dollars owing under our terminated foreign exchange derivative instruments into medium and long-term loans, as described below.

 

In connection with most of our obligations under our foreign exchange derivative instruments, the Company entered into a term sheet on March 19, 2009 to finance the obligations that would result from the termination of all of our foreign exchange derivative instruments that we had entered into with Credit Suisse, Deutsche Bank and JP Morgan Chase, as counterparties (the “Major Derivative Counterparties”).  On March 23, 2009, GRUMA and the Major Derivative Counterparties agreed to terminate all of these derivative instruments and fixed the total amount of obligations payable by GRUMA to the Major Derivative Counterparties at U.S.$668.3 million.  On October 16, 2009, GRUMA reached an agreement with the Major Derivative Counterparties to convert these derivatives obligations into a loan in the amount of U.S.$668.3 with a tenor of seven and one-half years (the “Term Loan”).  The Term Loan is secured by GRUMA’s shares in GIMSA, Gruma Corporation and Molinera de México (the “Pledged Shares”).

 

In connection with the balance of our foreign exchange derivative instruments, GRUMA entered into separate term sheets with Barclays Bank PLC (“Barclays”), the Royal Bank of Scotland PLC (“RBS”) and Standard Chartered Bank (“Standard Chartered”) during June and July 2009 that provided for the financing of the obligations that would result from the termination of all of our foreign exchange derivative instruments that we had entered into with each of Barclays, RBS and Standard Chartered.  GRUMA and Barclays, RBS and Standard Chartered agreed to terminate all of the derivative instruments owing to these parties and fixed the total amount of obligations payable by GRUMA to Barclays at U.S.$21.5 million, RBS at U.S.$13.9 million and Standard Chartered at U.S.$22.9 

 

55

----

Table of Contents

 

million for a total aggregate amount of U.S.$58.3 million.  In addition, during June of 2009, GRUMA entered into a term sheet with BNP that fixed the amount payable by GRUMA to BNP at approximately U.S.$11.8 million.

 

On October 16, 2009, GRUMA reached separate agreements with Barclays, RBS and Standard Chartered to convert the obligations that resulted from the termination of all of our foreign exchange derivative instruments entered into with these parties into loans in the amount of U.S.$21.5 million, U.S.$13.9 million and U.S.$22.9 million, respectively, with a tenor of three years (the “Three-Year Term Loans”).  On October 16 ,2009, GRUMA also reached a separate agreement with BNP to convert the obligations that resulted from the scheduled maturity of all of our foreign exchange derivative instruments entered into with BNP into a loan in the amount of approximately U.S.$11.8 million with a tenor of approximately one and one-half years (the “BNP Term Loan”).  As a result of the Term Loan, the Three-Year Term Loans and the BNP Term Loan, GRUMA converted a total of approximately U.S.$738.3 million dollars owing under our terminated foreign exchange derivative instruments into medium and long-term loans.  See “—Indebtedness.”

 

Factors that could decrease our sources of liquidity include a significant decrease in the demand for, or price of, our products, each of which could limit the amount of cash generated from operations, and a lowering of our corporate credit rating or any other credit downgrade, which could further impair our liquidity and increase our costs with respect to new debt and cause our stock price to suffer.  Our liquidity is also affected by factors such as the depreciation or appreciation of the peso and changes in interest rates.  See “—Indebtedness.”

 

As further described below, Gruma, S.A.B. de C.V. is subject to financial covenants contained in some of its debt agreements which require it to maintain certain financial ratios and balances on a consolidated basis, among other limitations.  Gruma Corporation is also subject to financial covenants contained in some of its debt agreements which require it to maintain certain financial ratios and balances on a consolidated basis.  A default under any of our existing debt obligations for borrowed money could result in acceleration of the due dates for payment of the amounts owing thereunder and in a cross-default under some of our existing credit agreements and the indenture governing our perpetual bonds. See “Item 10.  Additional Information—Material Contracts.”

 

Gruma, S.A.B. de C.V. and its consolidated subsidiaries are required to maintain a leverage ratio no greater than 5.6:1 in 2010, 5.0:1 in 2011, 4.5:1 in 2012, 4.0:1 in 2013 and 3.6:1 in 2014 .  As of March 31, 2010, Gruma, S.A.B. de C.V.’s leverage ratio was 4.97:1.  The amount of interest that Gruma Corporation pays on 95% of its debt may increase if its overall leverage ratio increases above 1.5:1.  See “—Indebtedness.”  As of March 31, 2010, Gruma Corporation’s leverage ratio was 0.85:1, which represents the lowest interest rate range under the U.S.$100 million facility at LIBOR + 35 bp.

 

Mr. González Barrera has pledged part of his shares in our company to secure some of his borrowings.  If there is a default and the lenders enforce their rights against any or all of these shares, Mr. González Barrera and his family could lose control over us and a change of control could result.  This could trigger a default in some of our credit agreements and the indenture governing our perpetual bonds which have an aggregate principal amount outstanding as of April 30, 2010 of U.S.$1,492 million and have a material adverse effect upon our business, financial condition, results of operations and prospects.  For more information about this pledge, see “Item 7.  Major Shareholders and Related Party Transactions.”

 

**Adjusted Working Capital**

** **

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

 
| December 31, 2008 |   | Ps. | 4,125 million |   |
|------------------------|--------|-----|--------------------|--------|
| December 31, 2009 |   | Ps. | 9,734 million      |   |

 

**Indebtedness**

** **

Our indebtedness bears interest at fixed and floating rates.  As of March 31, 2010, approximately 19% of our outstanding indebtedness bore interest at fixed rates and approximately 81% bore interest at floating rates, with almost all U.S. dollar and Mexican peso floating-rate indebtedness bearing interest based on LIBOR and TIIE, 

 

56

----

Table of Contents

 

respectively.  We partially hedge both our interest rate exposure and our foreign exchange rate exposure as discussed below.  For more information about our interest rate and foreign exchange rate exposures, see “Item 11.  Quantitative and Qualitative Disclosures About Market Risk.”

 

***2005 Facility***

 

On July 28, 2005, we refinanced a U.S.$250 million senior credit facility through another credit facility from a syndicate of five banks (the “2005 Facility”), achieving a reduction in the interest rate and eliminating the partial principal amortizations in years 2008 and 2009 and leaving a bullet payment at maturity in July 2010, among other minor benefits.  In connection with our refinancing under the Term Loan, the Three-Year Term Loans and the BNP Term Loan, we also refinanced the U.S.$197 million that remained outstanding under the 2005 Facility (the “Refinanced 2005 Facility”) on October 16, 2009.  As a result, the Refinanced 2005 Facility was converted into a secured term loan with a five-year tenor maturing in October of 2014, pursuant to which GRUMA is obligated to make equal quarterly interest payments beginning in January of 2010.  The Refinanced 2005 Facility is constituted by two tranches, a U.S. dollar tranche in the amount of U.S.$118.2 million and a Mexican peso tranche in the amount of Ps.1,031 million.  The interest rates for both the peso and the dollar tranches are TIIE and LIBOR, respectively, plus 2.875% for the first three years, 3.375% for the fourth year and 3.875% for the fifth year.  The Refinanced 2005 Facility contains covenants that require us to maintain a ratio of consolidated total funded debt to EBITDA of not more than 5.6:1 in 2010, 5.0:1 in 2011, 4.5:1 in 2012; 4.0:1 in 2013 and 3.6:1 in 2014.  We are also required to maintain a ratio of consolidated EBITDA to consolidated interest charges of not less than 2.5:1 in 2010 and 2.75:1 thereafter.  The Refinanced 2005 Facility also limits our ability, and our subsidiaries’ ability in certain cases, among other things, to:  (1) create liens; (2) merge or consolidate with other companies or sell substantially all of our assets; (3) engage in transactions with affiliates; (4) guarantee additional indebtedness; (5) make certain changes to corporate documents; (6) dispose of the collateral; (7) make capital expenditures; and (8) incur additional debt.  The Refinanced 2005 Facility is secured by the Pledged Shares.

 

***Perpetual Bonds***

 

On December 3, 2004, Gruma, S.A.B. de C.V. issued U.S.$300 million 7.75% senior unsecured perpetual bonds, which at the time were rated BBB- by Standard & Poor’s Ratings and by Fitch Ratings.  The bonds which have no fixed final maturity date, have a call option exercisable by GRUMA at any time beginning five years after the issue date.  In connection with our refinancing under the Term Loan, the Three-Year Term Loans, the BNP Term Loan and the Refinanced 2005 Facility, Gruma, S.A.B. de C.V. entered into a supplemental indenture on October 21, 2009 that provided holders of our perpetual bonds with an equal and ratable security interest in the Pledged Shares.  As of March 31, 2010 we have not hedged any interest payments on our U.S.$300 million 7.75% senior unsecured perpetual bonds.

 

***Gruma Corporation***

 

In October 2006, Gruma Corporation entered into a U.S.$100 million 5-year revolving credit facility with a syndicate of financial institutions.  The credit facility replaced the U.S.$70 million revolving credit facility which was to mature in June 2007 and was terminated upon the closing of the new facility.  The new facility 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 less restrictive provisions than those in the facility replaced.  This Facility contains covenants that limit Gruma Corporation’s ability to merge or consolidate, and require it to maintain:  (1) a ratio of total funded debt to consolidated EBITDA of not more than 3.0:1; and (2) a ratio of consolidated EBITDA to consolidated interest charges of not less than 2.0:1.  In addition, this facility limits Gruma Corporation’s, and certain of its subsidiaries’ ability, among other things, to:  (1) create liens; (2) make certain investments; (3) make certain restricted payments; (4) enter into any agreements that prohibit the payment of dividends; (5) incur additional debt; and (6) engage in transactions with affiliates.

 

Gruma Corporation is also subject to covenants which limit the amounts that may be advanced to, loaned to, or invested in us under certain circumstances.  Upon the occurrence of any default or event of default under its credit agreements, Gruma Corporation generally would be prohibited from making any cash dividend payments to us.  The covenants described above and other covenants could limit our and Gruma Corporation’s ability to help support our liquidity and capital resource requirements.

 

57

----

Table of Contents

 

***Peso Facility***

 

On November 12, 2008, we obtained a Ps 3,367 million peso-denominated two year bullet senior credit facility from Bancomext (*Banco Nacional de Comercio Exterior*) which we refer as the 2008 Peso Facility.  Bancomext entered into a separate guarantee agreement with the Mexican Government, pursuant to which Banco de México guarantees this facility through a fund that specializes in guaranteeing the debt of the Mexican agricultural sector (*Fondo Especial de Asistencia Técnica y Garantía para Créditos Agropecuarios*).  In connection with the refinancing of the majority of the Company’s outstanding debt, GRUMA refinanced the 2008 Peso Facility on September 18, 2009 (the “Refinanced Peso Facility”).  The Refinanced Peso Facility has a ten-year tenor maturing in September 2019 and GRUMA is obligated to make quarterly interest payments beginning in December of 2012 corresponding to either 10% or 20% of the outstanding value of the loan pursuant to the amortization schedule.  The interest rate for the Refinanced Peso Facility is 91-day TIIE plus 6.21%.****The Refinanced Peso Facility limits our ability, among other things, to transfer or encumber our assets.

 

***Term Loan***

 

We entered into the Term Loan with the Major Derivative Counterparties on October 16, 2009 for an amount of U.S.$668.3 million and a tenor of seven and one-half years, maturing on January 21, 2017.  The interest rate of the Term Loan is LIBOR plus 2.875% through July 20, 2012 with interest escalating to LIBOR plus 3.375% after July 20, 2012, LIBOR plus 3.875% after July 20, 2013, LIBOR plus 4.875% after July 20, 2014, LIBOR plus 5.875% after July 20, 2015 and LIBOR plus 6.875% from July 21, 2016 until the maturity date.  The Term Loan also contains financial covenants and limits GRUMA’s ability to pay dividends or make other distributions and make certain investments or other restricted payments.  Pursuant to the Term Loan, we are required to maintain a leverage ratio no greater than 5.6:1 in 2010, 5.0:1 in 2011, 4.5:1 in 2012, 4.0:1 in 2013, 3.6:1 in 2014, 3:1 in 2015, and 2.5:1 in 2016 and 2017.  Further, we are required to maintain an interest coverage ratio no greater than 2.5:1 prior to December 31, 2010 and no greater than 2.75:1 thereafter.  In addition, the Term Loan also limits our ability, and our subsidiaries’ ability, among other things, to:  in certain cases, (1) create liens; (2) merge or consolidate with other companies or sell substantially all of our assets; (3) engage in transactions with affiliates; (4) guarantee additional indebtedness; (5) make certain changes to corporate documents; (6) dispose of the collateral; (7) make capital expenditures; and (8) incur additional debt..

 

***Three-Year Term Loans***

 

In addition, we entered into the Three-Year Term Loans with Standard Chartered, Barclays, and RBS on October 16, 2009, for an amount of U.S.$22.9 million, U.S.$21.5 million and U.S.$13.9 million, respectively, maturing on July 21, 2012.  The interest rate on the Three-Year Term Loans are LIBOR plus 2.875%.  Pursuant to the Three-Year Term Loans, we are required to maintain leverage ratios and interest coverage ratios consistent with the applicable ratios described above concerning the Term Loan and Refinanced 2005 Facility.  The Three-Year Term Loans also contain financial covenants and limit GRUMA’s ability to pay dividends or make other distributions and make certain investments or other restricted payments.  In addition, the Three-Year Term Loans limit our ability, and our subsidiaries’ ability, among other things, to:  in certain cases, (1) create liens; (2) merge or consolidate with other companies or sell substantially all of our assets; (3) engage in transactions with affiliates; (4) guarantee additional indebtedness; (5) make certain changes to corporate documents; (6) dispose of the collateral; (7) make capital expenditures; and (8) incur additional debt.  The Three-Year Term Loans are unsecured.

 

***BNP Term Loan***

 

On October 16, 2009, we also entered into the BNP Term Loan, as described above for an amount of U.S.$11.8 million, maturing on May 1, 2011.  The BNP Term Loan bears interest at LIBOR plus 2.0%.  Pursuant to the BNP Term Loan, we are required to maintain leverage ratios and interest coverage ratios consistent with the applicable ratios described above concerning the Term Loan, the Refinanced 2005 Facility, and the Three-Year Term Loans.  The BNP Term Loan also contains financial covenants and limits GRUMA’s ability to pay dividends or make other distributions and make certain investments or other restricted payments.  In addition, the BNP Term Loan limits our ability, and our subsidiaries’ ability, in certain cases, among other things, to:  (1) create liens; (2) merge or consolidate with other companies or sell substantially all of our assets; (3) engage in transactions with affiliates; (4) guarantee additional indebtedness; (5) make certain changes to corporate documents; (6) dispose of the collateral; (7) make capital expenditures; and (8) incur additional debt.  The BNP Term Loan is unsecured.

 

58

----

Table of Contents

 

As of December 31, 2009 we were in compliance with all of the covenants and obligations under our existing debt agreements.

 

**We have a significant amount of indebtedness, which requires significant debt service.  Our level of debt could adversely affect our business in a number of ways.  See “Risk Factors—Risks Related to Our Company—Our Substantial Indebtedness could Adversely Affect our Business and, Consequently, our Ability to Pay Interest and Repay our Indebtedness.”**

** **

As of March 31, 2010, the Company has committed lines of credit for the amount of U.S.$100 million from banks in Mexico and elsewhere of which we have drawn U.S.$70 million dollars.

 

At December 31, 2009, we had total outstanding long-term debt aggregating approximately Ps.20,039.9 million (approximately U.S.$1,533.3 million).  Approximately 76% of our long-term debt at such date was dollar-denominated, 23% denominated in Mexican Pesos and the remaining 1% denominated in Honduran lempiras.  Our long-term debt includes mainly U.S.$643.3 million or Ps.8,407.9 million aggregate principal amount under the Term Loan which we obtained in October of 2009, U.S.$46.2 million or Ps.603.8 million aggregate principal amount under the Three-Year Term Loans which we entered into in October 2009, U.S.$3.3 million or Ps.43.1 million aggregate principal amount under the BNP Term Loan which we obtained in October 2009, U.S.$160.1 million or Ps.1,974.0 million aggregate principal amount under the Refinanced 2005 Facility which we refinanced in October 2009, U.S.$257.6 million or Ps.3,367 million aggregate principal amount under the Refinanced Peso Facility which we refinanced in September 2009 and Ps.3,921 million, or U.S.$300 million, aggregate principal amount of the 7.75% senior unsecured perpetual bonds, which we issued in December 2004.

 

As of December 31, 2009, we had total cash and cash equivalents of Ps.2,008 million.

 

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

 
| **Year**            | ** ** | **In   Millions of U.S. Dollars** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| 2010                |       | 168.6                                  |       |
| 2011                |       | 205.4                                  |       |
| 2012                |       | 155.2                                  |       |
| 2013                |       | 189.2                                  |       |
| 2014 and thereafter |       | 983.5                                  |       |
| **Total**           |       | 1,701.9                                |       |

 

The following table sets forth our ratios of consolidated debt to total capitalization (i.e., consolidated debt plus total stockholders’ equity) and consolidated liabilities to total stockholders’ equity as of the dates indicated.  For purposes 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, 2008 |       | 0.60                                                       |       | 3.79                                                                           |       |
| December 31, 2009 |       | 0.65                                                       |       | 2.72                                                                           |       |

 

**Capital Expenditures**

** **

In 2007, we invested U.S.$204 million, which were mainly applied to Gruma Corporation.  Major capital expenditures were oriented to capacity expansions and upgrades in Gruma Corporation, capacity expansions in GIMSA and Gruma Centroamérica, and the construction of a tortilla plant in Australia.  During 2008, GRUMA’s investments totaled U.S.$235 million, most of which was applied to Gruma Corporation.  Major investments were applied to the construction of tortilla plants in California and Australia and capacity expansions and upgrades in Gruma Corporation.  In 2009, we invested U.S.$87 million in major capital expenditures, which were applied to capacity expansions and upgrades in Gruma Corporation and GIMSA, the completion of a tortilla plant in California and the construction of a wheat mill in Venezuela.

 

59

----

Table of Contents

 

In light of the increase in our debt resulting from losses on derivative instruments during 2009, our capital expenditures will be oriented exclusively to the most material projects and therefore will be lower than what we have invested in recent years.  We have budgeted approximately U.S.$98 million for capital expenditures in 2010, which we intend to use mainly for upgrades at existing plants in Gruma Corporation and GIMSA, including approximately U.S.$18 million which were budgeted for capital expenditures in Gruma Venezuela and expected to be paid for with funds generated from our Venezuelan operations.  We anticipate financing these expenditures throughout the year through internally generated funds.  This capital expenditures budget does not include any potential acquisitions.  During the first quarter of 2010, we spent approximately U.S.$11 million on capital expenditures which were applied mainly to general manufacturing upgrades in Gruma Corporation.  U.S.$2.2 million were applied to capital expenditures in Gruma Venezuela during the first quarter of 2010.

 

**Concentration of Credit Risk**

 

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

 

We are also exposed to risk in connection with our cash management activities and temporary investments, and any disruption that affects our financial intermediaries could also adversely affect our operations.

 

Our exposure to risk due to trade receivables is limited given the large number of our customers located in different parts of Mexico, the United States, Central America, Venezuela and Europe.  However, we still maintain reserves for potential credit losses.  Our operations in Venezuela represented approximately 18% of our sales in 2009.  The severe political and economic situation in Venezuela presents a risk to our business that we cannot control and that cannot be accurately measured or estimated.  For example, the Venezuelan government devalued its currency and established a two tier exchange structure on January 11, 2010.  Pursuant to Exchange Agreement No.14, the official exchange rate of the Venezuelan bolívars (“Bs.”) has been devalued from Bs.2.15 to each U.S. dollar to 4.30 for non-essential goods and services and to 2.60 for essential goods.  At this time, we cannot predict the effect that the Venezuelan government’s decision to devalue its currency, or similar decisions the government may take in the future, will have on our suppliers and counterparties.  See “Item 3.  Key Information—Risk Factors—Risks Related to Venezuela—Venezuela Presents Significant Economic Uncertainty and Political Risk.”

 

Our financial condition and results of operations could be adversely affected since, among other reasons:  (i) 100% of the sales of our operations in Venezuela are denominated in bolívars; (ii) Gruma Venezuela produces products that are subject to price controls; (iii) part of Gruma Venezuela’s sales depend on centralized government procurement policies for its social welfare programs; (iv) we may have difficulties repatriating dividends from Gruma Venezuela, as well as importing some of its requirements for raw materials as a result of the exchange controls, and; (v) Gruma Venezuela may face increasing costs in some of our raw materials due to the implementation of import tariffs.  In the case of some of our raw materials, we may also face increasing costs due to the implementation of import tariffs.  See “Item 3.  Key Information—Risk Factors—Risks Related to Venezuela—Venezuela Presents Significant Economic Uncertainty and Political Risk.”

 

From time to time, we enter into currency derivative transactions that cover varying periods of time and have varying pricing provisions.  See “Item 11.  Quantitative and Qualitative Disclosures About Market Risk—Foreign Exchange Rate Risk.”

 

Our credit exposure on derivatives contracts is primarily to professional counterparties in the financial sector, arising from transactions with banks, investment banks and other financial institutions.  As of June 14, 2010, the Company had no foreign exchange derivative transactions in effect.  See “Item 11.  Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”

 

**Market Risk**

 

Market risk is the risk of loss generated by fluctuations in market prices such as commodities, interest rates and foreign exchange rates.  These are the main market risks to which we are exposed.

 

60

----

Table of Contents

 

Extreme exchange rate volatility in the financial markets during the last two quarters of 2008 and the first quarter of 2009 resulted in significant fluctuations in the mark-to-market value of GRUMA’s foreign exchange derivative instruments.  As a result, on November 12, 2008 we entered into a loan agreement with Bancomext in the amount of Ps. 3,367 million and applied the proceeds to terminate our commitments arising under all the currency derivative instruments that we had entered into with one of our derivative counterparties and to pay other commitments arising under the currency derivative instruments maturing from the date of such loan agreement with Bancomext.  In addition, the Company converted a total of approximately U.S.$738.3 million dollars owing under our terminated foreign exchange derivative instruments into medium and long-term loans on October 16, 2009, as described above.  See “—Indebtedness.”

 

As of June 14, 2010, all of the foreign exchange derivative instruments we had entered into with several counterparties with maturities in 2010 and 2011 had either expired by their terms or were terminated by the Company.  As a result, the Company had no foreign exchange derivative transactions in effect.  See “Item 11.  Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”

 

**RESEARCH AND DEVELOPMENT**

** **

We continuously engage in research and development activities that focus on, among other things:  increasing the efficiency of our proprietary corn flour and corn/wheat tortilla production technology; maintaining high product quality; developing new and improved products and manufacturing equipment; improving the shelf life of certain corn and wheat products; improving and expanding our information technology system; engineering, plant design and construction; and compliance with environmental regulations.  We have obtained 57 patents in the United States since 1968, one of which was obtained during the last three years. 20 of these patents are in force and effect in the United States as of the date hereof and the remaining 37 have expired.  We currently have 6 new patents in process, 3 in the United Sates and 3 in other countries.  Additionally, 6 of our registered patents are currently in the process of being published in other countries.

 

Our research and development is conducted through our subsidiaries INTASA, Tecnomaíz and CIASA.  Through Tecnomaíz, we engage in the design, manufacture and sale of machines for the production of corn/wheat tortillas and tortilla chips.  We carry out proprietary technological research and development for corn milling and tortilla production as well as all engineering, plant design and construction through INTASA and CIASA.  These companies administer and supervise the design and construction of our new plants and also provide advisory services and training to employees of our corn flour and tortilla manufacturing facilities.  We spent Ps.65 million, Ps.94 million and Ps.92 million on research and development in 2007, 2008 and 2009, respectively.

 

**TREND INFORMATION**

** **

Our financial results will likely continue to be influenced by factors such as changes in the level of consumer demand for tortillas and corn flour, government policies regarding the Mexican tortilla and corn flour industry, and the cost of corn, wheat and wheat flour.  In addition, we expect our financial results in 2010 to be influenced by:

 

·                  our ability to effectively manage our liquidity requirements in connection with our increased leverage;

 

·                  volatility in corn and wheat prices;

 

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

 

·                  increases or decrease in the Hispanic population in the United States;

 

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

 

61

----

Table of Contents

 

·                  volatility in energy costs;

 

·                  increased competition in the corn flour business;

 

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

 

·                  civil and political unrest, currency devaluation and other governmental economic policies in Venezuela which may negatively affect the profitability of Gruma Venezuela; and

 

·                  unfavorable general economic conditions in the United States and globally, such as the recession or economic slowdown, which could negatively affect the affordability of and consumer demand for some of our products.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

** **

As of December 31, 2009 we do not have any outstanding off-balance sheet arrangements.

 

**CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS**

** **

We have commitments under certain firm contractual arrangements to make future payments for goods and services.  These firm commitments secure the future rights to various assets to be used in the normal course of operations.  For example, we are contractually committed to make certain minimum lease payments for the use of property under operating lease agreements.  In accordance with Mexican FRS, the future rights and obligations pertaining to such firm commitments are not reflected as assets and liabilities on the accompanying consolidated balance sheets.  The following table summarizes separately our material firm commitments at December 31, 2009 and the timing and effect that such obligations are expected to have on our liquidity and cash flow in the future periods.  In addition, the table reflects the timing of principal and interest payments on outstanding debt, which is discussed in “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Indebtedness.”  We expect to fund the firm commitments with operating cash flow generated in the normal course of business.

 
| **Contractual Obligations   and   Commercial Commitments** | ** ** | **Total**                              | ** **   | **Less than   1 Year** | ** ** | **From 1 to 3   Years** | ** ** | **From 3 to 5   Years** | ** **  | **Over 5   Years** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|--------------|------------------------|------------|-------------------------|------------|-------------------------|-------------|--------------------|------------|
| ** **                                                 | ** ** | **(in millions of U.S. dollars)** | ** **   |
| Long-term debt obligations                                 |       | 1,533.3                                |         | —                 |       | 360.6                   |       | 380.5                   |        | 792.2              |       |
| Operating lease obligations(1)                             |       | 109.3                                  |         | 38.5                   |       | 45.7                    |       | 15.2                    |        | 9.9                |       |
| Purchase obligations(2)                                    |       | 155.7                                  |         | 155.7                  |       | —                  |       | —                  |        | —             |       |
| Interest payments on our indebtedness (3)                  |       | 389.8                                  |         | 87.0                   |       | 141.1                   |       | 114.1                   |        | 47.6               |       |
| Other liabilities(4)                                       |       | 168.6                                  |         | 168.6                  |       | —                  |       | —                  |        | —             |       |
| Total                                                      |       | 2,356.7                                |         | 449.8                  |       | 547.4                   |       | 509.8                   |        | 849.7              |       |
| Total in millions of peso equivalent amounts               |       | Ps.                                    |  30,802 |                   | Ps.        |  5,879             |       | Ps.                     |  7,155 |               | Ps.        |  6,663 |   | Ps. |  11,106 |   |
|                                                            |            |                                        |              |                        |            |                         |            |                         |             |                    |            |  |  |  |  |  |

 

----

(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, 2009.

 

(4) Other relate to liabilities for uncertain tax positions, short-term bank loans and the current portion of long-term debt.

 

62

----

Table of Contents

 

**U.S. GAAPRECONCILIATION**

** **

Ourconsolidated financial statements are prepared in accordance with Mexican FRS,which differ in certain significant respects from U.S. GAAP.  See Note 21 to our audited consolidatedfinancial statements for information relating to the nature and effect of suchdifferences.

 

Netincome (loss) under U.S. GAAP amounted to Ps.2,107.7 million in2007, Ps.(11,778.9) million in 2008, and Ps.1,545.6 million in 2009 comparedwith majority net income under Mexican FRS of Ps.2,233.3 million in 2007,loss of Ps.12,339.8 million in 2008 and Ps.1,528.9 million in 2009.

 

Stockholders’equity under U.S. GAAP amounted to Ps.9,678.7 million in 2008 and Ps.10,946.2million in 2009 compared with stockholders’ equity under Mexican FRS ofPs.9,281.5 million in 2008 and Ps.11,811.6 million in 2009.  Under U.S. GAAP, starting January 1,2009, the Company adopted the provisions contained in the FASB’s revised standardon accounting for noncontrolling interests. Therefore, the Company reclassified noncontrolling interest to aseparate component of stockholders’ equity. This reclassification applies retrospectively to all periods.  See Note 21 to our audited consolidated financialstatements for a further discussion of the adjustments under U.S. GAAP.

 

**New Accounting Standards**

** **

***New Accounting Pronouncements under Mexican FRS***

*** ***

The CINIF issued during December 2009, a seriesof Mexican Financial Reporting Standards (MFRS) and Interpretations (INIF)which become effective as of January 1, 2010, with exception of the INIF18 which became effective as of December 7, 2009 and the MFRS B-5 and B-9which will become effective as of January 1, 2011.

 

Such MFRS and interpretationsare not considered to have a material impact in the financial informationpresented by the Company:

 

MFRS B-5 “FinancialInformation by Segments.”  Establishesthe general standards to disclose financial information by segments,additionally it allows the user of such information to analyze the entity asmanagement does and allows to present information by segment more consistentwith its financial statements.  This standard will leave Bulletin B-5 *Financial Information by Segment* withouteffect, which will be effective until December 31, 2010.

 

MFRS C-1 “Cash and cashequivalents.”  Establishes generalstandards on the accounting treatment and disclosure of cash, restricted cashand available for sale investments, it also introduces new terminology to makeit consistent with other MFRS previously issued.   This standard leavesBulletin C-1, *Cash* withouteffect, which was effective until December 31, 2009.

 

INIF 17 “Service concessioncontracts.”   The INIF 17 removesthe inconsistency between MFRS D-6 *Capitalizationof the comprehensive financial result* and Bulletin D-7 *Contracts of construction and manufacturing of someequity goods*, concerning the accounting treatment of thecomprehensive financial result in the event of recognition of an intangible assetduring the construction phase, for service concession contracts.

 

INIF 18 “Recognition ofeffects of the Tax Reform 2010 in the Income tax.”   The INIF 18, was issued to giveresponse to diverse questioning of the financial information preparations relatedwith the Tax Reform 2010 effects, especially for the changes established in thetax consolidation regime and modifications to the Income tax rate.

 

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

*** ***

*Transfersand Servicing (ASC 860), Accounting for Transfers of Financial Assets (ASU2009-16):*

 

The FASB issued ASU 2009-16in December 2009. This standard became effective for the Company on January 1,2010. ASU 2009-16 changes how companies account for transfers of financialassets and eliminates the concept of qualifying special-purpose entities.Adoption of the guidance is not expected to have an impact on the Company’sresults of operations or financial position.

 

63

----

Table of Contents

 

*Consolidation(ASC 810), Improvements to Financial Reporting by Enterprises Involved WithVariable Interest Entities (ASU 2009-17):*

 

TheFASB issued ASU 2009-17 in December 2009. This standard became effectivefor the Company on January 1, 2010. ASU 2009-17 requires the enterprise toqualitatively assess if it is the primary beneficiary of a variable-interestentity (VIE), and, if so, the VIE must be consolidated. Adoption of thestandard is not expected to have a material impact on the Company’s results ofoperations or financial position.

 

*Fair Value Measurements and Disclosures (ASC 820), ImprovingDisclosures about Fair Value Measurements (ASU 2010-06)*

 

TheFASB issued ASU 2010-06, “Fair Value Measurements and Disclosures” in January 2010.This update provides amendments to Subtopic 820-10 related to new disclosuresand clarification of existing disclosures. This ASU should be effective forannual and interim reporting periods beginning after December 15, 2009,except for the requirement to provide the Level 3 activity between purchases,sales, issuances, and settlements on a gross basis. That requirement iseffective for fiscal years beginning after December 15, 2010, and forinterim periods within those fiscal years. Adoption of the standard is notexpected to have a material impact on the Company’s results of operations orfinancial position.

 

**ITEM 6.**                             Directors, Senior Management andEmployees.

** **

**MANAGEMENT STRUCTURE**

** **

Our management is vested in our board ofdirectors.  Our day to day operations arehandled 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. 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 29, 2010, 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:                    |   | 79                                                                                                                                                                                                                                      |
|--------------------------------|--------|-------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |   | Years  as Director:     |   | 28                                                                                                                                                                                                                                      |
|                           |   | 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                                                                                                                                                                                                           |

 

64

----

Table of Contents

 
| Juan  Diez-Canedo Ruiz                       |   | Age:                                                                                                                                                               |   | 59                                                                                                                                                                                                                                                                                                                                                                             |
|----------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         |   | Years  as Director:                                                                                                                                                |   | 5                                                                                                                                                                                                                                                                                                                                                                              |
|                                         |   | Principal  Occupation:                                                                                                                                             |   | Chief  Executive Officer of Financiera Local                                                                                                                                                                                                                                                                                                                                   |
|                                         |   | Outside  Directorships:                                                                                                                                            |   | Director  of GIMSA, member of the audit and corporate governance committees of GRUMA  and GIMSA.                                                                                                                                                                                                                                                                               |
|                                         |   | Business  Experience:                                                                                                                                              |   | Chief  Executive Officer of Fomento y Desarrollo Comercial, 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: |   | 61

1

Chief  Executive Officer of Autos Soni Corporation

None

Chief  Executive Officer of OBAMA Corporation, President of the Mexico office of FCB  Worldwide, Chief Operating Officer of Chrysler de México, Executive Vice  President Sales and Marketing of GRUMA, Chief Operating Officer of Gruma  Latin America.

Independent

Mario Ernesto Medina Ramírez |
|                                         |   |                                                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                           |
| Juan  Antonio González Moreno           |   | Age:                                                                                                                                                               |   | 52                                                                                                                                                                                                                                                                                                                                                                             |
|                                         |   | Years  as Director:                                                                                                                                                |   | 16                                                                                                                                                                                                                                                                                                                                                                             |
|                                         |   | 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                                                                                                                                                                                                                                                                                                                                             |
|                                         |   |                                                                                                                                                               |   |                                                                                                                                                                                                                                                                                                                                                                           |
| Bertha  Alicia González Moreno          |   | Age:                                                                                                                                                               |   | 56                                                                                                                                                                                                                                                                                                                                                                             |
|                                         |   | Years  as Director:                                                                                                                                                |   | 2                                                                                                                                                                                                                                                                                                                                                                              |
|                                         |   | Principal  Occupation:                                                                                                                                             |   | Honorary Life President of Patronato para el  Fomento Educativo y Asistencial de Cerralvo                                                                                                                                                                                                                                                                                      |
|                                         |   | Outside  Directorships:                                                                                                                                            |   | Director of Grupo Financiero Banorte, Centro  Educativo Universitario Panamericano, Adanec, and Grafo Industrial.                                                                                                                                                                                                                                                              |
|                                         |   | 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:                                                                                                                                                               |   | 47                                                                                                                                                                                                                                                                                                                                                                             |
|                                         |   | Years  as Director:                                                                                                                                                |   | 3                                                                                                                                                                                                                                                                                                                                                                              |
|                                         |   | Principal  Occupation:                                                                                                                                             |   | President  and General Manager of Archer Daniels Midland México                                                                                                                                                                                                                                                                                                           |
|                                         |   | Outside  Directorships:                                                                                                                                            |   | Chairman of the Board of Terminales de Carga Especializadas,  director of Asociación de Proveedores de Productos Agropecuarios de México.                                                                                                                                                                                                                            |

 

65

----

Table of Contents

 
|                                   |   | Business  Experience:                                                                                                                      |   | President  and General Manager of Compañía Continental de México.                                                                                                                                                                            |
|----------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   |   | Directorship  Type:                                                                                                                        |   | Shareholder, independent                                                                                                                                                                                                                                    |
|                                   |   | Alternate:                                                                                                                                 |   | Steve Mills                                                                                                                                                                                                                                                 |
|                                   |   |                                                                                                                                       |   |                                                                                                                                                                                                                                                        |
| Carlos  Hank Rhon                      |   | Age:                                                                                                                                       |   | 62                                                                                                                                                                                                                                                          |
|                                   |   | Years  as Director:                                                                                                                        |   | 16                                                                                                                                                                                                                                                          |
|                                   |   | 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: |   | 58

1

Chairman  of the Board, ABC Holding

Director  of CYDSA, XIGNUX, and Megacable.

Chief  Executive Officer of Bancomext (Exim-bank), Nacional Financiera, Bancomer and  Grupo Vector.

Independent

Alan Castellanos Carmona                          |
|                                   |   |                                                                                                                                       |   |                                                                                                                                                                                                                                                        |
| Juan  Manuel Ley López            |   | Age:                                                                                                                                       |   | 77                                                                                                                                                                                                                                                          |
|                                   |   | Years  as Director:                                                                                                                        |   | 16                                                                                                                                                                                                                                                          |
|                                   |   | 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:                                                                                                                                       |   | 68                                                                                                                                                                                                                                                          |
|                                   |   | Years  as Director:                                                                                                                        |   | 15                                                                                                                                                                                                                                                          |
|                                   |   | 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                                                                                                                                                                                                                                      |
|                                   |   |                                                                                                                                       |   |                                                                                                                                                                                                                                                        |
| Juan  A. Quiroga García           |   | Age:                                                                                                                                       |   | 60                                                                                                                                                                                                                                                          |
|                                   |   | Years  as Director:                                                                                                                        |   | 4                                                                                                                                                                                                                                                           |
|                                   |   | 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:                                                                                                                                       |   | 42                                                                                                                                                                                                                                                          |
|                                   |   | Years  as Director:                                                                                                                        |   | 3                                                                                                                                                                                                                                                           |
|                                   |   | Principal  Occupation:                                                                                                                     |   | Vice  President Strategic Planning and Business Development of Archer Daniels  Midland Company                                                                                                                                                              |
|                                   |   | Outside  Directorships:                                                                                                                    |   | None                                                                                                                                                                                                                                                        |

 

66

----

Table of Contents

 
|                            |   | 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:                    |   | 59                                                                                                                                                                                                                                          |
|                            |   | Years  as Director:     |   | 16                                                                                                                                                                                                                                          |
|                            |   | 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:                    |   | 65                                                                                                                                                                                                                                          |
|                            |   | Years  as Director:     |   | 16                                                                                                                                                                                                                                          |
|                            |   | 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:                    |   | 53                                                                                                                                                                                                                                          |
|                            |   | Years  as Director:     |   | 8                                                                                                                                                                                                                                           |
|                            |   | Principal  Occupation:  |   | Chief  Executive Officer of 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 ValueLink, Chief Executive Officer of Nacional Monte de  Piedad, Executive Vice President and Chief Financial Officer of GRUMA,  project director at Booz Allen Hamilton.                                       |
|                            |   | Directorship  Type:     |   | Independent                                                                                                                                                                                                                                 |
|                            |   | Alternate:              |   | Jorge Vélez Bautista                                                                                                                                                                                                                   |

 

Mr. Roberto González Moreno, Ms. BerthaAlicia González Moreno, and Mr. Juan Antonio González Moreno, members ofour board of directors are children of Mr. Roberto González Barrera,Chairman of our board of directors and our Chief Executive Officer.  Mr. Carlos Hank Rhon, a member of ourboard of directors, is the son-in-law of Mr. Roberto GonzálezBarrera.  Mr. Carlos Hank González,an alternate member of our board of directors, is the son of Carlos Hank Rhonand the grandson of Mr. Roberto González Barrera.  Furthermore, Mr. Roberto González Valdezand Mr. Ricardo González Valdez, alternate members of our board ofdirectors, are sons of Mr. Roberto González Moreno and grandsons of Mr. RobertoGonzález Barrera.

 

**Secretary**

** **

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

 

67

----

Table of Contents

 

**Senior Management**

** **

The following table sets forth our executiveofficers, their ages, years of service, current positions, and prior businessexperience:

 
| Roberto  González Barrera     |   | Age:                         |   | 79                                                                                                                                                                                                                                                                                      |
|------------------------------------|--------|------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   | Years  as Executive Officer: |   | 61                                                                                                                                                                                                                                                                                      |
|                               |   | Years  at GRUMA:             |   | 61                                                                                                                                                                                                                                                                                      |
|                               |   | 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:                         |   | 62                                                                                                                                                                                                                                                                                      |
|                               |   | Years  as Executive Officer: |   | 4                                                                                                                                                                                                                                                                                       |
|                               |   | Years  at GRUMA:             |   | 10                                                                                                                                                                                                                                                                                      |
|                               |   | 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:                         |   | 60                                                                                                                                                                                                                                                                                      |
|                               |   | Years  as Executive Officer: |   | 11                                                                                                                                                                                                                                                                                      |
|                               |   | Years  at GRUMA:             |   | 24                                                                                                                                                                                                                                                                                      |
|                               |   | 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:                         |   | 46                                                                                                                                                                                                                                                                                      |
|                               |   | Years  as Executive Officer: |   | 8                                                                                                                                                                                                                                                                                       |
|                               |   | Years  at GRUMA:             |   | 15                                                                                                                                                                                                                                                                                      |
|                               |   | 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.                                               |
|                               |   |                         |   |                                                                                                                                                                                                                                                                                    |
| Juan  Antonio González Moreno |   | Age:                         |   | 52                                                                                                                                                                                                                                                                                      |
|                               |   | Years  as Executive Officer: |   | 6                                                                                                                                                                                                                                                                                       |
|                               |   | Years  at GRUMA:             |   | 30                                                                                                                                                                                                                                                                                      |
|                               |   | 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:                         |   | 34                                                                                                                                                                                                                                                                                      |
|                               |   | Years  as Executive Officer: |   | 3                                                                                                                                                                                                                                                                                       |
|                               |   | Years  at GRUMA:             |   | 5                                                                                                                                                                                                                                                                                       |
|                               |   | 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.                                                                                              |

 

68

----

Table of Contents

 
|  Sylvia  Hernández Benítez |   | Age:                         |   | 45                                                                                                                                                                                                                                                                                                                                                                                       |
|-------------------------------------------|--------|------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      |   | Years  as Executive Officer: |   | 7                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | Years  at GRUMA:             |   | 7                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | 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:                         |   | 47                                                                                                                                                                                                                                                                                                                                                                                       |
|                                      |   | Years  as Executive Officer: |   | 8                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | Years  at GRUMA:             |   | 25                                                                                                                                                                                                                                                                                                                                                                                       |
|                                      |   | Current  Position:           |   | Chief  Administrative Officer                                                                                                                                                                                                                                                                                                                                                            |
|                                      |   | Business  Experience:        |   | Various  positions within GRUMA including Finance and Administrative Vice President of  Gruma Venezuela.                                                                                                                                                                                                                                                                                 |
|                                      |   |                         |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| Heinz Kollmann                            |   | Age:                         |   | 40                                                                                                                                                                                                                                                                                                                                                                                       |
|                                      |   | Years  as Executive Officer: |   | 4                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | Years  at GRUMA:             |   | 4                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | 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:                         |   | 49                                                                                                                                                                                                                                                                                                                                                                                       |
|                                      |   | Years  as Executive Officer: |   | 5                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | Years  at GRUMA:             |   | 5                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | 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:                         |   | 60                                                                                                                                                                                                                                                                                                                                                                                       |
| * *                                  |   | Years  as Executive Officer: |   | 12                                                                                                                                                                                                                                                                                                                                                                                       |
|                                      |   | Years  at GRUMA:             |   | 37                                                                                                                                                                                                                                                                                                                                                                                       |
|                                      |   | Current  Position:           |   | Chief  Corporate Officer                                                                                                                                                                                                                                                                                                                                                                 |
|                                      |   | Other  Positions:            |   | Senior  Corporate Controller of GIMSA                                                                                                                                                                                                                                                                                                                                                    |
|                                      |   | Business  Experience:        |   | Vice  President of Administration of Gruma Corporation, Chief Administrative and  Internal Auditing Officer of GRUMA, Vice President of Operations Control of  Gruma Corporation.                                                                                                                                                                                                        |
|                                      |   |                         |   |                                                                                                                                                                                                                                                                                                                                                                                     |
| Juan  Fernando Roche                      |   | Age:                         |   | 55                                                                                                                                                                                                                                                                                                                                                                                       |
|                                      |   | Years  as Executive Officer: |   | 4                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | Years  at GRUMA:             |   | 4                                                                                                                                                                                                                                                                                                                                                                                        |
|                                      |   | 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.                                                                                          |

 

69

----

Table of Contents

 
| Felipe  Rubio Lamas                                          |   | Age:                                                                                                    |   | 52                                                                                                                                                                                                                                                                                       |
|--------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                         |   | Years  as Executive Officer:                                                                            |   | 8                                                                                                                                                                                                                                                                                        |
|                                                         |   | Years  at GRUMA:                                                                                        |   | 27                                                                                                                                                                                                                                                                                       |
|                                                         |   | 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:

  |   | 51

1

1

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:                                                                                                    |   | 57                                                                                                                                                                                                                                                                                       |
| * *                                                     |   | Years  as Executive Officer:                                                                            |   | 13                                                                                                                                                                                                                                                                                       |
|                                                         |   | Years  at GRUMA:                                                                                        |   | 13                                                                                                                                                                                                                                                                                       |
|                                                         |   | 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 González Alcalá, President of GrumaMéxico and Latin America, and Mr. Juan Antonio González Moreno, ChiefExecutive Officer of Gruma Asia and Oceania, are sons of Mr. RobertoGonzález Barrera,  Chairman of our boardof directors and our Chief Executive Officer. Mr. Roberto González Valdés, Managing Director of GrumaCentroamérica, is the son of Mr. Roberto González Moreno, alternate memberof our board of directors, and the grandson of Mr. Roberto GonzálezBarrera.  Mr. Homero Huerta Moreno,our Chief Administrative Officer, is the cousin of Mr. Juan AntonioGonzález Moreno, Mr. Roberto González Moreno, and Ms. Bertha AliciaGonzález Moreno, members of our board of directors.

 

**Audit and CorporateGovernance Committees**

** **

As required by the Mexican Securities Law, the Sarbanes-OxleyAct of 2002 and our bylaws, an audit committee and a corporate governancecommittee were appointed by the meeting of the board of directors held on April 28,2010.  Members of the audit and corporategovernance committees were selected from members of the board ofdirectors.  Consequently, as required bythe Mexican Securities Law and our bylaws, a chairman for each committee waselected by the General Ordinary Shareholders’ Meeting held on April 29,2010, from among the members appointed by the board.

 

The current audit and corporate governancecommittees are comprised of three members, all of whom are independentdirectors.  Set forth below are the namesof our audit and corporate governance committees members, their positionswithin the committees, 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:           |   | Financial  Expert of the audit and corporate governance committees. |
|                                 |   | Directorship  Type: |   | Independent                                                         |

 

70

----

Table of Contents

 

**COMPENSATION OF DIRECTORS AND SENIOR MANAGEMENT**

** **

Members of the board of directors are paid a fee of Ps.35,000 for each board meeting they attend.  Additionally, members of the audit and corporate governance committees are paid a fee of Ps.35,000 for each committee meeting they attend.

 

For 2009, the aggregate amount of compensation paid to all directors, alternate directors, executive officers and audit and corporate governance committees members was approximately Ps.132.9 million (in nominal terms).  The contingent or deferred compensation reserved as of December 31, 2009 was Ps.41.8 million (in nominal terms).

 

We offer an Executive Bonus Plan that applies to managers, vice presidents, and executive officers.  The variable compensation under this plan can range from 20% to 100% of annual base compensation, depending upon the employee’s level, his individual performance and the results of our operations.

 

**EMPLOYEES**

** **

As of December 31, 2009, we had a total of 19,093 employees, including 12,019 unionized and 7,074 non-unionized full- and part-time employees.  Of this total, we employed 7,258 persons in Mexico, 6,317 in the United States, 2,006 in Central America, 2,182 in Venezuela, 698 in China and Australia, and 632 in Europe.  Total employees for 2007 and 2008 were 18,767 and 19,060, respectively.  Of our total employees as of December 31, 2009, approximately 37% were white-collar and 63% were blue collar.

 

In Mexico, workers at each of our plants are covered by a separate contract, under which salary revisions take place once each year, usually in January or February.  Non-salary provisions of these contracts are revised bi-annually.  We renewed agreements with the three unions that represent our workers in 2008.

 

In the United States, Gruma Corporation has four collective bargaining agreements that represent a total of 416 workers at four separate facilities (Pueblo, Tempe, Madera and Henderson).  We renewed one agreement in January of 2008.  In 2009, workers at our Hayward plant petitioned to unionize.  Ultimately, the workers at this plant withdrew their petition.

 

In England, we have one collective bargaining agreement covering 25 employees at a facility, which is renewed every 12 months.

 

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

 

Wages are reviewed during the negotiations and wage increases processed according to the terms of each agreement as well as non-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 labor relations are good.

 

**SHARE OWNERSHIP**

** **

The following Directors and Senior Managers have GRUMA shares which in each case represent less than 1% of our capital stock: Ms. Bertha Alicia González Moreno, Mr. Juan Antonio Quiroga García, and Mr. Leonel Garza Ramírez.  In addition, Mr. Roberto González Barrera owns directly and indirectly 279,301,152 shares representing approximately 49.6% of our outstanding shares.

 

**ITEM 7.**                             Major Shareholders And Related Party Transactions.

** **

**MAJOR SHAREHOLDERS**

** **

The following table sets forth certain information regarding the beneficial ownership of our capital stock as of April 29, 2010 (which consists entirely of Series B Shares) with respect to Mr. González Barrera and Archer-Daniels-Midland and its affiliates, the only shareholders we know to own beneficially more than 5% of our capital stock, as well as our directors and executive officers as a group and other shareholders.  See “Item 9.  The Offer and Listing” for a further discussion of our capital stock.  With the exception of Archer-Daniels-Midland’s right to 

 

71

----

Table of Contents

 

appoint two members of our board of directors, and their corresponding alternates, the major shareholders do not have different or preferential voting rights with respect to those shares they own.  As of April 29, 2010, our Series B shares were held by 607 record holders in Mexico.

 
| **Name**                                       | ** ** | **Number of   Series B Shares** | ** ** | **Percentage of   Outstanding Shares** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|
| Roberto González   Barrera and family (1) |       | 282,937,052                          |       | 50.20                                  | %          |
| Archer-Daniels-Midland (2)                     |       | 130,901,630                          |       | 23.22                                  | %          |
| Directors and Officers as a Group (3)          |       | 87,545                               |       | 0.02                                   | %          |
| Other shareholders                             |       | 149,724,482                          |       | 26.56                                  | %          |
|                                           |       |                                 |       |                                   |       |
| 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; and 3,635,900 shares held by Ms. Bertha Alicia González Moreno.

 

(2)  Of the shares beneficially owned by Archer-Daniels-Midland, 2,630,716 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 and Ms. Bertha Alicia González Moreno, members of our board of directors.

 

(4)  As of April 29, 2010, our capital stock was represented by 565,174,609 issued Series B, class I, no par value shares (“Series B shares”), of which 563,650,709 shares were outstanding, fully subscribed and paid, and 1,523,900 shares were held in our treasury.

 

Mr. González Barrera and his family control approximately 54.56% of our outstanding shares and therefore have the power to elect a majority of our 15 directors.  In addition, under Mexican law, any holder or group of holders representing 10% or more of our capital stock may elect one director.  Under our bylaws and the Archer-Daniels-Midland association, as long as Archer-Daniels-Midland owns at least 20% of our capital stock, it will have the right to designate two members of our board of directors and their corresponding alternates.

 

Under the terms of our agreement, Archer-Daniels-Midland may not, without the consent of Mr. Roberto González Barrera, the Chairman of our board of directors, acquire additional shares of us.

 

On May 20, 2008, we completed a preemptive rights offering in Mexico to our non-U.S. shareholders, pursuant to which we issued 82,624,657 of our Series B shares.  Company shareholders exercising their preemptive rights paid for and acquired the shares at a price of Ps.25.55 per share for a combined offering total of Ps.2,111,060,000.  Rights to acquire the shares were not offered to U.S. persons, nor in any other jurisdiction outside of Mexico.  Prior to the preemptive rights offering, Mr. González Barrera 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 to vote approximately 22% of our outstanding shares.  Archer-Daniels-Midland did not participate in the rights offering.  As of April 29, 2010, Archer-Daniels-Midland, directly and indirectly, owned approximately 23.22% of our outstanding shares and controlled the right to vote approximately 18.87% of our outstanding shares.

 

We have been informed that Mr. González Barrera has pledged or has been required to pledge part of his shares in us as collateral for loans made to him.  In the event of a default, should the lenders enforce their rights with respect to these shares, Mr. González Barrera and his family could lose their controlling interest in us.  In addition, Mr. González Barrera must give Archer-Daniels-Midland a right of first refusal on any sale of his GRUMA shares if at the time of the sale, he owns, or as a result of the sale will own, less than 30% of our outstanding shares.  Should Archer-Daniels-Midland exercise its right, then it could control us.  Archer-Daniels-Midland must also give Mr. González Barrera a right of first refusal on any sale of our shares.

 

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

 

72

----

Table of Contents

 

**RELATED PARTY TRANSACTIONS**

 

The transactions set forth below were made in the ordinary course of business, on substantially the same terms as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other unfavorable features. 

 

**Transactions with Subsidiaries**

 

We periodically enter into short-term credit arrangements with our subsidiaries, where we provide them with funds for working capital at market interest rates.

 

At their peak on October 10, 2009, the outstanding balance of loans from GIMSA to GRUMA were Ps.1,730.4 million in nominal terms.  As of May 14, 2010, we owed GIMSA Ps.1,089 million in nominal terms.  The average interest rate for this year up to May 14, 2010 has been 10.9% for loans in pesos.

 

In September of 2001, Gruma Corporation started to make loans to us which, at their peak on September 29, 2009, reached the amount of U.S.$100.0 million.  We borrowed money from Gruma Corporation at an average rate of 1% during 2009.  As of November 2009, we had paid off the balance of our loans owing to Gruma Corporation and as of June 2010 we have no outstanding balance owing to Gruma Corporation.

 

Upon an event of default as stipulated under the relevant financing agreements, all accounts payable to GRUMA in respect of intercompany debt are to be deposited in a Mexican trust.  The proceeds from any such payment in respect of intercompany debt may be held in such Mexican trust until the event of default is remedied.

 

**Transactions with Archer-Daniels-Midland**

** **

We entered into an association with Archer-Daniels-Midland in September 1996.  As a result of this association, (i) we received U.S.$258.0 million in cash, (ii) GRUMA and Archer-Daniels-Midland combined their U.S. corn flour operations under Azteca Milling, our wholly-owned U.S. corn flour operations, and, as a result, Archer-Daniels-Midland received a 20% partnership interest in Azteca Milling, and (iii) we received 60% of the capital stock of Molinera de México, Archer-Daniels-Midland’s wholly-owned Mexican wheat milling operations.  We also gained exclusivity rights from Archer-Daniels-Midland in specified corn flour and wheat flour markets.  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 that time, and 20% partnership interest in Azteca Milling, and retained 40% of the capital stock of Molinera de México.  Archer-Daniels-Midland also obtained the right to designate two of our 15 directors and their corresponding alternates.  In addition, Archer-Daniels-Midland acquired 5% of MONACA.  Archer-Daniels-Midland has designated Federico Gorbea, President and Chief Operating Officer of Archer-Daniels-Midland’s operations in México, and Ismael Roig, Vice President of Planning and Business Development, as members of our board of directors.  Archer-Daniels-Midland has elected David J. Smith, its Senior Vice President, Secretary and General Counsel, and Steve Mills its Group Vice President and Controller, to serve as alternates for Mr. Gorbea and Mr. Roig, respectively.  As of April 29, 2010, Archer-Daniels-Midland, directly and indirectly, owned approximately 23.22% of our outstanding shares and controlled the right to vote approximately 18.87% of our outstanding shares.

 

During 2007, 2008 and 2009, we purchased U.S.$133 million, U.S.$183 million and U.S.$159 million, respectively, of inventory, including primarily wheat and corn, from Archer-Daniels-Midland Corporation, a shareholder, at market rates and terms.  For more information regarding these transactions, please see “Item 4.  Information on the Company—Business Overview—Gruma Venezuela.”

 

**Other Transactions**

** **

As of December 31, 2009 we hold approximately 8.8% of the capital stock of GFNorte, a Mexican financial institution.  In the normal course of business, we may obtain financing from GFNorte’s subsidiaries at market rates and terms.  For the past seven years, the highest outstanding loan amount has been Ps.162 million (in nominal terms) with an average interest rate of 8.9% in December 2003.

 

We have insurance contracts in place with Seguros Banorte Generali, S.A. de C.V., a subsidiary of GFNorte, to manage certain risks associated with some of our subsidiaries.  In 2008 and 2009, we paid insurance premiums of approximately Ps.49,488 and Ps.112,563, respectively.

 

73

----

Table of Contents

 

As of December 31, 2008 and 2009, we have accounts receivable due from companies affiliated with Ricardo Fernández Barrueco, the former minority stockholder of our Venezuelan subsidiaries, of Ps.84,146 and Ps.500,669, respectively.  Additionally, we have accounts payable due to Ricardo Fernández Barrueco, included in trade accounts of Ps.12,375 and Ps.6,658, respectively.  See “—Risks Related to Venezuela—One of our Subsidiaries in Venezuela is Currently Involved in Expropriation Proceedings and our Remaining Subsidiary in Venezuela is Subject to Expropriation.”

 

**ITEM 8.**                             Financial Information.

** **

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

 

**LEGAL PROCEEDINGS**

** **

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

 

**United States**

** **

**Distributor Arbitrations and Litigations.**

** **

**In November 2001, one of GRUMA’s distributors 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 state court 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 the arbitrator decide whether the matter should proceed as a class action.  An additional distributor subsequently joined the arbitration as a claimant.  The arbitrator has made a preliminary ruling that 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 its agreements with its distributors; (ii) Gruma Corporation’s distributors are actually employees; (iii) Gruma Corporation has failed to make wage and other payments required for employees; (iv) Gruma Corporation has violated California’s labor, antitrust, and unfair competition statutes; and (v) Gruma Corporation has otherwise committed fraud and negligent misrepresentations.  The arbitrator subsequently dismissed the antitrust claims.  The plaintiffs seek damages and equitable relief, but have not yet specified 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 of any liability began on April 28, 2008 and finished on May 21, 2008.  On August 12, 2008, the arbitrator issued his final award in writing finding that the distributors are properly classified as independent contractors and denying all relief.  In November 2008, the District Court affirmed the award on all grounds and plaintiffs have appealed the confirmation to the Court of Appeals for the Ninth Circuit.  The Ninth Circuit heard oral arguments on March 4, 2010 and we are awaiting the Court’s decision.**

** **

In April 2007, GRUMA was named in a class action suit, Enrique Garza, et al. v. Gruma Corporation doing business as Mission Foods, filed in the United States District Court for the Northern District of California, San Jose Division.  The plaintiffs assert that they were induced to enter into distributor agreements and to pay for routes by false statements and that GRUMA breached the distributor agreements by arbitrarily taking their routes, shuffling around the routes, reselling the routes to others, and failing to adequately compensate the plaintiffs.  The plaintiffs also asserted a Racketeer Influenced and Corrupt Organizations (RICO) violation under 18 U.S. Code §§ 1962 et seq.  Plaintiffs seek an unspecified amount of damages and injunctive relief.  On July 24, 2008, the Court dismissed the RICO claims with prejudice.  In July 2009, the district court granted GRUMA’s motion for summary judgment and denied plaintiff’s motion for class certification.  Plaintiffs have not yet filed their appeal and have requested an extension.  We intend to vigorously defend against this action.

 

**Labor and Employment Related Claims.**

** **

**On March 24, 2009, Guadalupe Arevalo, a former employee, filed a class action complaint for damages and equitable relief for: (1) failure to pay minimum or contractual wages in violation of the California Labor Code §§ 1194 and 1197, et seq.; (2) failure to pay overtime wages in violation of the California Labor Code §§ 1194 and**

 

74

----

Table of Contents

 

**510; (3) failure to provide accurate wage statements in violation of the California Labor Code §§ 226; (4) violation of the California Labor Code §§ 201 and 202 resulting in § 203 wages and penalties for failure to pay wages due former employees at the time of resignation and/or discharge; and (5) unfair competition violations in connection with the California Business and Professions Code §§ 17200 et seq.  In August 2009, the case was removed to the United States District Court for the Central District of California.  The discovery phase of the trial has not yet begun.  Plaintiff has not yet identified the amount of damages sought.  We believe the lawsuit is without merit and we will vigorously defend the matter.**

** **

In July, 2009, the Office of Federal Contract Compliance Programs (OFCCP) filed an administrative complaint alleging that Gruma Corporation employed a hiring process and selection procedures which discriminated against female applicants for certain positions on the basis of their gender, and that Gruma Corporation failed to implement an applicant tracking system for hires that would identify applicants’ gender, race and ethnicity information in accordance with the requirements of the USCFR.  The parties are in current discussion to negotiate an out-of-court settlement.  In January of 2010, the Labor Department offered to settle for an amount of U.S.$381,879.  Gruma Corporation intends to negotiate for a further reduction of this amount.

 

**Mexico**

 

**Asset Tax Claim.**

 

The *Secretaría de Hacienda y Crédito Público*, or Ministry of Finance and Public Credit, has lodged tax assessments against our company for an amount of Ps.340.7 million plus penalties, accrued interest and other charges in connection with our asset tax returns for the years 1996, 1997 and 2000.  The Company has filed several appeals to obtain an annulment of these assessments.

 

In addition to the foregoing, a 1999 tax claim was recently resolved by the Mexican Supreme Court against our company for asset taxes (*Impuesto al Activo*) of approximately Ps.47.5 million.  We expect a similar result regarding the 2000 claim against the Company.

 

**Income Tax Claim.**

 

The *Secretaría de Hacienda y Crédito Público* has lodged tax assessments against our company for an amount of Ps.93.5 million regarding withholdings of interest payments to our foreign creditors for years 2000, 2001 and 2002.  Mexican authorities claim that our company should have withheld 10% of such payments instead of the 4.9%.  We intend to defend against these claims vigorously.  We believe that the outcome of these claims willl not have a material effect on our financial position and results of operation.

 

**CNBV Investigation.**

 

On December 8, 2009, the Surveillance Office of the *Comisión Nacional Bancaria y de Valores* (the Mexican National Banking and Securities Commission, or CNBV) began an investigation into the Company in respect of the timely disclosure of material events reported through the Mexican Stock Exchange during the end of 2008 and throughout 2009 in connection with the Company’s foreign exchange derivative losses and the subsequent conversion of the realized losses into debt.  As of this date, the investigation is ongoing.  The Company has complied with document requests provided by the CNBV and intends to fully cooperate with the CNBV throughout the course of this investigation.

 

**Venezuela**

 

**Expropiation Proceedings by the Venezuelan Government.**

 

On May 12, 2010, the Venezuelan government issued decree number 7.394, published the Expropriation Decree, announcing the forced acquisition of all goods, movables and real estate of MONACA .  Pursuant to the Expropriation Decree, the government of Venezuela has instructed government officials to undertake the necessary actions to execute the MONACA Expropriation.  As of the date of this annual report, the Venezuelan government has not yet taken operational or managerial control of MONACA.  Pending the resolution of our negotiations with 

 

75

----

Table of Contents

 

the government of Venezuela, MONACA continues to operate in the ordinary course of business.  The Company and the Venezuelan government are in preliminary negotiations to determine the compensation to be paid for the expropriated assets.  We are participating in these negotiations with a view to obtaining just and reasonable compensation for the assets subject to the MONACA Expropriation.

 

We may seek relief for the expropriation of our interest in our Venezuelan subsidiary by filing a request for arbitration against Venezuela before ICSID pursuant to the Investment Treaty.  In addition, we may seek relief in a Venezuelan competent court or tribunal under Venezuelan law.  See “Item 3.  Key Information Risk Factors—Risks Related to Venezuela— One of our Subsidiaries in Venezuela is Currently Involved in Expropriation Proceedings and our Remaining Subsidiary in Venezuela is Subject to Expropriation.”  At this time, we cannot predict the results of any such proceedings, whether we will be likely to prevail in such proceedings, or the ramifications that costly and prolonged legal disputes could have on our results of operations or financial position.

 

It is impossible to anticipate the future effects, if any, that the foregoing legal proceeding could have on our financial position and operations results.  We intend to exhaust all legal remedies available in order to safeguard and protect the Company’s legitimate interests.

 

**Intervention Proceedings by the Venezuelan Government.**

 

***In June of 2008, Rotch,***a controlled entity of our former indirect partner in MONACA and DEMASECA, Ricardo Fernández Barrueco, provided notice to the Company that it had transferred its equity interest in MONACA and DEMASECA, including all economic rights to distributions and voting rights, to the Interacciones Trust for the benefit of the Rotch Lender.  The interest was transferred in connection with a credit facility provided to a controlled entity of Rotch by an affiliate of the Rotch Lender.  Pursuant to the Interacciones Trust, the Rotch Lender retains the right to exercise and freely transfer the Venezuelan Equity Interests in the event of a default under the credit facility.

*** ***

On December 4, 2009, the Eleventh Investigations Court for Criminal Affairs of Venezuela issued an order authorizing the precautionary seizure of assets of all corporations in which Ricardo Fernández Barrueco had any direct or indirect interest.  As a result of Mr. Ricardo Fernández Barrueco’s former indirect ownership of MONACA and DEMASECA, these subsidiaries were subject to the precautionary seizure.  On December 22, 2009, March 2, 2010 and March 10, 2010, the Ministry of Finance of Venezuela, in light of the precautionary measure ordered by the Eleventh Investigations Court for Criminal Affairs, designated various individuals as special managers and representatives on behalf of the Republic of Venezuela of the shares that were previously owned indirectly by Mr. Fernandez Barrueco in MONACA and DEMASECA.

 

As a result of the foregoing, MONACA and DEMASECA, as well as Consorcio Andino, S.L. and Valores Mundiales, S.L., as holders of our Venezuelan subsidiaries, have filed a petition as aggrieved third-parties to the proceedings against Mr. Fernández Barrueco, as a challenge to the precautionary measures, the seizure and all related actions.  MONACA has also filed for corresponding legal remedies.  These challenges have yet to be resolved by the Venezuelan authorities.

 

In addition to the foregoing, on December 16, 2009, INDEPABIS authorized, on a precautionary basis, the temporary occupation and operation of MONACA for a term of 90 consecutive days.  On March 16, 2010, INDEPABIS issued a new temporary occupation and precautionary operation measure for MONACA for a term of 90 consecutive days.  INDEPABIS has also initiated a regulatory proceeding against MONACA in connection with alleged failure to comply with regulations governing precooked corn flour and for allegedly refusing to sell this product as a result of the December 4, 2009 precautionary asset seizure described above.

 

Additionally, INDEPABIS has also initiated an investigation of our Venezuelan subsidiary DEMASECA, and issued an order authorizing the temporary occupation and operation of DEMASECA for a period of 90 calendar days from May 25, 2010.  DEMASECA continues to operate in the ordinary course of business. We intend to exhaust all legal remedies available in order to safeguard and protect the Company’s legitimate interests.

 

We intend to exhaust all legal remedies available in order to safeguard and protect the Company’s legitimate interests.

 

76

----

Table of Contents

 

**Tax Claims.**

 

The Venezuelan tax authorities have lodged certain assessments against Molinos Nacionales, C.A. (MONACA) one of our Venezuelan subsidiaries, related to income tax returns for the years 1998 and 1999, which amounted to Ps. 18.3 million (U.S.$1.4 million) plus related Value Added Tax deficiencies in the amount of Ps. 1 million (U.S.$66,344).  The case has been appealed and is pending a final decision. Any tax liability arising from the resolution of these claims will be assumed by the previous shareholder, International Multifoods Corporation, in accordance with the purchase agreement by which the Company acquired our subsidiary in Venezuela, MONACA.

 

**Labor Lawsuits.**

 

In the past, our subsidiary Molinos Nacionales, C.A. (MONACA) was named in three labor lawsuits (two brought by Caleteros, as defined below, and one stemming from a workplace accident) seeking damages in the amount of Ps.20.9 million (U.S.$1.6 million). The lawsuits and claims are related to issues and rights such as profit sharing, social security, vacation, seniority and indemnity payment issues.  The “Caleteros” who brought the claims are workers who help freighters unload goods.

 

MONACA has been negotiating a settlement for the labor lawsuit and the extrajudicial claims and anctipates reaching a settlement of Ps.10.7 million (U.S.$0.82 million).  MONACA has created a reserve, reflected in accrued liabilities and other accounts payable, for the aforementioned amount to cover any potential liabilities.

 

Finally, the Company and its subsidiaries are involved in various pending litigations filed in the normal course of business.  It is the opinion of the Company that the outcome of these proceedings will not have a material adverse affect on the financial position and results of operations of the Company.

 

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

** **

**TRADING HISTORY**

** **

Our Series B Shares have been traded on the *Bolsa Mexicana de Valores, S.A.B. de C.V.*, or Mexican Stock Exchange, since 1994.  The ADSs, each representing four Series B Shares, commenced trading on the New York Stock Exchange in November 1998.  As of April 29, 2010, our capital stock was represented by 565,174,609 issued Series B shares, of which 563,650,709 shares were outstanding, fully subscribed and paid, and 1,523,900 shares were held in our treasury.  As of December 31, 2009, 77,976,580 Series B shares of our common stock were represented by 19,494,145 ADSs held by 10 record holders in the United States.

 

In May 2008, we issued 82,624,657 of our Series B shares pursuant to a preemptive rights offering in Mexico to our non-U.S. shareholders.  Company shareholders exercising their preemptive rights paid for and acquired the shares at a price of Ps.25.55 per share, resulting in aggregate net proceeds to us from the offering of Ps.2,111 million.  We did not offer any rights to acquire the shares to U.S. persons, nor in any other jurisdiction outside of Mexico.  The proceeds of the offering were used to reduce our level of debt and improve our debt ratios in order to maintain our investment-grade rating.

 

On October 13, 2008, our Series B Shares were suspended as required by the Mexican Stock Exchange in connection with pending information regarding the publication of events related to the Company’s currency derivative instruments.  Accordingly, our ADSs were also suspended on the New York Stock Exchange on October 20, 2008.  On October 29, 2008, our Series B Shares and our ADSs began trading again as the aforementioned information was released.

 

**PRICE HISTORY**

** **

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

 

77

----

Table of Contents

 
| ** **                  | ** ** | **Mexican Stock Exchange** | ** ** | **NYSE**                 | ** ** |
|-----------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                  | ** ** | **Common Stock**           | ** ** | **ADS(2)**               | ** ** |
| ** **                  | ** ** | **High**                   | ** ** | **Low**                  | ** ** | **High** | ** ** | **Low** | ** ** |
| ** **                  | ** ** | **(Ps. per share(1))**     | ** ** | **(U.S.$ per ADS)** | ** ** |
| **Annual Price History**    |       |                       |       |                     |       |   |   |   |   |
| 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 |   |
| 2009                        |       | 25.67                      |       | 3.67                     |       | 7.89 |   | .9214 |   |
| **Quarterly Price History** |       |                       |       |                     |       |   |   |   |   |
| 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 |   |
| 2009                        |       |                       |       |                     |       |   |   |   |   |
| 1st Quarter            |       | 7.32                       |       | 3.67                     |       | 2.14 |   | 0.92 |   |
| 2nd Quarter            |       | 14.75                      |       | 5.55                     |       | 4.44 |   | 1.54 |   |
| 3rd Quarter            |       | 24.00                      |       | 12.46                    |       | 6.99 |   | 3.68 |   |
| 4th Quarter            |       | 25.67                      |       | 22.54                    |       | 7.89 |   | 6.64 |   |
| 2010                        |       |                       |       |                     |       |   |   |   |   |
| 1st Quarter            |       | 28.70                      |       | 23.80                    |       | 8.98 |   | 7.33 |   |
| 2nd Quarter(3)         |       | 27.77                      |       | 19.20                    |       | 8.99 |   | 9.81 |   |
| **Monthly Price History**   |       |                       |       |                     |       |   |   |   |   |
| December 2009          |       | 24.75                      |       | 22.74                    |       | 7.89 |   | 6.95 |   |
| January 2010           |       | 28.70                      |       | 23.80                    |       | 8.98 |   | 7.33 |   |
| February 2010          |       | 27.19                      |       | 24.71                    |       | 8.40 |   | 7.52 |   |
| March 2010             |       | 27.95                      |       | 24.52                    |       | 8.97 |   | 7.85 |   |
| April 2010             |       | 27.77                      |       | 22.66                    |       | 8.99 |   | 7.32 |   |
| May 2010               |       | 22.82                      |       | 19.20                    |       | 7.25 |   | 5.81 |   |
| June 2010(3)                |       | 20.15                      |       | 19.46                    |       | 6.26 |   | 5.93 |   |

 

----

(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 4, 2010.

 

On June 4, 2010, the last reported sale price of the B Shares on the Mexican Stock Exchange was Ps.19.58 per B Share.  On June 4, 2010, the last reported sale price of the ADSs on the New York Stock Exchange was U.S.$5.96 per ADS.

 

**MEXICAN STOCK EXCHANGE**

** **

The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico.  Founded in 1907, it is organized as a corporation whose shares were originally held by brokerage firms, which are exclusively authorized to trade on the exchange.  As of June 13, 2008 the Mexican Stock Exchange became a publicly traded company.  Trading on the Mexican Stock Exchange takes place principally through automated systems 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 be performed off the exchange.  The Mexican Stock Exchange operates a system of automatic suspension of trading in shares of a particular issuer as a means of controlling excessive price volatility.

 

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

 

78

----

Table of Contents

 

As of June 2, 2001, the Mexican Securities Law requires issuers to increase the protections offered to minority shareholders and to impose corporate governance controls on Mexican listed companies in line with international standards.  The Mexican Securities Law expressly permits Mexican listed companies, with prior authorization from the CNBV, to include in their bylaws antitakeover defenses such as shareholder rights plans, or poison pills.  Our bylaws include certain of these protections.  See “Additional Information—Bylaws—Antitakeover Protections.”

 

**MARKET MAKER**

** **

On September 30, 2009, we entered into an agreement with UBS Casa de Bolsa (“UBS”) pursuant to which UBS acts as a market maker for our common shares listed on the Mexican Stock Exchange.  The purpose of the agreement is to provide liquidity in the Company’s shares.  On April 16, 2010, the agreement was extended until October 15, 2010.

 

**ITEM 10.**                      Additional Information.

** **

**BYLAWS**

** **

Set forth below is a brief summary of certain significant provisions of our bylaws, according to their last comprehensive amendment.  This description does not purport to be complete and is qualified by reference to our bylaws, which are incorporated as an exhibit to this Annual Report.

 

The new Mexican Securities Law of 2006 included provisions seeking to improve the applicable regulations on disclosure of information, minority shareholder rights and corporate governance of the issuers, among other matters.  It also imposes additional duties and liabilities on the members of the board of directors as well as senior officers.  Thus, we were required to carry out a comprehensive amendment of our bylaws through an extraordinary general shareholders’ meeting held on November 30, 2006.

 

**Incorporation and Register**

** **

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

 

**Corporate Purpose**

** **

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

 

**Directors**

** **

Our bylaws provide that our management shall be vested in the board of directors and our Chief Executive Officer.  Each director is elected by a simple majority of the shares.  Under Mexican law and our bylaws, any holder or group of holders owning 10% or more of our capital stock may elect one director and its corresponding alternate.  The board of directors must be comprised of a minimum of five and a maximum of twenty-one directors, as determined by the shareholders at the annual ordinary general shareholders’ meeting.  Additionally, under the Mexican Securities Law, at least 25% of the members of the board of directors must be independent.  Currently, our board of directors consists of 15 members.

 

79

----

Table of Contents

 

The board of directors shall meet at least fourtimes a year.  These meetings can becalled by the Chairman of the board of directors, the Chairman of the Audit andCorporate Governance Committees, or by 25% of the members of the board ofdirectors.  The directors serve for a oneyear term, or for up to 30 (thirty) additional days, if no designation of theirsubstitute has been made or if the substitute has not taken office.  Directors receive compensation as determinedby the shareholders at the annual ordinary general shareholders’ meeting.  The majority of directors are needed toconstitute a quorum, and board resolutions must be passed by a majority of thevotes present at any validly constituted meeting or by unanimous consent if nomeeting is convened.

 

Under the terms of our association withArcher-Daniels-Midland, it has the right to appoint two of our directors andtheir corresponding alternates as long as it owns at least 20% of our capitalstock.

 

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

 

Additionally, the board of directors has theauthority and responsibility to approve, with the previous opinion of thecorresponding 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 ofbusiness, those of insignificant amount, and those deemed as done within marketprices; (iii) the purchase or sale of 5% or more of our corporate assets; (iv) grantingof warranties or the assumption of liabilities for more than 5% of ourcorporate assets; (v) the appointment, and in its case, destitution of theChief Executive Officer and his integral compensation, as the designation ofintegral compensation policies for all other senior officers; (vi) internalcontrol and internal audit guidelines; (vii) the Company’s accountingguidelines; (viii) the Company’s financial statements; and (ix) thehiring of the firm providing external audit services and, in its case, anyservices additional or supplemental to the external audit.  The approval of the board in all of thesematters is non-delegable.

 

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

 

**Audit and CorporateGovernance Committees**

** **

Under our bylaws and in accordance with the MexicanSecurities Law, the board of directors, through the Audit and CorporateGovernance Committees as well as through the firm performing the externalaudit, shall be in charge of the surveillance of the Company.  Such Committees should be exclusivelycomprised by independent directors and by a minimum of three members, electedby the board of directors at the proposal of the Chairman of the Board.  The Chairman of such Committees shall beexclusively designated and/or removed from office by the annual ordinarygeneral shareholders’ meeting.

 

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

 

Likewise, for the performance of its duties, theAudit Committee shall:  (i) renderits opinion to the board of directors, pursuant to the Mexican Securities Law; (ii) requestthe opinion of independent experts when deemed convenient; (iii) conveneshareholders meetings and include issues in the agenda they deem appropriate; (iv) 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 the boardof directors; (vi) inform the board of directors of the condition of theinternal controls and internal auditing systems, including any irregularitiesdetected therein; (vii) prepare the opinion of the report rendered by theChief Executive Officer; (viii) assist the board of directors when makingthe annual reports; (ix) request from the senior officers and from otheremployees, reports relevant to the preparation of the financial information andof any other kind deemed necessary for the performance of their duties; (x) investigatepossible irregularities within the 

 

80

----

Table of Contents

 

Company, as well as carryout the actions deemed appropriate; (xi) request meetings with seniorofficers in connection with the internal control and internal audit;(xii) inform the board of directors about the material irregularitiesdetected while exerting their duties, and in case of any irregularities, notifythe 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 Mexican Securities Law providethat the directors shall act in good faith and in our best interest.  In order to fulfill its duty, our directorsmay:  (i) request information aboutus that is reasonably necessary to take actions; (ii) require the presenceof any officers or other key employees, including the external auditors, thatmay 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 damages caused whenbreaching their duty of diligence if such failure causes economic damage to theCompany or our subsidiaries, as well as if the director:  (i) fails to attend board or committeemeetings and, as a result of such absence, the board was unable to take action,unless such absence is approved by the shareholders meeting; (ii) fails todisclose to the board of directors or the committees material informationnecessary to reach a decision; and/or (iii) fails to comply with itsduties imposed by the Mexican Securities Law or our bylaws.  Members of the board of directors may notrepresent shareholders at any shareholders’ meeting.

 

**Fiduciary Duties - Duty ofLoyalty**

** **

Our bylaws and the Mexican Securities Law providethat the directors and secretary of the board shall keep confidential anynon-public information and matters about which they have knowledge as a resultof their position.  Also, directors mustabstain from participating, attending or voting at meetings related to matterswhere they have or may have a conflict of interest.

 

The directors and secretary of the board ofdirectors will be deemed to have violated their duty of loyalty and will beliable for any damages when they, directly or through third parties, obtain aneconomic benefit 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 particularshareholder of 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 corporatebusiness opportunity for their own benefit, or the benefit of a third party,without the prior approval of the board of directors.  Our directors may be liable for damages whenbreaching their duty of loyalty if such failure causes economic damage to theCompany or our subsidiaries.

 

**Civil Actions AgainstDirectors**

** **

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

 

81

----

Table of Contents

 

**Chief Executive Officer**

** **

According to our bylaws and the Mexican SecuritiesLaw, the Chief Executive Officer shall be in charge of running, conducting andexecuting the Company’s business, complying with the strategies, policies andguidelines approved by the board of directors.

 

For the performance of its duties the ChiefExecutive Officer shall:  (i) submit,for the approval of the board of directors, the business strategies of theCompany; (ii) execute the resolutions of the Shareholders’ Meetings and ofthe board of directors; (iii) propose to the Audit Committee, the internalcontrol system and internal audit guidelines of the Company, as well as executethe guidelines approved thereof by the board of directors; (iv) discloseany material information and events that should be disclosed to the investorpublic; (v) comply with the provisions relevant to the repurchase andplacement transactions of the Company’s own stock; (vi) exert any correspondingcorrective measures and liability suits; (vii) assure that adequateaccounting, registry and information systems are maintained by the Company; (viii) prepareand submit to the board of directors his annual report; (ix) establishmechanisms and internal controls permitting certification that the actions andtransactions of the Company conform to the applicable regulations; and (x) exercisehis right to file the liability suits referred to in the Mexican Securities Lawagainst related parties or third parties that allegedly cause damage to theCompany.

 

**Voting Rights andShareholders’ Meetings**

** **

Each share entitles the holder thereof to one voteat any general meeting of our shareholders. Shareholders may vote by proxy. At the ordinary general shareholders’ meeting, any shareholder or groupof shareholders representing 10% or more of the outstanding common stock hasthe right to appoint one director and his corresponding alternate, with theremaining directors being elected by majority vote.

 

General shareholders’ meetings may be ordinary orextraordinary.  Extraordinary generalshareholders’ meetings are called to consider matters specified in Article 182of the Mexican Corporations Law, including, principally, changes in theauthorized fixed share capital and other amendments to the bylaws, the issuanceof preferred stock, the liquidation, merger and spin-off of the Company,changes in the rights of security holders, and transformation from onecorporate form to another.  All othermatters may be approved by an ordinary general shareholders’ meetings.  Ordinary general shareholders’ meetings mustbe called to consider and approve matters specified in Article 181 of theMexican Corporations Law, including, principally, the appointment of themembers of the board of directors and the Chairman of the Audit and CorporateGovernance Committees, the compensation paid to the directors, the distributionof our profits for the previous year, and the annual reports presented by theboard of directors and the Chief Executive Officer.  Our shareholders establish the number ofmembers that will serve on our board of directors at the ordinary generalshareholders’ meeting.

 

A general ordinary shareholders’ meeting must beheld during the first four months after the end of each fiscal year.  In order to attend a general shareholders’meeting, the day before the meeting shareholders must deposit the certificatesrepresenting their common stock or other appropriate evidence of ownershipeither with the secretary of our board of directors, with a credit institution,or with Indeval.  The secretary, creditinstitution or Indeval will hold the certificates until after the generalshareholders’ meeting has taken place.

 

Under our bylaws, the quorum for an ordinary generalshareholders’ meeting is at least 50% of the outstanding common stock, andaction may be taken by the affirmative vote of holders representing a majorityof the shares present.  If a quorum isnot present, a subsequent meeting may be called at which the shareholderspresent, whatever their number, will constitute a quorum and action may betaken by a majority of the shares present. A quorum for extraordinary general shareholders’ meetings is at least75% of the outstanding common stock, but if a quorum is not present, asubsequent meeting may be called.  Aquorum for the subsequent meeting is at least 50% of the outstandingshares.  Action at an extraordinarygeneral shareholders’ meeting may only be taken by a vote of holdersrepresenting at least 50% of the outstanding shares.

 

Shareholders’ meetings may be called by the board ofdirectors, the Chairman of the Audit and/or Corporate Governance Committees, ora court.  The Chairman of the board ofdirectors or the Chairman of the Audit or Corporate Governance Committees maybe required to call a shareholders’ meeting if holders of at least 10% of ouroutstanding share capital request a meeting in writing, or at the writtenrequest of any shareholder if no shareholders’ meeting has been held for twoconsecutive years, or, if during a period of two consecutive years, the 

 

82

----

Table of Contents

 

board of directors’ annualreport for the previous year and the Company’s financial statements were notpresented to the shareholders, or if the shareholders did not elect directors.

 

Notice of shareholders’ meetings must be publishedin the Federal Official Gazette or in a newspaper of general circulation inMonterrey, Nuevo León at least 15 days prior to the meeting.  Shareholders’ meetings may be held withoutsuch publication provided that 100% of the outstanding shares arerepresented.  Shareholders’ meetings mustbe held within the corporate domicile in Monterrey, Nuevo León.

 

Under Mexican law, holders of 20% of our outstandingcapital stock may have any shareholder action set aside by filing a complaintwith a Mexican court of competent jurisdiction within 15 days after theclose of the meeting at which such action was taken, by showing that thechallenged action violates Mexican law or our bylaws.  Relief under these provisions is onlyavailable to holders who were entitled to vote on the challenged shareholderaction and whose shares were not represented when the action was taken or, ifrepresented, voted against it.

 

**Dividend Rights andDistribution**

** **

Within the first four months of each year, the boardof directors must submit our company’s financial statements for the precedingfiscal year to the shareholders for their approval at the ordinary generalshareholders’ meeting.  They are requiredby law to allocate 5% of any new profits to a legal reserve which is notthereafter available for distribution until the amount of the legal reserveequals 20% of our capital stock (before adjusting for inflation).  Amounts in excess of those allocated to thelegal reserve fund may be allocated to other reserve funds as the shareholdersdetermine, including a reserve for the repurchase of our shares.  The remaining balance of new profits, if any,is available for distribution as dividends prior to their approval at thesharholders’ meeting.  Cash dividends onthe shares held through Indeval will be distributed by us through Indeval.  Cash dividends on the shares evidenced byphysical certificates will be paid when the relevant dividend coupon registeredin the name of its holder is delivered to us. No dividends may be paid, however, unless losses for prior fiscal years havebeen paid up or absorbed.  See “Item3.  Key Information—Selected FinancialData—Dividends.”

 

**Liquidation**

** **

Upon our dissolution, one or more liquidators mustbe appointed by an extraordinary shareholders’ general meeting to wind up itsaffairs.  If the extraordinary generalshareholders’ meeting does not make said appointment, a Civil or District Judgecan do so at the request of any shareholder. All fully paid and outstanding common stock will be entitled toparticipate equally in any distribution upon liquidation after the payment ofthe Company’s debts, taxes and the expenses of the liquidation.  Common stock that has not been paid in fullwill be entitled to these proceeds in proportion to the paid-in amount.

 

If the extraordinary general shareholders’ meetingdoes not give express instructions on liquidation, the bylaws stipulate thatthe liquidators will (i) conclude all pending matters they deem mostconvenient, (ii) prepare a general balance and inventory, (iii) collectall credits and pay all debts by selling assets necessary to accomplish thistask, (iv) sell assets and distribute income, and (v) distribute theamount remaining, if any, pro rata among the shareholders.

 

**Changes in Capital Stock**

** **

Our outstanding capital stock consists of Class Iand Class II series B shares.  Class Ishares are the fixed portion of our capital stock and have no par value.  Class II shares are the variable portionof our capital stock and have no par value. The fixed portion 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.

 

An increase of capital stock may generally be madethrough the issuance of new shares for payment in cash or in kind, bycapitalization of indebtedness or by capitalization of certain items ofshareholders’ equity.  An increase ofcapital stock generally may not be made until all previously issued andsubscribed shares of capital stock 

 

83

----

Table of Contents

 

have been fully paid.  A reduction of capital stock may be effectedto absorb losses, to redeem shares, to repurchase shares in the market or torelease shareholders from payments not made.

 

As of April 29, 2010, our capital stock wasrepresented by 565,174,609 issued Series B shares, of which 563,650,709shares were outstanding, fully subscribed and paid, and 1,523,900 shares wereheld in our treasury.

 

**Preemptive Rights**

** **

In the event of a capital increase through theissuance of shares, other than in connection with a public offering of newlyissued shares or treasury stock, a holder of existing shares of a given seriesat the time of the capital increase has a preferential right to subscribe for asufficient number of new shares of the same series to 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, shareholders will not have preemptiverights to subscribe for common stock issued in connection with mergers, uponthe conversion of convertible debentures, or in the resale of treasury stock asa result of repurchases on the Mexican Stock Exchange.

 

Under Mexican law, preemptive rights may not bewaived in advance by a shareholder, except under limited circumstances, andcannot be represented by an instrument that is negotiable separately from thecorresponding share.  Holders of ADRs maybe restricted in their ability to participate in the exercise of preemptiverights.  See  “Item 3. Key Information—Risk Factors—RisksRelated to Our Controlling Shareholders and Capital Structure—Holders of ADSs May NotBe Able to Participate in Any Future Preemptive Rights Offering and as a ResultMay Be Subject to a Dilution of Equity Interest.”

 

**Restrictions AffectingNon-Mexican Shareholders**

** **

Foreign investment in capital stock of Mexicancorporations is regulated by the 1993 Foreign Investment Law and by the 1998Foreign Investment Regulations to the extent they are not inconsistent with theForeign Investment Law.  The Ministry ofEconomy and the National Commission on Foreign Investment are responsible forthe administration of the Foreign Investment Law and the Foreign InvestmentRegulations.

 

Our bylaws do not restrict the participation ofnon-Mexican investors in our capital stock. However, approval of the National Foreign Investment Commission must beobtained for foreign investors to acquire a direct or indirect participation inexcess of 49% of the capital stock of a Mexican company that has an aggregateasset value that exceeds, at the time of filing the corresponding notice ofacquisition, an amount determined annually by the National Foreign InvestmentCommission.

 

As required by Mexican law, our bylaws provide thatany non-Mexicans who acquire an interest or participation in our capital at anytime will be treated as having Mexican nationality for purposes of theirinterest in us, and with respect to the property, rights, concessions,participations or interests that we may own or rights and obligations that arebased on contracts to which we are a party with the Mexican authorities.  Such shareholders cannot invoke theprotection of their government under penalty of forfeiting to the Mexican Statethe ownership interest that they may have acquired.

 

Under this provision, a non-Mexican shareholder isdeemed to have agreed not to invoke the protection of his own government withrespect to his rights as a shareholder, but is not deemed to have waived anyother rights he may have with respect to its investment in us, including anyrights under U.S. securities laws. If a shareholder should invoke governmental protection in violation ofthis provision, his shares could be forfeited to the Mexican government.  Mexican law requires that such a provision beincluded in the bylaws of all Mexican companies unless such bylaws prohibitownership of shares by non-Mexicans.  See“Item 3.  Key Information—RiskFactors—Risks Related to Our Controlling Shareholders and CapitalStructure—Mexican Law Restricts the Ability of Non-Mexican Shareholders toInvoke the Protection of Their Governments with Respect to Their Rights asShareholders.”

 

84

----

Table of Contents

 

**Registration and Transfer**

** **

Our shares are evidenced by certificates inregistered form.  We maintain a stockregistry and, in accordance with Mexican law, only those persons whose namesare recorded on the stock registry are recognized as owners of the series Bshares.

 

**Other Provisions**

** **

***Appraisal Rights***

*** ***

Under Mexican law, whenever the shareholders approvea change of corporate purpose, change of our nationality or transformation fromone type of corporate form to another, any shareholder entitled to vote on suchchange or transformation who has voted against it has the right to tender itsshares and receive the amount attributable to its shares, provided suchshareholder exercises its right to withdraw within 15 days following theadjournment of the meeting at which the change or transformation wasapproved.  Under Mexican law, the amountwhich a withdrawing shareholder is entitled to receive is equal to itsproportionate interest in our capital stock according to our most recentbalance sheet approved by an ordinary general shareholders’ meeting.  The reimbursement may have certain taxconsequences.

 

***Share Repurchases***

*** ***

We may repurchase our common stock on the MexicanStock Exchange at any time at the then market price.  The repurchase of shares will be madecharging 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 stock will either be held by usor kept in our treasury, pending future sales thereof through the Mexican StockExchange.  If the repurchased shares arekept in our treasury, we may not exercise their economic and voting rights, andsuch shares will not be deemed to be outstanding for purposes of calculatingany quorum or voting at any shareholders’ meeting.  The repurchased shares held by us as treasuryshares may not be represented at any shareholder meeting.  The decrease or increase of our capital stockas a result of the repurchase does not require the approval of a shareholders’meeting or of the board of directors.

 

Under Mexican securities regulation, our directors,officers, external auditors, the secretary of the board of directors andholders of 10% or more of our outstanding common stock may not sell commonstock to us, or purchase repurchased common stock from us, unless the sale orpurchase is made through a tender offer. The repurchase of common stock representing 3% or more of ouroutstanding share capital in any 20 trading-day period must be conductedthrough a public tender offer.

 

***Repurchase in the Event of Delisting***

*** ***

In the event of the cancellation of the registrationof our shares at the *Registro Nacional deValores*, or National Registry of Securities, or RNV, whether at ourrequest or at the request of the CNBV, under our bylaws and the regulations ofthe CNBV, we will be obligated to make a tender offer to purchase all of ourshares held by non-controlling shareholders. Such tender offer shall be made at least at the greater price of thefollowing:  (i) the closing saleprice under the terms of the following paragraph, or (ii) the book valueof the shares according to the most recent quarterly report submitted to theCNBV and the Mexican Stock Exchange.

 

The quoted share price on the Mexican Stock Exchangereferred to in the preceding paragraph shall be the weighted average shareprice as quoted on the Mexican Stock Exchange for the last 30 days inwhich our shares were traded, in a period not greater than six months prior tothe date of the public tender offer.  Ifthe number of days in which our shares have traded during the period referredto above is less than 30, then only the actual number of days in which ourshares 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.

 

85

----

Table of Contents

 

In connection with any such cancellation of theregistration of our shares, we will be required to deposit sufficient fundsinto a trust account for at least six months following the date of cancellationto ensure adequate resources to purchase at the public tender offer price anyremaining outstanding shares from non-controlling shareholders that did notparticipate in the offer.

 

If we ask the RNV to cancel the registration of ourshares, we will be exempt from carrying out a public tender offer, providedthat:  (i) we have the consent of theholders of 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.

 

Within ten business days of the commencement of apublic tender offer, our board of directors must prepare and disclose to publicinvestors its opinion with respect to the reasonableness of the tender offerprice as well as any conflicts of interest that its members may have inconnection with the tender offer.  Theopinion of the board of directors may be accompanied by another opinion issuedby an independent expert that we may hire.

 

We may request the approval from the CNBV to usedifferent criteria to determine the price of the shares.  In requesting such approval, the followingmust be submitted to the CNBV:  (i) theresolution of the board of directors approving such request, (ii) theopinion of the Corporate Governance Committee addressing the reasons why itdeems appropriate the use of a different price, and (iii) a report from anindependent expert indicating that the price is consistent with the terms ofthe Mexican Securities Law.

 

***Shareholder’s Conflicts of Interest***

*** ***

Any shareholder that has a direct or indirectconflict of interest with respect to any transaction must abstain from votingthereon at the relevant shareholders’ meeting. A shareholder that votes on a business transaction in which its interestconflicts with ours may be liable for damages if the transaction would not havebeen approved without such shareholder’s vote.

 

***Rights of Shareholders***

*** ***

The protections afforded to minority shareholdersunder Mexican law are different from those in the United States and otherjurisdictions.  The law concerning dutiesand responsibilities of directors and controlling shareholders has not been thesubject of extensive judicial interpretation in Mexico, unlike the UnitedStates where judicial decisions have been issued regarding the duties ofdiligence and loyalty, which more effectively protect the rights of minorityshareholders.  In addition, Mexican civilprocedure does not contemplate class actions or shareholder derivative actions,which permit shareholders in U.S. courts to bring actions on behalf ofother shareholders or to enforce rights of the corporation itself.  Shareholders cannot challenge corporateaction taken at a shareholders’ meeting unless they meet certain proceduralrequirements.

 

In addition, under U.S. securities laws, as aforeign private issuer we are exempt from certain rules that apply todomestic U.S. issuers with equity securities registered under the ExchangeAct, including the proxy solicitation rules, the rules requiringdisclosure of share ownership by directors, officers and certainshareholders.  We are also exempt fromcertain of the corporate governance requirements of the New York StockExchange, including certain requirements concerning audit committees andindependent directors.  A summary ofsignificant ways in which our corporate governance standards differ from thosefollowed by U.S. companies pursuant to NYSE listing standards is availableon our website at www.gruma.com.  Theinformation found at this website is not incorporated by reference into thisdocument.

 

As a result of these factors, in practice it may bemore difficult for our minority shareholders to enforce rights against us orour directors or controlling shareholders than it would be for shareholders ofa U.S. company.  See “Item 3.  Key Information—Risk Factors—Risks Related toOur Controlling Shareholders and Capital Structure—The Protections Afforded toMinority Shareholders in Mexico Are Different From Those in the United States.”

 

86

----

Table of Contents

 

***Antitakeover Protections***

*** ***

Our bylaws provide that, subject to certainexceptions as explained below, prior written approval from the board ofdirectors shall be required for any person (as defined hereunder), or group ofpersons to acquire, directly or indirectly, any of our common shares or rightsto our common shares, by any means or under any title whether in a single eventor in a set of consecutive events, such that its total shares or rights toshares would represent 5% or more of our outstanding shares.

 

Prior approval from the board of directors must beobtained each time such ownership threshold (and multiples thereof) is intendedto be exceeded, except for persons who, directly or indirectly, are competitors(as such term is defined below) of the Company or of any of its subsidiaries,who must obtain the prior approval of the board of directors for futureacquisitions where a threshold of 2% (or multiples thereof) of our commonshares is intended to be exceeded.

 

Pursuant to our bylaws, a “person” is defined as anynatural person, corporate entity, trust or similar form of venture, vehicle,entity, corporation or economic or mercantile association or any subsidiariesor affiliates of any of the former or, as determined by the board of directors,any group of persons who may be acting jointly, coordinated or as a whole; anda “competitor” is defined as any person engaged, directly or indirectly, in (i) thebusiness of production and/or marketing of corn or wheat flour, and/or (ii) anyother activity carried on by the Company or by any of its subsidiaries oraffiliates.

 

Persons that acquire our common shares in violationof these requirements will not be considered the beneficial owners of suchshares under our bylaws and will not be able to vote such shares or receive anydividends, distributions or other rights in respect of these shares.  In addition, pursuant to our bylaws, theseholders will be obligated to pay us a penalty in an amount equal to the greaterof (i) the market value of the shares such party acquired withoutobtaining the prior approval of the board of directors and (ii) the marketvalue of shares representing 5% of our capital stock.

 

*Board Notices, Meetings, Quorum Requirements and Approvals*.  To obtain the prior approval of our board ofdirectors, a potential purchaser must properly deliver a written applicationcomplying with the applicable requirements set forth in our bylaws.  Such application shall state, among otherthings:  (i) the number and class ofour shares the 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 and nationality, or in the case of apurchaser which is a corporation, trust or legal entity, the nationality andidentity of its shareholders, partners or beneficiaries as well as the identityand nationality of each person effectively controlling such corporation, trustor legal entity, (vii) the reasons and purpose behind such acquisition, (viii) ifsuch person is, directly or indirectly, a competitor of the Company or any ofits subsidiaries or affiliates, and if such person has the authority to legallyacquire the shares pursuant to our bylaws and Mexican law, (ix) its sourceof financing 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 theperson has obtained any financing from one of its related parties for thepayment of the shares, (xii) the identity and nationality of the financialinstitution, if any, that will act as the underwriter or broker in connectionwith any tender offer, and (xiii) the person’s address for receivingnotices.

 

Either the Chairman, the Secretary or the AlternateSecretary of our board of directors must call a meeting of the board of directorswithin 10 business days following 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 common shares representing atleast 2% or 5%, as the case may be, of our outstanding capital stock, must beapproved by at least the majority of the members of our board of directorspresent at a meeting at which at least the majority of the members ispresent.  Such acquisitions must beresolved by our board of directors within 60 calendar days following thereceipt of the written application described above, unless the board of directorsdetermines that it does not have sufficient information upon which to base itsdecision.  In such 

 

87

----

Table of Contents

 

case, the board of directorsshall deliver a written request to the potential purchaser for any additionalinformation 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.

 

*Mandatory Tender 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 board of directors will berequired if the acquisition would increase the purchaser’s ownership to morethan 50% of our capital stock or result in a change of control, in which casethe purchaser must effect its acquisition by way of a tender offer for 100%minus one of our total outstanding capital stock, which tender shall be madepursuant to applicable Mexican laws.

 

The aforementioned tender offers must be madesimultaneously 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 additionto the aforementioned approvals, if a person increases its beneficial ownershipby 1% in the case of competitors, or 2% in the case of non-competitors, writtennotice must be submitted to the board of directors within five days of reachingor exceeding such thresholds.

 

*Exceptions*.  Theprovisions of our bylaws summarized above will not apply to:  (i) transfers of shares by operation ofthe laws of succession; (ii) acquisitions of shares by (a) any personwho, directly or indirectly, has the authority or possibility of appointing themajority of the directors of our board of directors, (b) any company, trustsor similar form of venture, vehicle, entity, corporation or economic ormercantile association, which may be under the control of the aforementionedperson, (c) the heirs of the aforementioned person, (d) theaforementioned person when such person is repurchasing the shares of anycorporation, trust or similar form of venture, vehicle, entity, corporation oreconomic or mercantile association referred to in the item (b) above,and (e) the Company or by trusts created by the Company; (iii) anyperson(s) that as of December 4, 2003 hold(s), directly orindirectly, more than 20% of the shares representing the Company’s capitalstock, and; (iv) any other exceptions provided for in the MexicanSecurities Law and other applicable legal dispositions.

 

**MATERIAL CONTRACTS**

** **

**Archer-Daniels-Midland**

** **

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

 

As a result of this association, (i) wereceived U.S.$258.0 million in cash, (ii) GRUMA andArcher-Daniels-Midland combined their U.S. corn flour operations underAzteca Milling, our wholly-owned U.S. corn flour operations, and, as aresult, Archer-Daniels-Midland received a 20% partnership interest in AztecaMilling, and (iii) we received 60% of the capital stock of Molinera deMéxico, Archer-Daniels-Midland’s wholly-owned Mexican wheat millingoperations.  We also gained exclusivityrights from 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 at that time approximately 22% of our total outstandingshares and a 20% partnership interest in Azteca Milling in addition toretaining 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. RobertoGonzález Barrera, the Chairman of our board of directors, acquire additionalshares of our company.  As of April 29,

 

88

----

Table of Contents

 

2010, Archer-Daniels-Midlandowned, directly and indirectly, approximately 23.22% of our outstandingshares.  A total of 24,566,561 of theseshares are held by Archer-Daniels Midland through a Mexican corporation jointlyowned with Mr. González Barrera and controlled by him.  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.  Archer-Daniels-Midland did not participate inthe preemptive rights offering we completed on May 20, 2008.  Prior to the preemptive rights offering,Archer-Daniels-Midland, directly and indirectly, owned approximately 27.1% ofour outstanding shares and controlled the right to vote approximately 22% ofour outstanding shares.

 

Furthermore, Archer-Daniels-Midland must give Mr. GonzálezBarrera a 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.”

 

***2005 Facility***

 

On July 28, 2005, we refinanced aU.S.$250 million senior credit facility through another credit facilityfrom a syndicate of five banks, achieving a reduction in the interest rate andeliminating the partial principal amortizations in years 2008 and 2009 andleaving a bullet payment at maturity in July 2010, among other minorbenefits.  In connection with ourrefinancing under the Term Loan, the Three-Year Term Loans and the BNP TermLoan, we also refinanced the U.S.$197 million that remained outstanding underthe 2005 Facility on October 16, 2009.  As a result, the Refinanced 2005 Facility wasconverted into a secured term loan with a five-year tenor maturing in October of2014, pursuant to which GRUMA is obligated to make equal quarterly interestpayments beginning in January of 2010. The Refinanced 2005 Facility is constituted by two tranches, a U.S.dollar tranche in the amount of U.S.$118.2 million and a Mexican peso tranchein the amount of Ps.1,031 million.  Theinterest rates for both the peso and the dollar tranches are TIIE and LIBOR, respectively,plus 2.875% for the first three years, 3.375% for the fourth year and 3.875%for the fifth year.  The Refinanced 2005Facility contains covenants that require us to maintain a ratio of consolidatedtotal funded debt to EBITDA of not more than 5.6:1 in 2010, 5.0:1 in 2011,4.5:1 in 2012; 4.0:1 in 2013 and 3.6:1 in 2014. We are also required to maintain a ratio of consolidated EBITDA toconsolidated interest charges of not less than 2.5:1 in 2010 and 2.75:1thereafter.  The Refinanced 2005 Facilityalso limits our ability, and our subsidiaries’ ability in certain cases, amongother things, to:  (1) create liens;(2) merge or consolidate with other companies or sell substantially all ofour assets; (3) engage in transactions with affiliates; (4) guaranteeadditional indebtedness; (5) make certain changes to corporate documents; (6) disposeof the collateral; (7) make capital expenditures; and (8) incuradditional debt.  The Refinanced 2005Facility is secured by the Pledged Shares.

 

***Perpetual Bonds***

 

On December 3, 2004, Gruma, S.A.B. de C.V.issued U.S.$300 million 7.75% senior unsecured perpetual bonds, which atthe time were rated BBB- by Standard & Poor’s Ratings and by FitchRatings.  The bonds which have no fixedfinal maturity date, have a call option exercisable by GRUMA at any timebeginning five years after the issue date. In connection with our refinancing under the Term Loan, the Three-YearTerm Loans, the BNP Term Loan and the Refinanced 2005 Facility, Gruma, S.A.B.de C.V. entered into a supplemental indenture on October 21, 2009 thatprovided holders of our perpetual bonds with an equal and ratable securityinterest in the Pledged Shares.  As of March 31,2010 we have not hedged any interest payments on our U.S.$300 million7.75% senior unsecured perpetual bonds.

 

89

----

Table of Contents

 

***Gruma Corporation***

 

In October 2006, Gruma Corporation entered intoa U.S.$100 million 5-year revolving credit facility with a syndicate offinancial institutions.  The creditfacility replaced the U.S.$70 million revolving credit facility whichmatured in June 2007 and was terminated upon the closing of the newfacility.  The new facility has aninterest rate based on LIBOR plus a spread of 0.35% to 0.45% that fluctuates inrelation to Gruma Corporations’ leverage and contains less restrictiveprovisions than those in the facility replaced. This Facility contains covenants that limit Gruma Corporation’s abilityto merge or consolidate, and require it to maintain:  (1) a ratio of total funded debt toconsolidated EBITDA of not more than 3.0:1; and (2) a ratio ofconsolidated EBITDA to consolidated interest charges of not less than2.0:1.  In addition, this facility limitsGruma Corporation’s, and certain of its subsidiaries’ ability, among otherthings, 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.

 

Gruma Corporation is also subject to covenants whichlimit the amounts that may be advanced to, loaned to, or invested in us undercertain circumstances.  Upon theoccurrence of any default or event of default under its credit agreements,Gruma Corporation generally is prohibited from making any cash dividendpayments to us.  The covenants describedabove and other covenants could limit our and Gruma Corporation’s ability tohelp support our liquidity and capital resource requirements.

 

***Peso Facility***

 

On November 12, 2008, we obtained a Ps3,367 million peso-denominated two year bullet senior credit facility fromBancomext (*Banco Nacional de Comercio Exterior*)which we refer as the 2008 Peso Facility. Bancomext entered into a separate guarantee agreement with the MexicanGovernment, pursuant to which Banco de México guarantees this facility througha fund that specializes in guaranteeing the debt of the Mexican agriculturalsector (*Fondo Especial de Asistencia Técnica y Garantíapara Créditos Agropecuarios*). In connection with the refinancing of the majority of GRUMA’soutstanding debt, GRUMA refinanced the 2008 Peso Facility on September 18,2009 (the “Refinanced Peso Facility”). The Refinanced Peso Facility has a ten-year tenor maturing in September 2019and GRUMA is obligated to make quarterly interest payments beginning in December of2012 corresponding to either 10% or 20% of the outstanding value of the loanpursuant to the amortization schedule. The interest rate for the Refinanced Peso Facilitiy is 91-day TIIE plus6.21%.****The Refinanced Peso Facility limitsour ability, among other things, to transfer or encumber our assets.

 

***Term Loan***

 

We entered into the Term Loan with the MajorDerivative Counterparties on October 16, 2009.  The Term Loan is for an amount of U.S.$668.3million and has a tenor of seven and one-half years, maturing on January 21,2017.  The interest rate of the Term Loanis LIBOR plus 2.875% through July 20, 2012 with interest escalating toLIBOR plus 3.375% after July 20, 2012, LIBOR plus 3.875% after July 20,2013, LIBOR plus 4.875% after July 20, 2014, LIBOR plus 5.875% after July 20,2015 and LIBOR plus 6.875% from July 21, 2016 until the maturitydate.  The Term Loan also containsfinancial covenants and limits GRUMA’s ability to pay dividends or make otherdistributions and make certain investments or other restricted payments.  Pursuant to the Term Loan, we are required tomaintain a leverage ratio no greater than 5.6:1 in 2010, 5.0:1 in 2011, 4.5:1in 2012, 4.0:1 in 2013, 3.6:1 in 2014, 3:1 in 2015, and 2.5:1 in 2016 and2017.  Further, we are required tomaintain an interest coverage ratio no greater than 2.5:1 prior to December 31,2010 and no greater than 2.75:1 thereafter. In addition, the Term Loan also limits our ability, and our subsidiaries’ability, in certain cases, 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..

 

***Three-Year Term Loans***

 

In addition, we entered intothe Three-Year Term Loans with Standard Chartered, Barclays, and RBS on October 16,2009, for an amount of U.S.$22.9 million, U.S.$21.5 million and U.S.$13.9million, respectively, maturing on July 21, 2012.  The interest rate on the Three-Year TermLoans are LIBOR plus 2.875%.  Pursuant tothe Three-Year Term Loans, we are required to maintain leverage ratios andinterest coverage ratios consistent with the applicable ratios described aboveconcerning the Term Loan and Refinanced 2005 Facility.  The Three-Year Term Loans also contain financialcovenants and limit GRUMA’s ability to pay dividends or make other 

 

90

----

Table of Contents

 

distributions and makecertain investments or other restricted payments.  In addition, the Three-Year Term Loans limitour ability, and our subsidiaries’ ability, in certain cases, among otherthings, to:  (1) create liens; (2) mergeor consolidate 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.  The Three-Year Term Loans are unsecured.

 

***BNP Term Loan***

 

On October 16, 2009, wealso entered into the BNP Term Loan, as described above.  The BNP Term Loan is for an amount ofU.S.$11.8 million, matures on May 1, 2011 and bears interest at LIBOR plus2.0%. Pursuant to the BNP Term Loan, we are required to maintain leverageratios and interest coverage ratios consistent with the applicable ratiosdescribed above concerning the Term Loan, the Refinanced 2005 Facility, and theThree-Year Term Loans. The BNP Term Loan also contains financial covenants andlimits GRUMA’s ability to pay dividends or make other distributions and makecertain investments or other restricted payments.  In addition, the BNP Term Loan limits ourability, and our subsidiaries’ ability, in certain cases, among other things,to:  (1) create liens; (2) mergeor consolidate 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.  The BNP Term Loan is unsecured.

 

**EXCHANGECONTROLS**

 

Mexican law does not restrict our ability to remitdividends and interest payments, if any, to Mexican or non-Mexican holders ofour securities.  Payments of dividends toequity-holders generally will not be subject to Mexican withholding tax.  See “—Taxation—Mexican TaxConsiderations—Payment of Dividends.” Mexico has had a free market for foreign exchange since 1991, and thegovernment has allowed the peso to float freely against the U.S. dollarsince December 1994.

 

Our ability to repatriate dividends from GrumaVenezuela may be adversely affected by exchange controls and other recentevents.  See “Item 3. KeyInformation—Risk Factors—Risks Related to Venezuela—Venezuela PresentsSignificant Economic Uncertainty and Political Risk.”

 

**TAXATION**

 

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

 

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

 

The summary is based 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 consequencesof the purchase, ownership and disposition of shares or ADSs, including, inparticular, the effect of any foreign, state or local tax laws.

 

**Mexican Tax Considerations**

 

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

 

91

----

Table of Contents

 

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

 

For purposes of Mexican taxation, a natural personis a resident of Mexico for tax purposes if he has established his home inMexico, unless he has resided in another country for more than 183 days,whether consecutive or not, in any one calendar year and can demonstrate thathe has become a resident of that country for tax purposes, and a legal entityis a resident of Mexico if it was incorporated in Mexico or maintains theprincipal administration of its business or the effective location of itsmanagement in Mexico.  A Mexican citizenis presumed to be a resident of Mexico unless such person can demonstrate thecontrary.  If a non-resident of Mexico isdeemed to have a permanent establishment or fixed base in Mexico for taxpurposes, all income attributable to such permanent establishment or fixed basewill be subject to Mexican taxes, in accordance with applicable tax laws.

 

***Tax Treaties***

 

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

 

Mexico has also entered into and is negotiatingseveral other tax treaties that may reduce the amount of Mexican withholdingtax to which payment of dividends on Series B Shares or ADSs may besubject.  Holders of Series B Sharesor ADSs should consult their own tax advisors as to the tax consequences, ifany, 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, eitherin cash or in kind, paid with respect to Series B Shares represented byADSs are not subject to Mexican withholding tax.  A Mexican corporation will not be subject toany tax if the amount of declared dividends does not exceed the net tax profitaccount (*cuenta de utilidad fiscal neta*, orCUFIN).

 

***If we pay a dividend in an amount greater than our CUFINbalance (which may occur in a year when net profits exceed the balance in suchaccounts),***then we are required to pay 30%income tax in 2010, 2011 and 2012 (29% income tax in 2013 and 28% in 2014)on an amount equal to the product of the portion of the grossed-up amount whichexceeds such balance multiplied by 1.4286 in 2010, 2011 and 2012 (1.4085 in2013 and 1.3889 in 2014).

 

***Taxation of Dispositions***

 

The sale or other disposition of ADSs by anon-resident holder will not be subject to Mexican tax.  Deposits of Series B Shares in exchangefor ADSs and withdrawals of Series B Shares in exchange for ADSs will notgive rise to Mexican tax or transfer duties.

 

The sale of Series B Shares by a non-residentholder will not be subject to any Mexican tax if the transaction is carried outthrough the Mexican Stock Exchange or other securities markets approved by theMexican Ministry of Finance.  Sales orother dispositions of Series B Shares made in other circumstancesgenerally would be subject to Mexican tax, regardless of the nationality orresidence of the transferor.

 

Under the Mexican Income Tax Law, gains realized bya nonresident holder of shares on the sale or disposition of Series BShares not conducted through a recognized stock exchange generally are subjectto a Mexican tax at a rate of 25% of the gross sale price.  However, if the holder is a resident of acountry which (i) is not considered to be a low tax rate country, (ii) itslegislation does not contain territorial taxation, and (iii) such incomeis not subject to a preferential tax regime, the holder may elect to designatea resident of Mexico as its representative, in which case taxes would bepayable at the applicable income tax rate on the gain on such disposition of Series BShares.

 

92

----

Table of Contents

 

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

 

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

 

·                  such U.S. holder owned 25% or more ofthe Series B Shares representing the capital stock of GRUMA (includingADSs), directly or indirectly, during the 12-month period preceding suchdisposition; or

 

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

 

***Other Mexican Taxes***

 

A non-resident holder will not be liable for estate,inheritance or similar taxes with respect to its holdings of Series BShares or ADSs; provided, however, that gratuitous transfers of Series BShares may in certain circumstances result in imposition of a Mexican tax uponthe recipient.  There are no Mexicanstamp, issue registration or similar taxes payable by a non-resident holderwith respect to Series B Shares or ADSs.

 

Reimbursement of capital pursuant to a redemption ofSeries B Shares will be tax exempt up to an amount equivalent to theadjusted contributed capital corresponding to the Series B Shares thatwill be redeemed.  Any excessdistribution pursuant to a redemption will be considered a dividend for taxpurposes and we may be taxed as described above.

 

***U.S. Federal Income TaxConsiderations***

 

The following is a summary of certainU.S. federal income tax consequences to U.S. holders, as definedbelow, of the acquisition, ownership and disposition of Series B Shares orADSs.  This summary is based upon thefederal income tax laws of the United States as in effect on the date of thisAnnual Report, including the provisions of the Tax Treaty, all of which aresubject to change, possibly with retroactive effect in the case ofU.S. federal income tax law.

 

The summary does not purport to be a comprehensivedescription of all of the tax consequences of the acquisition, ownership ordisposition of Series B Shares or ADSs. The summary applies only to U.S. holders that will hold their Series BShares or ADSs as capital assets and does not apply to special classes ofholders such as dealers in securities or currencies, holders with a functionalcurrency other than the U.S. dollar, holders of 10% or more of our voting Series BShares (whether held directly or through ADSs or both), tax-exemptorganizations, financial institutions, holders liable for the alternativeminimum tax, securities traders electing to account for their investment intheir Series B Shares or ADSs on a mark-to-market basis, and personsholding their Series B Shares or ADSs in a hedging transaction or as partof a straddle or conversion transaction.

 

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

 

·                  a citizen or resident of the United States ofAmerica;

 

·                  a corporation or partnership organized in orunder the laws of the United States of America or any state thereof or theDistrict of Columbia;

 

·                  an estate the income of which is subject toUnited States federal taxation regardless of its source;

 

·                  a trust if a court within the U.S. isable to exercise primary supervision over the administration and one or moreU.S. persons have the authority to control all substantial decisions ofthe trust; or

 

·                  otherwise subject to U.S. federal incometaxation on a net income basis with respect to the Series B Shares orADSs.

 

93

----

Table of Contents

 

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 Series BShares or the ADSs, as the case may be.

 

Prospective investors in the Series B Shares orADSs should consult their own tax advisors as to the U.S. federal, Mexicanor other tax consequences of the purchase, ownership and disposition of the Series BShares or ADSs, including, in particular, the effect of any foreign, state orlocal tax laws and their entitlement to the benefits, if any, afforded by theTax Treaty.

 

***Treatment of ADSs***

 

In general, a U.S. holder of ADSs will betreated as the beneficial owner of the Series B Shares represented bythose ADSs for U.S. federal income tax purposes.  Deposits or withdrawals of Series BShares by U.S. holders in exchange for the ADSs will not result in therealization of gain or loss for U.S. federal income tax purposes.  U.S. holders that withdraw any Series BShares should consult their own tax advisors regarding the treatment of anyforeign currency gain or loss on any pesos received in respect of such Series BShares.

 

***Taxation of Distributions***

 

In this discussion, the term “dividends” is used tomean distributions paid out of our current or accumulated earnings and profits(calculated for U.S. federal income tax purposes) with respect to Series BShares or ADSs.  In general, the grossamount of any dividends will be includible in the gross income of aU.S. holder as ordinary income on the day on which the dividends arereceived by the U.S. holder in the case of Series B Shares, or by thedepositary in the case of ADSs. Dividends paid by us will not be eligible for the dividends-receiveddeduction 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 Series B Shares or ADSs, andthereafter as capital gain (provided that the Series B Shares or ADSs areheld as capital assets).  Distributionswill be paid in pesos and will be includible in the income of aU.S. holder in a U.S. dollar amount calculated by reference to theexchange rate in effect on the day that they are received by theU.S. holder in the case of Series B Shares, or by the depositary inthe case of ADSs.  U.S. holdersshould consult their own tax advisors regarding the treatment of foreigncurrency gain or loss, if any, on any pesos received by a U.S. holder ordepositary that are converted into U.S. dollars on a date subsequent toreceipt.

 

Distributions of additional Series B Shares orADSs to U.S. holders with respect to their Series B Shares or ADSsthat are made as part of a pro rata distribution to all of our shareholdersgenerally will not be subject to U.S. federal income tax.

 

Dividends paid on Series B Shares or ADSsgenerally will be treated for U.S. foreign tax credit purposes as foreignsource passive category income.  In theevent Mexican withholding taxes are imposed on such dividends, any suchwithheld taxes would be treated as part of the gross amount of the dividendincludible in income of a U.S. holder for U.S. federal income taxpurposes (to the extent of current or accumulated earnings and profits), andsuch taxes may be treated as a foreign income tax eligible, subject togenerally applicable limitations and conditions under U.S. federal incometax 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 grossincome in computing the U.S. holder’s taxable income.  The calculation and availability of foreigntax credits and, in the case of a U.S. holder that elects to deductforeign taxes, the availability of deductions, involves the application of rules thatdepend on a U.S. holder’s particular circumstances.  In the event Mexican withholding taxes areimposed, U.S. holders should consult their own tax advisors regarding theavailability of foreign tax credits.

 

***Qualified Dividend Income***

 

Notwithstanding the foregoing, certain dividendsreceived by individual U.S. holders that constitute “qualified dividendincome” will be subject to a reduced maximum marginal U.S. federal incometax rate.  Qualified dividend incomegenerally includes, among other dividends, dividends received prior to January 1,2011, from “qualified foreign corporations.” In general, the term “qualified foreign corporation” includes a foreigncorporation that is eligible for the benefits of a comprehensive income taxtreaty with the United States which the U.S. Treasury 

 

94

----

Table of Contents

 

Department determines to be satisfactory, andwhich includes an exchange of information program.  In addition, a foreign corporation is treatedas a qualified foreign corporation with respect to any dividend paid by thecorporation with respect to stock of the corporation that is readily tradableon an established securities market in the United States.  For this purpose, a share is treated asreadily tradable on an established securities market in the United States if anADR backed by such share is so traded.

 

Notwithstanding the previous rule, dividendsreceived from a foreign corporation that is a passive foreign investmentcompany (as defined in section 1297 of the Code) will not constitutequalified dividend income.  In addition,the term “qualified dividend income” will not include, among other dividends,any (i) dividends on any share of stock or ADS which is held by a taxpayerfor 60 days or less during the 120-day period beginning on the date whichis 60 days before the date on which such share or the Series B Sharesbacking the ADS become ex-dividend with respect to such dividends (as measuredunder section 246(c) of the Code) or (ii) dividends to theextent that the taxpayer is under an obligation (whether pursuant to a shortsale or otherwise) to make related payments with respects to positions insubstantially similar or related property. Moreover, special rules apply in determining a taxpayer’s foreigntax credit limitation under section 904 of the Code in the case ofqualified dividend income.

 

Individual U.S. holders should consult theirown tax advisors to determine whether or not amounts received as dividends fromus will constitute qualified dividend income subject to a reduced maximummarginal U.S. federal income tax rate and, in such case, the effect, ifany, on the individual U.S. holder’s foreign tax credit.

 

***Taxation of Dispositions***

 

Gain or loss realized by a U.S. holder on thesale, redemption or other disposition of Series B Shares or ADSs will besubject to U.S. federal income taxation as capital gain or loss in anamount equal to the difference between such U.S. holder’s adjusted basisin the Series B Shares or the ADSs and the amount realized on thedisposition (including any amounts withheld in respect of Mexican withholdingtax).  Gain (including gain that arisesbecause the U.S. holder’s basis in the Series B Shares or ADSs has beenreduced because a distribution is treated as a return of capital rather than asa dividend) and loss realized by a U.S. holder on a sale, redemption orother disposition of Series B Shares or ADSs generally will be treated asU.S. source income or loss for U.S. foreign tax credit purposes.

 

The availability of U.S. foreign tax credits orany deduction 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, Series BShares or ADSs.

 

***Tax Return DisclosureRegulations***

 

Pursuant to U.S. Treasury regulations (the“Disclosure Regulations”), any taxpayer that has participated in a “reportabletransaction” and who is required to file a U.S. Federal income tax returnmust generally attach a disclosure statement disclosing such taxpayer’sparticipation in the reportable transaction to the taxpayer’s tax return foreach taxable year for which the taxpayer participates in the reportabletransaction.  The Disclosure Regulationsprovide that, in addition to certain other transactions, “loss transactions”and “transactions involving a brief asset holding period” constitute “reportabletransactions.” “Loss transactions” include transactions that produce a foreigncurrency exchange loss in an amount equal to or in excess of certain thresholdamounts.  “Transactions involving a briefasset holding period” are generally transactions resulting in the taxpayerclaiming a tax credit in excess of $250,000 if the underlying asset giving riseto the credit is held by the taxpayer for 45 days or less.  U.S. holders should consult their ownadvisors concerning the implications of the tax return disclosure requirementsin light of their particular circumstances.

 

Recently enacted legislation requires certain U.S.holders to report information with respect to their investment in Series BShares or ADSs not held through a custodial account with a U.S. financialinstitution to the IRS.  Investors whofail to report required information could become subject to substantial penalties.  Prospective investors are encouraged toconsult with their own tax advisors regarding the possible implication of thisnew legislation on their investment in Series B Shares or ADSs.

 

95

----

Table of Contents

 

***Information Reporting andBackup Withholding***

*** ***

Dividends on, and proceeds from the sale or otherdisposition of, the Series B Shares or ADSs paid to a U.S. holdergenerally may be subject to the information reporting requirements of the Codeand may be subject to backup withholding at the applicable rate unless theholder:

 

·                  establishes that it is a corporation or otherexempt holder; or

 

·                  provides an accurate taxpayer identificationnumber on a properly completed Internal Revenue Service Form W-9 andcertifies that no loss of exemption from backup withholding has occurred.

 

The amount of any backup withholding from a paymentto a holder will be allowed as a credit against the U.S. holder’sU.S. federal income tax liability and may entitle such holder to a refund,provided that certain required information is furnished to the Internal RevenueService.

 

***U.S. Tax Consequencesfor Non-U.S. Holders***

*** ***

*Distributions:*

 

A holder of Series B Shares or ADSs that is,with respect to the United States, a foreign corporation or a non-residentalien individual (a “non-U.S. holder”) generally will not be subject toU.S. federal income or withholding tax on dividends received on Series BShares or ADSs, unless such income is effectively connected with the conduct bythe holder of a U.S. trade or business.

 

*Dispositions:*

 

A non-U.S. holder of Series BShares or ADSs will not be subject to U.S. federal income or withholdingtax on gain realized on the sale of shares or ADSs, unless:

 

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

 

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

 

*Information Reporting and BackupWithholding:*

 

Although non-U.S. holders generally are exemptfrom backup 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.

 

**DOCUMENTSON DISPLAY**

** **

We are subject to the information requirements ofthe Exchange Act and, in accordance therewith, we are required to file reportsand other information with the SEC. These materials, including this Form 20-F and the exhibits thereto,may be inspected and copied at the SEC’s Public Reference Room at 450Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330.

 

**ITEM11.**                      Quantitative And Qualitative DisclosuresAbout Market Risk

 

We are exposed to market risks arising from changesin interest rates, foreign exchange rates, equity prices and commodityprices.  We use derivative instrumentsfrom time to time, on a selective basis, to manage these risks.  In addition, we have also historically usedcertain derivative instruments for trading purposes.  We recently adopted a new risk managementpolicy that precludes the use of derivative instruments for tradingpurposes.  We maintain and control ourtreasury operations and overall financial risk through practices approved byour senior management.

 

96

----

Table of Contents

 

**RISKMANAGEMENT AND FINANCIAL INSTRUMENTS**

 

During 2008 we implemented specific improvements toour internal controls concerning the use of derivative financialinstruments.  In addition, we haveimplemented a new risk management policy that besides consolidating suchimprovements, prohibits the Company from entering into derivative financialinstruments for trading purposes with the aim of obtaining profits based onchanges in market values.  However, theuse of financial derivative instruments for hedging purposes is allowed if usedwith the objective of mitigating financial risks and associated with a hedgeditem that is relevant to business activities.

 

**INTERESTRATE RISK**

 

We depend upon debt financing transactions,including debt securities, bank and vendor credit facilities and leases, tofinance our operations.  All suchfinancial instruments, as well as the related interest rate derivatives discussedfurther below, are entered into for other 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 todetermine the interest rates that are applicable to borrowings under our creditfacilities.  We are also exposed tointerest rate risk in connection with refinancing of maturing debt.  We had approximately U.S.$308 million(Ps.4,039.7 million) of fixed rate debt and approximately U.S.$1,392.7 million(Ps.18,203.6 million) in floating rate debt at December 31, 2009.  A hypothetical 100 basis point increase ordecrease in interest rates would not have a significant effect on the fairvalue of our fixed rate debt.  Thefollowing table sets forth, as of December 31, 2009, principal cash flowsand the related weighted average interest rates by expected maturity dates forour debt obligations.

 
| ** **          | ** ** | **Maturity  Dates**                             | ** ** |
|---------------------|------------|-------------------------------------------------|------------|
| ** **          | ** ** | **2010**                                        | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
| ** **          | ** ** | **(in  millions of pesos, except percentages)** | ** ** |
| Liabilities         |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt                |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed Rate (Ps.)    |       | 53.5                                            |       | 11.1 |   | 12.5 |   | 41.6 |   | 3,921 |   | 4,039.7 |   | 3,785 |   |
| Average Rate        |       | 7.1                                             | %          | 11.6 | % | 11.6 | % | 11.6 | % | 7.8 | % |   |   |   |   |
| Floating Rate (Ps.) |       | 2,149.7                                         |       | 2,673.3 |   | 2,015.9 |   | 2,346.9 |   | 9,017.8 |   | 18,203.6 |   | 18,203.6 |   |
| Average Rate        |       | 6.31                                            | %          | 3.17 | % | 4.75 | % | 4.97 | % | 5.00 | % | 4.85 | % |   |   |

 

From time to time, we usederivative financial instruments such as interest rate swaps for purposes ofhedging a portion of our debt, in order to reduce our exposure to increases ininterest rates.  Several of these contracts,however, do not qualify for accounting treatment as hedging transactions, asdescribed in Note 17 to our audited consolidated financial statements.

 

On November 2, 2004, we entered into aninterest rate swap transaction with five banks with an aggregate notionalamount 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%. The swap transaction provided that the counterparty pay us unless6-month LIBOR reached 6%, in which case the parties had no obligation to payany amount for the applicable period.  OnSeptember 30, 2005, this interest rate swap was modified resulting in anaverage fixed rate of 3.2775% and a maturity date of March 30, 2008.  The swap transaction provided that thecounterparty pay us unless 6-month LIBOR reached 6%, in which case the partieshad no obligation to pay any amount for the applicable period.  However, on March 8, 2006 we modifiedthis 6% level up to 6.5% and 6.75% for the interest payment dates due in 2007obtaining a fixed average rate of 3.6175% for this year.  In addition, in December 12, 2005 weentered into 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 transactionprovided that the counterparty would pay us unless 6-month LIBOR reached 7%, inwhich case the parties had no obligation to pay any amount for the applicableperiod.  After the March 30, 2009maturity we did not enter into any additional swap transactions.

 

97

----

Table of Contents

 

As of May 14, 2010, the Company had only one interest rate swap contract outstanding, which was entered into by Derivados de Maíz Alimenticio, S.A., our Costa Rican subsidiary on July 2008 to hedge the interest rate risk associated with certain long-term credit facilities.  This swap has an aggregate notional amount of U.S.$20 million and a maturity date of December 28, 2010.  Following the repayment of principal amounts outstanding under these credit facilities, as of May 14, 2010, only U.S.$0.4 million remained outstanding under one of these facilities.  The interest rate swap, however, was not terminated.  The Company is currently evaluating its options to settle this swap.  For a description of our debt, see Note 9 to our audited consolidated financial statements.

 

Additionally, some of the exchange rate forward and option contracts we entered into to financially hedge part of the interest payments due in 2006, 2007, 2008 and first two coupon dates of 2009 corresponding to our U.S.$300 million 7.75% senior unsecured perpetual bonds.  These forward and option contracts have either expired by their own terms or been terminated by the Company.

 

In the case of our cash and short-term investments, declines in interest rates decrease the interest return on floating rate cash deposits and short-term investments.  A hypothetical 100 basis point decrease in interest rates would not have a significant effect on our results of operations.

 

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

 

**FOREIGN EXCHANGE RATE RISK**

 

Our net sales are denominated in U.S. dollars, Mexican pesos and other currencies.  During 2009, approximately 47% of our revenues were generated in U.S. dollars, and approximately 27% in pesos.  In addition, as of December 31, 2009, approximately 61% of our total assets were denominated in currencies other than Mexican pesos, particularly U.S. dollars.  A significant portion of our operations is financed through U.S. dollar-denominated debt.

 

We believe that we have natural foreign exchange hedges incorporated in our balance sheet, in significant part because we have subsidiaries outside Mexico, and the peso-denominated value of our equity in these subsidiaries is also exposed to fluctuations in exchange rates.  Changes in the peso value of equity in our subsidiaries caused by movements in foreign exchange rates are recognized as a component of equity.  See Note 15 to our audited consolidated financial statements.

 

As of December 31, 2009, approximately 75% of our debt obligations was denominated in U.S. dollars.  The following table sets forth information concerning our U.S. dollar-denominated debt as of December 31, 2009.  The table does not reflect our U.S. dollar sales or our U.S. dollar-denominated assets.

 

**Expected Maturity Date (U.S.**

**dollar-denominated Debt)**

 
| **U.S.   dollar-denominated debt** | ** ** | **2010**                   | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair   Value** | ** ** |
|------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|------------------|------------|
| ** **                         | ** ** | **(in millions of pesos)** | ** ** |
| Term   Loan                        |       | 327                        |       | 654      |       | 980      |       | 1,307    |       | 5,467          |       | 8,735     |       | 9,463            |       |
| Three   Year and BNP Term Loans    |       | 261                        |       | 424      |       | 222      |       | 0        |       | 0              |       | 907       |       | 930              |       |
| Refinanced   Facility              |       | 309                        |       | 309      |       | 309      |       | 309      |       | 309            |       | 1,545     |       | 1,618            |       |
| 7.75%   Perpetual Bond             |       | 0                          |       | 0        |       | 0        |       | 0        |       | 3,921          |       | 3,921     |       | 3,666            |       |
| Gruma   Corp Revolving Facility    |       | 0                          |       | 915      |       | 0        |       | 0        |       | 0              |       | 915       |       | 915              |       |
| Other   U.S. dollar loans          |       | 591                        |       | 37       |       | 38       |       | 55       |       | 3              |       | 724       |       | 724              |       |
| TOTAL                              |       | 1,488                      |       | 2,339    |       | 1,549    |       | 1,671    |       | 9,700          |       | 16,747    |       | 17,316           |       |

 

An important part of our foreign exchange rate risk relates to our substantial U.S. dollar-denominated debt for our non-U.S. subsidiaries.

 

98

----

Table of Contents

 

During 2004 and 2005, we entered into forward contracts and exchange rate option contracts (Mexican peso — U.S. dollar) for a nominal amount of U.S.$55.8 million, with different maturity dates until November 2007.  The purpose of these contracts was to hedge the financial risks due to exchange rate fluctuations over the quarterly interest payments related to our perpetual notes.  The unfavorable effect of the contracts due during 2007 of Ps.15.2 million was recognized in our income statement for the year 2007.

 

During 2007, we entered into forward contracts and exchange rate option contracts (Mexican peso — U.S. dollar) with respect to our foreign exchange exposure related to the 7.75% perpetual notes.  These contracts covered four coupon dates for 2007, as well as four additional dates for 2008 and two for 2009.  Accordingly, the maturity dates for these contracts ranged from March 2007 to June 2009.  These financial instruments have either expired by their terms or were terminated by the Company.

 

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

 

During 2008, GRUMA entered into foreign exchange derivative instruments which covered varying periods of time and had varying pricing provisions.  The Company primarily entered into swap forwards and options contracts, for which the periodic settlement results depended on the behavior of the spot rate at a future maturity date.  In the first quarter of 2008, we entered into foreign exchange derivative instruments covering a basket of currencies.  In the second quarter of 2008 and through July, August and September of 2008, we entered into foreign exchange derivative instruments mainly in respect of the dollar/peso and the dollar/euro exchange rate.  These derivative instruments were entered into for trading purposes and did not qualify for hedge accounting treatment.

 

During 2008, we entered into foreign exchange derivative instruments with several counterparties maturing in 2008, 2009, 2010 and 2011.  These financial instruments have either expired by their terms or were terminated by the Company.  See “Liquidity and Capital Resources.”

 

We account for our currency derivative instruments using the mark-to-market accounting method.  Extreme exchange rate volatility in the financial markets during the last two quarters of 2008 and the first quarter of 2009 resulted in significant fluctuations in the mark-to-market value of GRUMA’s foreign exchange derivative instruments.  These fluctuations were further exacerbated by the leverage features included in certain of these instruments.  As of September 30, 2008, these instruments represented a negative mark-to-market net value of approximately U.S.$291.4 million.  As of October 8, 2008, these instruments represented a mark-to-market unrealized loss of approximately U.S.$684 million.  As of October 28, 2008, these instruments represented an aggregate mark-to-market non-cash charge of 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 loan agreement with Bancomext in the amount of Ps. 3,367 million and applied the proceeds to terminate our commitments arising under all the currency derivative instruments that we had entered into with one of our derivative counterparties and to pay other commitments arising under the currency derivative instruments maturing from the date of such loan agreement with Bancomext.  In addition, we entered into agreements on October 16, 2009 with our remaining derivative counterparties to convert a total of approximately U.S.$738.3 million dollars owing under our terminated foreign exchange derivative instruments into medium and long-term loans, as described below.

 

In connection with most of its obligations under its foreign exchange derivative instruments, the Company entered into a term sheet on March 19, 2009 that provided for the financing of the obligations that would result from the termination of all of its foreign exchange derivative instruments that it had entered into with the Major Derivative Counterparties.  On March 23, 2009, GRUMA and the Major Derivative Counterparties agreed to 

 

99

----

Table of Contents

 

terminate all of these derivative instruments and fixed the total amount of obligations payable by GRUMA to the Major Derivative Counterparties at U.S.$668.3 million.  On October 16, 2009, the Company reached an agreement with the Major Derivative Counterparties to convert these derivatives obligations into the Term Loan in the amount of U.S.$668.3 with a tenor of seven and one-half years.  The Term Loan is secured by the Company’s shares in GIMSA, Gruma Corporation and Molinera de México.

 

In connection with the balance of its foreign exchange derivative instruments, the Company entered into separate term sheets withBarclays, RBS and Standard Chartered during June and July 2009 that provided for the financing of the obligations that would result from the termination of all of its foreign exchange derivative instruments that it had entered into with each of Barclays, RBS and Standard Chartered.  GRUMA and Barclays, RBS and Standard Chartered agreed to terminate all of the derivative instruments owing to these parties and fixed the total amount of obligations payable by GRUMA to Barclays at U.S.$21.5 million, RBS at U.S.$13.9 million and Standard Chartered at U.S.$22.9 million for a total aggregate amount of U.S.$58.3 million.  In addition, during June of 2009, GRUMA entered into a term sheet with BNP that fixed the amount payable by GRUMA to BNP at approximately U.S.$11.8 million.

 

On October 16, 2009, the Company reached separate agreements with Barclays, RBS and Standard Chartered to convert the obligations that resulted from the termination of all of its foreign exchange derivative instruments entered into with these parties into loans in the amount of U.S.$21.5 million, U.S.$13.9 million and U.S.$22.9 million, respectively, with a tenor of three years.  On October 16 ,2009, GRUMA also reached a separate agreement with BNP to convert the obligations that resulted from the scheduled maturity of all of its foreign exchange derivative instruments entered into with BNP into a loan in the amount of approximately U.S.$11.8 million with a tenor of approximately one and one-half years (the “BNP Term Loan”).  As a result of the Term Loan, the Three-Year Term Loans and the BNP Term Loan, the Company converted a total of approximately U.S.$738.3 million dollars owing under our terminated foreign exchange derivative instruments into medium and long-term loans.

 

As of June 14, 2010, the Company had no foreign exchange derivative transactions in effect.  See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”

 

**COMMODITY AND DERIVATIVE PRICE RISK**

 

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

 

During 2009, we entered into short-term hedge transactions through commodity futures and options for a portion of our requirements.  For cash-flow hedge transactions, changes in the fair value of the derivative financial instrument are included as other comprehensive income in stockholders’ equity, based on the evaluation of the hedge effectiveness, and are reclassified to income in the periods when the hedged commitment or projected transaction is realized.  Hedge contracts other than cash flow are recognized at fair value and their valuation gain or loss is recognized in income.  As of December 31, 2009, we did not have outstanding fair value hedge contracts.  From time to time we hedge commodity price risks utilizing futures and options strategies that do not qualify for hedge accounting.  As a result of non-qualification, these derivative financial instruments are recognized at their estimated fair values and are marked to market with the associated effect recorded in current period earnings.  For the year ended December 31, 2009, we recognized an unfavorable effect of approximately Ps.114 million from these contracts.  Additionally, as of December 31, 2009, we recognized a favorable effect of approximately Ps.64 million for the 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, 2010, a hypothetical 10 percent decline in market prices applied to the fair value of the instruments would result in a charge to income of Ps.38 million (for non-qualifying contracts).

 

100

----

Table of Contents

 

**EQUITY PRICE RISK**

 

We classify our equity investments, consisting primarily of shares of GFNorte, a Mexican financial services holding company, as long-term assets.  Since these investments are accounted for using the equity method, we do not believe our exposure to a hypothetical 10% decrease in the value of these equity investments would have a material effect on our results.  For additional information concerning our investment in GFNorte, see “Item 4.  Information on the Company—Description of Business—Miscellaneous—GFNorte Investment.” We did not enter into any equity swap agreements in 2008.

 

**COUNTERPARTY RISK**

 

We maintain centralized treasury operations in Mexico for our Mexican operations and in the United States for our U.S. operations.  Liquid assets are invested primarily in government bonds and short-term debt instruments with a minimum “A1/P1” rating for our U.S. operations and “A” for our Mexican operations.  We face credit risk from the potential non-performance by the counterparties in respect of the financial instruments that we utilize.  Substantially all of these financial instruments are unsecured.  We do not anticipate non-performance by the counterparties, which are principally licensed commercial banks and investment banks with long-term credit ratings.  In addition, we minimize counterparty solvency risk by entering into derivative instruments only with major national and international financial institutions using standard International Swaps and Derivatives Association, Inc. (“ISDA”) forms and agreements.  For our Central American operations and Gruma Venezuela, we only invest cash reserves with well-known local banks and local branches of international banks.  In addition, we also keep small investments abroad.

 

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

 

**ITEM 12.**      Description Of Securities Other Than Equity Securities.

 

**American Depositary Shares**

 

Our Series B Shares have been traded on the *Bolsa Mexicana de Valores, S.A.B. de C.V.*, or Mexican Stock Exchange, since 1994.  The ADSs, each representing four Series B Shares, commenced trading on the New York Stock Exchange in November 1998.  As of April 29, 2010, our capital stock was represented by 565,174,609 issued Series B shares, of which 563,650,709 shares were outstanding, fully subscribed and paid, and 1,523,900 shares were held in our treasury.  As of December 31, 2009, 77,976,580 Series B shares of our common stock were represented by 19,494,145 ADSs held by 10 record holders in the United States.

 

In May 2008, we issued 82,624,657 of our Series B shares pursuant to a preemptive rights offering in Mexico to our non-U.S. shareholders.  Company shareholders exercising their preemptive rights paid for and acquired the shares at a price of Ps.25.55 per share, resulting in aggregate net proceeds to us from the offering of Ps.2,111 million.  We did not offer any rights to acquire the shares to U.S. persons, nor in any other jurisdiction outside of Mexico.  The proceeds of the offering were used to reduce our level of debt and improve our debt ratios in order to maintain our investment-grade rating.

 

On October 13, 2008, our Series B Shares were suspended as required by the Mexican Stock Exchange in connection with pending information regarding the publication of events related to the Company’s currency derivative instruments.  Accordingly, our ADSs were also suspended on the New York Stock Exchange on October 20, 2008.  On October 29, 2008, our Series B Shares and our ADSs began trading again as the aforementioned information was released.

 

**Fees and Expenses**

 

The following table summarizes the fees and expenses payable by holders of ADSs to Citibank, N.A. (the “Depositary”) pursuant to the Deposit Agreement dated September 18, 1998:

 

101

----

Table of Contents

 
| **Service**                                                                                                                                                       | ** ** | **Rate**                                                                    | ** ** | **By Whom Paid**                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------------------------------------|
|                                                                                                                                                              |       |                                                                        |       |                                                       |
| (1)   Issuance of ADSs upon deposit of Series B   Shares (excluding issuances contemplated by paragraphs 3(b) and   (5) below)           |       | Up   to U.S.$5.00 per 100 ADSs (or fraction thereof) issued                 |       | Party   for whom deposits are made or party receiving ADSs |
| (2)   Delivery of Series B Shares, property and cash   against surrender of ADSs.                                                                  |       | Up   to U.S.$5.00 per 100 ADSs (or fraction thereof) surrendered.           |       | Party   surrendering ADSs or making withdrawal.            |
| (3)   Distribution of (a) cash dividend or   (b) ADSs pursuant to stock dividends (or other free distribution of   stock)                     |       | No   fee, so long as prohibited by the exchange upon which ADSs are listed. |       | N/A                                                        |
| (4)   Distribution of cash proceeds (i.e. upon sale of   rights or the sale of any securities or property pursuant to Sections the   Deposit Agreement) |       | Up   to $2.00 per 100 ADSs held.                                            |       | Party   to whom distribution is made.                      |
| (5)   Distribution of ADSs pursuant to exercise of   rights.                                                                                            |       | Up   to $2.00 per 100 ADSs issued.                                          |       | Party   to whom distribution is made.                      |

 

In addition to the foregoing, holders of our ADSs are responsible for the following charges pursuant to the Deposit Agreement: (i) taxes (including applicable interest and penalties) and other governmental charges; (ii) such registration fees as may from time to time be in effect for the registration of Series B Shares on the share register and applicable to transfers of Series B Shares to or from the name of Citibank, S.A. (the “Custodian”), the Depositary or any nominees upon the making of deposits and withdrawals, respectively; (iii) such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing Series B Shares or holders of ADSs; (iv) the customary expenses and charges incurred by the Depositary in the conversion of foreign currency; and (v) such fees and expenses as are incurred by the Depositary in connection with compliance with exchange control regulatory requirements applicable to Series B Shares, ADSs and ADRs.

 

Pursuant to the Deposit Agreement, the Depositary may deduct the amount of any taxes or other governmental charges owed from any payments to holders.  It may also sell deposited securities to pay any taxes owed.  Holders may be required to indemnify the Depositary, the Company and the Custodian from any claims with respect to taxes.

 

**PART II**

 

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

 

Not applicable.

 

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

 

Not applicable.

 

**ITEM 15.**                 Controls and Procedures.

 

(a) *Disclosure controls and procedures*.  We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Corporate Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon our evaluation, our Chief Executive Officer, Chief Financial 

 

102

----

Table of Contents

 

Officer and Chief Corporate Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Corporate Officer, as appropriate to allow timely decisions regarding required disclosure.

 

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

 

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

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

 

PricewaterhouseCoopers, an independent registered public accounting firm, our independent auditor, issued an attestation report on our internal control over financial reporting on June 14, 2010.

 

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

 

(d) *Changes in internal control over financial reporting*.  There has been no change in our internal control over financial reporting during 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting:

 

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

 

Our Board of Directors has determined that Juan Diez-Canedo Ruiz and José de la Peña y Angelini qualify as “audit committee financial experts”, and Mr. Diez-Canedo Ruiz and José de la Peña y Angelini are 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-F under the Securities Exchange Act of 1934, as amended.  Our code of ethics applies, among others, to our Chief Executive Officer, Chief Financial Officer and Chief Corporate Officer, and persons performing similar functions.  Our code of ethics is available on our web site at www.gruma.com.  If we amend any provisions of our code of ethics that apply to our chief executive 

 

103

----

Table of Contents

 

officer, chief financial officer, comptroller and persons performing similar functions, or if we grant any waiver of such provisions, we will disclose such amendment or waiver on our web site at the same address.

 

**ITEM 16C.  Principal Accountant Fees and Services.**

 

**Audit and Non-Audit Fees**

 

The following table sets forth the fees billed to us and our subsidiaries by our independent auditors, PricewaterhouseCoopers, during the fiscal years ended December 31, 2008 and 2009:

 
| ** ** | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2008**                         | ** ** | **2009** | ** ** |
| ** ** | ** ** | **(thousands of Mexican pesos)** | ** ** |
| Audit fees |       | Ps.                              | 32,396     |   | Ps. | 40,199 |   |
| Tax fees   |       |                             | 6,686      |   |   | 6,120 |   |
| Other fees |       |                             | 635        |   |   | 13,814 |   |
| Total fees |       | Ps.                              | 39,717     |   | Ps. | 60,133 |   |

 

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

 

Tax fees in the above table are fees billed by PricewaterhouseCoopers and its affiliates for tax compliance services, tax planning services and tax advice services.

 

Other fees in the above table are fees billed by PricewaterhouseCoopers and its affiliates for non-audit services, mainly related to accounting advice on the implementation of new accounting standards as well as accounting advise on derivative financial instruments, as permitted by the applicable independence rules.

 

**Audit Committee Approval Policies and Procedures**

 

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

 

**ITEM 16D.  Exemptions from the Listing Standards for Audit Committees.**

 

Not Applicable.

 

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

 

We did not repurchase any of our Series B Shares or ADSs in 2009.

 

**ITEM 16F.  Change in Registrant’s Certifying Accountant.**

 

Not Applicable.

 

**ITEM 16G.  Corporate Governance.**

 

We are a Mexican corporation with shares listed on the Mexican Stock Exchange and on the NYSE.  Our corporate governance practices are 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*

 

104

----

Table of Contents

 

*Mexicana de Valores* (the “Mexican Stock Exchange Rules”), and to applicable US securities laws including the Sarbanes-Oxley Act of 2002 (“SOX”) and the rules of the NYSE (the “NYSE Rules”) to the extent SOX and the NYSE Rules apply to foreign private issuers like us.  Certain NYSE Rules relating to corporate governance are not applicable to us because of our status as a foreign private issuer.  Specifically, we are permitted to follow home country practices in lieu of certain provisions of Section 303A of the NYSE Rules.  In accordance with the requirement of Section 303A.11 of the NYSE Rules, the following is a summary of significant ways in which our corporate governance practices differ from those required to be followed by U.S. domestic companies under the NYSE’s listing standards.

 

**Independence of our Board of Directors**

 

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

 

**Executive Sessions**

 

Under the NYSE Rules, non-management directors must meet at executive sessions without management.  We are not required, under Mexican law, to hold executive sessions in which non-management directors meet without the management or to hold meetings of only independent directors.  Our Board of Directors must meet at least four times per year.

 

**Audit Committee**

 

Under the NYSE Rules, listed companies must have an audit committee with a minimum of three members who are independent directors.  Under the Mexican Securities Law, listed companies are required to have an Audit Committee comprised solely of independent directors.  The members of the Audit Committee are appointed by the Board of Directors, with the exception of its Chairman, who is appointed by the shareholders at the Shareholders’ Meeting.  Currently, our Audit Committee is comprised of 3 members.  Our Audit Committee operates pursuant to the provisions of the Mexican Securities Law and our Bylaws.  A description of the specific functions of our Audit Committee can be found in Item 10.  See “Item 10.  Additional Information—Audit and Corporate Governance Committees” for further information about our Audit Committee.

 

**Audit Committee Reports**

 

Under the NYSE Rules, Audit Committees are required to prepare an Audit Committee Report as required by the SEC to be included in the listed company’s annual proxy statement.  As a foreign private issuer, we are not required by the SEC to prepare and file proxy statements.  In this regard, we are subject to Mexican securities law requirements.  We have chosen to follow Mexican law and practice in this regard.

 

**Corporate Governance Committee**

 

Under both NYSE Rules and Mexican securities laws and regulations, listed companies are also required to have a Corporate Governance Committee comprised solely of independent directors.  The Company’s Board of Directors appoints the members of the Corporate Governance Committee, with the exception of its Chairman, who is appointed by the shareholders at a Shareholders’ Meeting.  Currently, our Corporate Governance Committee is comprised of the same three members of our Audit Committee.  Our Corporate Governance Committee operates pursuant to the provisions of the Mexican Securities Law and our Bylaws.  A description of the specific functions of our Corporate Governance Committee can be found in Item 10.  See “Item 10. Additional Information—Audit and Corporate Governance Committees” for further information about our Corporate Governance Committee.

 

105

----

**Table of Contents**

** **

**Compensation Committee**

** **

Under NYSE Rules, listed companies must have a compensation committee composed entirely of independent directors.  Under our Bylaws and the Mexican securities laws and regulations, we are not required to have a compensation committee.  Currently, we do not have such a committee.

 

**Corporate Governance Guidelines and Code of Ethics**

** **

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

 

**Solicitation of Proxies**

 

Under NYSE Rules, listed companies are required to solicit proxies and provide proxy materials for all meetings of shareholders.  Such proxy solicitations are to be provided to the NYSE.  We are not required to solicit proxies from our shareholders.  Under our Bylaws and Mexican securities laws and regulations, we inform shareholders of all meetings by public notice, which states the requirements for admission to the meeting. Under the deposit agreement relating to our ADSs, holders of our ADSs receive notice of of shareholders’ meetings together with information explaining how to instruct the depositary bank to exercise the voting rights of the securities represented by ADSs.

 

**PART III**

 

**ITEM 17.**                      Financial Statements.

** **

Not Applicable.

 

**ITEM 18.**                      Financial Statements.

** **

See pages F-1 through F-177, incorporated herein by reference.

 

**ITEM 19.**                      Exhibits.

** **

Pursuant to the rules and regulations of the SEC, we have filed certain agreements as exhibits to this annual report on Form 20-F.  These agreements may contain representations and warranties by the parties.  These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may be intended not as statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements if those statements turn out to be inaccurate, (ii) may have been qualified by disclosures that were made to such other party or parties and that either have been reflected in the Company’s filings or are not required to be disclosed in those filings, (iii) may apply materiality standards different from what may be viewed as material to investors, and (iv) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments.  Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof.

 

Documents filed as exhibits to this annual report:

 

106

----

Table of Contents

 
| **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 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)(2)              |       | Supplemental   Indenture, dated as of October 21, 2009, between us and the Bank of New   York Mellon, as successor Indenture Trustee under the Indenture referred to   above.                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 2(b)(3)              |       | U.S.$197   million Secured Loan Agreement among us, the Lenders party thereto, BBVA   Securities Inc. as Bookrunner and Lead Arranger, BBVA Bancomer, S.A. as   Administrative Agent and the Bank of New York Mellon, as Collateral Agent,   dated as of October 16, 2009.                  |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 2(b)(4)              |       | U.S.$100 million   revolving credit facility among Gruma Corporation, 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)(5)              |       | Ps.3,367 million   term loan between us and Bancomext with a variable interest rate of TIIE +   6.21%, dated September 18, 2009.                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 2(b)(6)              |       | U.S.$668.3   million senior secured credit facility among us, Deutsche Bank Trust Company   Americas, as Administrative Agent, The Bank of New York Mellon, as Collateral   Agent, and the Lenders Party thereto.                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 2(b)(7)              |       | U.S.$22.9   million term loan between us and Standard Chartered Bank, as Lender, dated   October 16, 2009.                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 2(b)(8)              |       | U.S.$21.5   million term loan between us and Barclays Bank PLC, as Lender, dated   October 16, 2009.                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 2(b)(9)              |       | U.S.$13.9    million term loan between us and ABN AMRO Bank N.V., as Lender, dated   October 16, 2009.                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 2(b)(10)             |       | U.S.$11.8    million term loan between us and BNP Paribas, as Lender, dated   October 16, 2009.                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                             |
| 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.****                                                                                          |

 

107

----

Table of Contents

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                                                                            |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                  |
| 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 14, 2010.                                                                                       |
|                 |       |                                                                                                                                                                                                  |
| 12(a)(2)             |       | CFO   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,   dated June 14, 2010.                                                                                       |
|                 |       |                                                                                                                                                                                                  |
| 13                   |       | Officer   Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of   2002, dated June 14, 2010.                                                                                  |

 

----

*                                         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 29, 2007.  Incorporated herein by reference.

 

108

----

Table of Contents

 

**SIGNATURES**

** **

The registrant, Gruma, S.A.B. de C.V., hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 
|                              | GRUMA, S.A.B. de C.V.           |
|-----------------------------------|---------------------------------|
|                              |                            |
|                              |                            |
|                              | /s/ Juan Antonio Quiroga Garcia |
|                              | Juan Antonio Quiroga Garcia     |
|                              | Chief   Corporate Officer       |
| Dated:    June 14, 2010 |                            |

 

----

Table of 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,   2008 and 2009                                                         |       | F-4      |
| Consolidated Statements of Income for the Years Ended   December 31, 2007, 2008 and 2009                               |       | F-5      |
| Consolidated Statements of Changes in Stockholders’   Equity for the Years Ended December 31, 2007, 2008 and 2009 |       | F-6      |
| Consolidated Statements of Cash Flows for the Years   Ended December 31, 2008 and 2009                                 |       | F-8      |
| Consolidated Statement of Changes in Financial   Position for the Year Ended December 31, 2007                         |       | F-9      |
| Notes to Consolidated Financial Statements                                                                                  |       | F-10     |

 

**Grupo Financiero Banorte, S.A.B. de C.V. and Subsidiaries**

 

**Report of Independent Registered Public Accounting Firm and Consolidated Financial Statements as of December 31, 2009, 2008 and 2007**

 
| **Table of   Contents**                                                                                      | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                         |       |     |
| Report of Independent Registered Public Accounting   Firm                                                    |       | F-81     |
| Consolidated Balance Sheets                                                                                  |       | F-82     |
| Consolidated Statements of Income                                                                            |       | F-84     |
| Consolidated Statements of Changes in Stockholders’   Equity                                            |       | F-85     |
| Consolidated Cash Flow Statement for the year ended   December 31, 2009                                 |       | F-87     |
| Consolidated Statement of Changes in Financial   Position for the year ended December 31, 2008 and 2007 |       | F-88     |
| Notes to Consolidated Financial Statements                                                                   |       | F-89     |

 

F-1

----

Table of Contents

 

# **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

# ** **

# **To the Stockholders of**

# **Gruma, S. A. B. de C. V.**

# ** **

In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and their related consolidated statements of income, of changes in stockholders’ equity, of cash flows and of changes in financial position, present fairly, in all material respects, the financial position of Gruma, S. A. B. de C. V. and subsidiaries (the Company) at December 31, 2009 and 2008, and the results of their operations for each of the three years in the period ended December 31, 2009, their cash flows for the years ended December 31, 2009 and 2008 and their changes in financial position for the year ended December 31, 2007, in conformity with Mexican Financial Reporting Standards.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in *Internal Control - Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing on Item 15.  Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We did not audit the financial statements of Grupo Financiero Banorte, S. A. B. de C. V., and subsidiaries, an associated company, whose investment in common stock as of December 31, 2009 and 2008 represents 9% and 7%, respectively, of the consolidated total assets, and whose equity in income represented 23%, (5)% and 32% of consolidated net (loss) income, for each of the three years in the period ended December 31, 2009, 2008 and 2007, respectively.  Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Grupo Financiero Banorte, S. A. B. de C. V. and subsidiaries, is based solely on the report of the other auditors.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and generally accepted auditing standards in Mexico.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits 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 by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinions.

 

As explained in Note 2, as of January 1, 2008 five new MFRS, whose characteristics and effects of adoption are described in that Note, became effective.  These are: (a) B-10 “Effects of inflation”, (b) B-2 “Cash flow statements”, (c) B-15 “Foreign currency translation”, (d) D-3 “Employee benefits” and (e) D-4 “Taxes on profits”.

 

Mexican Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America.  Information relating to the nature and effect of such differences is presented in Note 21 to the consolidated financial statements.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

F-2

----

Table of Contents

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As further explained in Note 20, in May 12, 2010 the Government of Venezuela announced its intention to expropriate Gruma’s Venezuelan subsidiary, Molinos Nacionales C.A.

 

 

PricewaterhouseCoopers, S.C.

Monterrey, Mexico

June 14, 2010

 

F-3

----

Table of Contents

 

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

 

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER 31, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos)**

**(Notes 1 and 2)**

 
| ** **                                                    | ** ** | **2008**   | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                    |       |       |       |       |       |
| Current:                                                      |       |       |       |       |       |
| Cash                                                          |       | Ps.        | 865,861    |       | Ps.        | 791,745 |   |
| Cash   equivalents (Note 2-G)                                 |       | 560,392    |       | 1,216,211  |       |
| Accounts   receivable, net (Note 3)                           |       | 6,232,601  |       | 5,754,256  |       |
| Refundable   taxes (Note 3)                                   |       | 1,038,703  |       | 632,688    |       |
| Inventories   (Note 4)                                        |       | 7,628,517  |       | 7,589,080  |       |
| Prepaid   expenses                                            |       | 372,975    |       | 496,012    |       |
| Total   current assets                                        |       | 16,699,049 |       | 16,479,992 |       |
| Investment   in common stock of associated companies (Note 5) |       | 3,435,648  |       | 3,975,652  |       |
| Property,   plant and equipment, net (Note 6)                 |       | 20,653,274 |       | 19,958,405 |       |
| Intangible   assets, net (Note 7)                             |       | 827,286    |       | 839,698    |       |
| Goodwill   (Note 2-K and 7)                                   |       | 2,204,087  |       | 2,169,473  |       |
| Other   assets (Note 8)                                       |       | 615,333    |       | 543,295    |       |
| **Total assets**                                              |       | Ps.        | 44,434,677 |       | Ps.        | 43,966,515 |   |
| **LIABILITIES**                                               |       |       |       |       |       |
| Current:                                                      |       |       |       |       |       |
| Bank   loans (Note 9)                                         |       | Ps.        | 1,910,929  |       | Ps.        | 912,141 |   |
| Current   portion of long-term debt (Note 9)                  |       | 507,631    |       | 1,291,251  |       |
| Trade   accounts payable                                      |       | 3,171,907  |       | 3,630,974  |       |
| Accrued   liabilities and other accounts payable              |       | 2,932,260  |       | 2,847,103  |       |
| Income   taxes payable                                        |       | 124,991    |       | 219,722    |       |
| Employees’   statutory profit sharing payable            |       | 28,123     |       | 36,467     |       |
| Derivative   financial instruments (Note 17)                  |       | 6,316,721  |       | 11,935     |       |
| Total   current liabilities                                   |       | 14,992,562 |       | 8,949,593  |       |
| Long-term   debt (Note 9)                                     |       | 11,728,068 |       | 20,039,868 |       |
| Derivative   financial instruments (Note 17)                  |       | 5,155,571  |       | —     |       |
| Deferred   taxes (Note 14-B)                                  |       | 2,556,308  |       | 2,476,245  |       |
| Deferred   employees’ statutory profit sharing (Note 10) |       | 298,501    |       | 272,910    |       |
| Other   liabilities (Note 10)                                 |       | 422,117    |       | 416,336    |       |
| Total   long-term liabilities                                 |       | 20,160,565 |       | 23,205,359 |       |
| **Total liabilities**                                         |       | 35,153,127 |       | 32,154,952 |       |
| Contingencies   and commitments (Note 11)                     |       |       |       |       |       |
| **STOCKHOLDERS’   EQUITY**                               |       |       |       |       |       |
| Majority   interest (Note 12):                                |       |       |       |       |       |
| Common   stock                                                |       | 6,972,425  |       | 6,972,425  |       |
| Additional   paid-in capital                                  |       | 2,144,238  |       | —     |       |
| Contributed   capital                                         |       | 9,116,663  |       | 6,972,425  |       |
|                                                          |       |       |       |       |       |
| Earned   surplus (deficit)                                    |       | (3,477,366 | )          | 729,040    |       |
| Total   majority interest                                     |       | 5,639,297  |       | 7,701,465  |       |
| Noncontrolling   interest                                     |       | 3,642,253  |       | 4,110,098  |       |
| **Total stockholders’ equity**                           |       | 9,281,550  |       | 11,811,563 |       |
| ** **                                                    |       | Ps.        | 44,434,677 |       | Ps.        | 43,966,515 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

----

Table of Contents

 

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

 

**CONSOLIDATED STATEMENTS OF INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except share and per share amounts)**

**(Notes 1 and 2)**

 
| ** **                                                    | ** ** | **2007**    | ** ** | **2008**    | ** ** | **2009**    | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                          | ** ** | ** **  |       |        |       |        |       |
| Net   sales                                                   |       | Ps.         | 35,816,046 |        | Ps.        | 44,792,572  |       | Ps. | 50,489,048 |   |
| Cost   of sales                                               |       | (24,192,290 | )          | (30,236,597 | )          | (33,100,107 | )          |
| Gross   profit                                                |       | 11,623,756  |       | 14,555,975  |       | 17,388,941  |       |
|                                                          |       |        |       |        |       |        |       |
| Selling   and administrative expenses                         |       | (9,749,888  | )          | (11,288,995 | )          | (13,581,969 | )          |
| Operating   income                                            |       | 1,873,868   |       | 3,266,980   |       | 3,806,972   |       |
|                                                          |       |        |       |        |       |        |       |
| Other   income (expenses), net (Notes 2-A and 13)             |       | 555,743     |       | (181,368    | )          | (150,439    | )          |
|                                                          |       |        |       |        |       |        |       |
| Comprehensive   financing income (expense):                   |       |        |       |        |       |        |       |
| Interest   expense                                            |       | (683,578    | )          | (823,702    | )          | (1,449,601  | )          |
| Interest   income                                             |       | 64,357      |       | 90,399      |       | 95,155      |       |
| Gain   (loss) from derivative financial instruments (Note 17) |       | 155,456     |       | (15,056,799 | )          | (543,123    | )          |
| Monetary   position gain, net                                 |       | 558,509     |       | 446,720     |       | 209,493     |       |
| Gain   from foreign exchange differences, net (Note 15-A)     |       | 72,129      |       | 255,530     |       | 755,188     |       |
|                                                          |       | 166,873     |       | (15,087,852 | )          | (932,888    | )          |
|                                                          |       |        |       |        |       |        |       |
| Equity   in earnings of associated companies                  |       | 707,835     |       | 618,476     |       | 495,045     |       |
|                                                          |       |        |       |        |       |        |       |
| Income   (loss) before income taxes                           |       | 3,304,319   |       | (11,383,764 | )          | 3,218,690   |       |
|                                                          |       |        |       |        |       |        |       |
| Income   taxes (Note 14):                                     |       |        |       |        |       |        |       |
| Current                                                       |       | (627,675    | )          | (304,753    | )          | (1,065,196  | )          |
| Deferred                                                      |       | (298,035    | )          | (129,942    | )          | (43,150     | )          |
|                                                          |       | (925,710    | )          | (434,695    | )          | (1,108,346  | )          |
|                                                          |       |        |       |        |       |        |       |
| Consolidated   income (loss)                                  |       | 2,378,609   |       | (11,818,459 | )          | 2,110,344   |       |
| Noncontrolling   interest                                     |       | (145,288    | )          | (521,299    | )          | (581,424    | )          |
| Majority   net income (loss)                                  |       | Ps.         | 2,233,321  |        | Ps.        | (12,339,758 | )          | Ps. | 1,528,920 |   |
|                                                          |       |        |       |        |       |        |       |
| Earnings   (loss) per share (in pesos)                        |       | Ps.         | 4.63       |        | Ps.        | (21.84      | )          | Ps. | 2.71 |   |
| Weighted   average shares outstanding (thousands)             |       | 482,506     |       | 564,853     |       | 563,651     |       |

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5

----

 

**Table of Contents**

 

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

** **

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

** (Expressed in thousands of Mexican 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**        | ** ** | **Non-** | ** ** | **Total** | ** ** |
| ** **                                                                             | ** ** | **shares**            | ** ** | ** ** | ** ** | **paid-in**    | ** ** | **Deficit from** | ** ** | **financial**                       | ** **  | **statutory profit**    | ** ** | **Prior**    | ** ** | **(loss) for** | ** ** | **adjustments**      | ** ** | **majority**     | ** ** | **controlling** | ** ** | **stockholders’** | ** ** |
| ** **                                                                             | ** ** | **(thousands)**       | ** ** | **Amount** | ** ** | **capital**    | ** ** | **restatement**       | ** ** | **instruments**                     | ** **  | **sharing**                  | ** ** | **years**    | ** ** | **the year**   | ** ** | **(Note 12-D)** | ** ** | **interest**     | ** ** | **interest** | ** ** | **equity** | ** ** |
| **Balances at December 31, 2006**                                                 |       | 482,550               |       | Ps.        | 13,317,435 |           | Ps.        | 4,841,487             |       | Ps.                                 | (15,091,290 | )                            | Ps.        |  6,725  |       | Ps.                 | (226,316   | )                    | Ps.        |  11,192,355 |       | Ps.  | 1,601,125 |   | Ps. | (808,026 | ) | Ps. | 14,833,495 |   | Ps. | 3,068,756 |   | Ps. |  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:                                                                 |       |                  |       |       |       |           |       |                  |       |                                |        |                         |       |         |       |                |       |                 |       |             |       |   |   |   |   |
| 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 |   |
|                                                                                   |       |                  |       |       |       |           |       |                  |       |                                |        |                         |       |         |       |                |       |                 |       |             |       |   |   |   |   |
| 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  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               |       | 6,972,425  |       | 2,144,238      |       | —                |       | (103,896                            | )           | —                       |       | 8,443,233    |       | (12,339,758         | )          | 523,055              |       | 5,639,297        |       | 3,642,253 |   | 9,281,550 |   |
|                                                                                        |            |                       |            |            |            |                |            |                       |            |                                     |             |                              |            |              |            |                     |            |                      |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-6

----

Table of Contents

 

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

** **

**CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

** (Expressed in thousands of Mexican 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**    | ** ** | **Non-** | ** ** | **Total** | ** ** |
| ** **                                          | ** ** | **shares**            | ** ** | ** ** | ** **      | **paid-in**    | ** ** | **Deficit from** | ** ** | **financial**                | ** **   | **statutory profit**  | ** ** | **Prior**    | ** ** | **(loss) for** | ** ** | **adjustments**      | ** ** | **majority** | ** ** | **controlling** | ** ** | **stockholders’** | ** ** |
| ** **                                          | ** ** | **(thousands)**       | ** ** | **Amount** | ** **      | **capital**    | ** ** | **restatement**       | ** ** | **instruments**              | ** **   | **sharing**                | ** ** | **years**    | ** ** | **the year**   | ** ** | **(Note 12-D)** | ** ** | **interest** | ** ** | **interest** | ** ** | **equity** | ** ** |
| Appropriation  of prior year net loss               |       |                  |       |       |            |           |       |                  |       |                         |         |                       |       | (12,339,758  | )          | 12,339,758          |       |                 |       | —       |       |   |   | — |   |
| Appropriation  of additional paid-in capital        |       |                  |       |       |            | (2,144,238     | )          |                  |       |                         |         |                       |       | 2,144,238    |       |                |       |                 |       | —       |       |   |   | — |   |
| Dividends  paid                                     |       |                  |       |       |            |           |       |                  |       |                         |         |                       |       |         |       |                |       |                 |       | —       |       | (175,255 | ) | (175,255 | ) |
|                                                |       |                  |       |       |            | (2,144,238     | )          |                  |       |                         |         |                       |       | (10,195,520  | )          | 12,339,758          |       |                 |       | —       |       | (175,255 | ) | (175,255 | ) |
| Comprehensive  income:                              |       |                  |       |       |            |           |       |                  |       |                         |         |                       |       |         |       |                |       |                 |       |         |       |   |   |   |   |
| Effect  due on tax consolidation                    |       |                  |       |       |            |           |       |                  |       |                         |         |                       |       | (2,475       | )          |                |       |                 |       | (2,475       | )          |   |   | (2,475 | ) |
| Equity  ownership from associated company           |       |                  |       |       |            |           |       |                  |       |                         |         |                       |       | 76,921       |       |                |       |                 |       | 76,921       |       |   |   | 76,921 |   |
| Foreign  currency translation adjustments           |       |                  |       |       |            |           |       |                  |       |                         |         |                       |       |         |       |                |       | 365,887              |       | 365,887      |       | 72,198 |   | 438,085 |   |
| Derivative  financial instruments, net of taxes     |       |                  |       |       |            |           |       |                  |       | 103,896                      |         |                       |       |         |       |                |       |                 |       | 103,896      |       |   |   | 103,896 |   |
| Other  transactions related to comprehensive income |       |                  |       |       |            |           |       |                  |       |                         |         |                       |       | (10,981      | )          |                |       |                 |       | (10,981      | )          | (10,522 | ) | (21,503 | ) |
| Net  income for the year                            |       |                  |       |       |            |           |       |                  |       |                         |         |                       |       |         |       | 1,528,920           |       |                 |       | 1,528,920    |       | 581,424 |   | 2,110,344 |   |
| Comprehensive  income for the year                  |       |                  |       |       |            |           |       |                  |       | 103,896                      |         |                       |       | 63,465       |       | 1,528,920           |       | 365,887              |       | 2,062,168    |       | 643,100 |   | 2,705,268 |   |
| **Balances at December 31, 2009**              |       | 563,651               |       | Ps.        |  6,972,425 |           | Ps.        |  —          |       | Ps.                          |  — |                       | Ps.        |  — |       | Ps.                 | —     |                 | Ps.        | (1,688,822   | )          | Ps. | 1,528,920 |   | Ps. |  888,942 |   | Ps. | 7,701,465 |   | Ps. | 4,110,098 |   | Ps. | 11,811,563 |   |
|                                                     |            |                       |            |            |                 |                |            |                       |            |                              |              |                            |            |              |            |                     |            |                      |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

F-7

----

Table of Contents

 

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

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos) (Notes 1 and 2)**

 
| ** **                                                                | ** ** | **2008**   | ** **        | **2009**    | ** ** |
|---------------------------------------------------------------------------|------------|------------|-------------------|-------------|------------|
|                                                                      |       |       |              |        |       |
| (Loss) income before income taxes                                         |       | Ps.        |  (11,383,764 | )           | Ps.        | 3,218,690 |   |
|                                                                      |       |       |              |        |       |
| Restatement effects from companies in an   inflationary environment       |       | (173,504   | )                 | 37,898      |       |
| Foreign exchange (gain) loss from working capital                         |       | (728,177   | )                 | 33,909      |       |
| Net cost of the year for labor obligations                                |       | 345,205    |              | 199,308     |       |
| Items related with investing activities:                                  |       |       |              |        |       |
| Depreciation and amortization                                             |       | 1,410,420  |              | 1,648,446   |       |
| Impairment of long-lived assets                                           |       | 46,851     |              | 26,799      |       |
| Interest income                                                           |       | (56,030    | )                 | (59,279     | )          |
| Foreign exchange gain from cash                                           |       | (104,979   | )                 | (21,296     | )          |
| Equity in earnings of associated companies                                |       | (618,476   | )                 | (495,045    | )          |
| Loss from sale of fixed assets                                            |       | 11,315     |              | 94,384      |       |
| Items related with financing activities:                                  |       |       |              |        |       |
| Derivative financial instruments                                          |       | 15,056,799 |              | 543,123     |       |
| Foreign exchange loss (gain) from bank loans                              |       | 577,627    |              | (767,801    | )          |
| Interest expense                                                          |       | 734,266    |              | 1,319,073   |       |
|                                                                      |       | 5,117,553  |              | 5,778,209   |       |
| Changes in working capital:                                               |       |       |              |        |       |
| Accounts receivable, net                                                  |       | (946,818   | )                 | (87,019     | )          |
| Inventories                                                               |       | (921,227   | )                 | 346,059     |       |
| Prepaid expenses                                                          |       | 3,935      |              | (141,855    | )          |
| Trade accounts payable                                                    |       | (245,707   | )                 | 201,000     |       |
| Accrued liabilities and other accounts payable                            |       | 191,118    |              | (153,674    | )          |
| Income taxes paid                                                         |       | (660,589   | )                 | (596,954    | )          |
| Employees’ retirement benefits and others, net                       |       | (325,269   | )                 | (177,968    | )          |
|                                                                      |       | (2,904,557 | )                 | (610,411    | )          |
| Net cash flows from operating activities                                  |       | 2,212,996  |              | 5,167,798   |       |
|                                                                      |       |       |              |        |       |
| Investing activities:                                                     |       |       |              |        |       |
| Acquisition of property, plant and equipment                              |       | (2,696,744 | )                 | (1,168,663  | )          |
| Sales of property, plant and equipment                                    |       | 27,880     |              | 126,333     |       |
| Intangible assets                                                         |       | (60,198    | )                 | (108,646    | )          |
| Acquisition of shares of associated companies                             |       | (154,568   | )                 | —      |       |
| Interest received                                                         |       | 43,828     |              | 43,392      |       |
| Dividends received from associated companies                              |       | 83,446     |              | 31,959      |       |
| Other                                                                     |       | (201,846   | )                 | 115,573     |       |
| Net cash flows from investing activities                                  |       | (2,958,202 | )                 | (960,052    | )          |
| Cash (to be obtained from) in excess to be used in   financing activities |       | (745,206   | )                 | 4,207,746   |       |
|                                                                      |       |       |              |        |       |
| Financing activities:                                                     |       |       |              |        |       |
| Proceeds from bank loans and long-term debt                               |       | 6,912,197  |              | 11,774,361  |       |
| Repayment of bank loans and long-term debt                                |       | (3,206,050 | )                 | (2,463,168  | )          |
| Interest paid                                                             |       | (781,525   | )                 | (1,237,114  | )          |
| Derivative financial instruments paid                                     |       | (3,538,840 | )                 | (11,485,512 | )          |
| Proceeds from stock issuance                                              |       | 2,111,060  |              | —      |       |
| Acquisition of subsidiary shares from minority   shareholder              |       | —     |              | (21,503     | )          |
| Net purchases and sales of Company’s common stock                    |       | (11,561    | )                 | —      |       |
| Dividends paid                                                            |       | (62,953    | )                 | (175,255    | )          |
| Other                                                                     |       | (11,517    | )                 | (836        | )          |
| Net cash flows from financing activities                                  |       | 1,410,811  |              | (3,609,027  | )          |
| Net increase in cash and cash equivalents                                 |       | 665,605    |              | 598,719     |       |
| Exchange differences on cash and cash equivalents                         |       | 279,720    |              | (17,016     | )          |
|                                                                      |       |       |              |        |       |
| Cash and cash equivalents at beginning of year                            |       | 480,928    |              | 1,426,253   |       |
| Cash and cash equivalents at end of year                                  |       | Ps.        | 1,426,253         |        | Ps.        | 2,007,956 |   |
|                                                                           |            |            |                   |             |            |  |  |  |

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-8

----

Table of Contents

 

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

** **

**CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION**

**FOR THE YEAR ENDED DECEMBER 31, 2007**

**(Expressed in thousands of constant Mexican pesos as of December 31, 2007) (Notes 1 and 2)**

 
| ** **                                                                                              | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Operating   activities:                                                                                 |       |       |       |
| Majority   net income for the year                                                                      |       | Ps.        | 2,233,321  |   |
| Noncontrolling   interest                                                                               |       | 145,288    |       |
| Consolidated   net income                                                                               |       | 2,378,609  |       |
|                                                                                                    |       |       |       |
| Adjustments   to reconcile consolidated net income to net resources provided by operating   activities: |       |       |       |
| Depreciation   and amortization                                                                         |       | 1,178,797  |       |
| Impairment   of long-lived assets                                                                       |       | 140,049    |       |
| Equity   in earnings of associated companies, net of dividends received                                 |       | (628,635   | )          |
| Deferred   income taxes and employees’ statutory profit sharing                                    |       | 280,776    |       |
| Net   gain from sale of subsidiaries’ shares                                                       |       | (75,718    | )          |
| Net   gain from sale of associated company’s shares                                                |       | (847,175   | )          |
| Loss   from sale of fixed assets                                                                        |       | 49,847     |       |
| Labor   obligations and other long-term accrued liabilities                                             |       | 21,263     |       |
|                                                                                                    |       | 2,497,813  |       |
| Changes   in working capital:                                                                           |       |       |       |
| Accounts   receivable, net                                                                              |       | (294,768   | )          |
| Inventories                                                                                             |       | (2,166,018 | )          |
| Prepaid   expenses                                                                                      |       | 45,984     |       |
| Trade   accounts payable                                                                                |       | 193,450    |       |
| Accrued   liabilities and other accounts payable                                                        |       | 17,653     |       |
| Income   taxes and employees’ statutory profit sharing payable                                     |       | (26,767    | )          |
|                                                                                                    |       | (2,230,466 | )          |
| Net   resources provided by operating activities                                                        |       | 267,347    |       |
|                                                                                                    |       |       |       |
| Financing   activities:                                                                                 |       |       |       |
| Proceeds   from bank loans and long-term debt                                                           |       | 4,133,286  |       |
| Repayment   of bank loans and long-term debt                                                            |       | (3,151,536 | )          |
| Long-term   notes payable for new acquisitions                                                          |       | (50,666    | )          |
| Decrease   by noncontrolling interest                                                                   |       | (21,191    | )          |
| Net   purchases and sales of Company’s common stock and derivative financial   instruments         |       | (365       | )          |
| Dividends   paid                                                                                        |       | (627,264   | )          |
| Other                                                                                                   |       | (74,261    | )          |
| Net   resources provided by financing activities                                                        |       | 208,003    |       |
|                                                                                                    |       |       |       |
| Investing   activities:                                                                                 |       |       |       |
| Acquisition   of property, plant and equipment                                                          |       | (2,222,903 | )          |
| Sale   of property, plant and equipment                                                                 |       | 194,549    |       |
| Intangible   assets                                                                                     |       | (16,487    | )          |
| Resources   received from sale of subsidiaries’ shares                                             |       | 167,420    |       |
| Resources   received from sale of associated company’s shares                                      |       | 1,267,353  |       |
| Other                                                                                                   |       | 16,260     |       |
| Net   resources used in investing activities                                                            |       | (593,808   | )          |
| Net   decrease in cash and cash equivalents                                                             |       | (118,458   | )          |
| Cash   and cash equivalents at beginning of year                                                        |       | 599,386    |       |
| Cash   and cash equivalents at end of year                                                              |       | Ps.        | 480,928    |   |
|                                                                                                         |            |            |            |  |  |

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-9

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**1.****                                     ****ENTITY AND NATURE OF BUSINESS**

 

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

 

The accompanying consolidated financial statements and notes were authorized on June 14, 2010 by Juan Quiroga García, Chief Corporate Officer, and Homero Huerta Moreno, Chief Administrative Officer.

 

**2.             SIGNIFICANT ACCOUNTING POLICIES**

 

A)               BASIS OF PREPARATION

 

The accompanying consolidated financial statements as of December 31, 2007, 2008 and 2009 have been prepared in accordance with Mexican Financial Reporting Standards (MFRS) or Mexican FRS. All new MFRS published to be mandatory for accounting periods beginning January 1, 2009 were adopted by the Company; however, these new MFRS did not have any material effect on the Company’s financial position and results of operation.

 

Certain reclassifications have been applied to previous years’ financial information for comparability purposes with the current presentation.

 

In order to achieve a fair presentation of the Company’s financial performance, the Company’s management followed the criteria of presenting the statement of income on a functional basis, since the different levels of income are disclosed when grouping its costs and expenses in a general way. Additionally, for convenience of the readers, operating income is presented separately, since this concept is useful for the analysis of the financial information and has been disclosed by the Company on a regular basis.

 

Due to the adoption of MFRS B-2 “Statement of Cash Flows”, effective starting January 1, 2008, the Company presents, as basic financial statements, the statements of cash flows for the years ending December 31, 2008 and 2009. These financial statements present cash inflows and outflows that show how cash is provided or used during these years, classified as operating, investing and financing activities. For this purpose, the Company used the indirect method, which presents earnings or losses before taxes adjusted for the effects of operations of prior periods received or paid in the current period, and for operations in the current period that will be received or paid in the future. For the year ended December 31, 2007, the statement of changes in financial position was presented separately as a basic financial statement which classifies changes in financial position for operating, financing, and investing activities. This financial statement is expressed in Mexican pesos of constant purchasing power as of December 31, 2007.

 

Based on the criteria mentioned above, the Company applied the accounting policies that are described below. A reconciliation from Mexican FRS to United States generally accepted accounting principles (U.S. GAAP) is included in Note 21.

 

F-10

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**2.             SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

B)                 BASIS OF CONSOLIDATION

 

The consolidated financial statements include the accounts of Gruma, S.A.B. de C.V., and all of those subsidiaries including Special Purpose Entities (SPE), in which the majority of the common shares are owned directly or indirectly by the Company or it otherwise has control or the Company has significant amount of risks and rewards, among other, since it has more than half of the voting rights as agreed with other shareholders. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements.

 

As of December 31, 2008 and 2009 the main subsidiaries included in the consolidation are the following:

 
| ** **                                                                      | ** ** | **% of ownership** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                      | ** ** | **2008**           | ** ** | **2009** | ** ** |
| Gruma Corporation and subsidiaries (Note 9)                                     |       | 100.00             |       | 100.00 |   |
| Grupo   Industrial Maseca, S.A.B. de C.V. and subsidiaries (Note 9)             |       | 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 (Note 9)               |       | 60.00              |       | 60.00 |   |
| Gruma   International Foods, S.L. 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 |   |

 

C)                 USE OF ESTIMATES

 

The preparation of the consolidated financial statements in conformity with Mexican FRS requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, and reported amounts of revenues, costs and expenses for the years reported on. The main items subject to such estimates are the carrying value of property, plant and equipment, goodwill and other intangible assets, deferred income tax and flat rate business tax, and valuation of derivative financial instruments. Actual results could differ from those estimates.

 

D)                FOREIGN CURRENCY TRANSLATION

 

Starting January 1, 2008, the Company adopted the provisions included in the new MFRS B-15 “Foreign Currency Translation”, under which the Mexican peso is defined as the Company’s functional currency as well as its reporting currency. Based on the new standard, the financial statements of the foreign subsidiaries are translated to Mexican pesos, depending on the economic environment in which the subsidiary operates, as follows:

 

Non-inflationary economic environment:

 

a.               As of December 31, 2009 assets and liabilities are translated to Mexican pesos using the year-end exchange rate of Ps.13.07.

b.              As of December 31, 2008 stockholders’ equity was translated to Mexican pesos using the exchange rate at that date, whereas the transactions of the year 2009 are translated by applying the exchange rate in effect at the dates on which the stockholders’ contributions were made and income was generated. The average exchange rate was Ps.13.57.

c.               Revenues, costs and expenses for the year 2009 are translated to Mexican pesos using the historical exchange rate. The average exchange rate was Ps.13.57.

d.              The effects of translation are recognized as a component of stockholders’ equity entitled “Foreign currency translation adjustments”.

 

F-11

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**2.             SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

Inflationary economic environment:

 

Financial statements are restated following the provisions of MFRS B-10, applying the price index of the foreign country which reflects the change in purchasing power of the currency in which the subsidiary reports. Afterwards, the financial statements are translated to Mexican pesos as follows:

 

a.        As of December 31, 2009 assets, liabilities and stockholders’ equity are translated to Mexican pesos using the year-end exchange rate of Ps.13.07.

b.       Revenues, costs and expenses for the year 2009 are translated to Mexican pesos using the year-end exchange rate of Ps.13.07.

c.        The changes were recognized by the Company as a component of stockholders’ equity entitled “Foreign currency translation adjustments”.

 

E)                  RECOGNITION OF THE EFFECTS OF INFLATION

 

Starting January 1, 2008, the provisions of MFRS B-10 “Effects of inflation” became effective. This standard establishes the guidelines for recognizing the effects of inflation based on the inflationary environment of the country. According to the provisions of MFRS B-10, as long as the accumulated inflation rate in the countries where the Company and its subsidiaries operate does not exceed 26% in the last three years, the effects of inflation in the financial information will not be applied. Since the accumulated inflation in the countries where the Company and its subsidiaries operate did not exceed the 26% for the last three years, with the exception of Venezuela and some other countries not significant for these consolidated financial statements, the consolidated financial statements as of December 31, 2008 and 2009 have been prepared based on the modified historical cost model (that is, the effects of transactions recognized as of December 31, 2007 are expressed in Mexican pesos of constant purchasing power at that date, and the effects of transactions that occurred after that date are expressed in nominal Mexican pesos, except for Venezuela and some other countries not significant for these consolidated financial statements, which transactions were restated following the provisions of MFRS B-10).

 

F)                  FOREIGN CURRENCY TRANSACTIONS

 

Foreign currency transactions are recorded in Mexican pesos at the exchange rate in effect on the dates the transactions are realized. Monetary assets and liabilities denominated in foreign currencies are translated into Mexican pesos at the exchange rate in effect at the balance sheet dates. Foreign exchange differences arising on the valuation and liquidation of these balances are credited or charged to income, except for the effects of translation of foreign currency denominated liabilities which are accounted for as a hedge of the Company’s net investment in foreign subsidiaries, and are recognized as a component of equity under “Foreign currency translation adjustments”.

 

G)                 CASH EQUIVALENTS

 

Cash equivalents are highly liquid investments with maturities of less than a year from the date of the balance sheet and are stated at cost, which approximates market value.

 

H)                INVENTORIES AND COST OF SALES

 

Inventories and cost of sales are expressed at their modified historical cost determined by the average cost method. These values do not exceed their market value.

 

F-12

----

Table of Contents

** **

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**2.             SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

In January 2007, the Mexican government and several participants in the corn, corn flour and tortilla supply chain signed an agreement which establishes rights and obligations to fix prices of corn and related products, in order to prevent significant increases in the tortilla price. As a result, the Company, through its subsidiary Grupo Industrial Maseca, S.A.B. de C.V. (GIMSA), agreed a price of Ps.5 thousand per ton of corn flour in all Mexico until the end of April of that year. On April 25, 2007, the Mexican government announced a second agreement that extended the term until August 15, 2007. GIMSA kept its corn 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 Economy and within the Agreement to Promote Competitiveness of the Industrial Sectors (“PROIND”), the Guidelines for the Operation of the Program of Benefits for the Corn Flour Industry (“PROHARINA”) for the fiscal year 2008. The PROHARINA had among its objectives to reduce the impact on the final consumer of increases in the international prices of corn using a mechanism of granting benefits to the final consumer, through the industry that produces corn flour, to which GIMSA belongs. These benefits are granted subject to the kilogram of corn flour being sold at a maximum price of Ps.5.45 per kilogram of corn flour starting June 2008. These benefits are recognized in the income statement as a reduction in the cost of sales. The benefits obtained by GIMSA through PROHARINA in 2009 amounted to Ps.1,465 million (Ps.1,271 million in 2008). In November 2009, the Ministry of Economy terminated the PROHARINA program.

 

I)                     INVESTMENT IN COMMON STOCK

 

Investment in common stock, where ownership in equity is between 10% and 50% for investees listed on a stock exchange or between 25% and 50% for non-listed investees and there is evidence that the Company has significant influence, are accounted for by the equity method. The equity method consists of adjusting the acquisition cost of the shares, determined through the purchase method, by the portion of comprehensive income or loss and the distribution of earnings through capital reimbursements subsequent to the acquisition date.

 

The Company’s equity in earnings of associated companies is presented separately in the income statement or in stockholders’ equity for transactions recorded directly in the stockholders’ equity of the investee.

 

J)                    PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment and its respective depreciation, including acquisitions through capital leases, are stated as follows:

 

a.         Acquisitions carried out starting January 1, 2008 at their historical costs, and

 

b.        Acquisitions settled until December 31, 2007 at their restated values, by applying National Consumer Price Index (NCPI) factors to their acquisition cost until December 31, 2007, except for machinery and equipment of foreign origin, which are restated on the basis of a specific index composed of the General Consumer Price Index (GCPI) of the country of origin and the change in value of the Mexican peso against the foreign currency at the year-end 2007.

 

Consequently, as of December 31, 2009, property, plant and equipment, are expressed at their modified historical cost.

 

Depreciation expense is computed based on the modified historical cost less salvage value, using the straight-line method over the estimated useful lives of the assets.  Useful lives of the assets are as follows:

 

F-13

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**2.             SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 
| ** **                  | ** ** | **Years**    | ** ** |
|-----------------------------|------------|--------------|------------|
| Buildings                   |       | 25 — 50 |       |
| Machinery and   equipment   |       | 5 — 25  |       |
| Software for   internal use |       | 3 — 7   |       |
| Leasehold   improvements    |       | 10 (*)       |       |

 

----

(*) The shorter of 10 years or the term of the leasehold agreement.

 

Leases for machinery and equipment are capitalized due to the fact that substantially all the risks and benefits inherent to the ownership are transferred. The amount capitalized represents the lower of the market value of the leased asset or the present value of the minimum payments. The interest expense from the financing provided by the lessor for the acquisition of these assets is recognized in the income statement in the period when incurred.

 

Maintenance and repairs are expensed as incurred. Costs of major replacements and improvements are capitalized. The interest expense, foreign exchange differences, gain or loss on monetary position and other costs of the financing required for fixed assets whose acquisition or construction requires a substantial period of time, are capitalized as part of the cost of the assets. The values so determined do not exceed their fair value.

 

Direct internal and external costs related to the development and implementation of internal use software are capitalized and amortized over its estimated useful life beginning when such software is ready for its intended use.

 

Idle assets that are not in service and will not be used in the future are no longer depreciated and are stated at their net replacement cost. An impairment loss is recognized in other expenses, net when the net replacement cost is less than its carrying value.

 

The value of these assets is subject to impairment tests when certain events and circumstances are present, as mentioned in Note 2-L.

 

K)                INTANGIBLE ASSETS, NET AND GOODWILL

 

Intangible assets acquired or developed, are stated as follows:

 

a.               Acquisitions or developments made starting January 1, 2008, at historical cost, and

 

b.              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, 2009, intangible assets are presented at modified historical cost.

 

As of December 31, 2008 and 2009, for foreign subsidiaries in an inflationary environment, the value of these assets is restated using the GCPI factors.

 

Expenses incurred during the development stage are capitalized. The development stage concludes upon the commencement of commercial operations. Research expenses are expensed as incurred.

 

Amortization expense of intangible assets with finite lives is computed on the restated values using the straight-line method, over a period of 2 to 20 years, based on contractual, economic, legal or regulatory factors. Indefinite-lived intangible assets are no longer amortized.

 

F-14

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**2.             SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

Business combinations and investments in subsidiaries and associated companies are accounted for by the purchase method. Goodwill is no longer amortized and is tested annually for impairment.

 

Debt issuance costs are capitalized. Amortization expense of debt issuance costs is computed using the straight-line method over the term of the related debt.

 

The value of these assets is subject to impairment tests, when certain events and circumstances are present as mentioned in Note 2-L.

 

L)                   IMPAIRMENT OF LONG-LIVED ASSETS

 

The Company performs impairment tests for its property, plant and equipment; intangible assets with finite lives; and investment in associated companies, when certain events and circumstances suggest that the carrying value of the assets might not be recovered. Intangible assets with indefinite lives and goodwill are subject to impairment tests at least once a year.

 

The recoverable amount under Mexican FRS is the higher of (1) the long-lived asset’s (asset group) fair value less costs to sell, representing the amount obtainable from the sale of the long-lived asset (asset group) in an arm’s length transaction between knowledgeable, willing parties less the costs of disposal and (2) the long-lived asset’s (asset group) value in use representing its future cash flows discounted to present value by using a rate that reflects the current assessment of the time value of money and the risks specific to the long-lived asset (asset group) for which the cash flow estimates have not been adjusted. An impairment loss is recognized to the extent that the net book value exceeds the estimated recoverable amount of the assets.

 

For the years ended December 31, 2007, 2008 and 2009, impairment losses of Ps. 140,049, Ps.46,851 and Ps.26,799, respectively, were included in income of the year as other expenses, net, and the related assets are stated net of such losses.

 

The value of assets to be disposed of is determined using the lower of book value or fair value less costs to sell; when appropriate, an impairment loss is recognized for the excess of book value over fair value less costs to sell. These assets are not depreciated or amortized.

 

M)              LABOR OBLIGATIONS

 

The most significant changes from the new provisions of MFRS D-3, applied prospectively starting January 1, 2008, are:

 

·            The reduction in the amortization periods of items related 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 the employees’ estimated remaining working life.

 

·            The recognition of deferred employees’ statutory profit sharing (ESPS) based on the comprehensive assets and liabilities method, which consists in recognizing a deferred ESPS for all differences between the carrying value and tax value of assets, when their payment or recovery is probable. As of January 1, 2008, the accumulated effect of the adoption of this method, which amounted to Ps.343,467, was recognized in retained earnings in the statement of changes in stockholders’ equity. The effect of the year is presented in the statement of income within other expenses, net. See Notes 10 and 13. Until December 31, 2007, deferred ESPS was only recognized for those temporary differences between net income of the year and adjusted income for ESPS, that was reasonably presumed would generate a liability or a benefit in the future.

 

The Company does not have defined contribution benefit plans, except for those required by the social security laws. The Company uses December 31 as a measurement date for its plans.

 

F-15

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**2.             SIGNIFICANT ACCOUNTING POLICIES (Continued)**

 

The benefits granted by the Company to its employees, including defined benefit plans, are described as follows: direct benefits (salaries, over-time, vacations, holidays and absence permissions with salary payment, etc.) are expensed as incurred and their liabilities are expressed at nominal value, due to their short-term nature. Compensated absences according to legal or contractual provisions are not cumulative. The Company does not have any long-term direct benefit plans.

 

The benefits at the end of the labor relationship other than for restructuring causes (severance payments for dismissal, seniority premium plan, voluntary separation, etc.), as well as benefits when employees reach the 60-year retirement age according to the Company’s single-payment retirement plan, are recognized based on studies by independent actuaries using the projected unit credit method. For these purposes, the Company has established trust funds to meet these obligations. The employees do not contribute to these funds.

 

The net period cost of each benefit plan is recognized as expense in the period when incurred. This cost includes, among others, the amortization of labor costs of past services and actuarial gains and losses of prior years.

 

Items pending amortization at December 31, 2007, known as transition liabilities (which include past service costs) have been amortized starting January 1, 2008 over a period of five years, instead of the estimated work life of employees, as was the case until 2007.  This change caused an additional expense in 2008 of Ps.27,483.

 

N)                 FINANCIAL INSTRUMENTS

 

Derivative financial instruments that are not designated as accounting hedges are recorded initially at cost (which approximates to fair value) and at each period-end at fair value, in the balance sheet as assets and/or liabilities. Any gain or loss on valuation is recognized in income of the year.

 

The fair value is determined based on recognized market prices. When the instruments are not quoted in a market, their fair value is determined based on valuation techniques accepted in the financial sector.

 

The changes in fair value of such derivative financial instruments are recognized as part of the comprehensive financing income or expense, except when the instruments are designated as hedges and comply with all hedging 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 evaluate the effectiveness.

 

The effectiveness of a hedge is determined when changes in the fair value or cash flows for the primary position are compensated by changes in the fair value or cash flows of the hedging instruments with a quotient that ranks from 80% to 125% of inverse correlation.

 

When hedge ineffectiveness is present, as well as when the hedge designation does not comply with the requirements for documentation established in MFRS C-10 “Derivative Financial Instruments”, the gain or loss on valuation of the financial instruments at fair value is recognized in income, in comprehensive financing income or expense.

 

For cash-flow hedge transactions, changes in the fair value of the derivative financial instrument are included as comprehensive income in stockholders’ equity, based on the evaluation of the hedge effectiveness, and are reclassified to income in the periods when the hedged commitment or projected transaction is realized. Hedge contracts other than cash-flow hedge transactions are valued at fair value, and their valuation gain or loss is recognized in income.

 

F-16

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**2.****                                     ****SIGNIFICANT ACCOUNTING POLICIES(Continued)**

 

O)               REVENUE RECOGNITION

 

Revenue on productsales is recognized upon shipment to, and acceptance by, the Company’scustomers and the risk of ownership has passed to the customers. Provisions fordiscounts and rebates to customers, returns and other adjustments arerecognized in the same period that the related sales are recorded and are basedupon either historical estimates or actual terms.

 

P)                 INCOME TAXES

 

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. Valuation allowancesare provided if**,** based upon the weight ofavailable evidence**,** it is morelikely than not that some or all the deferred tax assets will not berealizable.

 

The Company is subject tothe higher of income tax and flat tax. During the years presented in thesefinancial statements, the Company recognized deferred income tax, since thefinancial and tax projections prepared by management show that essentially theCompany and its subsidiaries in Mexico will pay income tax in the future;therefore, at the end of the year, the Company did not recognize the effect anydeferred flat tax effects.

 

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 shareare computed by dividing majority net income (loss) for the year by theweighted average number of common shares outstanding during the year.

 

R)                COMPREHENSIVE INCOME (LOSS)

 

Comprehensiveincome (loss) is composed by: income (loss) for the year, translation effectsof foreign entities, effects from changes in the fair value of derivativefinancial instruments that for accounting purposes were designated as hedgeinstruments and those items that due to a specific accounting requirement arerecorded in stockholders’ equity, and do not represent capital increases,reductions or distributions. The amounts of comprehensive income (loss) for2008 and 2009 are stated at modified historical Mexican pesos.

 

S)                 SEGMENT INFORMATION

 

TheMFRS B-5 “Segment Information” requires the Company to analyze its organizationalstructure and its reporting system, with the purpose of identifying segments.In Note 16, segment information is shown in the way the Company’s managementanalyzes, directs and controls business and operating income; additionally, thenote includes information by geographic area, as required by MFRS B-5.

 

F-17

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**3.****                                     ****ACCOUNTS RECEIVABLE, NET ANDREFUNDABLE TAXES**

 

Accountsreceivable, net comprised the following as of December 31:

 
| ** **                        | ** ** | **2008**  | ** ** | **2009**  | ** ** |
|-----------------------------------|------------|-----------|------------|-----------|------------|
| Trade  accounts receivable        |       | Ps.       | 4,936,849  |      | Ps.        | 4,562,111 |   |
| Allowance  for doubtful accounts  |       | (245,941  | )          | (308,537  | )          |
|                              |       | 4,690,908 |       | 4,253,574 |       |
| Related  parties                  |       | 84,146    |       | 500,669   |       |
| Derivative  financial instruments |       | 15,145    |       | 55,749    |       |
| Employees                         |       | 42,977    |       | 26,741    |       |
| Other  debtors                    |       | 1,399,425 |       | 917,523   |       |
|                              |       | Ps.       | 6,232,601  |      | Ps.        | 5,754,256 |   |

 

Refundable taxescomprised the following as of December 31:

 
| ** **       | ** ** | **2008** | ** ** | **2009** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| Value-added  tax |       | Ps.      | 243,375    |     | Ps.        | 216,729 |   |
| Income  tax      |       | 795,328  |       | 415,959  |       |
|             |       | Ps.      | 1,038,703  |     | Ps.        | 632,688 |   |

 

**4.****                                     ****INVENTORIES**

 

Inventoriesconsisted of the following as of December 31:

 
| ** **                            | ** ** | **2008** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Raw  materials, mainly corn and wheat |       | Ps.      | 6,039,906  |     | Ps.        | 5,817,681 |   |
| Finished  products                    |       | 716,363  |       | 838,676  |       |
| Materials  and spare parts            |       | 471,487  |       | 486,576  |       |
| Production  in process                |       | 210,541  |       | 218,253  |       |
| Advances  to suppliers                |       | 124,374  |       | 153,383  |       |
| Inventory  in transit                 |       | 65,846   |       | 74,511   |       |
|                                  |       | Ps.      | 7,628,517  |     | Ps.        | 7,589,080 |   |

 

**5.****                                     ****INVESTMENT IN COMMON STOCK OFASSOCIATED COMPANIES**

 

Investment in commonstock of associated companies consists of the investment in common stock ofGrupo Financiero Banorte, S.A.B. de C.V. (“GFNorte”) and Harinera de Monterrey,S.A. de C.V., which produces wheat flour and related products in Mexico.

 

The Company hassignificant influence over GFNorte, due to its representation on the Board ofDirectors and the equity interest of the Company’s principal shareholder inGFNorte.

 

F-18

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**5.****                                     ****INVESTMENT IN COMMON STOCK OFASSOCIATED COMPANIES (Continued)**

 

These investments,accounted for by the equity method, comprised the following as of December 31:

 
| ** **                          | ** ** | **2008** | ** ** | **Ownership as  of December  31, 2008** | ** ** | **2009** | ** ** | **Ownership as  of December  31, 2009** | ** ** |
|-------------------------------------|------------|----------|------------|-----------------------------------------|------------|----------|------------|-----------------------------------------|------------|
|                                |       |     |       |                                    |       |     |       |                                    |       |
| GFNorte                             |       | Ps.      | 3,299,031  |                                    | 8.7966     | %        | Ps.        | 3,836,513                               |       | 8.7966 | % |
| Harinera de Monterrey, S.A. de C.V. |       | 136,617  |       | 40                                      | %          | 139,139  |       | 40                                      | %          |
|                                |       | Ps.      | 3,435,648  |                                    |       |     | Ps.        | 3,975,652                               |       |   |   |

 

During 2008, the Companypurchased 3,500,000 shares of GFNorte for a total amount of Ps.154,568,generating a goodwill for Ps.91,813. These shares represented 0.1734% of thecapital stock of GFNorte.

 

As of December 31,2008 and 2009, the market value of the investment in common stock of GFNorte,which is publicly traded in the Mexican Stock Exchange, amounted to Ps.4,417,357 and Ps.8,493,824, respectively, based on market quotations.

 

**6.****                                     ****PROPERTY, PLANT AND EQUIPMENT,NET**

 

Property, plant andequipment, net consisted of the following as of December 31:

 
| ** **                 | ** ** | **2008**    | ** ** | **2009**    | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|
| Land                       |       | Ps.         | 1,565,601  |        | Ps.        | 1,593,576 |   |
| Buildings                  |       | 6,504,098   |       | 6,930,521   |       |
| Machinery  and equipment   |       | 24,217,119  |       | 25,595,417  |       |
| Construction  in progress  |       | 2,403,119   |       | 403,075     |       |
| Software  for internal use |       | 1,074,455   |       | 1,134,034   |       |
| Leasehold  improvements    |       | 635,025     |       | 923,437     |       |
| Other                      |       | 38,862      |       | 30,666      |       |
|                       |       | 36,438,279  |       | 36,610,726  |       |
| Accumulated  depreciation  |       | (15,785,005 | )          | (16,652,321 | )          |
|                       |       | Ps.         | 20,653,274 |        | Ps.        | 19,958,405 |   |

 

For the years ended December 31,2007, 2008 and 2009, depreciation expense amounted to Ps. 1,072,174, Ps.1,312,322 and Ps.1,542,463, respectively. For the years ended December 31,2007, 2008 and 2009, comprehensive financing costs of Ps. 2,894, Ps. 12,170 andPs.2,679, respectively, were capitalized to property, plant and equipment.

 

As of December 31,2008 and 2009, property, plant and equipment includes idle assets with acarrying value of approximately Ps.646,916 and Ps.621,212, respectively,resulting from the temporary shut-down of the productive operations of variousplants in Mexico, mainly in the corn flour division. These assets are stated attheir net realizable value and are not being depreciated.

 

F-19

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**6.****                                     ****PROPERTY, PLANT AND EQUIPMENT,NET (Continued)**

 

For the years ended December 31,2007, 2008 and 2009, the Company recognized impairment losses of Ps.97,196,Ps.46,851 and Ps.26,799, respectively, in “Other income (expense), net” inaccordance with the provisions of  MFRSC-15, “Impairment of Long-Lived Assets and their Disposal”, as follows:

 
| **Segment**                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Corn  flour division (Mexico)                           |       | Ps.      | 27,975     |     | Ps.        | 26,051   |       | Ps. | 26,799 |   |
| Corn  flour, wheat flour and other products (Venezuela) |       | 35,848   |       | —   |       | —   |       |
| Other                                                   |       | 33,373   |       | 20,800   |       | —   |       |
| Total                                                   |       | Ps.      | 97,196     |     | Ps.        | 46,851   |       | Ps. | 26,799 |   |

 

**7.****                                     ****INTANGIBLE ASSETS, NET**

 

Intangible assets, net,comprised the following:

 

**As of December 31,2008:**

 
| ** **                                | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Net carrying  amount** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Intangible  assets with finite lives:     |       |                        |       | ** **                    | ** ** | ** **               | ** ** |
| Acquired:                                 |       |                        |       |                          |       |                     |       |
| Covenants  not to compete                 |       | Ps.                         | 941,500    |                          | Ps.        | (586,686                 | )          | Ps. | 354,814 |   |
| Debt  issuance costs                      |       | 578,844                     |       | (246,337                      | )          | 332,507                  |       |
| Patents  and trademarks                   |       | 147,482                     |       | (67,474                       | )          | 80,008                   |       |
| Customer  lists                           |       | 94,950                      |       | (57,388                       | )          | 37,562                   |       |
| Generated:                                |       |                        |       |                          |       |                     |       |
| Pre-operating  expenses                   |       | 7,854                       |       | (7,179                        | )          | 675                      |       |
| Development  of new projects              |       | 32,062                      |       | (32,062                       | )          | —                   |       |
| Other                                     |       | 69,575                      |       | (55,395                       | )          | 14,180                   |       |
|                                      |       | Ps.                         | 1,872,267  |                          | Ps.        | (1,052,521               | )          | 819,746 |   |
| Intangible  assets with indefinite lives: |       |                        |       |                          |       |                     |       |
| Trademarks                                |       |                        |       |                          |       | 7,540                    |       |
|                                      |       |                        |       |                          |       | Ps.                      | 827,286    |   |

 

F-20

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**7.****                                     ****INTANGIBLE ASSETS, NET(Continued)**

 

**As of December 31,2009:**

 
| ** **                                | ** ** | **Remaining  useful life  (years)** | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Net carrying  amount** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Intangible  assets with finite lives:     |       |                                |       |                        |       |                          | ** ** | ** **               | ** ** |
| Acquired:                                 |       |                                |       |                        |       |                          |       |                     |       |
| Covenants  not to compete                 |       | 7                                   |       | Ps.                         | 921,764    |                          | Ps.        | (612,385                 | )          | Ps. | 309,379 |   |
| Debt  issuance costs                      |       | 5 – 15                         |       | 677,048                     |       | (262,133                      | )          | 414,915                  |       |
| Patents  and trademarks                   |       | 1 – 12                         |       | 126,880                     |       | (65,520                       | )          | 61,360                   |       |
| Customer  lists                           |       | 12 – 14                        |       | 78,279                      |       | (45,195                       | )          | 33,084                   |       |
| Generated:                                |       |                                |       |                        |       |                          |       |                     |       |
| Pre-operating  expenses                   |       | 1                                   |       | 423                         |       | (319                          | )          | 104                      |       |
| Development  of new projects              |       | 8                                   |       | 33,848                      |       | (32,523                       | )          | 1,325                    |       |
| Other                                     |       | 1 – 4                          |       | 62,422                      |       | (50,243                       | )          | 12,179                   |       |
|                                      |       |                                |       | Ps.                         | 1,900,664  |                          | Ps.        | (1,068,318               | )          | 832,346 |   |
| Intangible  assets with indefinite lives: |       |                                |       |                        |       |                          |       |                     |       |
| Trademarks                                |       |                                |       |                        |       |                          |       | 7,352                    |       |
|                                      |       |                                |       |                        |       |                          |       | Ps.                      | 839,698    |   |

 

Intangible assetsrecognized during 2008 amounted to Ps.60,198 due mainly to the acquisitionof  customer lists for an amount ofPs.31,788, in the segment of Central America, and debt issuance costs ofPs.16.835. Intangible assets recognized during 2009 amounted to Ps.112,336, duemainly to debt issuance costs of Ps.110,273.

 

The reconciliationbetween the initial and final balances of the carrying amounts of intangibleassets for the year 2009 is as follows:

 
| ** **                                | ** ** | **Investment** | ** ** | **Accumulated  amortization** | ** ** |
|-------------------------------------------|------------|----------------|------------|-------------------------------|------------|
| Balance  at beginning of the year         |       | Ps.            | 1,879,807  |                          | Ps.        | (1,052,521 | ) |
| Foreign  currency translation adjustments |       | (12,905        | )          | 22,450                        |       |
| Fully  amortized intangible assets        |       | (67,736        | )          | 67,736                        |       |
| Intangible  assets with finite lives:     |       |           |       |                          |       |
| Acquired:                                 |       |           |       |                          |       |
| Covenants not to compete                  |       | —         |       | (45,435                       | )          |
| Debt  issuance costs                      |       | 110,273        |       | (29,087                       | )          |
| Patents  and trademarks                   |       | —         |       | (9,036                        | )          |
| Customer lists                            |       | —         |       | (19,782                       | )          |
|                                      |       |           |       |                          |       |
| Generated:                                |       |           |       |                          |       |
| Pre-operating expenses                    |       | —         |       | (339                          | )          |
| Development  of new projects              |       | 1,641          |       | (316                          | )          |
| Other                                     |       | (3,064         | )          | (1,988                        | )          |
| Balance  at end of year                   |       | Ps.            | 1,908,016  |                          | Ps.        | (1,068,318 | ) |

 

TheCompany determined, based on the provisions of MFRS C-8 “Intangible Assets”,that certain trademarks have indefinite useful lives since their future cashflow generation is expected to be indefinite.

 

F-21

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**7.****                                     ****INTANGIBLE ASSETS, NET (Continued)**

 

Researchand development costs charged to income amounted to Ps. 64,504, Ps.93,638 andPs.91,550 as of December 31, 2007, 2008 and 2009, respectively.

 

Forthe years ended December 31, 2007, 2008 and 2009, amortization expense ofintangible assets amounted to Ps. 106,623, Ps.98,098 and Ps.105,983,respectively, which were recognized in income as follows:

 
| ** **                       | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cost  of sales                   |       | Ps.      | 11,227     |     | Ps.        | 4,535    |       | Ps. | 8,749 |   |
| Administrative  expenses         |       | 22,304   |       | 21,686   |       | 20,543   |       |
| Selling  expenses                |       | 745      |       | 731      |       | 1,053    |       |
| Comprehensive  financing expense |       | 26,512   |       | 23,249   |       | 29,231   |       |
| Other  expenses, net             |       | 45,835   |       | 47,897   |       | 46,407   |       |
| Total  amortization expense      |       | Ps.      | 106,623    |     | Ps.        | 98,098   |       | Ps. | 105,983 |   |

 

Theestimated amortization expense over the next five years is as follows:

 
| ** **                            | ** ** | **Am****ount** | ** ** |
|---------------------------------------|------------|----------------|------------|
| 2010                                  |       | Ps.            | 97,425     |   |
| 2011                                  |       | 96,247         |       |
| 2012                                  |       | 93,116         |       |
| 2013                                  |       | 90,563         |       |
| 2014                                  |       | 87,705         |       |
| 2015  onwards                         |       | 367,290        |       |
| Total  estimated amortization expense |       | Ps.            | 832,346    |   |

 

Goodwill,net, is comprised of the following:

 
| ** **                                | ** ** | **Corn flour and  packaged tortilla  (US and Europe)** | ** ** | **Corn flour  (Mexico)** | ** ** | **Other** | ** ** | **Other  reconciling  items** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------|------------|-------------------------------|------------|-----------|------------|
| Balance  at January 1, 2008          |       | Ps.                                                                             | 866,797    |                          | Ps.        | 195,199   |       | Ps.                           | 535,415    |      | Ps.        | 311,387 |   | Ps. | 1,908,798 |   |
| Acquisition  of intangible assets         |       | —                                                                          |       | —                        |       | 768       |       | —                        |       | 768       |       |
| Foreign  currency translation adjustments |       | 217,046                                                                         |       | —                        |       | 77,475    |       | —                        |       | 294,521   |       |
| Balance  at December 31, 2008        |       | 1,083,843                                                                       |       | 195,199                       |       | 613,658   |       | 311,387                       |       | 2,204,087 |       |
| Foreign  currency translation adjustments |       | (54,737                                                                         | )          | —                        |       | 20,123    |       | —                        |       | (34,614   | )          |
| Balance  at December 31, 2009        |       | Ps.                                                                             | 1,029,106  |                          | Ps.        | 195,199   |       | Ps.                           | 633,781    |      | Ps.        | 311,387 |   | Ps. | 2,169,473 |   |

 

F-22

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**8.****                                     ****OTHER ASSETS**

 

Other assets consisted ofthe following, as of December 31:

 
| ** **                              | ** ** | **2008** | ** ** | **2009** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Other investments and  club memberships |       | Ps.      | 215,319    |     | Ps.        | 203,459 |   |
| Long-term recoverable  asset tax        |       | 119,996  |       | 119,996  |       |
| Guarantee deposits                      |       | 144,504  |       | 119,217  |       |
| Long-term notes  receivable             |       | 135,514  |       | 100,623  |       |
|                                    |       | Ps.      | 615,333    |     | Ps.        | 543,295 |   |

 

**9.****                                     ****BANK LOANS AND LONG-TERM DEBT**

 

On October 16, 2009,the Company completed the refinancing of the majority of its debt, including:

 

a.               The conversion of the U.S.$738.3 million it owed toseveral financial institutions under its terminated foreign exchange derivativeinstruments, into medium and long-term loans;

b.              The refinancing of its U.S.$197 million debtobligations under its 5-year syndicated credit facility with  BBVA Bancomer, as agent (Syndicated Loan);

c.               The refinancing of its Ps. 3,367 millionpeso-denominated credit facility with Banco Nacional de Comercio Exterior(Bancomext); and

d.              Supplementing the indenture for ratably providing aCollateral Package to the holders of the Company’s 7.75% Perpetual Bonds.

 

The key components of theexecuted credit agreements are described as follows:

 

A)          Overview of loans replacing the terminated derivativefinancial instruments:

 

·                  Loan for U.S.$668.3 million with Credit Suisse,Deutsche Bank and JP Morgan Chase Bank. This loan requires a semi-annualamortization schedule starting in July 21, 2010 and maturing in January 21,2017, with escalating amortizations, and paying LIBOR plus 2.875% until July 20,2012 and annual step-ups thereafter, concluding at maturity with LIBOR plus6.875%. The credit agreement includes financial covenants and is guaranteedwith the Collateral Package described below.

 

·                  Loans for U.S.$58.3 million with Standard Chartered,Barclays and RBS (ABN AMRO). These loans require equal monthly amortizationsstarting in August 21, 2010 and maturing in July 21, 2012, payingLIBOR plus 2.875% until maturity. The credit agreements include financialcovenants and are not guaranteed.

 

·                  Loan for U.S.$11.8 million with BNP Paribas. This loanrequires equal monthly amortizations starting in December 1, 2009 andmaturing in May 1, 2011, paying LIBOR plus 2.0% until maturity. The creditagreement includes financial covenants and is not guaranteed.

 

B)            Refinancing of the Syndicated Credit facility forU.S.$197 million:

 

The loan is denominated60% in U.S. Dollars and 40% in Mexican Pesos. It requires equal quarterlyamortizations starting in January 21, 2010 and maturing in October 21,2014, paying LIBOR (for the U.S. Dollars loans) or TIIE (for the Mexican Pesoloans) plus 2.875% until the third anniversary and annual step-ups thereafter,concluding at maturity with a spread of 3.875%. The credit agreement includesfinancial covenants and is covered by the Collateral Package.

 

F-23

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**9.****                                     ****BANK LOANS AND LONG-TERM DEBT(Continued)**

 

C)            Refinancing of the Bancomext loan for Ps.3,367million:

 

The loan requires aquarterly amortization schedule starting in December 18, 2012 and maturingin September 18, 2019, at 91 day TIIE plus 6.21% until maturity. Thecredit agreement includes financial covenants.

 

D)           Collateral Package:

 

The Company granted ascollateral, shares of its following subsidiaries: Grupo Industrial Maseca,S.A.B. de C.V., Gruma Corporation and Molinera de Mexico, S.A. de C.V.(together, the ‘‘Collateral Package’’). To effect this security interest, theshares from Gimsa and Molinera were transferred to a guaranty trust in Mexico,and the shares from Gruma Corporation were pledged to the secured parties’collateral agent in the United States.

 

E)             Additionally, Grupo Industrial Maseca, S.A.B. de C.V.,obtained an unsecured long-term loan for working capital needs, which amountsto Ps.394.6 million, payable quarterly starting on July 6, 2009 andmaturing on April 7, 2014, bearing variable interest rate of TIIE plus5.0%.

 

Bank loans and long-termdebt as of December 31 are summarized as follows:

 
| ** **                                                                                                                                                                                                                                                                                                                                                           | ** ** | **2008**  | ** ** | **2009**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Loan  in U.S. dollars with semi-annual escalating amortizations, starting in  July 21, 2010 and maturing in January 21, 2017, paying LIBOR plus  2.875% until July 20, 2012 and annual step-ups thereafter                                                                                                                                            |       | Ps.       | —     |      | Ps.        | 8,734,388 |   |
| 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                                                                                                                                                                                                              |       | 4,149,000 |       | 3,921,000 |       |
| Loan  in Mexican pesos maturing in September 2019, with amortizations starting  in December 2012, and bearing interest at a variable rate of TIIE plus  6.21%, payable monthly                                                                                                                                                                             |       | 3,367,000 |       | 3,367,000 |       |
| Syndicated  loan denominated 60% in U.S. dollars and 40% in Mexican pesos, maturing in  October 2014, with 20 quarterly amortizations. The U.S. dollar loan  bears interest at an annual rate of LIBOR plus 2.875%, payable quarterly  (3.2% in 2009). The Mexican peso loan bears interest at annual rate of TIIE  plus 2.875%, payable monthly (7.8% in 2009) |       | 2,724,510 |       | 2,575,850 |       |
| Credit  line in U.S. dollars, maturing in October 2011, bearing interest at an  annual rate of LIBOR plus 0.35% to 0.45% (0.6% in 2009), payable in 30, 60,  90 and 180 days                                                                                                                                                                                    |       | 1,300,020 |       | 914,900   |       |
| Loans  in U.S. dollars, with monthly amortizations starting in August 21, 2010  and maturing in July 21, 2012, bearing interest at LIBOR plus 2.88%                                                                                                                                                                                                        |       | —    |       | 761,929   |       |
| Loans  in U.S. dollars and Honduran lempiras due between 2010 and 2014, bearing  interest at variable annual rates from 1.09% to 16.5%, payable monthly                                                                                                                                                                                                              |       | 469,857   |       | 466,501   |       |
| Loans  in Mexican pesos due in 2014, bearing interest at variable annual rates of  TIIE plus 5%, payable monthly                                                                                                                                                                                                                                                     |       | 557,978   |       | 394,654   |       |
|                                                                                                                                                                                                                                                                                                                                                                      |            |           |            |           |            |  |  |

 

F-24

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**9.****                                     ****BANK LOANS AND LONG-TERM DEBT(Continued)**

 
| ** **                                                                                                                                                                   | ** ** | **2008**   | ** ** | **2009**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Loans  in U.S. dollars due in January 14, 2010, bearing interest at an annual  rate of 2.23%                                                                            |       | 809,141    |       | 313,680    |       |
| Loans  in Venezuelan bolivars payable in 2010 and bearing interest at variable  annual rates, payable monthly (13% in 2009)                                                  |       | 555,465    |       | 267,479    |       |
| Loans  in Mexican pesos due between 2009 and 2013, bearing interest at variable  annual rates of 8.51% to 13.88%, payable monthly                                            |       | —     |       | 212,121    |       |
| Loan  in U.S. dollars due in 2011, with equal monthly amortizations, bearing  interest at LIBOR plus 2.0% (2.24% in 2009)                                                    |       | —     |       | 145,126    |       |
| Capital  leases for transportation and production equipment, payable monthly and  quarterly in a term of 42 to 48 months, maturing between 2010 and 2013                     |       | —     |       | 119,424    |       |
| Loans  in U.S. dollars and Euros, payable between 2009 and 2010 and bearing interest  at variable annual rates from 2.3% to 2.5% in 2009, payable in different  installments |       | 213,657    |       | 49,208     |       |
|                                                                                                                                                                         |       | Ps.        | 14,146,628 |       | Ps.        | 22,243,260 |   |
| Short-term  bank loans                                                                                                                                                       |       | (1,910,929 | )          | (912,141   | )          |
| Current  portion of long-term debt                                                                                                                                           |       | (507,631   | )          | (1,291,251 | )          |
| Long-term  debt                                                                                                                                                              |       | Ps.        | 11,728,068 |       | Ps.        | 20,039,868 |   |

 

As of December 31,2009, the short-term bank loans denominated in U.S. dollars amounting toPs.180,982 (U.S.$13.8 million) bear interest at an average rate of 11.6%.Short-term bank loans of Ps.150,000 denominated in Mexican pesos bear interestat an average rate of 8.51% as of December 31, 2009. Short-term bank loansof Ps.267,479 denominated in Venezuelan bolivars (Bs.20.5 million Venezuelanbolivars) bear interest at an average rate of 13% as of December 31, 2009.Additionally, as of December 31, 2009, the Company had short-term loans ofPs.313,680 denominated in U.S. dollars (U.S.$24 million) bearing an interestrate of 2.23%.

 

The Company has creditline agreements for Ps.1,307 million (U.S.$100 million), from which Ps.392.1million (U.S.$30 million) are available as of December 31, 2009. Thesecredit line agreements require the payment of an annual commitment fee rangingfrom 0.10% to 0.15% over the unused amounts.

 

The outstanding creditagreements contain covenants mainly related to the compliance with certainfinancial ratios and delivery of financial information, which, if not compliedduring the period as determined by creditors, may be considered as a cause forearly maturity of the debt. Financial ratios are calculated according toformulas established in the credit agreements. The main financial ratioscontained in the credit agreements are the following:

 

·                  Interest coverage ratio, defined as the ratio ofconsolidated earnings before interest, tax, depreciation and amortization(EBITDA) to consolidated interest charges, should not be less than 2.50 to 1.00for years 2009 and 2010.

 

·                  Leverage ratio, defined as the ratio of totalconsolidated indebtedness (as described in the credit agreements) toconsolidated EBITDA, should not exceed 5.95 and 5.60 to 1.00 for 2009 and 2010,respectively.

 

F-25

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**9.****                                     ****BANK LOANS AND LONG-TERM DEBT(Continued)**

 

·                  Calculation of excess cash (as defined in the creditagreements) which, together with the leverage ratio, determine the prepaymentsof debt as follows:

 

·                  If the leverage ratio is equal or higher than 3.50 to 1.00, then 75% ofexcess cash must be prepaid.

 

·                  If the leverage ratio is lower than 3.50 to 1.00, then no percentage ofexcess cash would be applied as prepayment.

 

·                  Investment in assets or capital expenditures are limitedto U.S.$80 million for 2009 and 2010; U.S.$120 million for 2011; U.S.$140million for 2012 and U.S.$150 million for 2013 and thereafter until maturity ofthe credit agreements.

 

Upon an event of defaultas stipulated under the relevant financing agreements, all accounts payable toGruma, S.A.B. de C.V. in respect of intercompany debt are to be deposited in aMexican trust.  The proceeds from any such payment in respect ofintercompany debt may be held in such Mexican trust until the event of default isremedied.

 

At December 31,2009, the Company was in compliance with the financial covenants, as well asthe delivery of the required financial information.

 

At December 31,2009, the annual maturities of long-term debt outstanding were as follows:

 
| **Year**             | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| 2011                 |       | Ps.        | 2,684,502  |   |
| 2012                 |       | 2,028,350  |       |
| 2013                 |       | 2,472,630  |       |
| 2014                 |       | 2,500,940  |       |
| 2015  and thereafter |       | 10,353,446 |       |
|                 |       | Ps.        | 20,039,868 |   |

 

**10.****                              ****LABOR OBLIGATIONS**

 

A)          BENEFITS UPON RETIREMENT AND EMPLOYMENTTERMINATION (SEVERANCE PAYMENTS)

 

At December 31,2008 and 2009, the balance payable related to benefits upon retirement andemployment termination amounted to Ps.162,045 and Ps.183,835, respectively, andis included in other long-term liabilities.

 

F-26

----

 

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**10.****                              ****LABOR OBLIGATIONS (Continued)**

 

For Mexicansubsidiaries:

 

The reconciliationbetween the initial and final balances of the present value of the definedbenefit obligations (DBO) for the years 2008 and 2009 is as follows:

 
| ** **                         | ** ** | **2008**               | ** ** | **2009**                  | ** ** |
|------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **Severance  payment** | ** ** | **Post-retirement  plan** | ** ** | **Severance  payment** | ** ** | **Post-retirement  plan** | ** ** |
| DBO at beginning of the year       |       | Ps.                    | 41,403     |                      | Ps.        | 165,737 |   | Ps. | 45,382 |   | Ps. | 188,711 |   |
| Add (deduct):                      |       |                   |       |                      |       |   |   |   |   |
| Current service cost               |       | 3,086                  |       | 10,541                    |       | 3,397 |   | 11,624 |   |
| Financial cost                     |       | 2,901                  |       | 13,472                    |       | 3,274 |   | 15,566 |   |
| Actuarial losses for the period    |       | 24,630                 |       | 19,345                    |       | 19,745 |   | 25,098 |   |
| Benefits paid                      |       | (26,638                | )          | (11,122                   | )          | (34,622 | ) | (14,471 | ) |
| Anticipated reduction in liability |       | —                 |       | (9,262                    | )          | — |   | (4,663 | ) |
| DBO at end of the year             |       | Ps.                    | 45,382     |                      | Ps.        | 188,711 |   | Ps. | 37,176 |   | Ps. | 221,865 |   |

 

At December 31,2008 and 2009, liabilities relating to vested benefits amounted to Ps.169,759and Ps.176,512, respectively.

 

The reconciliationbetween the initial and final balances of the employee benefit plan assets atfair value for the years 2008 and 2009 is shown below:

 
| ** **                                         | ** ** | **2008**               | ** ** | **2009**                  | ** ** |
|----------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                         | ** ** | **Severance  payment** | ** ** | **Post-retirement  plan** | ** ** | **Severance  payment** | ** ** | **Post-retirement  plan** | ** ** |
| Plan assets at fair value at beginning of the year |       | Ps.                    | 22,569     |                      | Ps.        | 13,312 |   | Ps. | 19,779 |   | Ps. | 11,975 |   |
| Add  (deduct):                                     |       |                   |       |                      |       |   |   |   |   |
| Actual  return                                     |       | (2,597                 | )          | (1,256                    | )          | 1,208 |   | 3,135 |   |
| Benefits  paid                                     |       | (193                   | )          | (81                       | )          | (174 | ) | (173 | ) |
| Plan  assets at fair value at end of the year      |       | Ps.                    | 19,779     |                      | Ps.        | 11,975 |   | Ps. | 20,813 |   | Ps. | 14,937 |   |

 

The followingtable shows the reconciliation between the present value of the defined benefitobligation and the plan assets at fair value, and the projected net liabilityincluded in the balance sheet as of December 31:

 
| ** **                              | ** ** | **2008**               | ** ** | **2009**                  | ** ** |
|-----------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                              | ** ** | **Severance  payment** | ** ** | **Post-retirement  plan** | ** ** | **Severance  payment** | ** ** | **Post-retirement  plan** | ** ** |
| Employee  benefit (assets) liabilities: |       |                   |       |                      |       |   |   |   |   |
| DBO                                     |       | Ps.                    | 45,382     |                      | Ps.        | 188,711 |   | Ps. | 37,176 |   | Ps. | 221,865 |   |
| Plan  assets                            |       | (19,779                | )          | (11,975                   | )          | (20,813 | ) | (14,937 | ) |
| Unfunded  portion of the plan           |       | 25,603                 |       | 176,736                   |       | 16,363 |   | 206,928 |   |
| Less  items pending amortization:       |       |                   |       |                      |       |   |   |   |   |
| Transition  liability                   |       | (262                   | )          | (117                      | )          | (196 | ) | (87 | ) |
| Actuarial  gains                        |       | (50                    | )          | (87,433                   | )          | (50 | ) | (96,477 | ) |
| Projected  net liability                |       | Ps.                    | 25,291     |                      | Ps.        | 89,186 |   | Ps. | 16,117 |   | Ps. | 110,364 |   |

 

F-27

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**10.****                              ****LABOR OBLIGATIONS (Continued)**

 

At December 31,the components of net cost by type of plan comprised the following:

 
| ** **                                         | ** ** | **2008**               | ** ** | **2009**                  | ** ** |
|----------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                         | ** ** | **Severance  payment** | ** ** | **Post-retirement  plan** | ** ** | **Severance  payment** | ** ** | **Post-retirement  plan** | ** ** |
| Current  service cost                              |       | Ps.                    | 3,086      |                      | Ps.        | 10,541 |   | Ps. | 3,397 |   | Ps. | 11,624 |   |
| Financial  cost                                    |       | 2,901                  |       | 13,472                    |       | 3,274 |   | 15,566 |   |
| Estimated  return on plan assets                   |       | (1,975                 | )          | (1,165                    | )          | (1,661 | ) | (1,042 | ) |
| Amortization  of actuarial gains, net              |       | 36,276                 |       | 5,613                     |       | 20,197 |   | 5,737 |   |
| Amortization  of prior service cost                |       | 67                     |       | 31                        |       | 67 |   | 29 |   |
| Effect  of reduction and extinction of obligations |       | —                 |       | —                    |       | — |   | 3,563 |   |
| Net  cost for the year                             |       | Ps.                    | 40,355     |                      | Ps.        | 28,492 |   | Ps. | 25,274 |   | Ps. | 35,477 |   |

 

At December 31,plan assets stated at fair value and related percentages with respect to totalplan assets are analyzed as follows:

 
| ** **                | ** ** | **2008**              | ** ** | **2009**                 | ** ** |
|---------------------------|------------|-----------------------|------------|--------------------------|------------|
| ** **                | ** ** | **Severance payment** | ** ** | **Post-retirement plan** | ** ** | **Severance payment** | ** ** | **Post-retirement plan** | ** ** |
| Equity securities         |       | Ps.                   | 11,742     |                     | 59         | % | Ps. | 7,109 |   | 59 | % | Ps. | 10,406 |   | 50 | % | Ps. | 7,468 |   | 50 | % |
| Fixed rate securities     |       | 8,037                 |       | 41                       | %          | 4,866 |   | 41 | % | 10,407 |   | 50 | % | 7,469 |   | 50 | % |
| Fair value of plan assets |       | Ps.                   | 19,779     |                     | 100        | % | Ps. | 11,975 |   | 100 | % | Ps. | 20,813 |   | 100 | % | Ps. | 14,937 |   | 100 | % |

 

The Company hasthe policy of maintaining at least 30% of the trust assets in Mexican FederalGovernment instruments. Guidelines have been established for the remaining 70%and investment decisions are taken in accordance with these guidelines to theextent market conditions and available funds allow it.

 

To date, the fundsmaintained in plan assets are considered sufficient to face the short-termneeds; therefore, the Company’s management has determined that for the timebeing there is no need of additional contributions to increase these assets.

 

The estimatedlong-term return on assets is based on the annual recommendations issued by theActuarial Commission of the Mexican Association of Actuaries. These recommendationsconsider historical information and future market expectations.

 

The main actuarialassumptions used were as follows:

 
| ** **                                   | ** ** | **2008** | ** ** | **2009** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Discount  rate                               |       | 9.00     | %          | 9.00     | %          |
| Future  increase rate in compensation levels |       | 4.50     | %          | 4.50     | %          |
| Estimated  return rate on plan assets        |       | 9.00     | %          | 9.00     | %          |

 

The definedbenefit obligation, the plan assets at fair value, the status of the plan, aswell as the actuarial gains or losses of the last four years are shown below:

 
| ** ** | ** ** | **Historical amounts** | ** ** | **Actuarial gains (losses)** | ** ** |
|------------|------------|------------------------|------------|------------------------------|------------|
| **Year**   | ** ** | **DBO**                | ** ** | **Plan  assets**             | ** ** | **Unfunded  portion of  the plan** | ** ** | **DBO** | ** ** | **Plan  Assets** | ** ** |
| 2009       |       | Ps.                    | 259,041    |                         | Ps.        | 35,750 |   | Ps. | 223,291 |   | Ps. | (44,843 | ) | Ps. | 1,638 |   |
| 2008       |       | 234,093                |       | 31,754                       |       | 202,339 |   | (43,975 | ) | 713 |   |
| 2007       |       | 162,243                |       | 34,885                       |       | 127,358 |   | (38,370 | ) | 4,434 |   |
| 2006       |       | 131,600                |       | 33,685                       |       | 97,915 |   | (28,046 | ) | 4,659 |   |
|            |            |                        |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-28

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**10.****                              ****LABOR OBLIGATIONS (Continued)**

 

For subsidiariesin other countries:

 

In the UnitedStates of America, the Company has a savings and investment plan thatincorporates voluntary employee 401(k) contributions with matchingcontributions from the subsidiaries located in this country. For the yearsended December 31, 2007, 2008 and 2009, total expenses related to thisplan amounted to Ps.37,335, Ps.50,576 and Ps.46,934, respectively (U.S.$3,419,U.S.$3,657 and U.S.$3,591 thousand respectively).

 

In Venezuela, theCompany recognizes when incurred and transfers to a trust for each worker, theseverance payments related to employment termination to which employees areentitled to, as established by the local Labor Law and collective agreements.Collective agreements include additional benefits upon employment terminationand the Company recognizes a liability when the right to receive these benefitsis irrevocable. As of December 31, 2008 and 2009, the liability recognizedfor these items amounted to Ps.25,976 and Ps.29,925, respectively.

 

In CentralAmerica, the accumulated payments to which workers may be entitled based on theyears of service and in accordance to the labor laws in each country, may bepaid in the case of death, retirement or dismissal without justifiable cause. Aliability is recognized to keep 100% coverage for this matter.  In the case of Costa Rica, this benefit isdetermined based on the employee’s seniority and corresponds to a month ofsalary for each working year, from which 10 days of salary must be transferredto an administrator/fiduciary of the employee pension fund and the remaining 20days of salary are recognized at the employer’s election: a) as a liability forthe employer or b) are paid monthly to the worker’s association, if this optionis elected, employers are released from their liabilities to employees. InCosta Rica, the total obligation for seniority is recorded and paid monthly;therefore, there is no remaining liability for the Company. For the rest of thecountries in Central America other than Costa Rica, the Company retains theobligation with its employees in the amount of Ps.21,592 and Ps.27,429 as of December 31,2008 and 2009, respectively.

 

The Company doesnot provide employees share-based payments.

 

B)            EMPLOYEES’ STATUTORY PROFIT SHARING(ESPS)

 

The Company issubject to the payment of ESPS in its Mexican operations, which is determinedby applying the procedures specified in the Mexican Income Tax Law.

 

From January 1,2008 onwards deferred ESPS is recorded in accordance with the comprehensiveasset and liability method, which requires the recognition of a deferred ESPSfor all temporary differences between the book and tax amounts of the assetsand liabilities which are expected to be realized in the future.

 

In 2008 and 2009the provisions for ESPS were summarized as follows:

 
| ** **       | ** ** | **2008** | ** ** | **2009** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| Current  ESPS    |       | Ps.      | 28,123     |     | Ps.        | 36,467 |   |
| Deferred  ESPS   |       | 298,501  |       | 272,910  |       |
| Total  provision |       | Ps.      | 326,624    |     | Ps.        | 309,377 |   |

 

F-29

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**10.****                              ****LABOR OBLIGATIONS (Continued)**

 

At December 31the main components of deferred ESPS were summarized as follows:

 
| ** **                          | ** ** | **(Assets) Liabilities** | ** ** |
|-------------------------------------|------------|--------------------------|------------|
| ** **                          | ** ** | **2008**                 | ** ** | **2009** | ** ** |
| Accrued  liabilities                |       | Ps.                      | (58,127    | ) | Ps. | (59,968 | ) |
| Deferred  ESPS asset                |       | (58,127                  | )          | (59,968 | ) |
|                                |       |                     |       |   |   |
| Property,  plant and equipment, net |       | 350,550                  |       | 330,888 |   |
| Inventories                         |       | 6,078                    |       | 1,990 |   |
| Deferred  ESPS liability            |       | Ps.                      | 356,628    |   | Ps. | 332,878 |   |
|                                |       |                     |       |   |   |
| Deferred  ESPS liability, net       |       | Ps.                      | 298,501    |   | Ps. | 272,910 |   |

 

**11.****                             ****CONTINGENCIES AND COMMITMENTS**

 

A)          CONTINGENCIES

 

**MEXICO**

 

**Asset Tax Claim.-**The Secretaría de Hacienda y Crédito Público (Ministry of Finance andPublic Credit) has lodged tax assessments against the Company for an amount ofPs.$340.7million plus penalties, updates and charges thereofin connection with our asset tax returns for the years 1996, 1997 and 2000.Notwithstanding, the Company has filed several appeals to obtain an annulmentof these assessments.

** **

**It is worth mentioning that the claim relevant to the year2000 for an amount of Ps.18.4 million has been lodged for similar grounds andmerits to the one recently and definitely resolved against the Company for theyear 1999. We expect a similar result regarding the 2000 claim against theCompany.**

** **

**IncomeTax Claims.-**The Ministry of Finance and Public Credit has lodged tax assessments against theCompany for an amount of Ps.93.5 million regarding withholdings of interestpayments to our foreign creditors for years 2000, 2001 and 2002. Mexicanauthorities claim that the Company should have withheld 10% of said paymentsinstead of the 4.9% withheld by the Company.

 

Weintend to defend from these claims vigorously. We believe that the outcome ofthese claims shall not affect our financial position, results of operation orcash flows.

 

**CNBVInvestigation.-**On December 8, 2009, the Surveillance Office ofthe Comisión Nacional Bancaria y de Valores (the Mexican National Banking andSecurities Commission, or CNBV) began an investigation into the Company inrespect of the timely disclosure of material events reported through theMexican Stock Exchange during the end of 2008 and throughout 2009, inconnection with the Company’s foreign exchange derivative losses and thesubsequent conversion of the realized losses into debt. As of this date, theinvestigation is ongoing. The Company has complied with document requestsprovided by the CNBV and intends to fully cooperate with the CNBV throughoutthe course of this investigation.

 

F-30

----

Tableof Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**11.****                             ****CONTINGENCIES AND COMMITMENTS(Continued)**

 

**UNITEDSTATES**

 

**Pending Labor Claims.-** On March 23, 2009, a former employee of Gruma Corporation filed aputative class action lawsuit against Gruma Corporation (*Guadalupe Arévalo vs Gruma Corporation*)alleging certain violations of Labor Code and the California Business &Professions Code. In August 2009 the case was removed to the United StatesDistrict Court for the Central District of California. Discovery has not yetbegun. Plaintiff has not yet identified any amount of sought damages. Webelieve the lawsuit is without merit and will vigorously defend the matter.

 

**Distributors’ Claims and Arbitration.-** On or about November 2001,one of Gruma Corporation’s independent distributors filed a putative classaction lawsuit against Gruma Corporation (*Dennis Johnsonand Arnold Rosenfeld et all vs. Gruma Corporation*) alleging that (i) Gruma Corporation breachedits distributor agreements; (ii) that Gruma Corporation’s distributors areactually employees; (iii) that Gruma Corporation has failed to make wage,expense, and other payments required for employees; (iv) that GrumaCorporation has violated the California antitrust laws and unfair competitionstatutes, among other claims. Plaintiffsseek damages and equitable relief, but have not yet specified the total amountof damages sought.

 

Suchcontroversy was referred to arbitration, where on April 2007, the arbitrator certified a class ofapproximately 900 individuals who were parties to California choice-of-lawStore Door Distributor Agreements. Later,on August 12, 2008, the arbitrator issued his final award finding that thedistributors were properly classified as independent contractors and denyingall relief. In November 2008, the District Court affirmed the award on allgrounds and plaintiffs have appealed the confirmation the Court of Appeals forthe Ninth Circuit. The appeal is currently pending.

 

Also, in April 2007,GRUMA was named in a class action suit *Enrique Garza, et al. v.Gruma Corporation* filed in the United States District Court for theNorthern District of California, San Jose Division. Plaintiffs assert that theywere induced to enter into distributor agreements and to pay for routes byfalse statements and that Gruma Corporation breached the distributor agreementsby arbitrarily taking their routes, shuffling around the routes, reselling theroutes to others, and failing to adequately compensate the plaintiffs. Theplaintiffs also asserted a Racketeer Influenced and Corrupt Organizations(RICO) violation under the US C.F.R. On July 24, 2008, the Court dismissedthe RICO claims. Plaintiffs are seeking damages not yet determined and aninjunctive relief. On July 16, 2009 the court denied class certificationand granted summary judgment against the Plaintiffs. A notice of appeal hasbeen filed by Plaintiffs. Plaintiff has not yet identified any amount ofdamages.

 

**Lawsuit for Discriminatory Practices****.-** The Office ofFederal Contract Compliance Programs (OFCCP) filed an administrative complaintalleging that Gruma Corporation utilized a hiring process and selectionprocedures which discriminated against female applicants for certain positionson the basis of their gender, and that Gruma Corporation failed to implement anapplicant tracking system for hires that would identify applicants’ gender,race and ethnicity information in accordance with the requirements of US C.F.R.The parties have exchanged limited information to determine if the matter maybe settled out of court. In January 2010 the Labor Department offered tosettle for an amount of $381,879, which is a lesser amount to our actual risk.Gruma Corporation intends to reduce said amount to a further extent.

 

F-31

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**11.****                             ****CONTINGENCIES AND COMMITMENTS (Continued)**

 

**ProductLabeling Claim.-** Gruma Corporation received a letter postmarked July 17,2009 from Jonathan Abdenur an alleged purchaser of Gruma Corporation’sguacamole dip, making a demand under California law for alleged misstatement onthe label of the product.  On July 29,2009, Gruma Corporation filed suit for declaratory judgment that the allegedpurchaser has no standing or basis to assert a claim against GrumaCorporation.  The alleged purchaser didnot answered Gruma Corporation’s suit, for which on November 30, 2009 acourt issued a resolution in favor of the Company. Additionally, the term toappeal said resolution has precluded, and therefore said resolution has becomefinal.

 

Weintend to vigorously defend against these actions and proceedings. We believethe resolution of these proceedings if determined adversely against theCompany, will not have a material effect on our financial position and resultsof operations.

 

**VENEZUELA**

 

**InterventionProceedings by the Venezuelan Government.-**On December 4, 2009 the Eleventh InvestigationsCourt for Criminal Affairs of Venezuela issued an order authorizing theprecautionary seizure of assets of all corporations in which Ricardo FernándezBarrueco had any direct or indirect interest. As a result of Ricardo FernándezBarrueco’s former indirect ownership of Molinos Nacionales, C.A. (MONACA) andDerivados de Maíz Seleccionado, C.A. (DEMASECA), these subsidiaries weresubject to the precautionary seizure. On December 22, 2009, March 2,2010 and March 10, 2010, the Ministry of Finance of Venezuela, in light ofthe precautionary measure ordered by the Eleventh Investigations Court forCriminal Affairs, designated various individuals as special managers andrepresentatives on behalf of the Republic of Venezuela of the shares that werepreviously owned indirectly by Ricardo Fernández Barrueco in MONACA andDEMASECA.

 

As a result of theforegoing, MONACA and DEMASECA, as well as Consorcio Andino, S.L. and ValoresMundiales, S.L., as holders of our Venezuelan subsidiaries, have filed apetition as aggrieved third-parties to the proceedings against RicardoFernández Barrueco, as a challenge to the precautionary measures, the seizureand all related actions. MONACA has also filed for corresponding legalremedies. These challenges have yet to be resolved by the Venezuelanauthorities.

 

In addition to theforegoing, on December 16, 2009, the People’s Defense Institute for theAccess of Goods and Services of Venezuela (INDEPABIS) authorized, on aprecautionary basis, the temporary occupation and operation of MONACA for aterm of 90 consecutive days. On March 16, 2010, INDEPABIS issued a newtemporary occupation and precautionary operation measure for MONACA for a termof 90 consecutive days. INDEPABIS has also initiated a regulatory proceedingagainst MONACA in connection with alleged failure to comply with regulationsgoverning precooked corn flour and for allegedly refusing to sell this productas a result of the December 4, 2009 precautionary asset seizure describedabove.

 

We intend to exhaust alllegal remedies available in order to safeguard and protect the Company’slegitimate interests.

 

**TaxClaims.-** TheVenezuelan tax authorities have lodged certain assessments against MONACA, oneof our Venezuelan subsidiaries, related to income tax returns for the years1998 and 1999, which amounted Ps. 18.3 million (U.S.$1.4 million) plus taxdebts derived from the Value Added Tax presumably omitted in the amount of Ps.1 million (U.S.$66.3 thousand).  The casehas been appealed and is pending a final decision. Any tax liability arisingfrom the resolution of these claims will be assumed by the previousshareholder, International Multifoods Corporation, in accordance with thepurchase agreement by which the Company acquired our subsidiary in Venezuela,MONACA.

 

F-32

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**11.****                             ****CONTINGENCIES AND COMMITMENTS(Continued)**

 

**LaborLawsuits.-**In thepast, our subsidiary MONACA was named in three labor lawsuits (2 from Caleterosand one from a Work Accident) seeking damages in the amount of Ps.20.9 million(U.S.$1.6 million). The lawsuits and claims are related to issues and rightssuch as profit sharing, social security, vacation, seniority and indemnitypayment issues.  The “Caleteros” whobrought the claims are workers who help freighters unload goods.

 

Presently, MONACA hasbeen negotiating the payment of the above-mentioned labor lawsuit and theextrajudicial claims, trying to reach agreements for the lawsuit and claims inan amount of Ps.10.7 million (U.S.$819.6 thousands). In the same manner, MONACAhas created a reserve for the aforementioned amount to cover any potentialliabilities thereof which is reflected in accrued liabilities and other accountspayable.

 

Additionally, the Companyand its subsidiaries are involved in various pending litigations filed duringthe normal course of business. It is the opinion of the Company that theoutcome of these proceedings shall not have a material adverse affect on thefinancial position and results of operations of the Company.

 

B) COMMITMENTS

 

As of December 31,2009, the Company is leasing certain facilities and equipment under long-termlease agreements in effect through 2019, which include an option for renewal.These agreements are recognized as operating leases. Future minimum leasepayments under such leases amount to approximately Ps.1,429,006 (U.S.$109,335thousand), as follows:

 
| **Year**   | ** ** | **Facilities** | ** ** | **Equipment** | ** ** | **Total** | ** ** |
|------------|------------|----------------|------------|---------------|------------|-----------|------------|
| 2010       |       | Ps.            | 213,315    |          | Ps.        | 289,343   |       | Ps. | 502,658 |   |
| 2011       |       | 166,643        |       | 215,223       |       | 381,866   |       |
| 2012       |       | 114,519        |       | 101,396       |       | 215,915   |       |
| 2013       |       | 72,669         |       | 65,599        |       | 138,268   |       |
| 2014       |       | 58,514         |       | 2,431         |       | 60,945    |       |
| Thereafter |       | 127,132        |       | 2,222         |       | 129,354   |       |
|       |       | Ps.            | 752,792    |          | Ps.        | 676,214   |       | Ps. | 1,429,006 |   |
|       |       | U.S.$          | 57,597     |          | U.S.$      | 51,738    |       | U.S.$ | 109,335 |   |

 

Rental expense wasapproximately Ps.559,058, Ps.580,793 and Ps.712,193 for the years ended December 31,2007, 2008 and 2009, respectively.

 

At December 31,2009, the Company had various outstanding commitments in the United States topurchase commodities and raw materials for approximately Ps.2,017,407(U.S.$154,354 thousand), which will be delivered during 2010.

 

As of December 31,2009, the Company had outstanding commitments to purchase machinery andequipment amounting to approximately Ps.18,167 (U.S.$1,390 thousand).

 

As of December 31, 2009**,**the Company had irrevocable letters of credit of approximately Ps.230,254(U.S.$17,617 thousand) serving as collateral for claims pursuant to the Company’sself-insured worker’s compensation program in the United States.

 

F-33

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere 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).

 

At December 31, 2008and 2009, the Company’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.

 

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 are not subject to income tax if paid from the Net Tax Profit Account(CUFIN, for its Spanish acronym), and will be taxed at a rate that fluctuatesbetween 4.62% and 7.69% if they are paid from the reinvested Net Tax ProfitAccount. Dividends paid from retained earnings that have not been previouslytaxed are subject to an income tax payable at a rate of 38.89% if paid in 2010.The tax is payable by the Company and may be credited against the normal incometax payable by the Company in the year in which the dividends are paid or inthe following two years or, if appropriate, against the flat tax of the year.

 

Until December 31,2007, the deficit from restatement consisted of the initial accumulated gain orloss on monetary position and gain or loss from holding non-monetary assets,expressed in Mexican pesos as of the end of the year. In accordance with thenew MFRS B-10 “Effects of Inflation”, effective as of January 1, 2008, theCompany reclassified this concept to the corresponding accounts for restatementof additional capital and restatement of common stock, as is shown in theconsolidated statement of changes in stockholders’ equity.

 

C)                 PURCHASE OF COMMON STOCK

 

The Stockholders’Meeting approved a Ps.650,000 reserve to repurchase the Company’s own shares.The total amount of repurchased shares cannot exceed 5% of total equity. Thedifference between the acquisition cost of the repurchased shares and theirstated value, composed of common stock and additional paid-in capital, isrecognized as part of the reserve to repurchase the Company’s own shares, whichis included within retained earnings from prior years. The gain or loss on thesale of the Company’s own shares is recorded as additional paid-in capital. Asof December 31, 2009, the Company carried out net purchases of 1,523,900of its own shares with a market value of Ps.35,156 at that date.

 

D)                FOREIGN CURRENCY TRANSLATION ADJUSTMENTS

 

Foreign currencytranslation adjustments consisted of the following as of December 31:

 
| ** **                                                                                                                                              | ** ** | **2008**   | ** ** | **2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Balance  at beginning of year                                                                                                                           |       | Ps.        | (453,086   | )        | Ps.        | 523,055 |   |
| Effect  of the year from translating net investment in foreign subsidiaries                                                                             |       | 2,264,919  |       | 24,332   |       |
| Exchange  differences arising from foreign currency liabilities accounted for as a  hedge of the Company’s net investments in foreign subsidiaries |       | (1,288,778 | )          | 341,555  |       |
|                                                                                                                                                    |       | Ps.        | 523,055    |     | Ps.        | 888,942 |   |

 

The investment that theCompany maintains in its operations in the United States and Europe generates anatural hedge of up to U.S.$450 and U.S.$418 million as of December 31,2008 and 2009, respectively.

 

F-34

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**12.****                              ****STOCKHOLDERS’ EQUITY (Continued)**

 

As of December 31,2008 and 2009, the accumulated effect of translating net investment in foreignsubsidiaries impacted noncontrolling interest in the amounts of Ps.270,555 andPs.342,750, respectively.

 

E)                   TAX VALUES OFCOMMON STOCK AND RETAINED EARNINGS

 

As of December 31,2009, tax values of common stock and retained earnings were Ps.11,545,457(Ps.11,147,492 in 2008) and Ps.3,257,820 (Ps. 3,260,200 in 2008), respectively.

 

**13.****                              ****OTHER INCOME (EXPENSE), NET**

 

Other income (expense),net comprised the following:

 
| ** **                                                 | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net  gain from sale of GFNorte’s shares (Note 5)      |       | Ps.                               | 847,175    |   | Ps. | — |   | Ps. | — |   |
| Net  gain from sale of subsidiaries’ shares           |       | 75,718                            |       | — |   | — |   |
| Asset  tax from previous years                             |       | —                            |       | (67,000 | ) | 26,287 |   |
| Impairment  loss on long-lived assets (Note 2-L and 6)     |       | (140,049                          | )          | (46,851 | ) | (26,799 | ) |
| Economic  aid to Chiapas and Tabasco for natural disasters |       | (100,000                          | )          | — |   | — |   |
| Amortization  of other deferred costs                      |       | (45,835                           | )          | (47,897 | ) | (46,407 | ) |
| Net  loss on sale of fixed assets                          |       | (49,847                           | )          | (22,869 | ) | (94,384 | ) |
| Current  ESPS (Note 2-M and 10)                            |       | (21,395                           | )          | (28,368 | ) | (36,087 | ) |
| Deferred  ESPS                                             |       | 17,259                            |       | 28,587 |   | 27,345 |   |
| Other                                                      |       | (27,283                           | )          | 3,030 |   | (394 | ) |
|                                                       |       | Ps.                               | 555,743    |   | Ps. | (181,368 | ) | Ps. | (150,439 | ) |

 

**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, 2007, 2008 and 2009 by Ps. 283,208, Ps.332,966 and Ps.379,401, 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.

 

F-35

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31,2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, exceptwhere otherwise indicated)**

 

**14.****                             ****INCOME TAX (Continued)**

 

B)    RECONCILIATION OF FINANCIAL AND TAXABLEINCOME

 

For the years ended December 31, 2007, 2008 and2009, the reconciliation between statutory income tax amounts and the effectiveincome tax amounts is summarized as follows:

 
| ** **                                                                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| Statutory  federal income tax (28% for 2007, 2008 and 2009)                       |       | Ps.                               | 925,209    |   | Ps. | (3,187,405 | ) | Ps. | 901,234 |   |
| Foreign  dividends                                                                |       | —                            |       | — |   | 1,073,371 |   |
| Difference  between tax and accounting basis for derivative financial instruments |       | —                            |       | — |   | (885,040 | ) |
| Equity  in earnings of associated companies                                       |       | (198,194                          | )          | (173,223 | ) | (138,613 | ) |
| Sale  of shares of subsidiaries and associated company                            |       | 49,783                            |       | — |   | — |   |
| Valuation  allowance for tax loss carryforwards                                   |       | 89,178                            |       | 3,334,661 |   | (137,121 | ) |
| Effects  related to inflation                                                     |       | (26,629                           | )          | 103,081 |   | 160,771 |   |
| Losses  of Mexican subsidiaries which cannot be used for income tax consolidation |       | 17,998                            |       | — |   | — |   |
| Foreign  income tax rate differences                                              |       | 66,473                            |       | 287,836 |   | 71,627 |   |
| Effect  due to change in deferred income tax rate (1)                             |       | —                            |       | — |   | (58,228 | ) |
| Effect  of deferred flat tax in subsidiaries                                      |       | 18,719                            |       | 2,960 |   | 29,478 |   |
| Other                                                                             |       | (16,827                           | )          | 66,785 |   | 90,867 |   |
| Effective  income tax (28% for 2007, -3.8% for 2008 and 34.2% for 2009)           |       | Ps.                               | 925,710    |   | Ps. | 434,695 |   | Ps. | 1,108,346 |   |

 

----

(1) On December 7,2009 several dispositions contained in the Income Tax Law were modified, addedand revoked, establishing among other, that the income tax rate applicable forthe years 2010 through 2012 will be 30%, for 2013 29% and from 2014 onwards28%. At December 31, 2009 the aforementioned changes in tax rates gaverise to a net decrease in deferred income tax of Ps.58,228 with thecorresponding effect in income for the year, which was determined based on theestimated reversal of temporary items at the rates which will be in effect.

 

At December 31, 2008and 2009, the principal components of the deferred income tax liability were asfollows:

 
| ** **                                              | ** ** | **(Assets) Liabilities** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|
| ** **                                              | ** ** | **2008**                 | ** ** | **2009** | ** ** |
| Deferred  tax assets:                                   |       |                     |       |   |   |
| Net  operating loss carryforwards and other tax credits |       | Ps.                      | (496,512   | ) | Ps. | (337,332 | ) |
| Accrued  liabilities                                    |       | (168,121                 | )          | (395,922 | ) |
| Recoverable  asset tax                                  |       | (17,791                  | )          | (19,167 | ) |
| Intangible  asset resulting from intercompany operation |       | (17,539                  | )          | 12,949 |   |
| Other                                                   |       | (229,295                 | )          | (285,599 | ) |
|                                                    |       | (929,258                 | )          | (1,025,071 | ) |
|                                                         |            |                          |            |  |  |  |  |

 

F-36

----

 

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**14.****         ****INCOME TAX (Continued)**

 
| ** **                                              | ** ** | **(Assets) Liabilities** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|
| ** **                                              | ** ** | **2008**                 | ** ** | **2009** | ** ** |
| Deferred   tax liabilities:                             |       |                     |       |   |   |
| Property,   plant and equipment, net                    |       | 2,211,278                |       | 2,134,717 |   |
| Inventories                                             |       | 154,338                  |       | 116,388 |   |
| Intangible   assets and other                           |       | 220,046                  |       | 277,205 |   |
| Investment   in partnership and equity method investees |       | 899,904                  |       | 973,006 |   |
|                                                    |       | 3,485,566                |       | 3,501,316 |   |
| Net   deferred tax liability                            |       | Ps.                      | 2,556,308  |   | Ps. | 2,476,245 |   |
|                                                         |            |                          |            |  |  |  |  |

 

As of December 31, 2009, the Company did not recognize a deferred income tax asset of Ps.3,721,731 for tax loss carryforwards, since sufficient evidence was not available to determine that these tax loss carryforwards will be realizable during their amortization period.

 

C)     TAX LOSS CARRYFORWARDS AND RECOVERABLE ASSET TAX

 

At December 31, 2009, the Company has tax loss carryforwards in Mexico, which amounted to Ps.17,299,399, that will expire as follows:

 
| **Year   of expiration** | ** ** | **Tax loss   carryforwards** | ** ** |
|--------------------------|------------|------------------------------|------------|
| 2010                     |       | Ps.                          | 405,406    |   |
| 2011                     |       | 253,730                      |       |
| 2012                     |       | 512,985                      |       |
| 2013                     |       | 360,509                      |       |
| 2014                     |       | 370,237                      |       |
| 2015   onwards           |       | 15,396,532                   |       |
|                     |       | Ps.                          | 17,299,399 |   |
|                          |            |                              |            |  |  |

 

Based on projections prepared by the Company’s management of expected future taxable income, it has been determined that only tax losses for an amount of Ps.4,893,630 will be used. Therefore, for the determination of deferred income taxes, a valuation allowance was recognized for the difference.

 

As of December 31, 2009, certain foreign subsidiaries have tax loss carryforwards of approximately Ps.47,305 (2,050,382 thousand Costa Rican colons) that expire in 2010 to 2012.

 

Asset tax paid in years prior to 2008 is subject to refund according to the procedure established in the Flat Rate Business Tax Law. The Company has the right to apply for asset tax refund of Ps.119,021 as shown below:

 
| **Year   of expiration** | ** ** | **Recoverable   asset tax** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| 2014                     |       | Ps.                         | 46,925     |   |
| 2015                     |       | 72,096                      |       |
|                     |       | Ps.                         | 119,021    |   |
|                          |            |                             |            |  |  |

 

F-37

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**14.****         ****INCOME TAX (Continued)**

 

D)     FLAT RATE BUSINESS TAX

 

The Flat Rate Business Tax Law was published on October 1, 2007, and is effective starting January 1, 2008. This law is applicable to individuals and companies with permanent establishment in Mexico, and its consolidation is not allowed. The Flat Tax for the period is calculated by applying the tax rate of 17.5% (16.5% and 17% for 2008 and 2009, respectively) to income determined based on cash flow; such income is determined by deducting the authorized expenses from total income from taxed activities. From this result, the Flat Tax credits are deducted, according to the applicable laws.

 

The Flat Tax determined for 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 Tax amount will be paid as a final payment, and the excess may not be credited in future years.

 

Based on financial and tax projections, the Company considers that this tax will not have an important impact in its results of operations, since the Company will essentially pay income tax.

 

E)      INCOME TAX UNDER TAX CONSOLIDATION REGIME

 

Gruma, S.A.B. de C.V. is authorized to determine income tax under the tax consolidation regime, together with its subsidiaries in Mexico, according to the authorization of Ministry of Finance and Public Credit on July 14, 1986, under what is stated in the corresponding Law.

 

In 2009, the Company determined a consolidated tax profit of Ps.1,634,246 (consolidated tax loss of Ps.11,056,556 in 2008); which was amortized against consolidated tax loss of 2008. As of December 31, 2009, consolidated tax loss carryforwards amounted to Ps.9,126,559, which expire in 2018. The consolidated tax result differs from the accounting result, mainly in such items taxed and deducted during different timing for accounting and tax purposes, from the recognition of the inflation effects for tax purposes, as well as such items only affecting either the consolidated accounting or taxable income.

 

Certain Income Tax Law provisions are reformed, added or derogated for 2010 was published on December 7, 2009, among which the following stand out:

 

1)    The income tax rate applicable from 2010 to 2012 will be 30%, for 2013 will be 29% and as of 2014 and thereafter will be 28%.  At December 31, 2009, the rate change previously described produced a reduction to the income tax deferred balance of Ps.58,228, with its corresponding effect in the income statement of the year, which was determined based on the expectative of temporary reversion to the effective rates.

 

2)    The possibility of using credits for the excess of deductions on taxable income for Flat tax purposes (credit of tax loss of flat tax) in order to reduce the income tax to be paid while could be credited against the flat tax base.

 

3)    The tax consolidation regime is modified in order to establish that the income tax payment related to the tax consolidation benefits obtained as of 1999 should be partially paid during the years sixth to tenth subsequent to such when those benefits were embraced.

 

The tax consolidation benefits previously mentioned come from:

 
| i)   | Tax losses embraced in   the tax consolidation and were not amortized individually by the entity which   produced them.       |
|------|-------------------------------------------------------------------------------------------------------------------------------|
| ii)  | Special consolidation   items derived from transactions held between the consolidating partnerships   and producing benefits. |
| iii) | Loss on disposal of   shares individually outstanding of deduction by the holding which produced   them.                      |

 

F-38

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**14.****         ****INCOME TAX (Continued)**

 
| iv) | Dividends distributed   by the holding and which do not come from the net tax profit account (CUFIN   by its Spanish acronym) balance and reinvested CUFIN. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

4)    It is stated that the existing differences between the consolidated CUFIN and reinvested CUFIN balances and the balances of these same accounts of the controlled entities by the Company can produce profits resulting in income tax.

 

At December 31, 2009, the liability arising from the aforementioned changes in the Income Tax Law amounts to Ps.1,121,038 and is estimated to be incurred as follows:

 
| ** **                                                                          | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 and   thereafter** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------------|------------|-----------|------------|
| Tax losses                                                                          |       | Ps.      | 162,988    |     | Ps.        | 144,200  |       | Ps.      | 46,931     |                      | Ps         | 43,613    |       | Ps. | 718,671 |   | Ps. | 1,116,403 |   |
| Special   consolidation items                                                       |       | 334      |       | 334      |       | 267      |       | 200      |       | 200                       |       | 1,335     |       |
| Dividends distributed by the subsidiaries not paid   from CUFIN or reinvested CUFIN |       | 825      |       | 825      |       | 660      |       | 495      |       | 495                       |       | 3,300     |       |
| Total                                                                               |       | Ps.      | 164,147    |     | Ps.        | 145,359  |       | Ps.      | 47,858     |                      | Ps.        | 44,308    |       | Ps. | 719,366 |   | Ps. | 1,121,038 |   |
|                                                                                     |            |          |            |          |            |          |            |          |            |                           |            |           |            |  |  |  |  |  |  |  |  |  |  |  |

 

The Company, through time, has been recognizing a tax liability compensated with income tax from tax loss carryforwards. At December 31, 2009, income tax payable with defined payment dates is classified in the statement of financial position as short and long-term income tax payable for Ps.41,906 and Ps.125,717, respectively. In addition, the remaining liability for which, in accordance with requirements of the Income Tax Law, settlement date is not yet determined is included as a component of the deferredincome taxes.

 

F-39

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**15.****         ****FOREIGN CURRENCY**

 

A)     EXCHANGE DIFFERENCES

 

For the years ended December 31, 2007, 2008 and 2009, the effects of exchange rate fluctuations on the Company’s monetary assets and liabilities were recognized as follows:

 
| ** **                                                                                                                                                                                                                                                                | ** ** | **2007** | ** ** | **2008** | ** ** | **2009**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| 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 (1) |       | Ps.      | (56,526    | )        | Ps.        | (1,288,778 | )          | Ps. | 341,555 |   |
| Exchange   differences arising from foreign currency transactions credited to income                                                                                                                                                                                      |       | 72,129   |       | 255,530  |       | 755,188    |       |
|                                                                                                                                                                                                                                                                      |       | Ps.      | 15,603     |     | Ps.        | (1,033,248 | )          | Ps. | 1,096,743 |   |
|                                                                                                                                                                                                                                                                           |            |          |            |          |            |            |            |  |  |  |  |

 

----

(1) 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% with respect to the exchange rate as of December 31, 2007. This situation caused the Company to incur in an exchange loss of Ps.1,033,248 as of December 31, 2008, of which Ps.1,288,788 is recognized in foreign currency translation adjustments within stockholders’ equity.

 

B)     FOREIGN CURRENCY POSITION

 

As of December 31, 2008 and 2009, monetary assets and liabilities held or payable in U.S. dollars are summarized below:

 
| ** **                        | ** ** | **Thousands of U.S. dollars** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2008**                      | ** ** | **2009** | ** ** |
| In   companies located in Mexico: |       |                          |       |   |   |
| Assets:                           |       |                          |       |   |   |
| Current                           |       | U.S.$                         | 5,866      |   | U.S.$ | 5,457 |   |
| Non-current                       |       | 71                            |       | — |   |
| Liabilities:                      |       |                          |       |   |   |
| Current                           |       | (514,118                      | )          | (106,400 | ) |
| Long-term                         |       | (869,820                      | )          | (1,087,404 | ) |
|                              |       | U.S.$                         | (1,378,001 | ) | U.S.$ | (1,188,347 | ) |
|                                   |            |                               |            |  |  |  |  |  |  |

 
| ** **              | ** ** | **Thousands of U.S. dollars** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **2008**                      | ** ** | **2009** | ** ** |
| In   foreign companies: |       |                          |       |   |   |
| Assets:                 |       |                          |       |   |   |
| Current                 |       | U.S.$                         | 331,399    |   | U.S.$ | 347,425 |   |
| Non-current             |       | 9,129                         |       | 11,420 |   |
| Liabilities:            |       |                          |       |   |   |
| Current                 |       | (443,995                      | )          | (422,756 | ) |
| Long-term               |       | (262,933                      | )          | (239,221 | ) |
|                    |       | U.S.$                         | (366,400   | ) | U.S.$ | (303,132 | ) |
|                         |            |                               |            |  |  |  |  |  |

 

F-40

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**15.****         ****FOREIGN CURRENCY (Continued)**

 

At December 31, 2008 and 2009, the exchange rates used to translate U.S. dollar assets and liabilities were Ps.13.83 and Ps.13.07**,** respectively. On June 14, 2010, date of issuance of these financial statements, the exchange rate for the U.S. dollar was Ps.12.74, approximately.

 

For the years ended December 31, 2007, 2008 and 2009, the Company’s Mexican subsidiaries had transactions in U.S. dollars as follows:

 
| ** **                             | ** ** | **Thousands of U.S. dollars** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2007**                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Flour   sales and others               |       | U.S.$                         | (9,641     | ) | U.S.$ | (24,096 | ) | U.S.$ | — |   |
| Corn   purchases and other inventories |       | 184,446                       |       | 225,883 |   | 124,485 |   |
| Interest   expense                     |       | 40,028                        |       | 35,740 |   | 47,195 |   |
| Plant   and equipment purchases        |       | 1,232                         |       | 1,913 |   | 1,481 |   |
| Services                               |       | 5,891                         |       | 6,975 |   | 7,924 |   |
|                                   |       | U.S.$                         | 221,956    |   | U.S.$ | 246,415 |   | U.S.$ | 181,085 |   |
|                                        |            |                               |            |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2008 and 2009, the consolidated non-monetary assets of foreign origin are summarized as follows:

 
| ** **            | ** ** | **2008**                             | ** ** | **2009**                       | ** ** |
|-----------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **Foreign   currency   (thousands)** | ** ** | **Year-end   exchange   rate** | ** ** | **Foreign   currency   (thousands)** | ** ** | **Year-end   exchange   rate** | ** ** |
| U.S.   dollars        |       | 972,221                              |       | 13.83                          |       | 936,306 |   | 13.07 |   |
| Swiss   francs        |       | 22,634                               |       | 12.94                          |       | 17,278 |   | 12.63 |   |
| Euros                 |       | 29,469                               |       | 19.297                         |       | 20,636 |   | 18.7358 |   |
| Venezuelan   bolivars |       | 674,328                              |       | 6.4326                         |       | 826,597 |   | 6.0791 |   |
| Australian   dollars  |       | 114,816                              |       | 9.5607                         |       | 36,449 |   | 11.7565 |   |
| Chinese   yuans       |       | 233,003                              |       | 2.0246                         |       | 15,963 |   | 1.9145 |   |
| Pounds   sterling     |       | 12,843                               |       | 19.9512                        |       | 61,897 |   | 21.1041 |   |
| Malaysian   ringgit   |       | 8,399                                |       | 3.977                          |       | 451,019 |   | 3.8143 |   |
| Canadian   dollars    |       | 327                                  |       | 11.29                          |       | 382 |   | 12.47 |   |
| Costa   Rican colons  |       | 76,571,625                           |       | 0.0249                         |       | 74,586,761 |   | 0.0231 |   |

 

**16.****         ****SEGMENT INFORMATION**

 

The Company’s reportable segments are strategic business units that offer different products in different geographical regions. These business units are managed separately because each business segment requires different technology and marketing strategies. The Company’s reportable segments are also operating segments and no aggregation was performed.

 

The Company’s reportable segments are as follows:

 

·    Corn flour and packaged tortilla division (United States and Europe) — manufactures and distributes more than 20 varieties of corn flour that are used mainly to produce and distribute different types of tortillas and tortilla chip products in the United States. The main brands are MASECA for corn flour and MISSION and GUERRERO for packaged tortillas.

 

·    Corn flour division (Mexico) — engaged principally in the production, distribution and sale of corn flour in Mexico under MASECA brand. Corn flour produced by this division is used mainly in the preparation of tortillas and other related products.

 

F-41

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**16.****         ****SEGMENT INFORMATION (Continued)**

 

·    Corn flour, wheat flour and other products division (Venezuela) — engaged mainly in producing and distributing grains used principally 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 amounting to less than 10% of the consolidated total. These segments are: corn flour and other products division in Central America, wheat flour division in Mexico, packaged tortillas division in Mexico, wheat flour tortillas and snacks division in Asia and Oceania and technology and equipment division. Corn flour and other products division in Central America is engaged in the production and marketing of corn products, snacks and preserves. The wheat flour division in Mexico is engaged in the production and local marketing of wheat flour in this country.  The packaged tortilla division in Mexico produces and distributes packaged tortillas. The Asia and Oceania division produces and distributes wheat flour tortilla and snacks. The technology and equipment division conducts research and development regarding flour and tortilla manufacturing equipment, produces machinery for corn flour and tortilla production and is engaged in the construction of the Company’s corn flour manufacturing facilities.

 

·    The “Other reconciling items” row includes the corporate expenses and the elimination of inter-business unit transactions.

 

All inter-segment sales prices are market-based. The Company’s management evaluates performance based on operating income of the respective business units.

 

Summarized financial information concerning the Company’s reportable segments is shown in the following tables.

 

Segment information as of and 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 |   |
|                                                                        |            |                                         |            |                                  |            |                                 |            |                                       |            |  |  |  |  |  |  |

 

F-42

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**16.****         ****SEGMENT INFORMATION (Continued)**

 
| **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 |   |

 

Segment information 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 |   |

 

F-43

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**16.****         ****SEGMENT INFORMATION (Continued)**

 

Segment information as of and for the year ended December 31, 2009:

 
| **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.                                     | 23,523,084 |                             | Ps.        | 43,865                          |       | Ps.                                   | 1,951,944  |   | Ps. | 933,758 |   |
| Corn   flour division (Mexico)                                         |       | 9,911,545                               |       | 435,994                          |       | 1,267,771                       |       | 293,649                               |       |
| Corn   flour, wheat flour and other products (Venezuela)               |       | 9,025,321                               |       | —                           |       | 957,329                         |       | 167,746                               |       |
| Other                                                                  |       | 8,005,041                               |       | 718,666                          |       | (241,470                        | )          | 287,606                               |       |
| Other   reconciling items                                              |       | 24,057                                  |       | (1,198,525                       | )          | (128,602                        | )          | (34,313                               | )          |
| Total                                                                  |       | Ps.                                     | 50,489,048 |                             | Ps.        | —                          |       | Ps.                                   | 3,806,972  |   | Ps. | 1,648,446 |   |

 
| **Segment**                                                            | ** ** | **Total   assets** | ** ** | **Total   liabilities** | ** ** | **Expenditures   for   fixed assets** | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|---------------------------------------|------------|
| Corn   flour and packaged tortilla division (United States and Europe) |       | Ps.                | 14,710,690 |                    | Ps.        | 7,039,306                             |       | Ps. | 420,317 |   |
| Corn   flour division (Mexico)                                         |       | 9,878,421          |       | 2,912,556               |       | 299,015                               |       |
| Corn   flour, wheat flour and other products (Venezuela)               |       | 6,777,967          |       | 3,211,330               |       | 305,607                               |       |
| Other                                                                  |       | 9,301,375          |       | 4,553,028               |       | 199,775                               |       |
| Other   reconciling items                                              |       | 3,298,062          |       | 14,438,732              |       | (56,051                               | )          |
| Total                                                                  |       | Ps.                | 43,966,515 |                    | Ps.        | 32,154,952                            |       | Ps. | 1,168,663 |   |

 

The following table presents the details of “Other reconciling items” for operating income:

 
| **Other   reconciling items**                     | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Corporate   expenses                              |       | Ps.      | (126,757   | )        | Ps.        | (99,018  | )          | Ps. | (288,144 | ) |
| Elimination   of inter-business unit transactions |       | 27,239   |       | 61,065   |       | 159,542  |       |
| Total                                             |       | Ps.      | (99,518    | )        | Ps.        | (37,953  | )          | Ps. | (128,602 | ) |

 

F-44

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**16.****         ****SEGMENT INFORMATION (Continued)**

 

Additionally, a summary of information by geographic segment is as follows:

 
| ** **                 | ** ** | **2007**   | ** ** | **%**  | ** ** | **2008**   | ** ** | **%**      | ** ** | **2009**   | ** ** | **%**  | ** ** |
|----------------------------|------------|------------|------------|--------|------------|------------|------------|------------|------------|------------|------------|--------|------------|
| **NET SALES:**             |       |       |       |   |       |       |       |       |       |       |       |   |       |
| United   States and Europe |       | Ps.        | 17,402,790 |   | 48         |       | Ps.        | 19,331,804 |       | 43         |       | Ps.    | 23,523,084 |   | 46 |   |
| Mexico                     |       | 11,651,844 |       | 33     |       | 12,784,001 |       | 29         |       | 13,843,751 |       | 27     |       |
| Venezuela                  |       | 3,862,214  |       | 11     |       | 8,727,009  |       | 19         |       | 9,025,321  |       | 18     |       |
| Central America            |       | 2,076,158  |       | 6      |       | 2,948,721  |       | 7          |       | 2,776,972  |       | 6      |       |
| Asia and Oceania           |       | 823,040    |       | 2      |       | 1,001,037  |       | 2          |       | 1,319,920  |       | 3      |       |
|                       |       | Ps.        | 35,816,046 |   | 100        |       | Ps.        | 44,792,572 |       | 100        |       | Ps.    | 50,489,048 |   | 100 |   |
|                       |       |       |       |   |       |       |       |       |       |       |       |   |       |
| **IDENTIFIABLE ASSETS:**   |       |       |       |   |       |       |       |       |       |       |       |   |       |
| United   States and Europe |       | Ps.        | 12,675,499 |   | 37         |       | Ps.        | 16,664,516 |       | 37         |       | Ps.    | 14,710,690 |   | 34 |   |
| Mexico                     |       | 14,920,029 |       | 44     |       | 16,965,087 |       | 38         |       | 17,109,977 |       | 39     |       |
| Venezuela                  |       | 2,893,111  |       | 9      |       | 5,804,022  |       | 13         |       | 6,777,967  |       | 15     |       |
| Central America            |       | 1,689,943  |       | 5      |       | 2,477,969  |       | 6          |       | 2,168,294  |       | 5      |       |
| Asia and Oceania           |       | 1,732,120  |       | 5      |       | 2,523,083  |       | 6          |       | 3,199,587  |       | 7      |       |
|                       |       | Ps.        | 33,910,702 |   | 100        |       | Ps.        | 44,434,677 |       | 100        |       | Ps.    | 43,966,515 |   | 100 |   |
|                       |       |       |       |   |       |       |       |       |       |       |       |   |       |
| **CAPITAL EXPENDITURES:**  |       |       |       |   |       |       |       |       |       |       |       |   |       |
| United   States and Europe |       | Ps.        | 1,049,192  |   | 48         |       | Ps.        | 1,321,402  |       | 49         |       | Ps.    | 420,317    |   | 36 |   |
| Mexico                     |       | 259,430    |       | 12     |       | 205,036    |       | 8          |       | 324,994    |       | 28     |       |
| Venezuela                  |       | 72,739     |       | 3      |       | 261,733    |       | 10         |       | 305,607    |       | 26     |       |
| Central America            |       | 143,070    |       | 6      |       | 304,941    |       | 11         |       | 51,689     |       | 4      |       |
| Asia   and Oceania         |       | 698,472    |       | 31     |       | 603,632    |       | 22         |       | 66,056     |       | 6      |       |
|                       |       | Ps.        | 2,222,903  |   | 100        |       | Ps.        | 2,696,744  |       | 100        |       | Ps.    | 1,168,663  |   | 100 |   |
|                            |            |            |            |        |            |            |            |            |            |            |            |        |            |  |  |  |  |

 

**17.****         ****FINANCIAL INSTRUMENTS**

 

A)     FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying amounts of cash and cash equivalents, accounts receivable, refundable taxes, trade accounts payable, short-term bank loans, current portion of long-term debt and accrued liabilities and other payables approximate their fair value, due to their short maturity. In addition, the net book value of accounts and notes receivable and refundable taxes represent the expected cash flow to be received.

 

The Company has negotiable securities called interest and capital bonds for a nominal amount 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.127,293. The unfavorable effect due to changes in the fair value of the outstanding contracts was Ps.11,608, which was recognized in income.

 

F-45

----

Table of Contents

 

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

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**17.****         ****FINANCIAL INSTRUMENTS (Continued)**

 

The estimated fair value of the Company’s financial instruments is as follows:

 
| ** **                                                                          | ** ** | **December 31, 2008** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                          | ** ** | **Carrying amount**        | ** ** | **Fair value** | ** ** |
| **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 |   |
| Long-term   debt                                                                    |       | 8,086,699                  |       | 7,750,144 |   |
| Derivative   financial instruments - exchange rate                                  |       | 11,230,170                 |       | 11,230,170 |   |
| Derivative   financial instruments - corn                                           |       | 279,233                    |       | 279,233 |   |
| Derivative   financial instruments - other raw materials                            |       | 108,685                    |       | 108,685 |   |
| Derivative   financial instruments - interest rate                                  |       | 27,741                     |       | 27,741 |   |
| **Assets:**                                                                         |       |                       |       |   |   |
| Derivative   financial instruments - corn                                           |       | 13,086                     |       | 13,086 |   |
| Derivative   financial instruments - other raw materials                            |       | 2,059                      |       | 2,059 |   |
| Interest   and capital bonds                                                        |       | 146,218                    |       | 146,218 |   |
|                                                                                     |            |                            |            |  |  |  |  |

 
| ** **                                                                          | ** ** | **December 31,   2009** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | **Carrying   amount**        | ** ** | **Fair   value** | ** ** |
| **Liabilities:**                                                                    |       |                         |       |   |   |
| Perpetual   bonds in U.S. dollars bearing fixed interest at an annual rate of 7.75% |       | Ps.                          | 3,921,000  |   | Ps. | 3,666,135 |   |
| Long-term   debt                                                                    |       | 17,410,119                   |       | 18,231,481 |   |
| Derivative   financial instruments - other raw materials                            |       | 4,526                        |       | 4,526 |   |
| Derivative   financial instruments - interest rate                                  |       | 7,133                        |       | 7,133 |   |
| **Assets:**                                                                         |       |                         |       |   |   |
| Interest   and capital bonds                                                        |       | 127,293                      |       | 127,293 |   |
| Derivative   financial instruments - corn                                           |       | 14,217                       |       | 14,217 |   |
| Derivative   financial instruments - other raw materials                            |       | 39,353                       |       | 39,353 |   |
|                                                                                     |            |                              |            |  |  |  |  |

 

The fair values in tables above were determined by the Company as follows:

 

·    The fair values of perpetual bonds and derivative financial instruments were determined based on available market prices and/or estimates using market data information and appropriate valuation methodologies for similar instruments.

 

·    The fair value for the rest of long-term debt is based on the present value of the cash flows discounted at interest rates based on readily observable market inputs.

 

F-46

----

**Table of Contents**

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**17.****         ****FINANCIAL INSTRUMENTS (Continued)**

 

B)            FINANCIAL RISKS

 

The availability and price of corn and other agricultural commodities are subject to important fluctuations due to factors that are beyond our control, such as the weather, planting seasons, agricultural programs and government policies (both national and foreign), global changes in the supply/demand generated by population growth, competitors and global production of similar harvests. We hedge a part of our production requirements through futures contracts and options in order to reduce 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 the business. As of December, 31, 2008 and 2009, the open positions of these instruments were valued at their fair value. The financial instruments that did not qualify as hedges for accounting purposes resulted in an unfavorable effect of Ps.295,092 and a favorable effect of Ps.63,769 for the years ended December 31, 2008 and 2009, respectively, which was recognized in income. As of December 31, 2008 and 2009, these instruments had not affected the Company’s cash flow.

 

During 2008, certain foreign exchange derivative transactions were entered into, which as of the end of December 2008, were primarily referenced to Mexican peso/U.S. dollar and U.S. dollar/Euro exchange rates. These foreign exchange financial instruments were valued in accordance with their estimated fair value. This estimated fair value represents the amount through which a financial asset may be exchanged or a financial liability be paid, between interested and willing parties in an arm’s-length transaction, based on the information given by the financial counterparties participating in these trades. At December 31, 2008, the open positions of these instruments represented a net loss of approximately Ps.11,230,170. The total loss was recognized in income of the year ended December 31, 2008. At that same date, these instruments did not have an effect on cash flow for the Company. During 2009, the Company completed the conversion of the liability that it owed to several financial institutions under its terminated foreign exchange derivative instruments, into medium and long-term loans (see Note 9). As of December 31, 2009, there were no open positions of these instruments.

 

As of December 31, 2008, the Company had complied with all obligations under its derivative financial instrument contracts.

 

C)            QUANTITATIVE INFORMATION

 

The derivative financial instruments for corn futures and corn options contracts are summarized as follows:

 
| ** **     | ** ** | **Notional Amount   (Bushels)** | ** ** | **Underlying Asset   Value   (Mexican pesos)** | ** ** | **Fair Value   (thousands of   Mexican pesos)** | ** ** | **Maturities   (thousands of   Mexican** | ** ** |
|----------------|------------|---------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **     | ** ** | **As of December 31,**     | ** ** | **As of December 31,**                    | ** ** | **As of December 31,**                     | ** ** | **pesos)**                               | ** ** |
| **Derivative** | ** ** | **2008**                        | ** ** | **2009**                                       | ** ** | **2008**                                        | ** ** | **2009**                                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
| Corn Futures   |       | 17,430,000                      |       | 2,520,000                                      |       | 58.2770                                         |       | 56.3820                                  |       | Ps. | (266,147 | ) | Ps. | 6,934 |   | Ps. | 6,934 |   |
| Corn Options   |       |                            |       | 4,410,000                                      |       |                                            |       | 1.6514                                   |       |   |   | 7,283 |   | 7,283 |   |
|           |       | 17,430,000                      |       | 6,930,000                                      |       |                                            |       |                                     |       | Ps. | (266,147 | ) | Ps. | 14,217 |   | Ps. | 14,217 |   |

 

The operations terminated during 2008 and 2009 with respect to corn futures contracts resulted in a loss of Ps.21,762 and Ps.66,305, respectively.

 

F-47

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**17.****         ****FINANCIAL INSTRUMENTS (Continued)**

 

The foreign exchange derivative financial instruments are summarized as follows:

 
| ** **     | ** ** | ** **   | ** ** | ** **   | ** ** | **Notional   Amount   (Thousands of U.S.   dollars)** | ** ** | **Underlying   Asset   Value** | ** ** | **Fair   Value   (thousands of   Mexican pesos)** | ** ** |
|----------------|------------|--------------|------------|--------------|------------|-------------------------------------------------------|------------|--------------------------------|------------|---------------------------------------------------|------------|
| ** **     | ** ** | **Purchase** | ** ** | ** **   | ** ** | **As of   December 31,**                         | ** ** | **As of   December 31,**  | ** ** | **As of   December 31,**                     | ** ** |
| **Derivative** | ** ** | **/ Sale**   | ** ** | **Currency** | ** ** | **2008**                                              | ** ** | **2009**                       | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Forwards       |       | Sale         |       | USD-MXN      |       | U.S.$                                                 | 712,900    |                           | U.S.$      | —                                            |       | Ps. | 15.0965 |   | — |   | Ps. |  (3,125,165 | ) | Ps. | — |   |
| Structures     |       | Sale         |       | USD-MXN      |       | 110,500                                               |       | —                         |       | 14.1751                                           |       | — |   | (7,708,933 | ) | — |   |
| Structures     |       | Purchase     |       | EUR-USD      |       | 16,636                                                |       | —                         |       | 1.3444                                            |       | — |   | (396,072 | ) | — |   |
|           |       |         |       |         |       | U.S.$                                                 | 840,036    |                           | U.S.$      | —                                            |       |   |   |   |   | Ps. | (11,230,170 | ) | Ps. | — |   |
|                |            |              |            |              |            |                                                       |            |                                |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

The operations terminated during 2008 and 2009 in foreign exchange derivative financial instruments resulted in a loss of Ps.3,479,549 and Ps.470,905, respectively.

 

The notional amounts related to derivative financial instruments reflect the volume of reference agreed; however, they do not reflect the amounts at risk in regard to future cash flows. The amounts at risk are generally limited to the unrealized gain or loss from market valuation for these instruments, which may vary according to changes in market value of the underlying asset, its volatility and the credit quality of the counterparties.

 

D)           CONCENTRATION OF RISK

 

The financial instruments that are potentially subject to a concentration of risk are principally cash, cash equivalents and trade accounts receivable. The Company deposits its cash and cash equivalents in recognized financial institutions. The concentration of the credit risk with respect to trade receivables is limited since the Company sells its products to a large number of customers located in different parts of Mexico, United States of America, Central America, Venezuela, Europe, Asia and Oceania. The Company maintains reserves for potential credit losses.

 

Operations in Venezuela represented approximately 18% of net sales and 15% of total assets in 2009. In recent years, political and social instability has prevailed in Venezuela. This severe political and civil uncertainty represents a risk to the business in this country, which cannot be controlled or measured accurately, for example:

 

·             On December 4, 2009 the Eleventh Criminal Court in Charge of the Control Court of the Metropolitan Area of Caracas, Venezuela resolved a precautionary seizure of assets of all corporations where Ricardo Fernández Barrueco, on his own or by any third party, whether an individual or company, had any kind of interest or was a shareholder. By Resolution No. 2549 published in Venezuela’s Official Gazette on December 22, 2009 the Ministry of Finance of Venezuela resolved the designation of various individuals as special managers and representatives in the name of the Republic of Venezuela of the shares owned indirectly by Ricardo Fernández Barrueco in MONACA. MONACA has filed as third aggrieved party a petition within the proceedings against Ricardo Fernández Barrueco, in order to release the precautionary measures and seizing ordered by the Eleventh Criminal Judge and all actions derived thereof such as the resolutions issued by the Ministry of Finance of Venezuela.

 

F-48

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**17.****         ****FINANCIAL INSTRUMENTS (Continued)**

 

·             Also, on December 16, 2009, the People’s Defense Institute for the Access of Goods and Services of Venezuela (INDEPABIS) ordered a precautionary measure for authorizing the occupation and temporary operation of MONACA for a term of 90 consecutive days. This notification became official on December 22, 2009. MONACA has filed the corresponding legal processes against the proceedings filed and the measures issued by INDEPABIS affecting MONACA.

 

·             On December 11, 2009, the President of Venezuela approved the formation of multidisciplinary teams to ensure the operation of the group of companies belonging to Ricardo Fernández Barrueco, which are subject to an occupation and operation process by the Venezuelan Executive Power, among those companies is FEXTUN Fábrica de Exquisiteces de Atún, S.A., a company to which subsidiaries in Venezuela maintain balances with for the purchase of products, amounting to Ps.500,239 (Note 18).

 

·             Since 2003 Venezuelan authorities imposed foreign exchange and price controls on certain products. These foreign exchange controls may limit the Company’s capacity to convert bolivars to other currencies and also transfer funds outside Venezuela. In February 2003, the Venezuelan government set a single fixed exchange rate for the Bolivar against the U.S. dollar of 1,600 bolivars to U.S.$1.00. Later, in February 2004 the Venezuelan government set a new fixed exchange rate of 1,920 bolivars to U.S.$1.00. In March 2005, the government established a new exchange rate of 2,150 bolivars per U.S. dollar.

 

·             In February 2003, the government of Venezuela established price controls for certain products such as corn flour and wheat flour. During 2008 and 2009, this measure was modified and new lists of products subject to price controls were issued. These price controls may limit the Company’s ability to increase prices in order to compensate for the higher costs of raw materials.

 

The financial position and results of the Company may be negatively affected due to the fact that:

 

a.          An extent of the Company’s sales are denominated in Bolivars;

b.         Subsidiaries in Venezuela manufacture products subject to price controls.

c.          It may be difficult for subsidiaries in Venezuela to pay dividends, as well as to import some of their requirements of raw materials as a result of the foreign exchange control.

 

The current president in Venezuela was reelected for a second term in December 2006; thus, the civil and political uncertainty will continue during the next six-year term. Additionally, starting 2007 the current president was granted by the legislature with extraordinary faculties to legislate by decree for a period of 18 months in several strategic areas, which could result in certain structural changes in the economical and social policies in Venezuela, thus increasing the uncertainty in that country.

 

**18.****         ****RELATED PARTY TRANSACTIONS**

 

As of December 31, 2008 and 2009, the Company owns 8.7966% interest in GFNorte, a Mexican financial institution. In the normal course of business, the Company obtains long-term financing from GFNorte and other subsidiaries of that institution at market rates and terms. During 2009, the Company did not obtain financing from GFNorte’s subsidiaries.

 

The Company has insurance contracts with Seguros Banorte Generali, S.A. de C.V. (subsidiary of GFNorte) in order to manage different risks in some of its subsidiaries. In 2008 and 2009, the Company paid insurance premiums of approximately Ps.49,488 and Ps.112,563, respectively.

 

F-49

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**18.****         ****RELATED PARTY TRANSACTIONS (Continued)**

 

As of December 31, 2008 and 2009, the Company had accounts payable to Archer-Daniels-Midland (ADM) included in trade accounts payable for Ps.135,307 and Ps.186,316, respectively. Additionally, during 2008 and 2009, the Company purchased inventory ingredients from ADM amounting to Ps.2,436,716 and Ps.2,116,318 (U.S.$183 and U.S.$159 million), respectively. In 1996 the Company entered into an association with ADM, a U.S. agricultural processor and trader.

 

As of December 31, 2008 and 2009, the Company had accounts receivable from different companies related to the minority stockholder of the Venezuelan subsidiaries for Ps.84,146 and Ps.500,669, respectively. Additionally, the Company had accounts payable included in trade accounts of Ps.12,375 and Ps.6,658, respectively.

 

For the years ended December 31, 2008 and 2009, related party transactions were carried out at market value.

 

For the years 2008 and 2009, the total compensation paid to all Board members, alternate Board members, directors and members of the audit committee and corporate practices committee amounted to Ps.122.2 and Ps.132.9 million, respectively. As of December 31, 2008 and 2009, the reserve for deferred compensation amounted to Ps.33.4 and Ps.41.8 million, respectively. The Company does not provide employees share-based compensation.

 

**19.****         ****NEW FINANCIAL REPORTING STANDARDS**

 

The Mexican Financial Reporting Standards Board (CINIF for its Spanish acronym) issued, during December 2009, a series of Mexican Financial Reporting Standards (MFRS) and interpretations (INIF), which become effective as of January 1, 2010, with exception of the INIF 18 which became effective as of December 7, 2009 and the MFRS B-5, which will become effective as of January 1, 2011. Such MFRS and interpretations are not considered to have a significant impact in the financial information presented by the Company, explained as follows:

 

MFRS B-5 “Financial information by segments”.  It establishes the general standards to disclose financial information by segments, additionally it allows the user or such information analyze the entity from the same vision as the management and allows to present information by segment more consistent with its financial statements.  This standard will supersede Bulletin B-5 *Financial Information by Segment* starting January 1, 2011.

 

MFRS C-1 “Cash and cash equivalents”.  It establishes standards on the accounting treatment and disclosure of cash, restricted cash and available for sale investments, it also introduces new terminology to make it consistent with other MFRS previously issued.   This standard superseded Bulletin C-1, *Cash*.

 

INIF 17 “Service concession contracts”.  The INIF 17 removes the inconsistency between MFRS D-6 *Capitalization of the Comprehensive Financial Result* and Bulletin D-7 *Contracts of Construction and Manufacturing of Some Equity Goods*, concerning the accounting treatment of the comprehensive financial result in the event of recognition of an intangible asset during the construction phase, for service concession contracts.

 

INIF 18 “Recognition of effects of the Tax Reform 2010 in the Income Tax”.  The INIF 18 was issued to give response to diverse questioning of the financial information preparers related with the Tax Reform 2010 effects, especially for the changes established in the tax consolidation regime and modifications to the income tax rate.

 

F-50

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**20.****         ****SUBSEQUENT EVENTS**

 

A)          DEVALUATION IN VENEZUELA

 

On January 8, 2010, the Venezuelan government issued the Exchange Agreement No. 14, in which a dual exchange rate of Bs.2.60/U.S.$1 and Bs.4.30/U.S.$1 was established. The Exchange Agreement became effective starting January 11, 2010.

 

This Exchange Agreement establishes that the acquisition of foreign currencies will be made at an exchange rate of Bs.2.60/U.S.$1 for the following items:

 

a)              Imports for food industry, health, education, machinery and equipment and science and technology, in accordance with commercial policy established by the President of Venezuela.

b)             Remittance operations to relatives abroad.

c)              Tuition payments for students abroad.

d)             Payments for health recovery, sports, culture, scientific research and other cases of special urgency, as established by the Venezuelan Currency Administration Commission (CADIVI).

e)              Payment to retirees and pensioners living abroad.

f)                Currency acquisitions by diplomatic representatives, consular officials and foreign officials from international organizations, properly accredited by the Venezuelan Government.

 

All purchases of foreign currencies, for purposes different from those mentioned above, will be made at an exchange rate of Bs.4.30/U.S.$1.

 

All buying and selling operations of currency requested from the Central Bank of Venezuela (CBV) before the effective date of this Exchange Agreement will be settled at an exchange rate of Bs.2.15/U.S.$1. At the date in which the Exchange Agreement became effective, the Company’s subsidiaries in Venezuela did not hold assets or liabilities whose liquidation was requested with the CBV.

 

Based on the foreign currency position as of December 31, 2009 and the new exchange rates established in the Exchange Agreement of Bs.2.60/U.S.$1 and Bs.4.30/U.S.$1 as well as management interpretations, the estimated financial effect resulting from the issuance of this Exchange Agreement for those items that the Management expects will be settled using the new exchange rates will result in an increase of the monetary assets denominated in foreign currency (different from Bolivars) of Bs.8,083, an estimated increase of the monetary liabilities denominated in foreign currency (different from Bolivars) of Bs.29,674, resulting in an estimated net exchange loss of Bs.21,592, which was recognized in January 2010. Likewise, on December 31, 2009, the investment in interest and capital bonds generates an income for the indexing of these securities, to the exchange rate of Bs.2.60/U.S.$1 of Bs.4,383, which was also recognized in January 2010. Additionally, the effect on the financial position and results of the Company when converting the financial information of subsidiaries in Venezuela using the exchange rate of Bs.4.30/U.S.$1 will result in a decrease of approximately 50% of the value in Mexican pesos of the financial information used for consolidation purposes.

 

F-51

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**20.****         ****SUBSEQUENT EVENTS (Continued)**

 

B)            EXPROPRIATION OF MONACA

 

On May 12, 2010, the Venezuelan government issued decree number 7.394, published in the Official Gazette of Venezuela (the “Expropriation Decree”), announcing the forced acquisition of all goods, movables and real estate of our Venezuelan subsidiary MONACA (the “MONACA Expropriation”). Pursuant to the Expropriation Decree, the government of Venezuela has instructed government officials to undertake the necessary actions to execute the MONACA Expropriation. As of this date, the Venezuelan government has not yet taken operational or managerial control of MONACA. Pending the resolution of our negotiations with the government of Venezuela, MONACA continues to operate in the ordinary course of business. The Company and the Venezuelan government are in preliminary negotiations to determine the compensation to be paid for the expropriated assets. We are participating in these negotiations with a view to obtaining just and reasonable compensation for the assets subject to the MONACA Expropriation. However, we cannot assure you that these negotiations will be successful. At this preliminary stage, we are unable to estimate the likely range of potential recovery or determine what position Venezuela will take in these negotiations and the difficulties of collection, among other matters.

 

Additionally, INDEPABIS has also initiated an investigation of our Venezuelan subsidiary DEMASECA, and issued an order authorizing the temporary occupation and operation of DEMASECA for a period of 90 calendar days from May 25, 2010. DEMASECA continues to operate in the ordinary course of business. We cannot assure you that the government of Venezuela will not continue to expropriate our remaining operations in Venezuela.

 

We reserve and will continue to reserve the right to seek full compensation for any and all expropriated assets and investments under all applicable legal regimes, including investment treaties and customary international law. Gruma’s interest in MONACA is held through Valores Mundiales, S.L., a company organized under the laws of the Kingdom of Spain. Venezuela and Spain are parties to a bilateral investment treaty (the “Investment Treaty”). Under the Investment Treaty, companies subject to expropriation are entitled to certain rights, including the right to arbitrate disputes before the International Centre for Settlement of Investment Disputes (“ICSID”) in Washington, D.C.

 

While the ultimate outcome of this matter is presently uncertain, it is reasonably possible that the expropriation may result in a loss of control of the Company’s Venezuelan business, which may require accounting for the expropriation as discontinued operation in future periods, together with a retrospective restatement of prior year’s financial statements to reflect the presentation of the business in Venezuela as a discontinued operation. Pending the resolution of this matter, an estimate of an impairment charge, if any, and the determination as to whether this business will need to be accounted for as a discontinued operation, cannot be made. Furthermore, at this time, we cannot predict the results of any court or tribunal proceedings, whether we will be likely to prevail in such proceedings, or the ramifications that costly and prolonged legal disputes could have on our results of operations or financial position. As a result, the net impact of this matter on the Company’s consolidated financial results cannot be reasonably estimated at this time.

 

F-52

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**20.****         ****SUBSEQUENT EVENTS (Continued)**

 

The condensed balance sheets for MONACA as of December 31, 2008 and 2009 are as follows:

 
| ** **                                       | ** ** | **2008**  | ** **      | **2009**  | ** ** |
|--------------------------------------------------|------------|-----------|-----------------|-----------|------------|
| Current assets                                   |       | Ps.       |  3,182,962 |      | Ps.        |  3,624,199 |   |
| Non-current   assets                             |       | 2,163,609 |            | 2,637,347 |       |
| Total   assets                                   |       | 5,346,571 |            | 6,261,546 |       |
| Percentage   from consolidated total assets      |       | 12.0      | %               | 14.2      | %          |
|                                             |       |      |            |      |       |
| Current   liabilities                            |       | 3,297,097 |            | 3,123,487 |       |
| Long-term   liabilities                          |       | 104,710   |            | 44,573    |       |
| Total liabilities                                |       | 3,401,817 |            | 3,168,060 |       |
| Percentage   from consolidated total liabilities |       | 9.7       | %               | 9.9       | %          |
|                                             |       |      |            |      |       |
| Total net assets                                 |       | 1,944,754 |            | 3,093,486 |       |
| Percentage   from consolidated total net assets  |       | 21.0      | %               | 26.1      | %          |
|                                             |       |      |            |      |       |
| Non-controlling   interest                       |       | 527,806   |            | 839,572   |       |
| Interest   of Gruma in total net assets          |       | 1,416,948 |            | 2,253,914 |       |
|                                                  |            |           |                 |           |            |  |  |

 

The condensed statements of income for MONACA for the years ended December 31, 2007, 2008 and 2009 are as follows:

 
| ** **                                      | ** ** | **2007** | ** ** | **2008** | ** ** | **2009**  | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Net   sales                                     |       | Ps.      | 3,566,386  |     | Ps.        | 8,624,161 |       | Ps. | 8,956,322 |   |
| Percentage   from consolidated net sales        |       | 10.0     | %          | 19.3     | %          | 17.7      | %          |
|                                            |       |     |       |     |       |      |       |
| Operating   income                              |       | 92,398   |       | 834,679  |       | 959,874   |       |
| Percentage   from consolidated operating income |       | 4.9      | %          | 25.5     | %          | 25.2      | %          |
|                                            |       |     |       |     |       |      |       |
| Net   income                                    |       | 210,587  |       | 870,443  |       | 794,440   |       |
| Percentage   from consolidated net income       |       | 8.9      | %          | —   |       | 37.6      | %          |
|                                                 |            |          |            |          |            |           |            |  |  |  |

 

The condensed balance sheets for MONACA as of December 31, 2008 and 2009 and the condensed statements of income for the years ended December 31, 2007, 2008 and 2009 do not reflect the impact of the devaluation in Venezuela as explained in section A above.

 

In addition, the preceding information does not include DEMASECA, our remaining Venezuelan subsidiary, since DEMASECA was not mentioned in the Expropriation Decree.  The majority interest in the total net assets of DEMASECA, as of December 31, 2009, was Ps. 269,697.

 

**21.****         ****DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP**

 

The Company’s consolidated financial statements are prepared in accordance with Mexican FRS, which differ in certain significant respects from U.S. GAAP.

 

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168, *The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162*. This standard establishes the FASB Accounting Standards Codification (Codification or ASC) as the single source of authoritative U.S. GAAP, superseding all previously issued authoritative guidance. All references to pre-Codification in these financial statements are replaced with the current Codification titles.

 

The principal differences between Mexican FRS and U.S. GAAP and the effect on consolidated net income and consolidated stockholders’ equity are presented below, with an explanation of the adjustments.

 

F-53

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**21.****         ****DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

** **
| ** **                                                                      | ** ** | **For the years ended December 31,** | ** **      |
|---------------------------------------------------------------------------------|------------|-------------------------------------------|-----------------|
| ** **                                                                      | ** ** | **2007**                                  | ** **      | **2008** | ** ** | **2009** | ** ** |
| **Reconciliation of net income:**                                |       |                                      |            |   |   |   |   |   |   |   |
| **Net income (loss) attributable to Gruma, S.A.B.   de C.V. under Mexican FRS** |       | Ps.                                       | 2,233,321       |   | Ps. |  (12,339,758 | ) | Ps. | 1,528,920 |   |
| U.S.   GAAP adjustments:                                                        |       |                                      |            |   |   |   |   |
| Depreciation   expense (Note 21-B)                                              |       | (71,722                                   | )               | (78,909 | ) | (91,367 | ) |
| Impairment   loss in the carrying value of idle assets (Note 21-B)              |       | 20,838                                    |            | 18,334 |   | — |   |
| Pre-operating   expenses and other deferred costs (Note 21-C)                   |       | 10,461                                    |            | (229 | ) | 675 |   |
| Capitalized   comprehensive financing costs (Note 21-D)                         |       | 3,346                                     |            | 3,346 |   | — |   |
| Sale-leaseback   transaction (Note 21-E):                                       |       |                                      |            |   |   |   |   |
| Interest   expense                                                              |       | (8,976                                    | )               | (2,667 | ) | — |   |
| Rental   and depreciation expense, net                                          |       | 590                                       |            | 3,431 |   | 6,958 |   |
| Deferred   income taxes (Note 21-G)                                             |       | (177,829                                  | )               | 32,843 |   | 225,007 |   |
| Deferred   employees’ statutory profit sharing (Note 21-K)                 |       | (609                                      | )               | 2,806 |   | 7,222 |   |
| Net   gain from sale of associated company’s shares (Note 21-P)            |       | 13,281                                    |            | — |   | — |   |
| Effect   of U.S. GAAP adjustments on equity method investee (Note 21-P)         |       | (18,885                                   | )               | (53,310 | ) | 129,750 |   |
| Negative   goodwill (Note 21-H):                                                |       |                                      |            |   |   |   |   |
| Depreciation   expense                                                          |       | 61,793                                    |            | 61,793 |   | 61,793 |   |
| Extinguishment   of debt (Note 21-J)                                            |       | 14,205                                    |            | 14,251 |   | 14,251 |   |
| Debt   issuance costs (Note 21-J)                                               |       | 1,148                                     |            | 1,033 |   | 85,227 |   |
| Labor   obligations (Note 21-K)                                                 |       | —                                    |            | 13,051 |   | (319 | ) |
| Fair   value measurements (Note 21-L)                                           |       | —                                    |            | 537,749 |   | (536,572 | ) |
| Effects   of inflation of foreign subsidiaries (Note 21-M)                      |       | —                                    |            | — |   | 246,697 |   |
| Monetary   position loss resulting from U.S. GAAP adjustments                   |       | (9                                        | )               | — |   | — |   |
| Total   U.S. GAAP adjustments                                                   |       | (152,368                                  | )               | 553,522 |   | 149,322 |   |
| Noncontrolling   interest (Note 21-A)                                           |       | 26,809                                    |            | 7,296 |   | (132,677 | ) |
| **Net income (loss) attributable to Gruma, S.A.B.   de C.V. under U.S. GAAP**   |       | Ps.                                       |  2,107,762 |   | Ps. | (11,778,940 | ) | Ps. |  1,545,565 |   |
| **Basic and diluted earnings (loss) per share (in   pesos)**                    |       | Ps.                                       |  4.37      |   | Ps. |  (20.85 | ) | Ps. | 2.74 |   |
| **Weighted average shares outstanding (thousands)**                             |       | 482,506                                   |            | 564,853 |   | 563,651 |   |

 

F-54

----

Table of Contents

 

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

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexican pesos, except where otherwise indicated)**

 

**21.****         ****DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 
| ** **                                                                        | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                        | ** ** | **2008**                    | ** ** | **2009** | ** ** |
| **Reconciliation of stockholders’ equity:**                   |       |                        |       |   |   |   |   |
| **Stockholders’ equity under Mexican FRS**                                   |       | Ps.                         | 9,281,550  |   | Ps. | 11,811,563 |   |
| U.S.   GAAP adjustments:                                                          |       |                        |       |   |   |
| Property,   plant and equipment (Note 21-B)                                       |       | 850,619                     |       | 759,252 |   |
| Pre-operating   expenses and other deferred costs (Note 21-C)                     |       | (675                        | )          | — |   |
| Sale-leaseback   transaction (Note 21-E)                                          |       | (122,990                    | )          | (109,527 | ) |
| Goodwill   arising from acquisitions of entities under common control (Note 21-F) |       | (172,951                    | )          | (172,951 | ) |
| Deferred   income taxes (Note 21-G)                                               |       | 92,172                      |       | 438,764 |   |
| Deferred   employees’ statutory profit sharing (Note 21-K)                   |       | (48,495                     | )          | (40,410 | ) |
| Equity   method investee (Note 21-P)                                              |       | 33,801                      |       | (233,679 | ) |
| Negative   goodwill (Note 21-H)                                                   |       | (661,061                    | )          | (599,269 | ) |
| Goodwill   and indefinite-lived intangible assets (Note 21-I)                     |       | 190,588                     |       | 190,588 |   |
| Extinguishment   of debt (Note 21-J)                                              |       | (228,013                    | )          | (213,762 | ) |
| Debt   issuance costs (Note 21-J)                                                 |       | 309                         |       | 85,537 |   |
| Labor   obligations (Note 21-K)                                                   |       | (87,863                     | )          | (96,810 | ) |
| Fair   value measurements (Note 21-L)                                             |       | 551,735                     |       | 1,177 |   |
| Effects   of inflation of foreign subsidiaries (Note 21-M)                        |       | —                      |       | (874,310 | ) |
| Total   U.S. GAAP adjustments                                                     |       | 397,176                     |       | (865,400 | ) |
| **Stockholders’ equity under U.S. GAAP**                                     |       | Ps.                         | 9,678,726  |   | Ps. | 10,946,163 |   |

 

A summary of the Company’s statement of changes in stockholders’ equity with balances determined under U.S. GAAP is as follows:

 
| ** **                                                              | ** ** | **2008**    | ** ** | **2009**  | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|-----------|------------|
| Beginning balance                                                       |       | Ps.         | 18,145,722 |      | Ps.        | 9,678,726 |   |
| Stock   issuance                                                        |       | 2,111,060   |       | —    |       |
| Net   purchases and sales of Company’s common stock                |       | (11,561     | )          | —    |       |
| Effect   due on tax consolidation                                       |       | —      |       | (2,475    | )          |
| Cumulative   effect of change in accounting for deferred profit sharing |       | (296,027    | )          | —    |       |
| Derivative   financial instruments                                      |       | (131,699    | )          | 89,909    |       |
| Equity   ownership from associated company                              |       | (18,924     | )          | (201,139  | )          |
| Labor   obligation adjustments (net of income tax)                      |       | (23,627     | )          | (4,549    | )          |
| Foreign   currency translation adjustments                              |       | 949,769     |       | (438,536  | )          |
| Other   transactions related to comprehensive income                    |       | —      |       | (10,981   | )          |
| Net   (loss) income for the year                                        |       | (11,778,940 | )          | 1,545,565 |       |
| Noncontrolling   interest (Note 21-A)                                   |       | 732,953     |       | 289,643   |       |
| Ending   balance                                                        |       | Ps.         | 9,678,726  |      | Ps.        | 10,946,163 |   |

 

F-55

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

On April 30, 2009, under MFRS theCompany’s stockholders resolved to reclassify the amount of additional paid-incapital to retained earnings. For U.S. GAAP purposes, a deficitreclassification of any nature is considered to be a quasi-reorganization, as aresult, a company may not reclassify or eliminate a deficit in retainedearnings unless all requisite conditions for a quasi-reorganization aresatisfied. The Company does not comply with all the requisite conditions andconsequently, such reclassification was reversed.  As a result of theaforementioned, the stockholders’ equity as of December 31, 2008 and 2009,after U.S. GAAP adjustments described above is as follows:

 
| ** **                                                    | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **2008**                    | ** ** | **2009** | ** ** |
| Capital stock                                                 |       | Ps.                         | 6,972,425  |   | Ps. | 6,972,425 |   |
| Additional  paid-in capital                                   |       | 2,044,014                   |       | 2,044,014 |   |
| Retained  earnings                                            |       | (4,916,576                  | )          | (3,585,606 | ) |
| Accumulated  other comprehensive income                       |       | 1,816,937                   |       | 1,463,761 |   |
| Equity  attributable to Gruma, S.A.B. de C.V. under U.S. GAAP |       | 5,916,800                   |       | 6,894,594 |   |
| Equity  attributable to noncontrolling interest               |       | 3,761,926                   |       | 4,051,569 |   |
| **Total stockholders’ equity under U.S. GAAP**           |       | Ps.                         | 9,678,726  |   | Ps. | 10,946,163 |   |

 

A)               NONCONTROLLING INTEREST

 

Under U.S. GAAP, starting January 1, 2009, the Company adopted theFASB’s revised standard on accounting for noncontrolling interests inconsolidated financial statements included in ASC 810 — Consolidation, whichclarifies that a noncontrolling interest (commonly referred to previously asminority interest) in a subsidiary is an ownership interest in the consolidatedentity that should be reported as equity in the consolidated financialstatements. It also states that changes in a parent’s ownership interest whilethe parent retains its controlling financial interest in its subsidiary areaccounted for consistently, as equity transactions.  In addition, when asubsidiary is deconsolidated, any retained noncontrolling equity investment inthe former subsidiary should be initially measured at fair value.  TheFASB also issued Accounting Standards Update 2010-02 “Accounting and Reportingfor Decreases in Ownership of a Subsidiary Consolidation”, which clarifies thatASC 810 also applies to the disposal of businesses that are not subsidiariesand clarifies certain implementation issues. New guidance is required to beapplied prospectively except for the presentation and disclosure requirements.The Company has retrospectively applied the presentation and disclosurerequirements of these standards to all periods. This practice is consistentwith Mexican FRS

 

B)                 PROPERTY, PLANT AND EQUIPMENT

 

Until December 31, 2007, under Mexican FRS, the Company used aspecific index, which contemplated inflation and currency exchange movements inthe restatement and related depreciation expense for machinery and equipment offoreign origin. For U.S. GAAP purposes, the use of the specific index, whichcontemplates currency exchange variations, is not in accordance with thehistorical cost concept nor does it present financial information in a constantreporting currency.

 

Upon the adoption of MFRS B-10, starting January 1, 2008, theCompany ceased the use of a specific index for the restatement of machinery andequipment of foreign origin. Therefore, the U.S. GAAP adjustments refer solelyto the accumulated effect as of December 31, 2007. Under U.S. GAAP, theadjustment for restating fixed assets of foreign origin utilizing the MexicanNCPI as of December 31, 2008 and 2009 increases stockholders’ equity byPs.937,987 and Ps.877,110, respectively.

 

F-56

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

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, 2008 and2009 by Ps.236,013 and Ps.266,503, 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, 2008 and 2009 by Ps.148,645.

 

C)                 PRE-OPERATING EXPENSES AND OTHER DEFERRED COSTS

 

As of December 31, 2002, under Mexican FRS, pre-operating 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 expensesincurred during the development stage are capitalized, whereas expensesidentified as research are expensed as incurred. Additionally, thepre-operating expenses capitalized until January 1, 2003 continue to beamortized using the straight-line method over a period not to exceed 12 years.Under U.S. GAAP, such expenses should be treated as period expenses.

 

The U.S. GAAP equity adjustment of Ps.675 decreases intangible assetspresented in the balance sheets as of December 31, 2008. As of December 31,2009 amount was fully amortized.

 

D)               COMPREHENSIVE FINANCING COSTS

 

Under Mexican FRS, comprehensive financing costs, including interestexpense, foreign exchange gains or losses and monetary position of the relateddebt for major construction projects, are capitalized as part of the assetsduring the construction period.  UnderU.S. GAAP, monetary position and foreign exchange gains and losses on U.S.dollar or other stable currency borrowings are excluded from capitalizedinterest. For the years ended December 31, 2007 and 2008, the net incomereconciliation adjustment of Ps.3,346 decreases depreciation expense. There isno net income reconciliation adjustment for the year 2009.

 

E)                  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, ASC 840 — *Leases*, such atransaction 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, under both Mexican FRS and U.S.GAAP it is now being accounted for as a fixed asset and the adjustment toproperty, plant and equipment decrease stockholders’ equity as of December 31,2008 and 2009 by Ps.122,990 and Ps.109,527, respectively, as a result of a higher accumulated depreciation forU.S. GAAP purposes.

 

F-57

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

F)                  GOODWILL ARISING FROM ACQUISITIONS OF ENTITIES UNDERCOMMON CONTROL

 

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, 2008 and 2009. There isno net income reconciliation adjustment in 2007, 2008 and 2009, since theCompany ceased amortizing goodwill under Mexican FRS with the adoption of MFRSB-7.

 

G)                 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 ASC 740 - *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 the amount for financial reporting over the taxbasis of the investment in GFNorte. Starting January 1, 2008, with theadoption of new MFRS D-4, the Company recognized this deferred tax liabilityunder Mexican FRS.

 

Under thecomprehensive asset and liability method of ASC 740, deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to 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 2-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,** | ** **      |
|------------|------------|-----------------------------------|-----------------|
| ** ** | ** ** | **2007**                          | ** **      | **2008** | ** ** | **2009** | ** ** |
| Domestic   |       | Ps.                               |  2,151,090 |   | Ps. | (12,919,047 | ) | Ps. | 675,530 |   |
| Foreign    |       |                              | 1,153,229       |   |   | 1,535,283 |   |   | 2,543,160 |   |
|       |       | Ps.                               | 3,304,319       |   | Ps. | (11,383,764 | ) | Ps. | 3,218,690 |   |

 

F-58

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

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,** | ** ** |
|---------------------|------------|-----------------------------------|------------|
| ** **          | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| Current:            |       |                              |       |   |   |   |   |
| Domestic  federal   |       | Ps.                               | 390,074    |   | Ps. | 97,307 |   | Ps. | 93,863 |   |
| Foreign  federal    |       |                              | 205,682    |   |   | 164,006 |   |   | 886,480 |   |
| Foreign  state      |       |                              | 31,919     |   |   | 43,440 |   |   | 84,853 |   |
|                |       | Ps.                               | 627,675    |   | Ps. | 304,753 |   |   | 1,065,196 |   |
| Deferred:           |       |                              |       |   |   |   |   |   |   |   |
| Domestic  federal   |       | Ps.                               | 265,820    |   | Ps. | (310,079 | ) | Ps. | 206,165 |   |
| Foreign  federal    |       |                              | 30,358     |   |   | 453,713 |   |   | (159,270 | ) |
| Foreign  state      |       |                              | 1,857      |   |   | (13,692 | ) |   | (3,745 | ) |
|                |       | Ps.                               | 298,035    |   | Ps. | 129,942 |   |   | 43,150 |   |
| Total  income taxes |       | Ps.                               | 925,710    |   | Ps. | 434,695 |   | Ps. | 1,108,346 |   |

 

The tax effects oftemporary differences that gave rise to significant portions of the deferredtax assets and liabilities at December 31, 2008 and 2009, were as follows:

 
| ** **                                                  | ** ** | **2008**   | ** **    | **2009**   | ** ** |
|-------------------------------------------------------------|------------|------------|---------------|------------|------------|
| **Deferred  tax assets:**                                   | ** ** | ** ** | ** **    | ** ** | ** ** |
| Net  operating loss carryforwards and other tax credits (a) |       | Ps.        |  514,303 |       | Ps.        |  356,499 |   |
| Accrued  liabilities                                        |       | 192,723    |          | 423,029    |       |
| Intangible  assets (b)                                      |       | 17,539     |          | (12,949    | )          |
| Other                                                       |       | 229,295    |          | 285,599    |       |
| Total  gross deferred tax assets                            |       | 953,860    |          | 1,052,178  |       |
|                                                        |       |       |          |       |       |
| **Deferred tax liabilities:**                               |       |       |          |       |       |
| Property,  plant and equipment, net (c)                     |       | 2,197,436  |          | 1,813,970  |       |
| Inventories                                                 |       | 154,338    |          | 127,979    |       |
| Investment  in partnership and equity method investee       |       | 909,369    |          | 902,902    |       |
| Other  assets                                               |       | 156,853    |          | 244,808    |       |
| Total  gross deferred tax liabilities                       |       | 3,417,996  |          | 3,089,659  |       |
|                                                        |       |       |          |       |       |
| Net  deferred tax liability under U.S. GAAP                 |       | 2,464,136  |          | 2,037,481  |       |
| Net  deferred tax liability under Mexican FRS               |       | 2,556,308  |          | 2,476,245  |       |
| Adjustment  for U.S. GAAP                                   |       | Ps.        |  (92,172 | )          | Ps.        |  (438,764 | ) |

 

F-59

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

----

(a)          ASC 740 permits a deferred tax asset tobe recorded if the asset meets a more likely than not standard (i.e. more than50 percent likely) that the asset will be realized. Realization of the Company’snet operating loss carryforwards and other tax credits depends on the Company’sability to generate sufficient future taxable income of the appropriatecharacter within carryforward periods of the jurisdictions in which the netoperating losses and other tax credits were incurred. During 2008 a significantincrease in net operating loss carryforwards existed, arising from loss ofderivative financial instruments (See Note 14-B).  As of December 31, 2008 and 2009, thisitem includes a valuation allowance of Ps. 2,859,739 and Ps.3,721,731 since nosufficient evidence is available that these tax loss carryforwards will berealized.

(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:

 
| ** **              | ** ** | **2008**  | ** **      | **2009**  | ** ** |
|-------------------------|------------|-----------|-----------------|-----------|------------|
| Current:                |       |      |            |      |       |
| Deferred  tax asset     |       | Ps.       | (397,416        | )         | Ps.        | (681,521 | ) |
| Deferred  tax liability |       | 154,338   |            | 127,979   |       |
|                    |       | (243,078  | )               | (553,542  | )          |
| Non-current:            |       |      |            |      |       |
| Deferred  tax asset     |       | (556,444  | )               | (370,657  | )          |
| Deferred  tax liability |       | 3,263,658 |            | 2,961,680 |       |
|                    |       | 2,707,214 |            | 2,591,023 |       |
| Total                   |       | Ps.       |  2,464,136 |      | Ps.        |  2,037,481 |   |

 

The provision for incometax on a U.S. GAAP basis was as follows:

 
| ** ** | ** ** | **2007** | ** **       | **2008** | ** ** | **2009**       | ** ** |
|------------|------------|----------|------------------|----------|------------|----------------|------------|
| ** ** |       |     |             |     |       |           |       |
| Current    |       | Ps.      | (627,675         | )        | Ps.        |  (304,753 | )          | Ps. | (1,065,196 | ) |
| Deferred   |       | (475,864 | )                | (97,099  | )          | 181,857        |       |
|       |       | Ps.      |  (1,103,539 | )        | Ps.        |  (401,852 | )          | Ps. |  (883,339 | ) |

 

ASC 740 — *Income Taxes* prescribes a comprehensive model for therecognition, measurement, financial statement presentation and disclosure ofuncertain tax positions taken or expected to be taken in a tax return. This standardprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. The Companyclassifies income tax-related interest and penalties as income taxes in thefinancial statements. This standard has no significant effect on the Company’soverall financial position or results of operations.

 

F-60

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

As of December 31,2008 and 2009, the Company presented a liability for unrecognized tax benefitsof Ps. 121,801 and Ps.90,418, respectively, which included interest andpenalties. The following table presents a reconciliation of the Company’sunrecognized tax benefits, excluding interest and penalties (primarily relatedto the U.S. operations):

 
| ** **                                                    | ** ** | **2008** | ** **    | **2009** | ** ** |
|---------------------------------------------------------------|------------|----------|---------------|----------|------------|
| Unrecognized  tax benefits at beginning of year               |       | Ps.      |  83,101  |     | Ps.        |  111,276 |   |
| Translation  adjustment of the initial balance                |       | 22,145   |          | (6,114   | )          |
| Increase  as result of tax position taken in the year         |       | 5,325    |          | 9,044    |       |
| Increase  as a result of tax positions taken in prior periods |       | 18,767   |          | —   |       |
| Settlements                                                   |       | (5,947   | )             | —   |       |
| Reductions  due to a lapse of the statue of limitations       |       | (12,115  | )             | (28,754  | )          |
| Unrecognized  tax benefits at end of year                     |       | Ps.      |  111,276 |     | Ps.        |  85,452 |   |

 

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. 6,203,Ps. 10,525 and Ps.4,966 related to unrecognized tax benefits for fiscal 2007,2008 and 2009, respectively.

 

The following yearsremain open to examination and adjustment by the Company’s major taxjurisdictions: United States — 2005 and all following years; Mexico — 2005 andall following years; and Venezuela — 2006 and all following years.

 

H)                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, until December 31,2008, the excess of fair value of acquired net assets over cost was allocatedto the book value of the non-monetary assets acquired. Once the book value wasreduced to zero, any unallocated amounts were recorded in earnings. Starting January 1,2009, for new acquisitions, the acquirer shall reassess whether it hascorrectly identified all of the assets acquired and all of the liabilitiesassumed and shall recognize any additional assets or liabilities that areidentified in that review. Additionally, the acquirer shall review theprocedures used to measure the amounts to be recognized at the acquisition datefor all of the following: (a) the identifiable assets acquired andliabilities assumed, (b) the noncontrolling interest in the acquiree, ifany, (c) for a business combination achieved in stages, the acquirer’spreviously held equity interest in the acquiree, and (d) the considerationtransferred. If the excess remains after applying the above requirements, theacquirer shall recognize the resulting gain in earnings on the acquisitiondate.

 

As of December 31,2008 and 2009, the U.S. GAAP equity adjustments of Ps. 661,061 and Ps.599,269respectively, decreased the net fixed assets in the same amounts.

 

F-61

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

I)                     GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS

 

Under U.S. GAAP,effective January 1, 2002, the Company adopted the provisions of ASC 350 —*Intangibles — Goodwill and Other*. UnderASC 350, goodwill and indefinite-lived intangible assets are no longeramortized but are reviewed for impairment on an annual basis at the reportingunit 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. Starting January 1, 2004, under Mexican FRS goodwillshould no longer be amortized, but subject to annual impairment tests at thecash generating unit level. Accordingly, goodwill amortization ceased in 2002for U.S. GAAP and in 2004 for Mexican FRS.

 

The U.S. GAAP equityadjustment of Ps.190,588 increased goodwill in Ps.187,897 and intangible assetsin Ps.2,691 as of December 31, 2008 and 2009, as a result of the aboveitems.

 

J)                    EXTINGUISHMENT OF DEBT

 

In December 2004,the Company issued perpetual notes for a total of Ps.4,149,000 (U.S. $300million) which pay interest quarterly at a 7.75% annual rate. The proceeds wereused mainly to repay 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 Mexican FRS, this premium was recognized inintangible assets as debt issuance costs of the perpetual notes and amortizedusing the straight-line method over a period of 20 years.

 

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.

 

As mentioned in Note 9,during 2009 the Company refinanced the U.S.$197 million Syndicated Creditfacility and the Ps.3,367,000 Bancomext loan. The Company incurred debtissuance costs of Ps.102,259 related to the modified debt instruments. At thedate of refinancing, the Company had Ps.11,633 of unamortized debt issuancecosts related to the old debt. Under Mexican FRS, the unamortized costs relatedto the old debt will continue to be amortized throughout the maturity of thenew debt as it has been considered a refinancing of the old debt under MFRSC-9. Debt issuance costs incurred with the issuance of the modified debtinstruments have been expensed. Under U.S. GAAP, the debt issuance costs ofPs.102,259 related to the modified debt instruments were capitalized andtogether with the unamortized debt issuance costs related to the old debt willbe amortized during the term of the modified debt instruments using theinterest method.

 

F-62

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

K)                LABOR OBLIGATIONS

 

Benefits upon retirementand employment termination

 

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 ASC 715 *— Compensation —Retirement Benefits*. Under ASC 715, the Company recognized as acomponent of other comprehensive income the gains or losses and prior servicecosts or credits that arise during the period but are not recognized ascomponents of net periodic benefit cost of the period. As of December 31,2008 and 2009, the U.S. GAAP equity adjustment of Ps.87,863 and Ps.96,810,respectively, increased Other liabilities.

 

The disclosures accordingto ASC 715 are included below:

 

For the years ended December 31,2007, 2008 and 2009, the net periodic cost for the Company’s plans wascomprised of:

 
| ** **             | ** ** | **2007** | ** **   | **2008** | ** ** | **2009**     | ** ** |
|------------------------|------------|----------|--------------|----------|------------|--------------|------------|
| Service  cost          |       | Ps.      | 11,291       |     | Ps.        |  13,627 |       | Ps. |  15,020 |   |
| Interest  cost         |       | 13,189   |         | 16,373   |       | 18,840       |       |
| Return  on plan assets |       | (2,807   | )            | (3,140   | )          | (2,706       | )          |
| Settlement  loss       |       | —   |         | —   |       | 23,304       |       |
| Net  amortization      |       | 2,168    |         | 5,718    |       | 6,614        |       |
| Net  cost for the year |       | Ps.      |  23,841 |     | Ps.        |  32,578 |       | Ps. |  61,072 |   |

 

As of December 31,2008 and 2009, the status of the plan was as follows:

 
| ** **                                                                  | ** ** | **2008** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Actuarial  present value of accumulated benefit obligations:                |       |     |       |     |       |
| Vested  benefit obligation                                                  |       | Ps.      | (144,155   | )        | Ps.        | (154,363 | ) |
| Non-vested  benefit obligation                                              |       | (47,951  | )          | (63,028  | )          |
|                                                                        |       | (192,106 | )          | (217,391 | )          |
| Excess  of projected benefit obligation over accumulated benefit obligation |       | (41,987  | )          | (41,650  | )          |
| Projected  benefit obligation                                               |       | (234,093 | )          | (259,041 | )          |
| Plan  assets at fair value (trust funds)                                    |       | 31,753   |       | 35,750   |       |
| Labor  obligations liability as of year-end                                 |       | Ps.      | (202,340   | )        | Ps.        | (223,291 | ) |

 

Forthe years ended December 31, 2008 and 2009, the changes in projectedbenefit obligation and plan assets (trust funds) are summarized as follows:

 
| ** **                                         | ** ** | **2008** | ** **    | **2009** | ** ** |
|----------------------------------------------------|------------|----------|---------------|----------|------------|
| Projected  benefit obligation at beginning of year |       | Ps.      |  162,243 |     | Ps.        |  234,093 |   |
| Service  cost                                      |       | 13,627   |          | 15,020   |       |
| Interest  cost                                     |       | 16,373   |          | 18,840   |       |
| Benefit  payments                                  |       | (37,760  | )             | (49,093  | )          |
| Settlements                                        |       | —   |          | (5,218   | )          |
| Actuarial  loss                                    |       | 79,610   |          | 45,399   |       |
| Projected  benefit obligation at end of year       |       | Ps.      |  234,093 |     | Ps.        |  259,041 |   |

 

F-63

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands of Mexicanpesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 
| ** **                                      | ** ** | **2008** | ** **   | **2009** | ** ** |
|-------------------------------------------------|------------|----------|--------------|----------|------------|
| Fair  value of plan assets at beginning of year |       | Ps.      | 34,886       |     | Ps.        |  31,753 |   |
| Return  on plan assets                          |       | (2,858   | )            | 4,344    |       |
| Benefit  payments                               |       | (275     | )            | (347     | )          |
| Fair  value of plan assets at end of year       |       | Ps.      |  31,753 |     | Ps.        |  35,750 |   |

 

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 as follows:

 
| ** **                                   | ** ** | **2008** | ** ** | **2009** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Discount  rate                               |       | 9.00     | %          | 9.00     | %          |
| Future  increase rate in compensation levels |       | 4.50     | %          | 4.50     | %          |
| Estimated  return rate on plan assets        |       | 9.00     | %          | 9.00     | %          |

 

The Company’sweighted average asset allocation by asset category as of December 31 wasas follows:

 
| ** **             | ** ** | **2008** | ** ** | **2009** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Equity  securities     |       | 59       | %          | 50       | %          |
| Fixed  rate securities |       | 41       | %          | 50       | %          |
| Total                  |       | 100      | %          | 100      | %          |

 

The following tablesummarizes the Company’s plan assets measured at fair value at December 31,2009:

 
| ** **                   | ** ** | **Quoted prices in  active markets   for identical   assets  (Level 1)** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------------|------------|
| Fixed  income securities (1) |       | Ps.                                                                      | 17,876     |   |
| Equity  securities (2)       |       | 17,874                                                                   |       |
| Total                        |       | Ps.                                                                      | 35,750     |   |

 

----

(1) Fixed incomesecurities are comprised of investments funds shares, focused on investments infixed income securities, that are valued at the quoted market prices multipliedby the number of shares owned.

 

(2) Equitysecurities consist of investments in common stock of listed entities, which arevalued using quoted market prices multiplied by the number of shares owned.

 

The Company does not haveany plan assets classified as Level 2 (significant other observable inputs) orLevel 3 (unobservable inputs). The description of the three hierarchy levelsfor measuring fair value is disclosed in Note 21-L.

 

F-64

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**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** | ** ** |
|------------|------------|------------|------------|
| 2010       |       | Ps.        | 51,829     |   |
| 2011       |       | 36,288     |       |
| 2012       |       | 30,942     |       |
| 2013       |       | 28,460     |       |
| 2014       |       | 31,386     |       |
| Thereafter |       | 170,635    |       |
|            |            |            |            |  |

 

Included in accumulatedother comprehensive income at December 31, 2008 and 2009 are the followingamounts that have not yet been recognized in net periodic pension cost:

 
| ** **             | ** ** | **2008**                        | ** **   | **2009**                        | ** ** |
|------------------------|------------|---------------------------------|--------------|---------------------------------|------------|
| Unamortized  items (*) |       | Ps.                             |  62,567 |                            | Ps.        |  67,916 |   |
|                   |       | (net of incometax of Ps.38,347) |         | (net of incometax of Ps.41,626) |       |
|                        |            |                                 |              |                                 |            |  |  |

 

----

(*)Comprised of actuarial losses and net transition liability.

 

The estimated amount ofcumulative net gain that is expected to be amortized from accumulated othercomprehensive loss into net periodic pension cost over the next fiscal year isPs.6,087.

 

F-65

----

Tableof Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressed in thousands ofMexican pesos, except where otherwise indicated)**

 

**21.****                              ****DIFFERENCES BETWEEN MEXICAN FRSAND 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, 2007   |       | Ps.            | (46,072        | )              | Ps.        |  (12,900 | )          | Ps. |  (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   |       | (100,914       | )              | (38,347        | )          | (62,567       | )          |
|                                                                |       |           |           |           |       |          |       |
| Reclassification  adjustment for items included in 2009 net income: |       |           |           |           |       |          |       |
| Actuarial  (gains) losses                                           |       | 6,545          |           | 2,487          |       | 4,058         |       |
| Transition  (asset) liability                                       |       | 68             |           | 26             |       | 42            |       |
| Enhancement  to the plan                                            |       | 1              |           | —         |       | 1             |       |
|                                                                |       |           |           |           |       |          |       |
| Items  arising during 2009:                                         |       |           |           |           |       |          |       |
| Actuarial  (gains) losses                                           |       | (43,763        | )              | (16,630        | )          | (27,133       | )          |
| Settlements                                                         |       | 28,522         |           | 10,838         |       | 17,684        |       |
|                                                                |       |           |           |           |       |          |       |
| Accumulated  other comprehensive income at December 31, 2009   |       | Ps.            |  (109,541 | )              | Ps.        |  (41,626 | )          | Ps. | (67,916 | ) |

 

F-66

----

 

 

 

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

Deferredemployees’ statutory profit sharing (ESPS)

 

Asstated in Note 10-B, under Mexican FRS, the Company adopted the provisions ofrevised MFRS D-3 and deferred ESPS was recognized starting January 1, 2008based on the comprehensive asset and liability method, which is consistent withASC 740. For U.S. GAAP purposes, the Company has historically recognizeddeferred ESPS, using the comprehensive asset and liability method; however,book values were not restated for the effects of inflation, since per theapplicable tax regulation the effects of inflation are not considered in theESPS calculation. The revised MFRS D-3 requires full application of Mexican FRSto determine the book values of the ESPS calculation and therefore, inflationeffects are considered in the ESPS calculation. In order to align U.S. GAAP andMFRS accounting for this item, the Company has concluded it would be preferableto change 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.

 

L)             FAIR VALUE MEASUREMENTS

 

During 2008, under U.S. GAAP, the Company adopted ASC820 — *Fair Value Measurements and Disclosures*.This standard defines fair value, establishes a consistent framework formeasuring fair value and expands disclosure requirements about fair-valuemeasurements. ASC 820, among other things, requires the Company to maximize theuse of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value.

 

ASC 820 defines fair value as the price that would bereceived to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. It clarifiesthat fair value should be based on the assumptions market participants woulduse when pricing an asset or liability and establishes a fair value hierarchythat prioritizes the information used to develop those assumptions. The fairvalue hierarchy gives the highest priority to quoted prices available in activemarkets (i.e., observable inputs) and the lowest priority to data lackingtransparency (i.e., unobservable inputs). Additionally, this standard requiresan entity to consider all aspects of nonperformance risk, including the entity’sown credit standing, when measuring the fair value of a liability.

 

Fair-Value Hierarchy

 

ASC 820 establishes a three-level hierarchy to be usedwhen measuring and disclosing fair value. An instrument’s categorization withinthe fair value hierarchy is based on the lowest level of significant input toits valuation. Following is a description of the three hierarchy 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.

 

F-67

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican 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** | ** **    |
|-----------------------------------------------------------------------|------------|----------------------------|---------------|
| ** **                                                            | ** ** | **Level 1**                | ** **    | **Level 2** | ** ** | **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 |   |

 
| ** **                                                            | ** ** | **December 31, 2009** | ** **   |
|-----------------------------------------------------------------------|------------|----------------------------|--------------|
| ** **                                                            | ** ** | **Level 1**                | ** **   | **Level 2** | ** ** | **Level 3** | ** ** | **Total   carrying   value in the   consolidated   balance sheet** | ** ** |
| *Assets:*                                                             |       |                       |         |   |   |   |   |   |   |
| Derivative financial instruments — corn and other  raw materials |       | Ps.                        |  55,749 |   | Ps. |  — |   | Ps. |  — |   | Ps. |  55,749 |   |
|                                                                  |       |                       |         |   |   |   |   |   |   |
| *Liabilities:*                                                        |       |                       |         |   |   |   |   |   |   |
| Derivative financial instruments — other raw  materials          |       | Ps.                        |  4,802  |   | Ps. |  — |   | Ps. |  — |   | Ps. |  4,802 |   |
| Derivative financial instruments — interest rate                 |       | —                     |         |   |   | 5,956 |   | 5,956 |   |
|                                                                  |       | Ps.                        |  4,802  |   | Ps. |  — |   | Ps. |  5,956 |   | Ps. |  10,758 |   |

 

F-68

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

The adoption of ASC 820 didnot change the Company’s previous accounting for financial assets andliabilities, but had an impact of Ps.551,735 and Ps.1,177 as equity adjustmentas of December 31, 2008 and 2009, respectively, when the Company’s owncredit risk was considered in the determination of the fair value of thederivative financial instruments.

 

In March 2009 theCompany and its derivative counterparties agreed to terminate the derivativeinstruments, fixed the total amount of obligations payable by the Company andconvert this amount into a secured term loan. In October 2009 the Companycompleted the conversion of U.S.$738.3 million that it owed to severalfinancial institutions under its terminated foreign exchange derivativeinstruments, into medium and long-term loans. Therefore, the U.S. GAAPadjustment to the fair value of the existing exchange rate derivative financialinstruments as of December 31, 2008 was reversed in 2009.

 

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.

 

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 and 2009 the Company has not classified any assets or liabilities as Level2.

 

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 was 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 table below includesa roll-forward of the balance sheet amounts for the years ended December 31,2008 and 2009 for financial instruments classified by the Company within Level3 of the valuation hierarchy. When a determination is made to classify afinancial instrument within Level 3, it is due to the use of significantunobservable inputs. However, Level 3 financial instruments typically include,in addition to the unobservable or level 3 components, observable components(that is, components that are actively quoted and can be validated to externalsources); accordingly, the gains and losses in the table below include changesin fair value due, in part, to observable factors that are part of thevaluation methodology:

 

F-69

----

Table of Contents

** **

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 
| 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 |   |
| Realized  and unrealized loss                |   | 1,022,897   |             |
| Net  settlements (paid) received             |   | (11,833,044 | )                |
| Ending  balance as of December 31, 2009 |   | Ps.         |  5,956      |   |

 

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. The fair values for the rest of thefinancial instruments are disclosed in Note 17-A.

 

M)        EFFECTS OF INFLATION OF FOREIGN SUBSIDIARIES

 

Due to the adoption ofMFRS B-10 and MFRS B-15, the Company ceased the recognition of effects ofinflation, except for foreign subsidiaries considered inflationary (Venezuelaand Central America). Therefore, the Company ceased to qualify for theindexation accommodation under Item 17 c (2) iv, effective January 1,2008. As a result, the Company is reconciling the effect of inflation for 2009of foreign subsidiaries for U.S. GAAP purposes. Inflation effects generatedduring 2008 were not material.

 

In addition, the Companydoes not provide a reconciliation between reported amounts as of December 31,2007 and amounts that would have been reported under U.S. GAAP in reliance onthe accommodation provided by Form 20-F for this item.

 

U,S. GAAP considers aneconomy to be highly inflationary when cumulative three-year inflation exceeds100%. The functional currency of an entity operating in a high inflationaryeconomy must be the reporting currency.

 

Two different inflationindices exist for determining highly inflationary status in Venezuela: theConsumer Price Index (“CPI”) and the National Consumer Price Index (“NCPI”).The CPI, which only includes the metropolitan areas of Caracas and Maracaibo,has been available since 1984. The NCPI, which includes the entire country ofVenezuela, has only been available since January 1, 2008. At its July 27,2009 meeting, the International Practices Task Force (“IPTF”) concluded thateither the CPI or a blended CPI/NCPI index is acceptable for determining thehighly inflationary status of Venezuela. The IPTF concluded at that meeting,however, that once three years of data is available for the NCPI, the NCPI isthe appropriate index to use because it is a broad-based measure of generalinflation for the entire country of Venezuela.

 

The Company applies theblended CPI/NCPI, which reached cumulative three-year inflation in excess of100% at November 30, 2009. As a result of the aforementioned, starting January 1,2010, the Company’s Venezuelan subsidiaries are considered as highlyinflationary for U.S. GAAP purposes.

 

F-70

----

Table of Contents

** **

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.****         ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (Continued)**

 

N)           IMPAIRMENT OF LONG-LIVED ASSETS

 

MFRS follows a one-stepimpairment test by which the carrying amount of a long-lived asset (assetgroup) is compared with its recoverable amount. When the carrying amountexceeds the recoverable amount, the difference is accounted for as animpairment loss. See Note 2-L “Impairment of long-lived assets”.

 

U.S. GAAP requires atwo-step impairment test and measurement model as follows:

 

1)              The carrying amount of the long-lived asset (assetgroup) is first compared with the undiscounted cash flows, and if the carryingamount is lower than the undiscounted cash flows, no impairment loss isrecognized, although it may be necessary to review depreciation (oramortization) estimates and methods for the related long-lived asset (group ofassets).

2)              If the carrying value is higher than the undiscountedcash flows, an impairment loss is measured as the difference between thecarrying amount and fair value.

 

Although there aretechnical accounting differences between MFRS and U.S. GAAP for the recognitionand measurement of impairment for long-lived assets, as described in the aboveparagraphs, due to specific facts and circumstances in respect of theimpairments recognized by the Company, these technical differences do notnormally result in reconciliation adjustments. As an example, even though MFRSrequires the reduction of such fair value by the cost to sell the assets, theCompany is not adjusting the fair value since it is consider that anyincremental costs directly attributable to the disposal of these assets areimmaterial.

 

O)           DERIVATIVE FINANCIAL INSTRUMENTS

 

The following summarizes2009 net losses on the Company’s derivative financial instruments under U.S.GAAP and the classification of such net losses in the consolidated statementsof operation:

 
| ** **                  | ** ** | **Classification of loss**       | ** ** | **2009**   | ** **          |
|-----------------------------|------------|----------------------------------|------------|------------|---------------------|
| Commodity contracts         |       | Comprehensive  financing expense |       | Ps.        |  54,567        |   |
| Commodity contracts         |       | Cost  of sales                   |       | 78,987     |                |
| Interest rate contracts     |       | Comprehensive  financing expense |       | 23,982     |                |
| Foreign exchange  contracts |       | Comprehensive  financing expense |       | 1,001,145  |                |
|                        |       |                             | ** ** | ** ** | ** **          |
|                        |       |                             | ** ** | **Ps.**    | ** 1,158,681** | ** ** |

 

The following summarizesthe fair values under U.S. GAAP and the classification in the consolidatedbalance sheets of derivative financial instruments held by the Company as of December 31,2009:

 
| ** **               | ** ** | **Classification of derivative   instruments**     | ** ** | **2009** | ** **   |
|--------------------------|------------|----------------------------------------------------|------------|----------|--------------|
| Commodity  contracts     |       | Accounts receivable,  net                          |       | Ps.      |  55,749 |   |
| Interest  rate contracts |       | Derivative financial  instruments (as liabilities) |       | (5,956   | )            |
| Commodity  contracts     |       | Derivative financial  instruments (as liabilities) |       | (4,802   | )            |
|                          |            |                                                    |            |          |              |  |

 

F-71

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

The following tablesummarizes the Company’s outstanding derivative agreements as of December 31,2009:

 
| ** **               | ** ** | **Notional amount (in units)** | ** ** | **Maturity** | ** ** |
|--------------------------|------------|--------------------------------|------------|--------------|------------|
| Commodity  contracts     |       | 1,710,000 Mmbtu                |       | 2010         |       |
| Commodity  contracts     |       | 9,765,000  gallons             |       | 2010         |       |
| Commodity  contracts     |       | 6,930,000  bushels             |       | 2010         |       |
| Interest  rate contracts |       | U.S.$20,000,000                |       | 2010         |       |

 

The Company’s objectiveand strategy for using derivative financial instruments is disclosed in Note17-B. In addition, information regarding fair value of derivatives is disclosedin Note 21-L.

 

P)             SUPPLEMENTAL BALANCE SHEET INFORMATION

 

·                  Securities of related parties:

 

The investment incommon stock of GFNorte is accounted for under the equity method, since theCompany has significant influence over the investee due to its representationon the Board 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 2007 the Companysold 27,835,900 shares from its investment in GFNorte. Under Mexican FRS, theCompany recognized a net gain of Ps.847,175 from this sale in 2007. Consideringthe carrying value of the investment in GFNorte under U.S. GAAP, the net gainfrom this sale amounted to Ps.860,456.

 

During 2008 and 2009,the Company received dividends from GFNorte amounting to Ps. 83,446 andPs.31,959, 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 of ASC350, goodwill was no longer amortized. The amount of such remaining goodwill isPs.38,690. Under Mexican FRS, goodwill was fully amortized by December 31,2002.

 

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** | ** **   |
|-------------------------------------------------|------------|-------------------------------------------|--------------|
| ** **                                      | ** ** | **2008**                                  | ** **   | **2009** | ** ** |
| Cash  and cash equivalents                      |       | Ps.                                       |  54,402 |   | Ps. |  59,268 |   |
| Investment  securities                          |       | 239,173                                   |         | 226,492 |   |
| Net  loan portfolio                             |       | 238,556                                   |         | 237,573 |   |
| Property,  furniture and equipment, net         |       | 8,429                                     |         | 8,622 |   |
| Total  assets                                   |       | 577,025                                   |         | 567,138 |   |
| Deposits                                        |       | 260,769                                   |         | 274,908 |   |
| Bank  and other entity loans – current     |       | 26,048                                    |         | 13,406 |   |
| Bank  and other entity loans – non-current |       | 10,635                                    |         | 7,562 |   |
| Total  liabilities                              |       | 537,279                                   |         | 522,164 |   |
| Controlling  interest                           |       | 37,802                                    |         | 41,366 |   |
| Noncontrolling  interest                        |       | 1,944                                     |         | 3,608 |   |
|                                                 |            |                                           |              |  |  |  |  |

 

F-72

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 
| ** **                             | ** ** | **Amounts in millions of Mexican pesos** | ** **   |
|----------------------------------------|------------|------------------------------------------|--------------|
| ** **                             | ** ** | **2007**                                 | ** **   | **2008** | ** ** | **2009** | ** ** |
| Interest  income                       |       | Ps.                                      |  40,585 |   | Ps. |  50,416 |   | Ps. |  45,451 |   |
| Interest  expense                      |       | (22,838                                  | )            | (27,789 | ) | (22,268 | ) |
| Income  before noncontrolling interest |       | 7,136                                    |         | 7,387 |   | 6,190 |   |
| Net  income                            |       | 6,810                                    |         | 7,014 |   | 5,854 |   |
|                                        |            |                                          |              |  |  |  |  |  |  |  |

 

·                  Other current assets:

 

Included within accountsreceivable, net as of December 31, 2008 are benefits obtained throughPROHARINA amounting to Ps.659,918, as mentioned in Note 2-H.

 

·                  Other current liabilities:

 

Included withinaccrued liabilities and other payables as of December 31, 2009 areemployee-related liabilities of Ps.777,481.

 

·                  Computer software:

 

Depreciation expense forthe years ended December 31, 2007, 2008 and 2009 amounted to Ps. 36,216,Ps. 27,587 and Ps.11,141, respectively, on capitalized computer software cost.Unamortized software costs included as of December 31, 2008 and 2009totaled Ps. 26,230 and Ps.14,723.

 

·                  Capital leases:

 

As of December 31,2009 the gross amount of assets recorded under capital leases totaled Ps.45,367and correspond to transportation equipment. The accumulated depreciation ofthese capitalized leases as of December 31, 2009 amounted Ps.3,765.

 

During 2009, the Companyentered in a sale-leaseback transaction with the production equipment in awheat plant located in Mexico. The lease has a term of 4 years, with an earlybuy-out option in the third year and quarterly rental payments. As of December 31,2009 the gross amount of this equipment recorded under this lease totaledPs.125,946 and its accumulated depreciation amounted to Ps.8,431.

 

Future minimum leasepayments under these leases amount to approximately Ps.119,424 as follows:

 
| **Year** | ** ** | **Transportation   Equipment** | ** **  | **Production   Equipment** | ** ** | **Total**    | ** ** |
|----------|------------|--------------------------------|-------------|----------------------------|------------|--------------|------------|
| 2010     |       | Ps.                            |  8,117 |                       | Ps.        |  9,941  |       | Ps. | 18,058 |   |
| 2011     |       | 14,513                         |        | 11,149                     |       | 25,662       |       |
| 2012     |       | 14,513                         |        | 12,504                     |       | 27,017       |       |
| 2013     |       | 7,099                          |        | 41,588                     |       | 48,687       |       |
|     |       | Ps.                            | 44,242      |                       | Ps.        |  75,182 |       | Ps. | 119,424 |   |

 

·                  Other stockholders’ equity:

 

Included withinretained earnings as of December 31, 2008 and 2009 are undistributedearnings of GFNorte amounting to Ps. 2,106,698 and Ps.2,334,178, respectively.

 

F-73

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.****         ****DIFFERENCES BETWEEN MEXICAN FRSAND U.S. GAAP (Continued)**

 

Q)           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. 872,610, Ps. 989,251and Ps.1,045,081 for the years ended December 31, 2007, 2008 and 2009,respectively. The Company had Ps. 25,240 and Ps.32,923 of prepaid advertisingcosts reported as prepaid expenses as of December 31, 2008 and 2009,respectively.

 

·                  Shipping and handling costs:

 

Shipping andhandling costs are included in selling, general and administrative expenses andamounted to Ps. 1,975,231, Ps. 2,699,354 and Ps.2,551,899 for the years ended December 31,2007, 2008 and 2009, respectively.

 

·                  Operating income:

 

Under U.S. GAAP, certainother income items included in the Mexican FRS financial statements of theCompany, such as employees’ statutory profit sharing, amortization of otherdeferred costs, impairment loss on assets, and loss on sale of fixed assetswould be included in the determination of operating income. For the years endedDecember 31, 2007, 2008 and 2009, these items amounted to Ps. 239,867, Ps.117,398 and Ps.176,332, 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 31,2007, 2008 and 2009 these items amounted to Ps. 388,839, Ps. 411,857 andPs.417,626, respectively.

 

R)            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 basic financial statements,the statements of cash flows for the year ending December 31, 2008 and2009. Until December 31, 2007, under Mexican FRS, the Company presented astatement of changes in financial position that identify the sources and usesof resources based on the differences between beginning and ending consolidatedfinancial statement balances in constant pesos.

 

Under U.S. GAAP, theCompany has applied the provisions of ASC 230 — *Statement ofCash Flows*. The differences between the statement of cash flowsunder Mexican FRS and U.S. GAAP are mainly related with minor presentationreclassifications between the operating, investing and financing sections, aswell as the recognition in operating, financing and investing activities of theU.S. GAAP adjustments. The following presents the statements of cash flows forthe years ended December 31, 2007, 2008 and 2009, after considering theimpact of U.S. GAAP adjustments in conformity with the AICPA SEC RegulationsCommittees’ International Practice Task Force recommendation.

 

F-74

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

** **
| ** **                                                                                     | ** ** | **For the year ended December 31,** | ** **      |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------|-----------------|
| ** **                                                                                     | ** ** | **2007**                                 | ** **      | **2008** | ** ** | **2009** | ** ** |
| *Operating activities:*                                                                        | ** ** | ** **                               | ** **      | ** ** | ** ** | ** ** | ** ** |
| Consolidated  income (loss)                                                                    |       | Ps.                                      |  2,226,241 |   | Ps. |  (11,264,937 | ) | Ps. |  2,259,666 |   |
| Adjustments  to reconcile net income to resources provided by operating activities:            |       |                                     |            |   |   |   |   |
| Monetary  position gain and restatement effects from companies in an inflationary  environment |       | (558,500                                 | )               | (147,213 | ) | — |   |
| Depreciation  and amortization                                                                 |       | 1,158,976                                |            | 1,405,704 |   | 1,534,657 |   |
| Impairment  of long-lived assets                                                               |       | 119,211                                  |            | 28,517 |   | 26,799 |   |
| Allowance  for doubtful accounts                                                               |       | 42,336                                   |            | 79,539 |   | 85,818 |   |
| Equity  in earnings of associated companies                                                    |       | (688,950                                 | )               | (565,166 | ) | (624,795 | ) |
| Seniority  premium and other long-term accrued liabilities                                     |       | 21,263                                   |            | 55,796 |   | 61,070 |   |
| Net  gain from sale of subsidiaries’ shares                                               |       | (75,718                                  | )               | — |   | — |   |
| Net  gain from sale of associated company’s shares                                        |       | (860,456                                 | )               | — |   | — |   |
| Loss  from sale of fixed assets                                                                |       | 49,847                                   |            | 11,315 |   | 94,384 |   |
| Change  in fair value of derivative financial instruments                                      |       | 52,442                                   |            | 14,519,050 |   | 1,079,695 |   |
| Foreign  exchange loss from bank loans                                                         |       | —                                   |            | 577,627 |   | (767,801 | ) |
| Deferred  income taxes and employees’ statutory profit sharing                            |       | 459,214                                  |            | 65,706 |   | (216,424 | ) |
|                                                                                           |       | 1,945,906                                |            | 4,765,938 |   | 3,533,069 |   |
| Changes  in working capital:                                                                   |       |                                     |            |   |   |   |   |
| Accounts  receivable, net                                                                      |       | (654,980                                 | )               | (1,766,736 | ) | (154,815 | ) |
| Inventories                                                                                    |       | (2,166,018                               | )               | (921,227 | ) | 275,771 |   |
| Prepaid  expenses                                                                              |       | 45,984                                   |            | 3,935 |   | (141,855 | ) |
| Trade  accounts payable                                                                        |       | 498,656                                  |            | (245,707 | ) | 201,000 |   |
| Accrued  liabilities and other payable                                                         |       | 121,362                                  |            | 146,526 |   | (71,715 | ) |
| Income  taxes and employees’ statutory profit sharing                                     |       | 31,776                                   |            | (327,249 | ) | 495,587 |   |
|                                                                                           |       | (2,123,220                               | )               | (3,110,458 | ) | 603,973 |   |
| Net  cash flows from operating activities                                                      |       | (177,314                                 | )               | 1,655,480 |   | 4,137,042 |   |
|                                                                                                |            |                                          |                 |  |  |  |  |  |  |  |

 

F-75

----

Table of Contents

 

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

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

** **
| ** **                                              | ** ** | **For the year ended December 31,** | ** **    |
|---------------------------------------------------------|------------|------------------------------------------|---------------|
| ** **                                              | ** ** | **2007**                                 | ** **    | **2008** | ** ** | **2009** | ** ** |
| *Investing activities:*                                 |       |                                     |          |   |   |   |   |
| Purchases  of property, plant and equipment             |       | (2,221,326                               | )             | (2,696,744 | ) | (997,350 | ) |
| Proceeds  from sale of property, plant and equipment    |       | 192,972                                  |          | 27,880 |   | 126,333 |   |
| Deferred  assets                                        |       | (16,487                                  | )             | (60,198 | ) | 1,627 |   |
| Acquisition  of shares of associated company            |       | —                                   |          | (154,568 | ) | — |   |
| Dividends  received from associated company             |       | 79,200                                   |          | 83,446 |   | 31,959 |   |
| Proceeds  from sale of subsidiaries’ shares        |       | 167,420                                  |          | — |   | — |   |
| Proceeds  from sale of associated company’s shares |       | 1,267,353                                |          | — |   | — |   |
| Trading  investments                                    |       | (44,389                                  | )             | (101,829 | ) | 18,925 |   |
| Other                                                   |       | 16,260                                   |          | (201,846 | ) | 115,573 |   |
| Net  cash flows from investing activities               |       | (558,997                                 | )             | (3,103,859 | ) | (702,933 | ) |
| *Financing activities:*                                 |       |                                     |          |   |   |   |   |
| Proceeds  from bank loans and long-term debt            |       | 4,552,391                                |          | 6,912,197 |   | 11,603,048 |   |
| Repayment  of bank loans and long-term debt             |       | (3,151,536                               | )             | (3,206,050 | ) | (2,463,168 | ) |
| Repayment  of long-term note payable                    |       | (50,666                                  | )             | — |   | — |   |
| Proceeds  from stock issuance                           |       | —                                   |          | 2,111,060 |   | — |   |
| Distributions  by minority interest                     |       | (21,191                                  | )             | — |   | (21,503 | ) |
| Net  purchases-sales of Company’s common stock     |       | (365                                     | )             | (11,561 | ) | — |   |
| Payments  of derivative financial instruments           |       | —                                   |          | (3,538,840 | ) | (11,485,512 | ) |
| Dividends  paid                                         |       | (627,264                                 | )             | (62,953 | ) | (175,255 | ) |
| Other                                                   |       | (74,261                                  | )             | (60,428 | ) | (252,779 | ) |
| Net  cash flows from by financing activities            |       | 627,108                                  |          | 2,143,425 |   | (2,795,169 | ) |
| Effect  of inflation on cash and cash equivalents       |       | (46,503                                  | )             | (26,291 | ) | — |   |
| Net  (decrease) increase in cash and cash equivalents   |       | (155,706                                 | )             | 668,755 |   | 638,940 |   |
| Exchange  differences on cash and cash equivalents      |       | —                                   |          | 174,741 |   | (38,312 | ) |
| Cash  and cash equivalents at beginning of year         |       | 592,245                                  |          | 436,539 |   | 1,280,035 |   |
| Cash  and cash equivalents at end of year               |       | Ps.                                      |  436,539 |   | Ps. | 1,280,035 |   | Ps. | 1,880,663 |   |
|                                                         |            |                                          |               |  |  |  |  |  |  |  |

 

Non-cash activity:

 

During 2009, acapital lease obligation of Ps. 171,313 was incurred when the Company enteredinto a lease for equipment (Note 21-M).

 

F-76

----

Table of Contents

 

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

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

Net cash flow fromoperating activities reflects cash payments for interest and income taxes asfollows:

 
| ** **                   | ** ** | **Years ended December 31,** | ** ** |
|------------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| Interest  paid               |       | Ps.                               | 544,700    |   | Ps. | 781,225 |   | Ps. | 1,237,114 |   |
| Income  and asset taxes paid |       | 687,819                           |       | 660,589 |   | 596,954 |   |
|                              |            |                                   |            |  |  |  |  |  |  |  |

 

For U.S. GAAPpurposes, cash equivalents represent those highly liquid instruments purchasedwith an original maturity of three months or less.  Under Mexican FRS,cash equivalents are short term, highly liquid investments, which in certaincases their maturity exceeds three months; as a result, as of December 31,2007, 2008 and 2009 the Company had revised Ps.44,389, Ps.101,829 andPs.18,925, respectively, from cash equivalents to investing activities (tradinginvestments) in the statement of cash flows under U.S. GAAP.

 

S)      COMPREHENSIVE INCOME

 

Comprehensive income forthe majority interest is as follows:

 
| ** **                                            | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                            | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net  income (loss) under U.S. GAAP                    |       | Ps.                               | 2,107,762  |   | Ps. | (11,778,940 | ) | Ps. | 1,545,565 |   |
| Other  comprehensive loss, net of taxes:              |       |                              |       |   |   |   |   |
| Deficit  from restatement                             |       | (832,483                          | )          | — |   | — |   |
| Other  transactions related to comprehensive income   |       | —                            |       | — |   | (10,981 | ) |
| Effect  due on tax consolidation                      |       | —                            |       | — |   | (2,475 | ) |
| Equity  ownership from associated company             |       | —                            |       | (18,924 | ) | (201,139 | ) |
| Derivative  financial instruments                     |       | 35,065                            |       | (131,699 | ) | 89,909 |   |
| Labor  obligations adjustments, net of income tax (a) |       | (20,499                           | )          | (23,627 | ) | (4,549 | ) |
| Foreign  currency translation adjustments (b)         |       | 354,631                           |       | 949,769 |   | (438,536 | ) |
| Comprehensive  income (loss) under U.S. GAAP          |       | Ps.                               | 1,644,476  |   | Ps. | (11,003,421 | ) | Ps. | 977,794 |   |

 

----

(a)          Excludes amortization of net cumulative losses, net transitionliability and prior service cost, reported in net income.

 

(b)         Foreign currency translation adjustments are presentednet of tax benefit of Ps.15,417 for the year ended December 31, 2007.

 

F-77

----

Tableof Contents

 

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

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

Comprehensive income forthe noncontrolling interest is as follows:

 
| ** **                                          | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                          | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net  income under U.S. GAAP                         |       | Ps.                               | 118,479    |   | Ps. | 514,003 |   | Ps. | 714,101 |   |
| Other  comprehensive income, net of taxes:          |       |                              |       |   |   |   |   |
| Deficit  from restatement                           |       | (12,957                           | )          | — |   | — |   |
| Other  transactions related to comprehensive income |       | —                            |       | — |   | (10,522 | ) |
| Equity  ownership from associated company           |       | —                            |       | (700 | ) | — |   |
| Labor  obligations adjustments, net of income tax   |       | —                            |       | (5,627 | ) | (799 | ) |
| Foreign  currency translation adjustments           |       | (46,152                           | )          | 393,643 |   | (237,883 | ) |
| Comprehensive  income under U.S. GAAP               |       | Ps.                               | 59,370     |   | Ps. | 901,319 |   | Ps. | 464,897 |   |

 

The components of accumulatedother comprehensive (loss) income were as follows as of December 31, 2008and 2009:

 
| ** **                         | ** ** | **Foreign  currency  translation  adjustments** | ** ** | **Derivative  financial  instruments** | ** ** | **Deficit from  restatement** | ** ** | **Labor  obligations  adjustments,  net of  income tax** | ** **  | **Accumulated  other  comprehensive  (loss) income** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------|-------------|-----------------------------------------------------------|------------|
| ** **                         | ** ** | ** **                                      | ** ** | ** **                             | ** ** | ** **                         | ** ** | ** **                                                         | ** **  | ** **                                                | ** ** |
| Balance  at December 31, 2007 |       | Ps.                                             | 1,013,876  |                                   | Ps.        | 41,790                             |       | Ps.                                                                | (16,327,553 | )                                                         | Ps.        | (33,172 | ) | Ps. | (15,305,059 | ) |
|                               |       |                                            |       |                                   |       |                               |       |                                                               |        |                                                      |       |
| Current  period changes            |       | 949,769                                         |       | (131,699                               | )          | 16,327,553                         |       | (23,627                                                            | )           | 17,121,996                                                |       |
|                               |       |                                            |       |                                   |       |                               |       |                                                               |        |                                                      |       |
| Balance  at December 31, 2008 |       | 1,963,645                                       |       | (89,909                                | )          | —                             |       | (56,799                                                            | )           | 1,816,937                                                 |       |
|                               |       |                                            |       |                                   |       |                               |       |                                                               |        |                                                      |       |
| Current  period changes            |       | (438,536                                        | )          | 89,909                                 |       | —                             |       | (4,549                                                             | )           | (353,176                                                  | )          |
|                               |       |                                            |       |                                   |       |                               |       |                                                               |        |                                                      |       |
| Balance  at December 31, 2009 |       | Ps.                                             | 1,525,109  |                                   | Ps.        | —                             |       | Ps.                                                                | —      |                                                      | Ps.        | (61,348 | ) | Ps. | 1,463,761 |   |

 

F-78

----

Tableof Contents

 

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

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

T)            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** | ** **    |
|------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------|------------|----------------|------------|-------------------------------|---------------|
| 2007                                                 |       | Ps.                                          | 215,100    | ** **                                                   | Ps.        | 42,336         |       | Ps.                           |  (23,703 | ) | Ps. |  233,733 |   |
| 2008                                                 |       | 233,733                                      |       | 79,539                                                       |       | (67,331        | )          | 245,941                       |          |
| 2009                                                 |       | 245,941                                      |       | 85,818                                                       |       | (23,222        | )          | 308,537                       |          |
|                                                      |            |                                              |            |                                                              |            |                |            |                               |               |  |  |  |  |

 

U)           CONDENSED FINANCIAL INFORMATION UNDER U.S. GAAP

 

Condensedconsolidated balance sheets prepared on a U.S. GAAP basis as of December 31are as follows:

 
| ** **                           | ** ** | **2008**   | ** ** | **2009**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| Total  current assets                |       | Ps.        | 16,699,126 |       | Ps.        | 16,520,879 |   |
| Property,  plant and equipment       |       | 20,719,842 |       | 19,094,842 |       |
| Total  assets                        |       | 44,324,382 |       | 42,808,031 |       |
| Short-term  debt                     |       | 2,418,560  |       | 2,203,392  |       |
| Total  current liabilities           |       | 14,780,182 |       | 8,958,053  |       |
| Long-term  debt                      |       | 11,728,068 |       | 20,039,868 |       |
| Total  liabilities                   |       | 34,645,656 |       | 31,861,868 |       |
| Noncontrolling  interest (*)         |       | 3,761,926  |       | 4,051,569  |       |
| Total  stockholders’ equity (*) |       | 9,678,726  |       | 10,946,163 |       |
|                                      |            |            |            |            |            |  |  |

 

----

(*)Due to recent changes in U.S. GAAP, starting January 1, 2009 noncontrollinginterest is presented within stockholders’ equity and such change wasretrospectively applied during 2008 for comparative purposes.

 

Condensedconsolidated statements of income prepared on a U.S. GAAP basis for the yearsended December 31 are as follows:

 
| ** **                  | ** ** | **2007**   | ** ** | **2008**    | ** ** | **2009**   | ** ** |
|-----------------------------|------------|------------|------------|-------------|------------|------------|------------|
| Net  sales                  |       | Ps.        | 35,427,207 |        | Ps.        | 44,381,012 |       | Ps. | 49,034,395 |   |
| Gross  profit               |       | 11,228,924 |       | 14,134,076  |       | 16,986,695 |       |
| Operating  income           |       | 1,655,824  |       | 3,171,353   |       | 4,020,016  |       |
| Majority  net income (loss) |       | 2,107,762  |       | (11,778,940 | )          | 1,545,565  |       |
|                             |            |            |            |             |            |            |            |  |  |  |

 

F-79

----

Tableof Contents

 

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

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2008 AND 2009**

**(Expressedin thousands of Mexican pesos, except where otherwise indicated)**

 

**21.          DIFFERENCES BETWEEN MEXICAN FRS AND U.S. GAAP (Continued)**

 

V)            RECENTLY ISSUED ACCOUNTING STANDARDS

 

*Transfersand Servicing (ASC 860), Accounting for Transfers of Financial Assets (ASU2009-16)*

 

The FASB issued ASU2009-16 in December 2009. This standard became effective for the Companyon January 1, 2010. ASU 2009-16 changes how companies account fortransfers of financial assets and eliminates the concept of qualifyingspecial-purpose entities. Adoption of the guidance is not expected to have animpact on the Company’s results of operations or financial position.

 

*Consolidation(ASC 810), Improvements to Financial Reporting by Enterprises Involved WithVariable Interest Entities (ASU 2009-17)*

 

The FASB issued ASU2009-17 in December 2009. This standard became effective for the Company January 1,2010. ASU 2009-17 requires the enterprise to qualitatively assess if it is theprimary beneficiary of a variable-interest entity (VIE), and, if so, the VIEmust be consolidated. Adoption of the standard is not expected to have amaterial impact on the Company’s results of operations or financial position.

 

*FairValue Measurements and Disclosures (ASC 820), Improving Disclosures about FairValue Measurements (ASU 2010-06)*

 

The FASB issued ASU2010-06, “Fair Value Measurements and Disclosures” in January 2010. Thisupdate provides amendments to Subtopic 820-10 related to new disclosures andclarification of existing disclosures. This ASU should be effective for annualand interim reporting periods beginning after December 15, 2009, exceptfor the requirement to provide the Level 3 activity between purchases, sales,issuances, and settlements on a gross basis. That requirement is effective forfiscal years beginning after December 15, 2010, and for interim periodswithin those fiscal years. Adoption of the standard is not expected to have amaterial impact on the Company’s results of operations or financial position.

 

F-80

----

Tableof Contents

 

**Report of Independent RegisteredPublic Accounting Firmto the Board of Directors and Stockholders of Grupo Financiero Banorte, S.A.B.de C.V. and Subsidiaries**

 

We have audited the accompanying consolidated balancesheets of Grupo Financiero Banorte, S.A.B. de C.V. and Subsidiaries (the “FinancialGroup”) as of December 31, 2009 and 2008, and the related consolidatedstatements of income and changes in stockholders’ equity for each of the threeyears in the period ended December 31, 2009, of cash flows for the yearended December 31, 2009, and of changes in financial position for theyears ended December 31, 2008 and 2007. 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.

 

We conducted our audits in accordance with auditingstandards generally accepted in Mexico and with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement and thatthey are prepared in conformity with the accounting practices prescribed by theMexican National Banking and Securities Commission (the “Commission”). TheFinancial Group is not required to have, nor were we engaged to perform, anaudit of its internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the FinancialGroup’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

Note 1 to the financial statements describes theFinancial Group’s operations. Note 4 describes the accounting criteriaestablished by the Commission in the “General Provisions Applicable to BankingInstitutions”, which the Financial Group adheres to for the preparation of itsfinancial information, as well as the modifications to such accounting criteriathat became effective during 2009, some of which were applied prospectively,affecting the comparability with the 2008 figures.

 

In our opinion, the consolidated financial statementspresent fairly, in all material respects, the financial position of GrupoFinanciero Banorte, S. A.B. de C. V. and Subsidiaries as of December 31,2009 and 2008, and the results of their operations and changes in theirstockholders’ equity for each of the three years in the period ended December 31,2009, their cash flows for the year ended December 31, 2009 and changes intheir financial position for the years ended December 31, 2008 and 2007,in conformity with the accounting practices prescribed by the Mexican NationalBanking and Securities Commission.

 

Accounting practices prescribed by the Commission varyin certain significant respects from Mexican Financial Reporting Standards. Theapplication of the latter would have affected the determination of stockholders’equity and net income as of and for the years ended December 31, 2009 and2008, to the extent summarized in Note 37.

 

Accounting practices prescribed by the Commission varyin certain significant respects from accounting principles generally acceptedin the United States of America. The application of the latter would haveaffected the determination of stockholders’ equity as of December 31, 2009and 2008 and net income for each of the three years in the period ended December 31,2009, to the extent summarized in Note 38.

 

As disclosed in Note 38 to the accompanyingconsolidated financial statements, in January 2009 the Financial Groupadopted the recognition and disclosure provision of the Financial AccountingStandards Board’s Accounting Standards Codification 810-10 (SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment ofARB No. 51).

 

The accompanying consolidated financial statementshave been translated into English for the convenience of users.

 

 

Galaz, Yamazaki, RuizUrquiza, S. C.

Member of Deloitte Touche Tohmatsu

 

 

C.P.C. Carlos A. García Cardoso

Monterrey, N.L., México

 

February 19, 2010

March 29, 2010 as to Note 37

May 7, 2010 as to Note 38

 

F-81

----

Table of Contents

 

**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER 31, 2009 AND 2008**

(In million of Mexican pesos)

 
| **ASSETS**                                                  | ** ** | **2009**    | ** **  | **2008**    | ** ** |
|-------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **CASH AND  CASH EQUIVALENTS**                              | ** ** | **Ps.**     | **59,268**  | ** **  | **Ps.**    | **54,396** | ** ** |
| ** **                                                  |       |        |        |        |       |
| **MARGIN SECURITIES**                                       | ** ** | **18**      | ** **  | **6**       | ** ** |
| ** **                                                  |       |        |        |        |       |
| **INVESTMENTS  IN SECURITIES**                              |       |        |        |        |       |
| Trading securities                                          |       | 24,459      |        | 6,076       |       |
| Available for sale securities                               |       | 11,701      |        | 11,480      |       |
| Held to maturity securities                                 |       | 190,332     |        | 221,617     |       |
|                                                        | ** ** | **226,492** | ** **  | **239,173** | ** ** |
|                                                        |       |        |        |        |       |
| **DEBTOR BALANCES UNDER  REPURCHASE AND RESALE AGREEMENTS** | ** ** | **4**       | ** **  | **149**     | ** ** |
| ** **                                                  |       |        |        |        |       |
| **DERIVATIVE  FINANCIAL INSTRUMENTS**                       | ** ** | ** **  | ** **  | ** **  | ** ** |
| For trading purposes                                        |       | 4,824       |        | 5,325       |       |
| For hedging purposes                                        |       | 1,056       |        | 2,843       |       |
|                                                        | ** ** | **5,880**   | ** **  | **8,168**   | ** ** |
| ** **                                                  | ** ** | ** **  | ** **  | ** **  | ** ** |
| **PERFORMING LOAN PORTFOLIO**                               |       |        |        |        |       |
| Commercial loans                                            |       |        |        |        |       |
| Business loans                                              |       | 117,237     |        | 126,798     |       |
| Financial Institutions’ Loans                          |       | 7,131       |        | 10,860      |       |
| Government loans                                            |       | 38,993      |        | 26,989      |       |
| Consumer loans                                              |       | 25,712      |        | 29,369      |       |
| Mortgage loans                                              |       | 49,881      |        | 46,282      |       |
| **TOTAL  PERFORMING LOAN PORTFOLIO**                        | ** ** | **238,954** | ** **  | **240,298** | ** ** |
|                                                        | ** ** | ** **  | ** **  | ** **  | ** ** |
| **PAST-DUE  LOAN PORTFOLIO**                                | ** ** | ** **  | ** **  | ** **  | ** ** |
| Commercial loans                                            |       |        |        |        |       |
| Business loans                                              |       | 3,163       |        | 1,703       |       |
| Consumer loans                                              |       | 1,942       |        | 2,499       |       |
| Mortgage loans                                              |       | 1,049       |        | 746         |       |
| **TOTAL PAST-DUE LOAN PORTFOLIO**                           | ** ** | **6,154**   | ** **  | **4,948**   | ** ** |
|                                                        | ** ** | ** **  | ** **  | ** **  | ** ** |
| **LOAN  PORTFOLIO**                                         | ** ** | **245,108** | ** **  | **245,246** | ** ** |
| (Minus) Allowance for loan losses                           |       | (7,535      | )           | (6,690      | )          |
| **LOAN  PORTFOLIO, net**                                    | ** ** | **237,573** | ** **  | **238,556** | ** ** |
| **ACQUIRED  COLLECTION RIGHTS**                             | ** ** | **2,548**   | ** **  | **3,049**   | ** ** |
|                                                        |       |        |        |        |       |
| **TOTAL  LOAN PORTFOLIO, net**                              | ** ** | **240,121** | ** **  | **241,605** | ** ** |
|                                                        | ** ** | ** **  | ** **  | ** **  | ** ** |
| **RECEIVABLES GENERATED BY  SECURITIZATIONS**               | ** ** | **432**     | ** **  | **796**     | ** ** |
| **OTHER  ACCOUNTS RECEIVABLE, net**                         | ** ** | **11,324**  | ** **  | **9,514**   | ** ** |
| **MERCHANDISE  INVENTORY**                                  | ** ** | **119**     | ** **  | **165**     | ** ** |
| **FORECLOSED  ASSETS, net**                                 | ** ** | **928**     | ** **  | **863**     | ** ** |
| **PROPERTY, FURNITURE AND  FIXTURES, net**                  | ** ** | **8,622**   | ** **  | **8,429**   | ** ** |
| **PERMANENT STOCK INVESTMENTS**                             | ** ** | **3,036**   | ** **  | **2,559**   | ** ** |
| **DEFERRED  TAXES, net**                                    | ** ** | **1,411**   | ** **  | **471**     | ** ** |
|                                                        |       |        |        |        |       |
| **OTHER ASSETS**                                            |       |        |        |        |       |
| Other assets, deferred charges and intangible  assets       | ** ** | **9,483**   | ** **  | **10,731**  | ** ** |
|                                                        |       |        |        |        |       |
| **TOTAL ASSETS**                                            | ** ** | **Ps.**     | **567,138** | ** **  | **Ps.**    | **577,025** | ** ** |
|                                                             |            |             |             |             |            |  |  |  |  |

 

MEMORANDUM ACCOUNTS (Note 33)

 

These balance sheets, consolidated with those ofthe financial entities and other companies that form part of the FinancialGroup and are susceptible to consolidation, were prepared according toaccounting principles applicable to Financial Service Holding Companies issuedby the Mexican National Banking and Securities Commission according to article30 of 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 balancesheet dates above. The stockholders’ equity amounts to Ps. 7,000 (nominalvalue).

 

The accompanying Consolidated Balance Sheetshave been approved by the Board of Directors in accordance with theresponsibility assigned to them. The attached notes are an integral part ofthese consolidated balance sheets.

 

F-82

----

Table of Contents

 
| **LIABILITIES**                                               | ** ** | **2009**    | ** **  | **2008**    | ** ** |
|---------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **DEPOSITS**                                                  |       |        |        |        |       |
| Demand deposits                                               |       | Ps.         | 137,581     |        | Ps.        | 128,350 |   |
| Time deposits                                                 |       |        |        |        |       |
| General public                                                |       | 134,141     |        | 118,740     |       |
| Money market                                                  |       | 3,186       |        | 13,679      |       |
|                                                          | ** ** | **274,908** | ** **  | **260,769** | ** ** |
|                                                          |       |        |        |        |       |
| **INTERBANK AND OTHER LOANS**                                 |       |        |        |        |       |
| Demand loans                                                  |       | 21          |        | 1,245       |       |
| Short-term loans                                              |       | 13,385      |        | 24,803      |       |
| Long-term loans                                               |       | 7,562       |        | 10,635      |       |
|                                                          | ** ** | **20,968**  | ** **  | **36,683**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **ASSIGNED  SECURITIES TO PAY OFF**                           | ** ** | **159**     | ** **  | **—**  | ** ** |
| ** **                                                    | ** ** | ** **  | ** **  | ** **  | ** ** |
| **CREDITOR  BALANCES UNDER REPURCHASE AND RESALE AGREEMENTS** | ** ** | **185,480** | ** **  | **192,727** | ** ** |
| ** **                                                    | ** ** | ** **  | ** **  | ** **  | ** ** |
| **COLLATERAL SOLD OR PLEDGED**                                | ** ** | ** **  | ** **  | ** **  | ** ** |
| Repurchase or resale  agreements (creditor balance)           | ** ** | **2**       | ** **  | **2**       | ** ** |
| ** **                                                    |       |        |        |        |       |
| **DERIVATIVE  FINANCIAL INSTRUMENTS**                         | ** ** | ** **  | ** **  | ** **  | ** ** |
| For trading purposes                                          |       | 4,553       |        | 5,269       |       |
| For hedging purposes                                          |       | 3,822       |        | 5,477       |       |
| ** **                                                    | ** ** | **8,375**   | ** **  | **10,746**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **OTHER ACCOUNTS PAYABLE**                                    |       |        |        |        |       |
| Income tax                                                    |       | 617         |        | 374         |       |
| Employee profit  sharing                                      |       | 676         |        | 898         |       |
| Creditors from settlements of  transactions                   |       | 2,224       |        | 2,405       |       |
| Sundry debtors and other  payables                            |       | 8,968       |        | 10,716      |       |
|                                                          | ** ** | **12,485**  | ** **  | **14,393**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **SUBORDINATED DEBENTURES**                                   | ** ** | **18,168**  | ** **  | **20,613**  | ** ** |
| **DEFERRED  CREDITS AND ADVANCED COLLECTIONS**                | ** ** | **1,619**   | ** **  | **1,346**   | ** ** |
| ** **                                                    |       |        |        |        |       |
| **TOTAL  LIABILITIES**                                        | ** ** | **522,164** | ** **  | **537,279** | ** ** |
| ** **                                                    |       |        |        |        |       |
| **STOCKHOLDERS’  EQUITY**                                |       |        |        |        |       |
| ** **                                                    |       |        |        |        |       |
| **PAID-IN  CAPITAL**                                          |       |        |        |        |       |
| Common stock                                                  |       | 11,956      |        | 11,941      |       |
| Additional paid-in capital                                    |       | 1,525       |        | 1,468       |       |
| ** **                                                    | ** ** | **13,481**  | ** **  | **13,409**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **OTHER  CAPITAL**                                            |       |        |        |        |       |
| Capital reserves                                              |       | 3,154       |        | 2,720       |       |
| Retained earnings from prior  years                           |       | 20,681      |        | 16,935      |       |
| Result from valuation of  securities available for sale       |       | 206         |        | (550        | )          |
| Result from valuation of  instruments for cash flow hedging   |       | (1,369      | )           | —      |       |
| Cumulative foreign currency  translation adjustment           |       | (641        | )           | 1,095       |       |
| Effect of holding  non-monetary assets                        |       | —      |        | (2,821      | )          |
| Net income                                                    |       | 5,854       |        | 7,014       |       |
| ** **                                                    | ** ** | **27,885**  | ** **  | **24,393**  | ** ** |
| **NONCONTROLLING INTEREST**                                   | ** ** | **3,608**   | ** **  | **1,944**   | ** ** |
| **TOTAL  STOCKHOLDERS’ EQUITY**                          | ** ** | **44,974**  | ** **  | **39,746**  | ** ** |
| ** **                                                    |       |        |        |        |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**          | ** ** | **Ps.**     | **567,138** | ** **  | **Ps.**    | **577,025** | ** ** |

 

 
| 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 and Tax |

 

F-83

----

Tableof Contents

 

**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

## **CONSOLIDATED STATEMENTS OF INCOME**

## **FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007**

(In million of Mexican pesos)

 
| ** **                                                                                     | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Interest income                                                                                |       | Ps.        | 45,451     |       | Ps.        | 50,417     |       | Ps. | 40,585 |   |
| Interest expense                                                                               |       | (22,268    | )          | (27,789    | )          | (22,838    | )          |
| Monetary position loss, net                                                                    |       | —     |       | —     |       | (363       | )          |
| **NET INTEREST  INCOME**                                                                       | ** ** | **23,183** | ** ** | **22,628** | ** ** | **17,384** | ** ** |
|                                                                                           |       |       |       |       |       |       |       |
|  Provision for loan losses                                                                |       | (8,286     | )          | (6,896     | )          | (2,646     | )          |
| **NET INTEREST  INCOME****AFTER ALLOWANCE FOR LOAN LOSSES**                                    | ** ** | **14,897** | ** ** | **15,732** | ** ** | **14,738** | ** ** |
|                                                                                           |       |       |       |       |       |       |       |
| Commission and fee income                                                                      |       | 8,291      |       | 8,535      |       | 7,693      |       |
| Commission and fee expense                                                                     |       | (1,338     | )          | (1,208     | )          | (1,086     | )          |
| Brokerage revenues                                                                             |       | 1,244      |       | 1,039      |       | 1,292      |       |
| Other revenues                                                                                 |       | 980        |       | 746        |       | 303        |       |
| ** **                                                                                     | ** ** | **9,177**  | ** ** | **9,112**  | ** ** | **8,202**  | ** ** |
| **NET OPERATING REVENUES**                                                                     | ** ** | **24,074** | ** ** | **24,844** | ** ** | **22,940** | ** ** |
|                                                                                           |       |       |       |       |       |       |       |
| Administrative and promotional expenses                                                        |       | (17,024    | )          | (16,687    | )          | (15,294    | )          |
| **OPERATING INCOME**                                                                           | ** ** | **7,050**  | ** ** | **8,157**  | ** ** | **7,646**  | ** ** |
|                                                                                           |       |       |       |       |       |       |       |
| Other income                                                                                   |       | 2,438      |       | 2,997      |       | 2,096      |       |
| Other expenses                                                                                 |       | (1,566     | )          | (1,523     | )          | (532       | )          |
| ** **                                                                                     | ** ** | **872**    | ** ** | **1,474**  | ** ** | **1,564**  | ** ** |
| **INCOME BEFORE INCOME TAX**                                                                   | ** ** | **7,922**  | ** ** | **9,631**  | ** ** | **9,210**  | ** ** |
|                                                                                           |       |       |       |       |       |       |       |
| Current income tax                                                                             |       | (2,581     | )          | (2,765     | )          | (2,918     | )          |
| Deferred income taxes, net                                                                     |       | 536        |       | 245        |       | 487        |       |
| ** **                                                                                     | ** ** | **(2,045** | **)**      | **(2,520** | **)**      | **(2,431** | **)**      |
|                                                                                           |       |       |       |       |       |       |       |
| **INCOME  BEFORE EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES AND ASSOCIATED  COMPANIES** | ** ** | **5,877**  | ** ** | **7,111**  | ** ** | **6,779**  | ** ** |
|                                                                                           |       |       |       |       |       |       |       |
| Equity in earnings of  unconsolidated subsidiaries and associated companies                    |       | 313        |       | 276        |       | 357        |       |
|                                                                                           |       |       |       |       |       |       |       |
| **INCOME BEFORE NONCONTROLLING INTEREST**                                                      | ** ** | **6,190**  | ** ** | **7,387**  | ** ** | **7,136**  | ** ** |
|                                                                                           |       |       |       |       |       |       |       |
| Noncontrolling interest                                                                        |       | (336       | )          | (373       | )          | (326       | )          |
|                                                                                           |       |       |       |       |       |       |       |
| **NET  INCOME**                                                                                | ** ** | **Ps.**    | **5,854**  | ** ** | **Ps.**    | **7,014**  | ** ** | **Ps.** | **6,810** | ** ** |

 

These income statements, consolidated with those of the financialentities and other companies that form part of the Financial Group and aresusceptible to consolidation, were prepared according to accounting principlesapplicable to Financial Service Holding Companies issued by the MexicanNational Banking and Securities Commission according to article 30 of the Lawof 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 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 and Tax |

 

F-84

----

Table of 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, 2009, 2008 AND 2007**

(In million 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** | ** ** | **Result from  valuation of cash  flow hedging  instruments** | ** ** |
| **Balances, January 1, 2007**                                                     | ** ** | **Ps.**                  | **12,020** | ** **                       | **Ps.**    | **1,862** | ** ** | **Ps.** | **2,140** | ** ** | **Ps.** | **16,417** | ** ** | **Ps.** | **—** | ** ** | **Ps.** | **—** | ** ** |
| **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 | ) | — |   | — |   |
| Change in credit card loan rating criterion                                            |       | —                   |       | —                           |       | — |   | (100 | ) | — |   | — |   |
| **Total comprehensive income**                                                         | ** ** | **—**               | ** ** | **—**                       | ** ** | **—** | ** ** | **(170** | **)** | **—** | ** ** | **—** | ** ** |
| Noncontrolling interest                                                                |       | —                   |       | —                           |       | — |   | — |   | — |   | — |   |
| **Balances, December 31, 2007**                                                   | ** ** | **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 | ) | — |   | — |   |
| Dividend 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                                                                             |       | —                   |       | —                           |       | — |   | — |   | — |   | — |   |
| Effect of subsidiaries                                                                 |       | —                   |       | (3                               | )          | — |   | (30 | ) | (550 | ) | — |   |
| Result from valuation of cash flow hedging  instruments                                |       | —                   |       | —                           |       | — |   | — |   | — |   | — |   |
| Changes in accounting principles (NIF B-10)                                            |       | —                   |       | —                           |       | — |   | (9,835 | ) | — |   | — |   |
| **Total comprehensive income**                                                         | ** ** | **—**               | ** ** | **(3**                           | **)**      | **—** | ** ** | **(9,865** | **)** | **(550** | **)** | **—** | ** ** |
| Noncontrolling interest                                                                |       | —                   |       | —                           |       | — |   | — |   | — |   | — |   |
| **Balances, December 31, 2008**                                                   | ** ** | **11,941**               | ** ** | **1,468**                        | ** ** | **2,720** | ** ** | **16,935** | ** ** | **(550** | **)** | **—** | ** ** |
| **TRANSACTIONS APPROVED BY  STOCKHOLDERS**                                             |       |                     |       |                             |       |   |   |   |   |   |   |   |   |
| Issuance  (repurchase) of shares                                                       |       | 15                       |       | (328                             | )          | 83 |   | — |   | (221 | ) | — |   |
| Transfer of prior year’s result                                                   |       | —                   |       | —                           |       | — |   | 7,014 |   | — |   | — |   |
| Effect of the acquisition of the remaining 30% of  the subsidiary INB                  |       | —                   |       | —                           |       | — |   | — |   | — |   | — |   |
| Creation of reserves as per General Stockholders’  meeting on April 30, 2009 |       | —                   |       | —                           |       | 351 |   | (351 | ) | — |   | — |   |
| Dividend declared at the General Stockholders’  meeting on October 5, 2009   |       | —                   |       | —                           |       | — |   | (364 | ) | — |   | — |   |
| **Total transactions approved by  stockholders**                                       | ** ** | **15**                   | ** ** | **(328**                         | **)**      | **434** | ** ** | **6,299** | ** ** | **(221** | **)** | **—** | ** ** |
| **COMPREHENSIVE INCOME**                                                               | ** ** | ** **               | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                             |       | —                   |       | —                           |       | — |   | — |   | — |   | — |   |
| Result from valuation of available for sale  securities                                |       | —                   |       | —                           |       | — |   | — |   | 592 |   | — |   |
| Effect of subsidiaries, affiliates and mutual funds                                    |       | —                   |       | (5                               | )          | — |   | (47 | ) | — |   | — |   |
| Result from valuation of cash flow hedging  instruments                                |       | —                   |       | —                           |       | — |   | — |   | — |   | 209 |   |
| Application of the effect of holding non-monetary  assets                              |       | —                   |       | (4                               | )          | — |   | (1,640 | ) | 385 |   | (1,578 | ) |
| Change in credit card loan rating methodology (net  of deferred taxes)                 |       | —                   |       | —                           |       | — |   | (683 | ) | — |   | — |   |
| **Total comprehensive income**                                                         | ** ** | **—**               | ** ** | **(9**                           | **)**      | **—** | ** ** | **(2,370** | **)** | **977** | ** ** | **(1,369** | **)** |
| Noncontrolling interest                                                                |       | —                   |       | 394                              |       | — |   | (183 | ) | — |   | — |   |
| **Balances, December 31, 2009**                                                   | ** ** | **Ps.**                  | **11,956** | ** **                       | **Ps.**    | **1,525** | ** ** | **Ps.** | **3,154** | ** ** | **Ps.** | **20,681** | ** ** | **Ps.** | **206** | ** ** | **Ps.** | **(1,369** | **)** |

 

These statementsof changes in stockholder’s equity, consolidated with those of the financialentities and other companies that form part of the Financial Group and aresusceptible to consolidation, were prepared according to accounting principlesapplicable to Financial Service Holding Companies issued by the MexicanNational Banking and Securities Commission according to article 30 of the Lawof Financial Institutions. Such principles are consistently applied in thefinancial statements, which are presented according to sound practices andapplicable legal and administrative provisions and reflect all the operationsconducted by the Financial Group, its financial service subsidiaries and theother companies that form part of the Financial Group and are consolidated asof the dates above. These consolidated statements of changes in stockholder’sequity were approved by the Board of Directors in accordance with theresponsibility assigned to them.  Theattached notes are an integral part of these consolidated statements of changesin stockholders’ equity.

 

F-85

----

Tableof Contents

 
| ** **                                                                             | ** ** | **OTHER CAPITAL**                                     | ** **       |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------------|
| ** **                                                                             | ** ** | **Cumulative  foreign  currency  translation  adjustment** | ** **       | **Insufficiency in  restated  stockholders’  equity** | ** ** | **Effect of  holding non-  monetary  assets** | ** ** | **Net income** | ** ** | **Total  majority  interest** | ** ** | **Noncontrol-  ling interest** | ** ** | **Total  stockholders’  equity** | ** ** |
| **Balances,  January 1, 2007**                                                    | ** ** | **Ps.**                                                    | ** —** | ** ** | **Ps.** | **(6,380** | **)** | **Ps.** | **(5,734** | **)** | **Ps.** | **6,255** | ** ** | **Ps.** | **26,580** | ** ** | **Ps.** | **1,446** | ** ** | **Ps.** | **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 |   |
| Change  in credit card loan rating criterion                                           | ** ** | **—**                                                 | ** **       | **—** |   | — |   | — |   | (100 | ) | — |   | (100 | ) |
| **Total comprehensive income**                                                         | ** ** | **—**                                                 | ** **       | **—** | ** ** | **725** | ** ** | **6,810** | ** ** | **7,365** | ** ** | **15** | ** ** | **7,380** | ** ** |
| Noncontrolling  interest                                                               | ** ** | **—**                                                 | ** **       | **—** |   | — |   | — |   | — |   | 206 |   | 206 |   |
| **Balances,  December 31, 2007**                                                  | ** ** | **—**                                                 | ** **       | **(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 |       | —                                                     |             | — |   | — |   | — |   | — |   | — |   | — |   |
| Dividend  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 |   |
| Effect  of subsidiaries                                                                |       | 1,095                                                      |             | — |   | — |   | — |   | 512 |   | — |   | 512 |   |
| Result  from valuation of cash flow hedging instruments                                |       | —                                                     |             | — |   | (1,267 | ) | — |   | (1,267 | ) | — |   | (1,267 | ) |
| Changes  in accounting principles (NIF B-10)                                           |       | —                                                     |             | 6,380 |   | 3,455 |   | — |   | — |   | — |   | — |   |
| **Total comprehensive income**                                                         | ** ** | **1,095**                                                  | ** **       | **6,380** | ** ** | **2,188** | ** ** | **7,014** | ** ** | **6,259** | ** ** | **—** | ** ** | **6,259** | ** ** |
| Noncontrolling  interest                                                               |       | —                                                     |             | — |   | — |   | — |   | — |   | 277 |   | 277 |   |
| **Balances,  December 31, 2008**                                                  | ** ** | **1,095**                                                  | ** **       | **—** | ** ** | **(2,821** | **)** | **7,014** | ** ** | **37,802** | ** ** | **1,944** | ** ** | **39,746** | ** ** |
| TRANSACTIONS  APPROVED BY STOCKHOLDERS                                                 |       |                                                       |             |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuance  (repurchase) of shares                                                       |       | —                                                     |             | — |   | — |   | — |   | (451 | ) | — |   | (451 | ) |
| Transfer  of prior year’s result                                                  |       | —                                                     |             | — |   | — |   | (7,014 | ) | — |   | — |   | — |   |
| Effect  of the acquisition of the remaining 30% of the subsidiary INB                  |       | (1,698                                                     | )                | — |   | — |   | — |   | (1,698 | ) | — |   | (1,698 | ) |
| Creation  of reserves as per General Stockholders’ meeting on April 30, 2009 |       | —                                                     |             | — |   | — |   | — |   | — |   | — |   | — |   |
| Dividend  declared at the General Stockholders’ meeting on October 5, 2009   |       | —                                                     |             | — |   | — |   | — |   | (364 | ) | — |   | (364 | ) |
| **Total transactions approved by stockholders**                                        | ** ** | **(1,698**                                                 | **)**            | **—** | ** ** | **—** | ** ** | **(7,014** | **)** | **(2,513** | **)** | **—** | ** ** | **(2,513** | **)** |
| **COMPREHENSIVE INCOME**                                                               | ** ** | ** **                                                 |             |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  income                                                                            |       | —                                                     |             | — |   | — |   | 5,854 |   | 5,854 |   | — |   | 5,854 |   |
| Result  from valuation of available for sale securities                                |       | —                                                     |             | — |   | — |   | — |   | 592 |   | — |   | 592 |   |
| Effect  of subsidiaries, affiliates and mutual funds                                   |       | (54                                                        | )                | — |   | — |   | — |   | (106 | ) | — |   | (106 | ) |
| Result  from valuation of cash flow hedging instruments                                |       | —                                                     |             | — |   | — |   | — |   | 209 |   | — |   | 209 |   |
| Application  of the effect of holding non-monetary assets                              |       | 16                                                         |             | — |   | 2,821 |   | — |   | — |   | — |   | — |   |
| Change  in credit card loan rating methodology (net of deferred taxes)                 |       | —                                                     |             | — |   | — |   | — |   | (683 | ) | — |   | (683 | ) |
| **Total comprehensive income**                                                         | ** ** | **(38**                                                    | **)**            | **—** | ** ** | **2,821** | ** ** | **5,854** | ** ** | **5,866** | ** ** | **—** | ** ** | **5,866** | ** ** |
| Noncontrolling  interest                                                               |       | —                                                     |             | — |   | — |   | — |   | 211 |   | 1,664 |   | 1,875 |   |
| **Balances,  December 31, 2009**                                                  | ** ** | **Ps.**                                                    | **(641**         | **)** | **Ps.** | **—** | ** ** | **Ps.** | **—** | ** ** | **Ps.** | **5,854** | ** ** | **Ps.** | **41,366** | ** ** | **Ps.** | **3,608** | ** ** | **Ps.** | **44,974** | ** ** |

 

| 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 and Tax |

 

F-86

----

Tableof Contents

 

**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

## **CONSOLIDATED CASH FLOW STATEMENT**

**FOR THE YEAR ENDED DECEMBER 31, 2009**

(In million of Mexican pesos)

 
| **Net  Income**                                                             | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|
| ** **                                                                  | ** ** | **Ps.**    | **5,854**  | ** ** |
| Items not requiring  (generating) resources:                                |       |       |       |
| Provision for loan losses                                                   |       | 8,286      |       |
| Provision for uncollectible  or doubtful accounts receivable                |       | 182        |       |
| Depreciation and amortization                                               |       | 954        |       |
| Other provisions                                                            |       | (1,786     | )          |
| Current and deferred income  tax                                            |       | 2,045      |       |
| Equity in earnings of  unconsolidated subsidiaries and associated companies |       | (313       | )          |
|                                                                        | ** ** | **15,222** | ** ** |
|                                                                        |       |       |       |
| **OPERATING ACTIVITIES:**                                                   |       |       |       |
| Changes in margin securities                                                |       | (11        | )          |
| Changes in investments in  securities                                       |       | 12,312     |       |
| Changes in debtor balances  under repurchase and resale agreements          |       | 144        |       |
| Changes in asset position of  derivative financial instruments              |       | 501        |       |
| Change in loan portfolio                                                    |       | (8,167     | )          |
| Changes in acquired loan  portfolios                                        |       | 502        |       |
| Changes in securitization  transaction receivables                          |       | 364        |       |
| Change in foreclosed assets                                                 |       | (94        | )          |
| Change in other operating  assets                                           |       | (969       | )          |
| Change in deposits                                                          |       | 15,344     |       |
| Change in interbank and other  loans                                        |       | (15,644    | )          |
| Change in creditor balances  under repurchase and sale agreements           |       | (7,088     | )          |
| Change in liability position  of derivative financial instruments           |       | (717       | )          |
| Change in subordinated debentures                                           |       | (2,481     | )          |
| Change in other operating  liabilities                                      |       | (2,365     | )          |
| Change in hedging instruments  related to operations                        |       | 133        |       |
| **Net  operating activity cash flows**                                      | ** ** | **6,986**  | ** ** |
|                                                                        |       |       |       |
| **INVESTING  ACTIVITIES:**                                                  | ** ** | ** ** | ** ** |
| Proceeds on disposal of property, furniture and  fixtures                   |       | 259        |       |
| Acquisition of property, furniture and fixtures                             |       | (1,447     | )          |
| Acquisition of subsidiaries and associated  companies                       |       | (183       | )          |
| Sale of other permanent investments                                         |       | 1          |       |
| Acquisition of other permanent investments                                  |       | (1         | )          |
| Dividends received                                                          |       | 135        |       |
| **Net  investing activity cash flows**                                      | ** ** | **(1,236** | **)**      |
| ** **                                                                  | ** ** | ** ** | ** ** |
| **FINANCING ACTIVITIES:**                                                   | ** ** | ** ** | ** ** |
| Dividends paid                                                              |       | (364       | )          |
| Repurchase of shares                                                        |       | (451       | )          |
| **Net financing activity cash flows**                                       | ** ** | **(815**   | **)**      |
|                                                                        |       |       |       |
| Net increase in cash and cash equivalents                                   |       | 4,935      |       |
| Adjustments to cash flows from variation in the  foreign exchange rate      |       | (63        | )          |
| Cash and cash equivalents at the beginning of the  year                     |       | 54,396     |       |
| **Cash and cash equivalents at  the end of the year**                       | ** ** | **Ps.**    | **59,268** | ** ** |

 

This statement of cash flows, consolidated with those ofthe financial entities and other companies that form part of the FinancialGroup and are susceptible to consolidation, was 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.  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 dates above. The accompanyingConsolidated Statement of Cash Flows has been approved by the Board ofDirectors in accordance with the responsibility assigned to them. The attachednotes are an integral part of this consolidated statement of cash flows.

 

 

| 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 and Tax |

 

F-87

----

Tableof Contents

 

**GRUPO FINANCIERO BANORTE, S.A.B.DE C.V. AND SUBSIDIARIES**

## **CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION**

**FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007**

(In million of Mexican pesos)

 
| ** **                                                                    | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **OPERATING ACTIVITIES:**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net Income                                                                    | ** ** | **Ps.**    | **7,014**  | ** ** | **Ps.**    | **6,810** | ** ** |
|                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Items not requiring  (generating) resources:                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value adjustments of  financial instruments                              |       | (268       | )          | (192       | )          |
| Provision for loan losses                                                     |       | 6,896      |       | 2,646      |       |
| Depreciation and amortization                                                 |       | 1,099      |       | 980        |       |
| Deferred taxes                                                                |       | (245       | )          | (487       | )          |
| Provisions for other  obligations                                             |       | 24         |       | 2,433      |       |
| Noncontrolling interest                                                       |       | 373        |       | 326        |       |
| Equity in earnings of  subsidiaries and associated companies                  |       | (276       | )          | (357       | )          |
|                                                                          | ** ** | **14,617** | ** ** | **12,159** | ** ** |
|                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Changes in operating accounts:                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase in deposits                                                          |       | 57,462     |       | 27,447     |       |
| Increase in loan portfolio                                                    |       | (52,095    | )          | (51,124    | )          |
| Increase from treasury transactions                                           |       | (220,239   | )          | 10,171     |       |
| Decrease in transactions with  securities or derivative financial instruments |       | 194,552    |       | (2,370     | )          |
| Increase in bank and other  loans                                             |       | 13,960     |       | 5,233      |       |
| Increase in deferred taxes                                                    |       | (12        | )          | (65        | )          |
| **Net  resources generated by operating activities**                          | ** ** | **8,245**  | ** ** | **1,451**  | ** ** |
|                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **FINANCING ACTIVITIES:**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase (decrease) in subordinated debentures                                |       | 10,403     |       | (1,551     | )          |
| Issuance of shares                                                            |       | 103        |       | (639       | )          |
| Increase in other payables                                                    |       | 1,269      |       | (418       | )          |
| Dividends paid                                                                |       | (949       | )          | (917       | )          |
| **Net resources generated by  financing activities**                          | ** ** | **10,826** | ** ** | **3,525**  | ** ** |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **INVESTING  ACTIVITIES:**                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Acquisition of property, furniture and fixtures,  net                         |       | (1,308     | )          | (1,961     | )          |
| Increase in permanent stock investments                                       |       | (644       | )          | 353        |       |
| Increase in deferred charges and credits                                      |       | (1,958     | )          | (388       | )          |
| Increase in foreclosed assets                                                 |       | (478       | )          | (6         | )          |
| Increase in other  accounts receivable                                        |       | (1,897     | )          | 632        |       |
| **Net resources used in investing  activities**                               | ** ** | **(6,285** | **)**      | **(1,370** | **)**      |
| ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net increase in cash and cash equivalents                                     |       | 12,786     |       | (3,444     | )          |
| Cash and cash equivalents available at the  beginning of the year             |       | 41,610     |       | 45,054     |       |
| **Cash and cash equivalents  available at the end of the year**               | ** ** | **Ps.**    | **54,396** | ** ** | **Ps.**    | **41,610** | ** ** |

 

This statement of changes in financial position,consolidated with those of the financial entities and other companies that formpart of the Financial Group and are susceptible to consolidation, was preparedaccording to accounting principles applicable to Financial Service HoldingCompanies issued by the Mexican National Banking and Securities Commissionaccording to Article 30 of the Law of Financial Institutions.  Such principles are consistently applied inthe financial statements, which are presented according to sound practices andapplicable legal and administrative provisions and reflect all the operationsconducted by the Financial Group, its financial service subsidiaries and theother companies that form part of the Financial Group and are consolidated asof the dates above.

 

The accompanying Consolidated Statement of Changes inFinancial Position has been approved by the Board of Directors in accordancewith the responsibility assigned to them.

 

The attached notes are an integral part of thisconsolidated statement 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 and Tax |

 

F-88

----

Tableof Contents

 

**GRUPO FINANCIERO BANORTE, S.A.B. DE C.V. ANDSUBSIDIARIES**

## **NOTES TOCONSOLIDATED FINANCIALSTATEMENTS**

## **FOR THE YEARSENDED DECEMBER 31, 2009, 2008 AND 2007**

**(In million of Mexican pesos, except exchange rates)**

** **

**1 — ACTIVITY AND REGULATORY ENVIRONMENT**

 

GrupoFinanciero Banorte, S.A.B. de C.V. (the Financial Group) is authorized byMexico’s Ministry of Finance and Public Credit (SHCP) to operate as a holdingcompany under the form and terms established by the Mexican Financial GroupLaw, subject to the supervision and monitoring of the Mexican National Bankingand Securities Commission (the Commission). Its main activities consist ofacquiring and managing entities engaged in the financial services industry andsupervising their activities, as defined in the above-mentioned law. TheFinancial Group and its subsidiaries are regulated, depending on theiractivities, by the Commission, the Mexican National Insurance and BondCommission, the Mexican National Retirement Savings Systems Commission (theCommissions), the Mexican Central Bank (Banco de México) and other applicablelaws 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 and casualty insurance.

 

Perlegal requirements, the Group has unlimited liability for the obligationsassumed 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 28, 2010 meeting in accordance withthe responsibility assigned to them.

 

**2 — SIGNIFICANT EVENTS DURING THE YEAR**

 

**a.****         ****Prepayment ofSubordinated Debentures**

 

On February 17, 2009Banco Mercantil del Norte, S. A. (Banorte) exercised the prepayment option onits USD 300 million non-convertible subordinated debentures issued in 2004scheduled to mature in 2014, which were registered on the Luxembourg StockExchange. This subordinated debt was issued in February 2004 with a10-year term and included a prepayment option as of the fifth year.

 

**b.****         ****Merger of Créditos Pronegocio, S.A. de C.V.********(Pronegocio)**

 

At the ExtraordinaryStockholders’ Meeting held on April 30, 2009, the merger of Banorte, asthe merging entity, and Pronegocio (subsidiary of the Financial Group), as themerged entity, was approved.  The finalmerger agreement was executed on August 31, 2009, after having receivedthe corresponding authorizations by the regulating authorities. Said merger wascompleted in September 2009.

 

F-89

----

Tableof Contents

 

**c.****         ****Acquisition of the remaining 30% ofINB**

 

On April 1, 2009, Banorte announced the completion of thepurchase transaction of the remaining 30% of the shares of INB Financial Corp.(“INB”), holding company of “Inter National Bank” based in Texas in the UnitedStates of America.This acquisition concludes the original plan established in January 2006,when Banorte acquired 70% of Inter National Bank’s shares through itssubsidiary Banorte USA Corporation, which held that percentage from December 31,2008 until April 1, 2009. The cost of acquiring the remaining 30% was USD146.6 million, which Banorte covered using its own resources. This acquisition did not impactBanorte’s regulatory capitalization ratio. The effect of this transaction isreflected in the Financial Group’s statement of changes in stockholders’equity.

 

**d.****         ****Issuance of subordinated debentures**

 

In March 2009, Banorte issued subordinated debentures tostrengthen its regulatory capital.The issuance of Ps. 2,200 in preferred non-convertiblesubordinated debentures (BANORTE 09) with a 10-year maturity will pay aninterest rate equivalent to the 28-day Interbank Equilibrium Interest Rate(TIIE) + 2%. Moody’s rated the securities with Aaa.mx and Fitch with AA (mex).

 

**e.****         ****International Finance Corporation’s(IFC) Investment in Banorte**

 

Banorte’s Extraordinary Stockholders’ Meeting held on October 23,2009 approved both an increase in its ordinary stockholders’ equity and amodification to its corporate bylaws to complete the IFC’s investment of up toUSD 150 million in Banorte’s capital. The investment was finalized in November 2009by providing the IFC 3,370,657,357 ordinary nominative “O” Series shareswith a nominal value of Ps. 0.10 (ten cents). The IFC settled this operationwith USD 82.3 million in cash and the capitalization of a credit of USD 67.7million. Banorte, the IFC and the Financial Group celebrated a series ofagreements that obligate the IFC to maintain its participation in Banorte forat least five years. After five years the IFC could sell its participation tothe Financial Group, which would be obligated to purchase it either byexchanging it with shares of the Financial Group or paying it in cash,depending on the Financial Group’s choice and convenience.

 

**f.****           ****Afore Banorte Generali, S. A. de C. V. asset acquisitions********(AFOREBanorte)**

 

In June 2009, AFORE Banorte acquired theretirement fund management and investment business from AFORE IXE for Ps. 258.This transaction involved transferring a portfolio of 312,489 clients, whichrepresents Ps. 5,447 in managed assets.

 

Furthermore, in August 2009, AFORE Banorteacquired AFORE Ahorra Ahora’s management rights over a portfolio of 367,660clients, which represents Ps. 1,138 in managed assets. The amount paid for thisoperation was Ps. 19.

 

Additionally, in December 2009, AFORE Banorteacquired AFORE Argos’ management rights over a portfolio of over 22 thousandclients, which represents managed assets of approximately Ps. 600. Theacquisition cost was Ps. 17.

 

These operations wereapproved by the respective Boards of Directors, Government Board of the MexicanNational Commission for the Retirement Savings System and the FederalCompetition Commission.

 

These acquisitionsposition AFORE Banorte as the fourth largest Afore in Mexico, in terms ofnumber of affiliates.

 

F-90

----

Tableof Contents

 

**3 — BASIS OF PRESENTATION**

 

**Monetary unit of the financial statements**

 

The financial statementsand notes as of December 31, 2009 and 2008 and for the years then endedinclude balances and transactions in Mexican pesos of purchasing power of suchdates.

 

**Consolidationof financial statements**

 

The accompanyingconsolidated financial statements include those of the Financial Group and itssubsidiaries mentioned below. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

As of December 31,2009 and 2008, the Financial Group’s consolidated subsidiaries and its equityownership is as follows:

 
| ** **                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Banco Mercantil  del Norte, S.A. and subsidiaries |       | 92.72    | %          | 97.06    | %          |
| Casa de Bolsa  Banorte, S.A. de C.V.              |       | 99.99    | %          | 99.99    | %          |
| Arrendadora y  Factor Banorte, S.A. de C.V.       |       | 99.99    | %          | 99.99    | %          |
| Almacenadora  Banorte, S.A. de C.V.               |       | 99.99    | %          | 99.99    | %          |

 

**Conversionof Financial Statements of Banorte USA, Corporation and Subsidiaries (indirectforeign subsidiary)**

 

In order to consolidatethe financial statements of Banorte USA, they are first adjusted in therecording and functional 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:

 

Foreign operations whoserecording and functional currency are one and the same convert their financialstatements using the following exchange rates: a) year-end rate for assets andliabilities, b) historical rate for stockholders’ equity, and c) weightedaverage rate of the period for income, costs and expenses. The conversioneffects are presented in the Financial Group’s stockholders’ equity.

 

**Comprehensive Income**

 

This is the change instockholders’ equity during the year, for items other than distributions andactivity in contributed common stock, and is comprised of the net income of theyear, plus other comprehensive income (loss) items of the same period, whichare presented directly in stockholders’ equity without affecting theconsolidated statements of income, in accordance with the accounting practicesestablished by the Commission. In 2009, 2008 and 2007, comprehensive incomeincludes the net income of the year, the result from valuation of available forsale securities, the effect of subsidiaries, the effect of acquiring theremaining 30% of INB, the result from valuation of cash flow hedginginstruments and the change in credit card loan rating methodology.

 

**4 — SIGNIFICANT ACCOUNTING POLICIES**

 

The significantaccounting policies of the Financial Group are in conformity with practicesprescribed by the Commission through issued accounting standards and otherapplicable laws, which require Management to make certain estimates and usecertain assumptions to determine the valuation of certain items included in theconsolidated financial statements and make the required disclosures therein.Even though they may differ in their final effect, Management considers theestimates and assumptions to have been adequate under the currentcircumstances.

 

Pursuant to accountingCircular A-1, “Basic Scheme of the Set of Accounting Criteria Applicable toBanking Institutions”, prescribed by the Commission, the Institutions’accounting will adhere to Mexican Financial Reporting Standards (NIF), definedby the Mexican Board for Research and Development of Financial ReportingStandards (CINIF), except when the Commission deems it necessary to apply aspecific accounting standard or Circular, considering the fact that financialinstitutions perform specialized operations.

 

F-91

----

Tableof Contents

 

**Changesin accounting policies**

 

On September 1,2008, the Commission issued a resolution that modifies the “General ProvisionsApplicable to Banking Institutions” thereby replacing accounting Circular C-1, “Recordingand Cancellation of Financial Assets”, and C-2, “Securitization Operations”,and adding accounting Circular C-5, “Consolidation of Special Purpose Entities.”These provisions went into effect on January 1, 2009.

 

Additionally, on April 27,2009, the Commission issued a resolution that modifies the “General ProvisionsApplicable to Banking Institutions” thereby updating all accounting criteria.These provisions went into effect on April 28, 2009.

 

The principle changes inthe accounting policies that apply to the Financial Group are explained below:

 

·                  Circular B-2, “Investments in securities”,introduces the concept of amortized cost for the valuation of held to maturitysecurities; it considers the loss of value due to the deterioration ofsecurities available for sale and held to maturity; such loss must be recordedin the results of operations. It allows reclassifying held to maturitysecurities as available for sale, provided there is no intention or capabilityof holding them to maturity. The Commission’s expressed authorization isrequired to reclassify to securities held to maturity or from trading tosecurities available for sale. The result of selling the securities is recordedas the result of a purchase and sale agreement instead of a valuation result.Furthermore, the transaction costs of acquiring securities will be recordedaccording to the category; in the case of securities for trading they will berecorded in the results of operations, and in the cases of securities availablefor sale and held to maturity, they will be recognized as part of theinvestment cost.

 

·                  Circular B-5, “Derivatives and hedgingtransactions”, establishes the recognition of purchase and sale transactionagreements as embedded derivatives. Assets and liabilities valued at their fairvalue through results may be considered hedging items. Tests of effectivenessare required for hedging in all cases, with the ineffective portion of thehedge recorded in the results of operations. The presentation of these items inthe balance sheet is modified. Furthermore, the transaction costs associatedwith the acquisition of derivative financial instruments must be recordeddirectly in the results of the period in which they were incurred.

 

·                  Circular B-6, “Loan portfolio”, indicatesthat the annual credit card fees charged by banking institutions, the fees forunused credit lines, as well as their associated costs and expenses, must allbe amortized during a 12 month period. Costs and expenses associated with theinitial granting of the credit are recorded as a deferred expense to beamortized as interest expense over the same period in which the fee income isrecorded. This applies only to those costs and expenses that are consideredincremental. These changes will be applied prospectively given the practicalimpossibility of their determination for prior years.

 

·                  According to Circular C-2, “Securitizationtransactions,” as of January 1, 2009, securitizations must meet therequirements set forth in Circular C-1, “Recognition and derecognition offinancial assets”, in order to be considered as a sale. Otherwise, thesecuritized assets shall remain on the balance sheet, and the resultingliability must be recorded. On the other hand, an entity shall consolidate aspecial purpose entity (EPE) created on or after January 1, 2009, when theeconomic substance of the relationship indicates that the EPE is controlled bythe entity.

 

·                  A cash flow statement must be presentedprospectively instead of a statement of changes in financial position; as aresult, a statement of cash flows and a statement of changes in financialposition for the years ended December 31, 2009 and 2008, respectively, arepresented. Employee profit sharing (PTU) should be recorded in 2009 as part ofoperating expenses and not as part of income taxes. In general, the financialstatement structure is changed, and there are more disclosure requirements invarious concepts, mainly concerning derivative financial instruments andrelated parties.

 

·                  Employee profit sharing (PTU) should bepresented in 2009 as part of operating expenses and not as part of incometaxes.

 

·                  In general, the financial statementstructure is changed, and there are more disclosure requirements in variousconcepts, mainly concerning derivative financial instruments and relatedparties.

 

F-92

----

Tableof Contents

 

·                  On August 12, 2009, the Commissionissued a resolution modifying the “General Provisions applicable to BankingInstitutions”, which modifies the consumer loan rating methodology to show theexpected loss in these operations based on the current environment.

 

This new methodologyrequires separating the consumer loan portfolio into two groups: those thatrefer to credit card operations and those that do not. The consumer loanportfolio that does not include credit card operations will consider the numberof unpaid billing periods established by the Financial Group as well as theprobability of nonpayment and the severity of the loss according to percentagesestablished by the Commission. If this portfolio has collateral or means ofpayment in favor of the Financial Group, the covered balance will be consideredto have zero unpaid periods for provisioning purposes.

 

Regarding credit cardrelated consumer loans, such portfolio shall be provisioned and rated on aloan-by-loan basis taking into consideration the probability of nonpayment, theseverity of the loss and the exposure to nonpayment. If there are less than 10consecutive delinquent payments at the calculation date, the severity of theloss will be considered as 75%; if there are 10 or more, it will be 100%.Exposure to nonpayment is determined by applying a formula that considers boththe total balance of the creditor’s debt and the credit limit. In the case ofinactive accounts, a provision equivalent to 2.68% of the credit limit must beconstituted.

 

The resulting effect ofapplying the revised consumer loan rating method for credit card operations isshown in Note 11.

 

**Retrospectiveapplication of the changes in accounting principles**

 

As a result of theaccounting changes described above, the 2008 financial statements reflect theeffects of the reclassifications derived from such changes in order to makethem comparable to the 2009 financial statements.

 

The 2008 items that havebeen retrospectively reclassified and their effects are:

 

**ITEMS  OF THE CONSOLIDATED BALANCE SHEET**

 
| **ASSETS**                                | ** ** | **As reported** | ** ** | **As adjusted** | ** ** | **Change** | ** ** |
|-------------------------------------------|------------|----------------------|------------|----------------------|------------|------------|------------|
| CASH AND CASH EQUIVALENTS                 |       | Ps.                  | 54,402     |                 | Ps.        | 54,396     |       | Ps. | (6 | ) |
| MARGIN SECURITIES                         |       | —               |       | 6                    |       | 6          |       |
| INVESTMENTS IN SECURITIES                 |       | 239,969              |       | 239,173              |       | (796       | )          |
| RECEIVABLES  GENERATED BY SECURITIZATIONS |       | —               |       | 796                  |       | 796        |       |
| **TOTAL ASSETS**                          | ** ** | **577,025**          | ** ** | **577,025**          | ** ** | **—** | ** ** |
|                                           |            |                      |            |                      |            |            |            |  |  |  |

 
| **LIABILITIES**                             | ** ** | **As reported** | ** ** | **As adjusted** | ** ** | **Change** | ** ** |
|---------------------------------------------|------------|----------------------|------------|----------------------|------------|------------|------------|
| OTHER ACCOUNT PAYABLE:                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** ** | ** ** |
| Income tax                                  |       | 1,272                |       | 374                  |       | (898       | )          |
| Employee profit  sharing                    |       | —               |       | 898                  |       | 898        |       |
| Creditors  from settlements of transactions |       | —               |       | 2,405                |       | 2,405      |       |
| Sundry debtors and other payables           |       | 13,121               |       | 10,716               |       | (2,405     | )          |
| **TOTAL OTHER ACCOUNTS  PAYABLE**           | ** ** | **Ps.**              | **14,393** | ** **           | **Ps.**    | **14,393** | ** ** | **Ps.** | **—** | ** ** |
|                                             |            |                      |            |                      |            |            |            |  |  |  |

 

**ITEMS OF THE CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                               | ** ** | **As reported** | ** ** | **As adjusted** | ** ** | **Change** | ** ** |
|------------------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| Interest income                          |       | Ps.             | 50,416     |            | Ps.        | 50,417     |       | Ps. | 1 |   |
| Brokerage revenues                       |       | 1,040           |       | 1,039           |       | (1         | )          |
| Other revenues                           |       | —          |       | 746             |       | 746        |       |
| Administrative and  promotional expenses |       | (15,807         | )          | (16,687         | )          | (880       | )          |
| Other income                             |       | 3,789           |       | 2,997           |       | (792       | )          |
| Other expenses                           |       | (1,569          | )          | (1,523          | )          | 46         |       |
| Current income tax                       |       | (3,645          | )          | (2,765          | )          | 880        |       |
| **NET INCOME**                           | ** ** | **Ps.**         | **7,014**  | ** **      | **Ps.**    | **7,014**  | ** ** | **Ps.** | **—** | ** ** |

 

F-93

----

Tableof Contents

 

The 2007 items that havebeen retrospectively reclassified and their effects are:

 

**ITEMS OF THE CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                              | ** ** | **As reported** | ** ** | **As adjusted** | ** ** | **Change**      | ** ** |
|-----------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| Interest income                         |       | Ps.             | 40,585     |            | Ps.        |  40,585    |       | Ps. | — |   |
| Brokerage revenues                      |       | 1,292           |       | 1,292           |       | —          |       |
| Other revenues                          |       | —          |       | 303             |       | 303             |       |
| Administrative and promotional expenses |       | (14,432         | )          | (15,294         | )          | (862            | )          |
| Other income                            |       | 2,835           |       | 2,096           |       | (739            | )          |
| Other expenses                          |       | (968            | )          | (532            | )          | 436             |       |
| Current income tax                      |       | (3,780          | )          | (2,918          | )          | 862             |       |
| **NET INCOME**                          | ** ** | **Ps.**         | **6,810**  | ** **      | **Ps.**    | ** 6,810** | ** ** | **Ps.** | **—** | ** ** |

 

The significantaccounting policies followed by the Financial Group are described below:

 

**Recognition of the effects of inflation in financialinformation**

 

Inflation recognition isdone pursuant to NIF B-10, “Inflation Effects,” which considers two types ofeconomic environments: a) inflationary; when the accumulated inflation of thethree previous years is 26% or over, in which case the inflation effects mustbe acknowledged; b) non-inflationary; when in the same period inflation is lessthan 26%; in this case the effects of inflation should not be recorded in thefinancial statements.

 

The cumulative Mexicaninflation over the three years prior to 2009 and 2008 was 15.03% and 11.26%,respectively. Therefore, the Mexican economy is considered as non-inflationaryaccording to the NIF B-10 definition. As of January 1, 2008, the FinancialGroup is no longer adjusting for the effects of inflation. However, assets,liabilities and stockholders’ equity as of December 31, 2009 and 2008include the restatement effects recorded up until December 31, 2007.

 

Until December 31,2007, such recording resulted mainly in inflationary gains or losses onnon-monetary and monetary items, which are shown in the financial statementsunder “Insufficiency in Restated Stockholders’ Equity” and “Effect of HoldingNon-Monetary Assets”.

 

The Mexican inflationrates for the years ended December 31, 2009 and 2008, were 3.72% and6.39%, respectively.

 

**Cash and Cash Equivalents**

 

Cash and cash equivalentsare stated at nominal value, except for coined precious metals, which arestated at fair value at the end of the period. Funds available in foreigncurrency are valued at the exchange rate published by Banco de México at thebalance sheet date.

 

**Trading securities**

 

Trading securities arethose owned by the Financial Group, acquired with the intention of selling themfor a profit derived from price differences in short-term purchase and saleoperations made by the Financial Group as a market participant.

 

At acquisition they areinitially recorded at fair value, which may include either a discount orpremium.

 

These securities (includingboth capital and accrued interest) are stated at fair value, which isdetermined by the price vendor used by the Financial Group.

 

The tradingsecurities valuation result is recorded in the results of the period.

 

**Available for sale securities**

 

Securities available for sale are debt or equitysecurities that are neither classified as trading nor held to maturity,therefore they represent a residual category, that is, they are purchased withan intention different from that of the trading or held to maturity securities.

 

F-94

----

Tableof Contents

 

They are valued in thesame way as trading securities, but with unrealized gains and losses recognizedin other comprehensive income within stockholders’ equity

 

In an inflationaryenvironment, the result of monetary position corresponding to the valuationresult of securities available for sale is recorded in other comprehensiveincome in stockholders’ equity.

 

**Held-to-maturity securities**

 

Securities held tomaturity consist of debt instruments whose payments are fixed or can bedetermined with a set maturity, which are acquired with the intent andcapability to hold them to maturity.

 

They are initiallyrecorded at fair value and valued at amortized cost, which means that theamortization of the premium or discount (included in the fair value at whichthey were initially recorded), is part of the earned interest.

 

General valuationstandards

 

Upon the sale of tradingsecurities, the valuation result previously recorded in the year’s results isreclassified as part of the gain or loss on the sale. Similarly, upon the saleof available for sale securities, the cumulative valuation result recorded inother comprehensive income in stockholders’ equity is reclassified as part ofthe gain or loss on the sale.

 

Accrued interest on debtinstruments is determined using the effective interest method and is recordedin the corresponding category of investments in securities and in the year’sresults.

 

Dividends on equityinstruments are recorded in the corresponding category of investments insecurities and in the year’s results when the right to receive such dividendsis established.

 

The foreign exchange gainor loss on investments in securities denominated in foreign currency isrecorded in the year’s results.

 

Reclassifications ofsecurities held to maturity to available for sale are allowed, provided thereis no intention or ability of holding them to maturity. The Commission’sexpressed authorization is required to reclassify securities to held tomaturity, or from trading to securities available for sale.

 

If securities held tomaturity are reclassified as available for sale, the corresponding valuation resulton the reclassification date is recorded in other comprehensive income withinstockholders’ equity.

 

An impairment loss on asecurity is recorded against the year’s results if there is objective evidenceof such impairment as a result of one or more events, occurring after theinitial recording of the security, that have had an impact on the estimatedfuture cash flows that can be reliably determined. The effect of recording theimpairment of securities is shown in Note 6.

 

A previously recordedimpairment loss is reversed against the year’s results if, in a later period,the amount of the loss decreases and such decrease is objectively associatedwith an event occurring after the impairment was recorded.

 

**Customer repurchase agreements (repos)**

 

This is a transaction bywhich the purchaser acquires ownership of credit instruments for a sum of moneyand is obligated to transfer the property of another amount of instruments ofthe same kind to the seller of the securities within the agreed term and in exchangefor the same price, plus a premium. The purchaser keeps the premium unlessagreed otherwise.

 

Repurchase transactionsare recorded according to their economic substance, which is financing withcollateral, by which the Financial Group, acting as the purchaser, providescash as financing in exchange for financial assets that serve as guarantee inthe event of noncompliance.

 

On the repurchaseagreement transaction contract date, the Financial Group, acting as the seller,records the cash income, or else a settlement debtor account as well as apayable account at its fair value, initially at the agreed price, whichrepresents the obligation to reimburse the cash to the purchaser. The accountpayable is subsequently valued over the term of the repurchase agreement atamortized cost by recognizing the interest from the repurchase agreement in theyear’s results using the effective interest method. As to the collateralgranted, the Financial Group reclassifies the financial asset in its 

 

F-95

----

Tableof Contents

 

balance sheet asrestricted and values it according to the criteria mentioned earlier in thisnote until the maturity of the repurchase agreement.

 

The Financial Group,acting as the purchaser, on the repurchase transaction contract date recordscash and cash equivalents or a creditor settlement account, with an accountreceivable at its fair value, initially at the agreed price, which representsthe right to recover the cash that was delivered. The receivable issubsequently valued over the life of the repurchase agreement at amortized costby recognizing the repurchase agreement interest in the year’s results usingthe effective interest method. As to the collateral received, the FinancialGroup records it in off balance sheet memorandum accounts until the repurchaseagreement’s maturity, following the guidelines of Circular B-9, “Asset Custodyand Management”, issued by the Commission.

 

**Derivative financial instruments**

 

The Institution isauthorized to perform two types of transactions involving derivative financialinstruments:

 

Transactions to hedge theFinancial Group’s open risk position: Such transactions involve purchasing or sellingderivative financial instruments to mitigate the risk resulting from one or agroup of given transactions.

 

Transactions for tradingpurposes: TheFinancial Group enters into such transactions as a market participant forreasons other than to hedge its exposed position.

 

Transactions withderivative financial instruments are presented in assets or liabilities, asapplicable, under the heading “Derivative financial instruments”, separatingderivatives for trading purposes from those for hedging purposes.

 

When entering intotransactions involving derivative financial instruments, the Financial Group’sinternal policies and norms require an assessment and if necessarydetermination of different risk exposures for each counterparty in thefinancial system that have been authorized by the Banco de México to enter intothese types of transactions. Regarding corporate customers, a preauthorizedcredit line by the National Credit Committee must be granted or liquidguarantees must be given through a securitized collateral contract beforeentering into these types of transactions. Medium and small sized companies andindividuals must provide liquid guarantees established in securitizedcollateral contracts with this type of transactions.

 

The recognition or cancellationof assets and/or liabilities derived from transactions involving derivativefinancial instruments occurs when these transactions are entered into,regardless of the respective settlement or the delivery date.

 

*Forward and futures contracts*

 

Forward and futures contracts with trading purposesestablish an obligation to buy or sell a financial asset or an underlying at afuture date in the quantity, quality and prices pre-established in thecontract. Futures contracts are recorded initially by the Financial Group inthe balance sheet as an asset and a liability at fair value, which representsthe price agreed in the contract in order to acknowledge the right andobligation to receive and/or deliver the underlying, as well as the right andobligation to receive and/or deliver the cash equivalent to the underlying,object of the contract.

 

The derivatives are presented in a specific item inassets or liabilities depending on whether their fair value (as a consequenceof the rights and/or obligations it establishes) corresponds to a debtorbalance or a creditor balance, respectively. Such debtor or creditor balancesin the balance sheet are offset if the Financial Group has the contractualright to offset the stated amount, the intention to settle the net amount orrealize the asset and cancel the liability simultaneously.

 

In the case of trading transactions, their balancerepresents the difference between the fair value of the contract and theestablished “forward” price.

 

*Options contracts*

 

Through paying a premium, options contracts grant theright but not the obligation to buy or sell a financial asset or underlyinginstrument 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.

 

F-96

----

Tableof Contents

 

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 said price isestablished is the reference or underlying value.

 

The premium is the price the holder pays the issuerfor the option rights.

 

The holder of a call option has the right, but not theobligation, to purchase from the issuer a certain financial asset or underlyinginstrument at a fixed price (transaction price) within a certain term.

 

The holder of a put option has the right, but not theobligation, to sell a certain financial asset or underlying instrument at afixed price (transaction price) within a certain term.

 

The Financial Group records the option premium as anasset or liability at the transaction date. The fluctuations resulting frommarket valuation of the option’s premium are recorded in the income statementunder “Trading” thereby affecting the corresponding account’s balance.

 

*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.

 

They are recorded at fairvalue which corresponds to the net amount between the asset and liabilityportion for the rights and obligations agreed upon; they are subsequentlyvalued at fair value using the present value of the future flows to be receivedor granted according to the estimated future applicable rates, discounting themarket rate on the valuation date with yield curves given by the priceprovider. The result of such valuation is recorded in the year’s results.

 

Management’s policy withregards to hedge contracts is to protect the Financial Group’s balance sheetand stockholders’ equity by anticipating interest rate and exchange ratefluctuations.

 

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 for each transaction is created inorder to have documented proof as per Circular B-5 paragraph 71, whichestablishes conditions for using hedge accounting.

 

Accordingly, theFinancial Group documents its hedging transactions based on the followingguidelines:

 

·      A cash flow hedging transaction is recorded asfollows:

 

a.     The effective portion of the hedging instrument’s gainor loss is recorded as a component of other comprehensive income instockholders’ equity using as a counter-account an asset or liability accountcalled “derivative financial instruments”. The portion determined asineffective is measured through retrospective tests, and when they result inover-hedging, they are immediately recognized in current earnings.

 

b.     The effective hedging instrument component stated instockholders’ equity associated with the hedged item is adjusted to equal thelower (in absolute terms) of these items:

 

I.    The accumulated gain or loss of thehedging instrument from its inception.

 

ii.   The accumulated change in the fair value(present value) of the expected future cash flows of the item hedged from thebeginning of the transaction.

 

Valuation method

 

As the derivativeproducts transacted are considered conventional (“plain vanilla”), the standardvaluation models contained in the derivative transaction systems and theFinancial Group’s risk management are used.

 

F-97

----

Tableof Contents

 

All of the valuationmethods that the Financial Group uses result in the fair value of thetransactions and are periodically adjusted. Furthermore, they are audited byinternal and external auditors, 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.

 

Operation strategies

 

*Trading*

 

The Financial Group participatesin the derivative instruments market with trading purposes, and the riskexposures 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 any necessary decisions.

 

*Hedging*

 

The hedging strategy isdetermined annually and each time the market conditions require. Hedgingstrategies are submitted to the Risk Policies’ Committee.

 

Hedging transactionscomply with the applicable standard set forth in Circular B-5 of the CNBV. Thisimplies, among other things, that the hedge’s effectiveness is evaluated bothprior to its arrangement (prospective) and thereafter (retrospective). Thesetests are performed on a monthly basis.

 

Embedded derivatives

 

Identified embeddedderivatives are separated from the host contract for valuation purposes and aretreated as derivatives when they meet the features set forth in Circular B-5paragraph 22. The main embedded derivatives recognized by the Financial Groupare from service and leasing contracts established in US dollars.

 

**Loan portfolio**

 

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:

 

·                  Loans with bullet payment of principaland interest at maturity: 30 calendar days after being overdue.

 

·                  Loans involving a single principalpayment at maturity, but with periodic interest payments: total principal andinterest payments 30 and 90 calendar days after being overdue, 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 when they are 60 or more daysoverdue.

 

·                  Overdrawn customer checking accounts areconsidered as part of the past-due portfolio when such situations arise.

 

Interest is recognizedand accrued as income when earned. The accrual of interest income is suspendedwhen loans are transferred to the past-due portfolio.

 

The fees charged for theinitial granting of loans will be recorded as a deferred credit, which will beamortized as interest income using the straight-line method over the loan’scontractual term, except those originating from revolving loans, which areamortized over a 12-month period.

 

Annual credit card fees,whether the first or renewal, are recorded as a deferred credit and amortizedover a 12-month period against the year’s results in the commission and feeincome line item.

 

F-98

----

Tableof Contents

 

The costs and expensesassociated with the initial granting of the credit are stated as a deferredcharge, which is amortized against the year’s earnings as interest expense forthe duration of the loan, except those originating from revolving loans andcredit cards that are amortized over a 12-month period.

 

Restructured past-dueloans are not considered in the performing portfolio until evidence ofsustained payment is obtained; this occurs when credit institutions receivethree timely consecutive payments, or a payment is received for periods exceeding60 days.

 

Renewed loans in whichthe borrower has not paid on time or when the accrued interest balance equalsat least 25% of the original loan amount are considered past-due until evidenceof sustained 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 portfolio ratingprovisions*

 

The loan portfolio israted 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 rating the loan portfolio as issued by theCommission on August 12, 2009 and December 2, 2005, respectively. TheFinancial Group uses the internal methodology authorized by the Commission forrating commercial loans.

 

Such provisions alsoestablish general methodologies for the rating and calculation of allowancesfor each type of loan, while also permitting credit institutions to classifyand calculate allowances based on internal methodologies, when previouslyapproved by the Commission.

 

Since June 2001, theFinancial Group has the Commission’s approval to apply its own methodology,called Internal Risk Rating (CIR Banorte) to commercial loans. CIR Banorteapplies to commercial loans with outstanding balances equal to or greater than4 million UDIS or its equivalent in Mexican pesos. This methodology isexplained below.

 

On 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 suchinternal loan rating methodology.

 

The commercial loanportfolio rating procedure requires credit institutions to 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 months followingeach quarterly close, financial institutions must apply to any loan therespective rating used at the close of the immediately preceding quarter, basedon the outstanding balance on the last day of the aforementioned months. Theallowances for loan risks that have exceeded the amount required to rate theloan will be cancelled on the date of the following quarterly rating againstthe period’s results. Additionally, recoveries on previously written-off loanportfolio are recorded in the period’s results.

 

Derived from theacquisition of INB in 2006, Banorte applied the loan rating methodologiesestablished by the Commission to INB’s loans, homologating the risk degrees andadjusting the allowance for loan losses derived from applying suchmethodologies.

 

Commercial loans equal toor greater than 4 million UDIS or its equivalent in Mexican pesos are ratedbased on the following criteria:

 

·                  Debtor’scredit quality

·                  The loans in relation to the value of the guarantees or the value ofthe assets in trusts or in “structured” programs, as applicable.

 

F-99

----

Tableof Contents

 

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 rating methodology, CIR Banorte, authorized by theCommission 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 indicates theborrower’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               |       | Minimum risk                         |       | A2                                       |
| 4               |       | Low risk                             |       | B1                                       |
| 5               |       | Moderate risk                        |       | B2                                       |
| 6               |       | Average risk                         |       | B3                                       |
| 7               |       | Risk requiring  management attention |       | C1                                       |
| 8               |       | Potential partial loss               |       | C2                                       |
| 9               |       | High loss percentage                 |       | D                                        |
| 10              |       | Total loss                           |       | E                                        |

 

For commercial loansunder 4 million UDIS or its equivalent in Mexican pesos and 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.

 

**Acquired loan 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:

 

*Costrecovery method —* Payments received are applied against the acquisition cost of the loanportfolio until the balance equals zero. Recoveries in excess of theacquisition cost are recognized in current earnings.

 

*Interestmethod -* Theresult of multiplying the acquired portfolio’s outstanding balance by theestimated yield is recorded in current earnings. Differences between theFinancial Group’s collection estimates and actual collections are reflectedprospectively in the estimated yield.

 

F-100

----

Table of Contents

 

*Cashbasis method -*The amount resulting from multiplying the estimated yield times the amountactually collected is recorded in the income statement, provided it is notgreater than the amount obtained by the interest method. The difference betweenthe recorded amount and the amount collected reduces the outstanding portfoliobalance, once the entire initial investment has been amortized. Any subsequentrecovery will be recorded in the income statement.

 

For its portfolios valuedusing the interest method, the Financial Group evaluates twice a year to verifyif the cash flow estimate of its collection rights is consistent with actualrecoveries and therefore considered to be effective. The Financial Group usesthe cost recovery method on those collection rights in which the expected cashflow estimate is not effective. The expected cash flow estimate is consideredas “highly effective” if the result of dividing the sum of the flows actuallycollected by the sum of the expected cash flows is between 0.8 and 1.25 whensuch effectiveness is evaluated.

 

**Securitizations involving transfer of ownership**

 

Using securitizationtransactions involving the transfer of ownership in mortgage and governmentloans, the Financial Group transfers those financial assets through a trust sothat said trust may issue publically available securities through anintermediary. The securities represent the right to the yield on the securitizedportfolio and, as compensation the Financial Group receives cash and a receipt,which grants it the right over the trust’s cash flow remnants after paying theholders for their certificates. This receipt is recorded at its fair valueunder “Receivables generated by securitizations”.

 

The Financial Groupprovides management services for the transferred financial assets and recordsthe revenue thereof in the period’s earning when accrued. Such revenues areincluded in “Other income.”

 

**Other accounts 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 is 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.

 

**Merchandise Inventory**

 

This is comprised mainlyof finished goods and prior to 2008 was restated to the lower of replacementcost or market. Cost of sales, included in “Other expenses”, is restated usingthe replacement cost at the time of the sale prior to 2008.

 

**Impairment of the value of long-lived assets and theirdisposal**

 

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.

 

**Foreclosed assets, net**

 

Foreclosed property orproperty received as payments in kind are recorded at the lower of their costor fair value reduced by the strictly necessary costs and expenses disbursed inthe foreclosure. Cost is determined as the forced-sale value established by thejudge upon foreclosure or, in the case of payments in kind, the price agreedbetween the parties involved.

 

When the value of theasset or the accrued or past due amortizations leading to the foreclosure, netestimates, is higher than that of the foreclosed property, the difference isrecorded in the period’s results under “Other revenues.”

 

When the value of theasset or the accrued or past due amortizations leading to the foreclosure, netestimates, is lower than that of the foreclosed property, its value is adjustedto the net asset value.

 

The carrying value isonly modified when there is evidence that the fair value is lower than therecorded carrying value. Reductions in the carrying value of the loan arerecorded in the current earnings as they occur.

 

F-101

----

Table of Contents

 

The provisions applicableto the new valuation methodology for the allowance for loan losses mentionedabove define the valuation methodology for reserves related to eitherforeclosed property or those assets received as payment in kind, establishingthat additional 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 securities receivedas foreclosed goods or payment in kind, based on the following guidelines:

 

I. In the case ofcollection rights and personal property, the provisions referred to by thepreceding paragraph must be treated as follows:

 

**Personalproperty reserves**

 
| **Time  elapsed as of  award date or receipt as payment in kind (months)** | ** ** | **Reserve********percentage** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------|------------|
| Up to 6                                                                    |       | 0                             | %          |
| More than 6 and up to 12                                                   |       | 10                            | %          |
| More than 12 and up to 18                                                  |       | 20                            | %          |
| More than 18 and up to 24                                                  |       | 45                            | %          |
| More than 24 and up to 30                                                  |       | 60                            | %          |
| More than 30                                                               |       | 100                           | %          |

 

The amount of thereserves to be created will be the result of applying the reserve percentagedetermined under the preceding table to the value of collection rights orforeclosed property, received as payment in kind or awarded in a courtproceeding.

 

II. Investments insecurities must be valued in accordance with the provisions of the Commission’saccounting Circular B-2, using annual audited financial statements and monthlyfinancial 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 realestate property, provisions must be created as follows:

 

**Realestate property reserves**

 
| **Time  elapsed as of  award date or receipt as payment in  kind (months)** | ** ** | **Reserve********percentage** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------|------------|
| Up to 12                                                                         |       | 0                             | %          |
| More than 12 and up to 24                                                        |       | 10                            | %          |
| More than 24 and up to 30                                                        |       | 15                            | %          |
| More than 30 and up to 36                                                        |       | 25                            | %          |
| More than 36 and up to 42                                                        |       | 30                            | %          |
| More than 42 and up to 48                                                        |       | 35                            | %          |
| More than 48 and up to 54                                                        |       | 40                            | %          |
| More than 54 and up to 60                                                        |       | 50                            | %          |
| More than 60                                                                     |       | 100                           | %          |

 

The amount of thereserves to be created will be the result of applying the reserve percentagedetermined under the preceding table to the awarded value of the property basedon the accounting criteria. Furthermore, when problems are identified regardingthe realization of the value of the foreclosed property, the Financial Grouprecords additional reserves based on management’s best estimates. On December 31,2009, there are no reserves in addition to those created by the percentageapplied based on the accounting criteria that could indicate realizationproblems with the values of the foreclosed properties.

 

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.

 

F-102

----

Table ofContents

 

**Property, furniture and fixtures**

 

Property, furniture andfixtures are recorded at acquisition cost. The balances of acquisitions madeuntil December 31, 2007, were restated using factors derived from thevalue of the UDI of that date.

 

Depreciation iscalculated using the straight-line method based on the useful lives of theassets as estimated by independent appraisers.

 

**Permanent stock 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. The Financial Group will record deferred ISR or IETU, correspondingto the tax it will pay. Deferred taxes are calculated by applying thecorresponding tax rate to the applicable temporary differences resulting fromcomparing the accounting and tax bases of assets and liabilities and including,if any, future benefits from tax loss carryforwards and certain tax credits.Deferred tax assets are recorded only when there is a high probability ofrecovery.

 

The net effect of theaforementioned items is presented in the consolidated balance sheet under the “Deferredtaxes, net” line.

 

**Intangible assets**

 

Intangible assets arerecognized in the consolidated balance sheet provided they are identifiable andgenerate future economic benefits that are controlled by the Financial Group.The amortizable amount of the intangible asset is assigned on a systematicbasis during its estimated useful life. Intangible assets with indefinite livesare not amortized, and their value is subject to annual impairment tests.

 

**Goodwill**

 

The Financial Grouprecords goodwill when the total fair value of the acquisition cost and thenoncontrolling interest is greater than the fair value of the net assets of theacquired business, pursuant to NIF B-7 “Business acquisitions.” As goodwill isconsidered an intangible asset with an indefinite life, it is subject toimpairment tests at least annually according to NIF C-15, “Impairment in thevalue of long-lived assets and their disposal.” No indicators of impairment ofgoodwill have been identified as of December 31, 2009.

 

**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.

 

**Interbank and other loans**

 

These loans are recordedbased on the contractual value, recognizing the interest in the year’s earningsas accrued. The Financial Group records the direct national and foreign bankloans obtained by loan bids with Banco de México and development fundfinancing. Furthermore, this includes discounted portfolio loans from fundsprovided by banks specializing in financing economic, productive or developmentactivities.

 

**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.

 

F-103

----

Table of Contents

 

**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 plan

 

The Financial Grouprecords liabilities for seniority premiums, pensions and post-retirementmedical services as incurred, based on calculations by independent actuariesusing the projected unit credit method at nominal interest rates.  Accordingly, this recognizes the liabilitywhose present value will cover the obligation from the benefits projected tothe estimated retirement date of the Company’s overall employees, as well asthe obligation related to retired personnel.

 

The balance at thebeginning of each period of actuarial gains and losses derived from pensionplans exceeding 10% of the greater amount between the defined benefitsobligation and plan assets are amortized in future periods against the period’sresults.

 

The Financial Groupapplies the provision of NIF D-3, “Employee benefits”, related to therecognition of the liability for severance payments for reasons other thanrestructuring, which is recorded using the projected unit credit method basedon 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. The participatingemployees are those hired as of this date as well as those hired prior to suchdate who enrolled voluntarily. This pension plan is invested in a diversifiedmutual 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  to the defined contribution plan for pastservices was financed with funds established originally for the defined benefitplan that was extinguished early and recognized in accordance with therequirements 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 conversion**

 

Foreign currencytransactions are recorded at the applicable exchange rate in effect at thetransaction date. Monetary assets and liabilities denominated in foreign currencyare translated into Mexican pesos at the applicable exchange rate at the closeof each period. The exchange rate used to establish Mexican peso equivalents isthe FIX exchange rate published by Banco de México. Exchange fluctuations arerecorded in the results of operations.

 

**Interest on outstanding subordinated debentures**

 

Accrued interest onoutstanding subordinated debentures is recognized as it is accrued andtranslated according to the exchange rate in effect at each monthly close.

 

**Transfer of financial assets**

 

The Financial Group mayact as the assignor o assignee, as applicable, in this type of transactions.Moreover, the Financial Group evaluates whether or not to retain the risks andbenefits associated with the asset property to determine whether or not therewas a transfer of property in a transaction. In transactions involving thetransfer of ownership in financial assets, 

 

F-104

----

Table of Contents

 

the assignor yieldscontrol and substantially transfers all the risks and benefits over suchassets. Therefore, the assignor derecognizes such assets and records theconsideration received in the transaction. Conversely, the assignee recognizessuch financial assets and the transfer of consideration in its accountingrecords.

 

**Share-basedpayments**

 

The Financial Groupgrants stock options to key officers through different payment schemes based onstocks. The Financial Group has established trusts to manage the plans andcontributes the necessary funds so that shares can be purchased directly fromthe market at the initiation of each plan.

 

The Financial Group records its stock option plansaccording to the guidelines of NIF D-8, “Share-based payments.” Thecompensation expense is recorded at fair value as of the date the stock optionsare granted. The NIF D-8 guidelines stipulate that the fair value determined atthe beginning is not revalued at a later date.

 

The fair value of eachshare is estimated as of the date granted using the Black-Scholes optionpricing model or the forwards valuation model, depending on the plans’features.

 

**5 - CASH AND CASH EQUIVALENTS**

 

As of December 31,2009 and 2008, this line item was composed as follows:

 
| ** **                          | ** ** | **2009** | ** ** | **2008**   | ** ** |
|-------------------------------------|------------|----------|------------|------------|------------|
| Cash                                |       | Ps.      | 9,415      |       | Ps.        | 8,419 |   |
| Banks                               |       |     | 45,949     |       |       | 40,004 |   |
| Other  deposits and available funds |       |     | 3,904      |       |       | 5,973 |   |
|                                | ** ** | **Ps.**  | **59,268** | ** ** | **Ps.**    | **54,396** | ** ** |

 

On December 31,2009, “Other deposits and available funds” include Ps. 1,598 for funds due tobe received in 24 and 48 hours, and Ps. 35 in gold and silver coins. In 2008,it included Ps. 2,441 for funds due to be received in 24 and 48 hours, and Ps.25 in gold and silver coins.

 

The exchange rate usedfor the conversion of gold and silver coins (centenarios and Troy ounces,respectively) was Ps. 14,627.95 and Ps. 239.89, per unit, respectively, in 2009and Ps. 12,296.12 and Ps. 173.46, per unit, respectively, in 2008.

 

“Banks” is represented bycash in Mexican pesos and US dollars converted at the exchange rate issued byBanco de México of Ps.13.0659 and Ps. 13.8325 as of December 31, 2009 and2008, respectively and is made up as follows:

 
| ** **                                 | ** ** | **Mexican pesos** | ** ** | **Denominated in US dollars** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|-------------------|------------|-------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2009**          | ** ** | **2008**                      | ** ** | **2009**   | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Call  money                                |       | Ps.               | 2,447      |                          | Ps.        | 3,184      |       | Ps. | 653 |   | Ps. | — |   | Ps. | 3,100 |   | Ps. | 3,184 |   |
| Deposits  with foreign credit institutions |       | —            |       | —                        |       | 15,928     |       | 6,866 |   | 15,928 |   | 6,866 |   |
| Domestic banks                             |       | 370               |       | 503                           |       | —     |       | — |   | 370 |   | 503 |   |
| Banco de México                       |       | 26,510            |       | 29,405                        |       | 41         |       | 46 |   | 26,551 |   | 29,451 |   |
| ** **                                 | ** ** | **Ps.**           | **29,327** | ** **                    | **Ps.**    | **33,092** | ** ** | **Ps.** | **16,622** | ** ** | **Ps.** | **6,912** | ** ** | **Ps.** | **45,949** | ** ** | **Ps.** | **40,004** | ** ** |

 

As of December 31,2009 and 2008, the Financial Group had made monetary regulation deposits of Ps.26,342 and Ps. 26,394, respectively.

 

As of December 31,2009 and 2008, the total sum of restricted cash and cash equivalents is Ps.33,289 and Ps. 35,476, respectively. This includes monetary regulationdeposits, futures placed in the domestic and foreign market, call money andcontracted transactions pending settlement in 24 and 48 hours.

 

The interbank loans aredocumented and accrued at an average rate of return of 0.167% and 0.086% in USDand 4.5% and 8.25% in pesos, as of December 31, 2009 and 2008,respectively.

 

F-105

----

Table of Contents

** **

**6 - INVESTMENTS IN SECURITIES**

 

**a.Trading securities**

 

As of December 31,2009 and 2008, trading securities are as follows:

 
| ** **                      | ** ** | **2009**              | ** ** | **2008**               | ** ** |
|---------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                      | ** ** | **Acquisition  cost** | ** ** | **Accrued   interest** | ** ** | **Valuation   increase   (decrease)** | ** ** | **Book  value** | ** ** | **Book  value** | ** ** |
| CETES                           |       | Ps.                   |  925  |                   | Ps.        | — |   | Ps. |  1 |   | Ps. |  926 |   | Ps. |  — |   |
| Bonds                           |       | 519                   |       | 1                      |       | — |   | 520 |   | — |   |
| Development bonds               |       | 3,136                 |       | 2                      |       | (2 | ) | 3,136 |   | — |   |
| Savings protection bonds (BPAS) |       | 9,472                 |       | 27                     |       | (5 | ) | 9,494 |   | 102 |   |
| Bank securities                 |       | 9,990                 |       | —                 |       | 4 |   | 9,994 |   | 5,847 |   |
| Commercial paper                |       | —                |       | —                 |       | — |   | — |   | 123 |   |
| Securitization certificates     |       | 259                   |       | 1                      |       | — |   | 260 |   | — |   |
| Treasury notes                  |       | 65                    |       | —                 |       | — |   | 65 |   | — |   |
| Futures                         |       | —                |       | —                 |       | — |   | — |   | 4 |   |
| Investment funds                |       | 64                    |       | —                 |       | — |   | 64 |   | — |   |
| ** **                      | ** ** | **Ps.**               | **24,430** | ** **             | **Ps.**    | ** 31** | ** ** | **Ps.** | **(2** | **)** | **Ps.** | ** 24,459** | ** ** | **Ps.** | **6,076** | ** ** |

 

During 2009 and 2008, theFinancial Group recognized under “Brokerage revenues” a loss and a profit of(Ps. 17) and Ps. 109, respectively, for the fair value valuation of theseinstruments.

 

As ofDecember 31, 2009, there are Ps. 19,310 in restricted trading securitiesassociated mainly with repurchase operations.

 

As ofDecember 31, 2009, these investments mature as follows (stated at theiracquisition cost):

 
| ** **                     | ** ** | **From 1 to 179 days** | ** **       | **More than 2 years** | ** ** | **Total**    | ** ** |
|--------------------------------|------------|------------------------|------------------|-----------------------|------------|--------------|------------|
| CETES                          |       | Ps.                    |  925        |                  | Ps.        |  — |       | Ps. |  925 |   |
| Bonds                          |       | 519                    |             | —                |       | 519          |       |
| Development bonds              |       | 3,136                  |             | —                |       | 3,136        |       |
| Saving protection bonds (BPAS) |       | 9,472                  |             | —                |       | 9,472        |       |
| Bank securities                |       | 9,990                  |             | —                |       | 9,990        |       |
| Securitization certificates    |       | 259                    |             | —                |       | 259          |       |
| Treasury notes                 |       | —                 |             | 65                    |       | 65           |       |
| Investment funds               |       | 64                     |             | —                |       | 64           |       |
| ** **                     | ** ** | **Ps.**                | ** 24,365** | ** **            | **Ps.**    | ** 65** | ** ** | **Ps.** | ** 24,430** | ** ** |

 

F-106

----

Table of Contents

 

**b. Available for sale securities**

 

As of December 31,2009 and 2008, available for sale securities were as follows:

 
| ** **          | ** ** | **2009**               | ** ** | **2008**               | ** ** |
|---------------------|------------|------------------------|------------|------------------------|------------|
| ** **          | ** ** | **Acquisition   cost** | ** ** | **Accrued   interest** | ** ** | **Valuation   increase   (decrease)** | ** ** | **Book value** | ** ** | **Book  value** | ** ** |
| US Government bonds |       | Ps.                    | 6,387      |                   | Ps.        |  26 |   | Ps. |  190 |   | Ps. |  6,603 |   | Ps. |  6,227 |   |
| UMS                 |       | 342                    |       | 12                     |       | 7 |   | 361 |   | 516 |   |
| Bonds               |       | 2,624                  |       | 34                     |       | 60 |   | 2,718 |   | 3,708 |   |
| VISA                |       | —                 |       | —                 |       | — |   | — |   | 96 |   |
| MASTER CARD         |       | —                 |       | —                 |       | 35 |   | 35 |   | 21 |   |
| BMV Shares          |       | 234                    |       | —                 |       | (15 | ) | 219 |   | 144 |   |
| EUROBONDS           |       | 978                    |       | 17                     |       | (54 | ) | 941 |   | 564 |   |
| PEMEX bonds         |       | 781                    |       | 8                      |       | 35 |   | 824 |   | 204 |   |
| ** **          | ** ** | **Ps.**                | **11,346** | ** **             | **Ps.**    | ** 97** | ** ** | **Ps.** | ** 258** | ** ** | **Ps.** | ** 11,701** | ** ** | **Ps.** | ** 11,480** | ** ** |

 

As ofDecember 31, 2009 and 2008 there are Ps. 2,489 and Ps. 4,001,respectively, in restricted trading securities.

 

As of December 31,2009, these investments mature as follows (stated at their acquisition cost):

 
| ** **          | ** ** | **From 1 to 179 days** | ** **      | **More than 1 year** | ** ** | **Total**       | ** ** |
|---------------------|------------|------------------------|-----------------|----------------------|------------|-----------------|------------|
| US Government bonds |       | Ps.                    |  —    |                 | Ps.        |  6,387     |       | Ps. |  6,387 |   |
| UMS                 |       | —                 |            | 342                  |       | 342             |       |
| Bonds               |       | 2,624                  |            | —               |       | 2,624           |       |
| Shares              |       | —                 |            | 234                  |       | 234             |       |
| EUROBONDS           |       | —                 |            | 978                  |       | 978             |       |
| PEMEX bonds         |       | —                 |            | 781                  |       | 781             |       |
| ** **          | ** ** | **Ps.**                | ** 2,624** | ** **           | **Ps.**    | ** 8,722** | ** ** | **Ps.** | **11,346** | ** ** |

 

**c. Held to maturity securities**

 

As of December 31,2009 and 2008, held to maturity securities are as follows:

 

Medium and long-term debtinstruments:

** **
| ** **                                                                   | ** ** | **2009**             | ** **        | **2008**             | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|-------------------|----------------------|------------|
| ** **                                                                   | ** ** | **Acquisition cost** | ** **        | **Accrued interest** | ** ** | **Book value** | ** ** | **Book  value** | ** ** |
| Government bonds- support program for Special  Federal Treasury Certificates |       | Ps.                  | 722               |                 | Ps.        |  3 |   | Ps. |  725 |   | Ps. |  690 |   |
| Government bonds                                                             |       | 604                  |              | 27                   |       | 631 |   | 655 |   |
| Development bonds                                                            |       | 33,078               |              | 49                   |       | 33,127 |   | 33,062 |   |
| Saving protection bonds (BPAS)                                               |       | 103,257              |              | 502                  |       | 103,759 |   | 124,868 |   |
| UMS                                                                          |       | 2,405                |              | 65                   |       | 2,470 |   | 2,609 |   |
| UDIBONOS                                                                     |       | 3                    |              | —               |       | 3 |   | 3 |   |
| Separable securitization certificates                                        |       | 26                   |              | 1                    |       | 27 |   | 33 |   |
| Bank securities                                                              |       | 25,912               |              | 93                   |       | 26,005 |   | 31,557 |   |
| US Government bonds                                                          |       | 12                   |              | —               |       | 12 |   | 13 |   |
| PEMEX bonds                                                                  |       | 4,897                |              | 94                   |       | 4,991 |   | 5,463 |   |
| Private  securitization certificates                                         |       | 18,509               |              | 73                   |       | 18,582 |   | 21,770 |   |
| CETES                                                                        |       | —               |              | —               |       | — |   | 3 |   |
| Structured notes                                                             |       | —               |              | —               |       | — |   | 520 |   |
| Other debt  instruments                                                      |       | —               |              | —               |       | — |   | 349 |   |
| Subordinated securities                                                      |       | —               |              | —               |       | — |   | 22 |   |
| ** **                                                                   | ** ** | **Ps.**              | ** 189,425** | ** **           | **Ps.**    | ** 907** | ** ** | **Ps.** | ** 190,332** | ** ** | **Ps.** | ** 221,617** | ** ** |

 

F-107

----

Table of Contents

 

As of December 31,2009 and 2008, there are Ps. 175,369 and Ps. 200,973, respectively, inrestricted trading securities associated mainly with repurchase operations.

 

As of December 31,2009, these investments mature as follows (stated at their acquisition cost):

 
| ** **                                                                   | ** ** | **From 1 to 179 days** | ** **  | **More than 2 years** | ** ** | **Total**       | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|-----------------|------------|
| Government  bonds- support program for Special Federal Treasury Certificates |       | Ps.                    | —      |                  | Ps.        |  722       |       | Ps. |  722 |   |
| Government  bonds                                                            |       | —                 |        | 604                   |       | 604             |       |
| Development  bonds                                                           |       | 33,078                 |        | —                |       | 33,078          |       |
| Saving  protection bonds (BPAS)                                              |       | 103,257                |        | —                |       | 103,257         |       |
| UMS                                                                          |       | —                 |        | 2,405                 |       | 2,405           |       |
| UDIBONOS                                                                     |       | —                 |        | 3                     |       | 3               |       |
| Separable  securitization certificates                                       |       | —                 |        | 26                    |       | 26              |       |
| Bank  securities                                                             |       | 25,912                 |        | —                |       | 25,912          |       |
| US  Government bonds                                                         |       | —                 |        | 12                    |       | 12              |       |
| PEMEX  bonds                                                                 |       | —                 |        | 4,897                 |       | 4,897           |       |
| Private securitization certificates                                          |       | 18,509                 |        | —                |       | 18,509          |       |
| ** **                                                                   | ** ** | **Ps.**                | **180,756** | ** **            | **Ps.**    | ** 8,669** | ** ** | **Ps.** | ** 189,425** | ** ** |

 

Some of the investmentsin securities are given as collateral in derivative transactions without anyrestriction. Therefore, the receiver has the right to trade them and offer themas collateral.

 

The fair value of thecollateral given in derivative transactions as of December 31, 2009 and2008, is as follows:

 
| ** **              | ** ** | ** **               | ** ** | **2009**                   | ** **    |
|-------------------------|------------|--------------------------|------------|----------------------------|---------------|
| ** **              | ** ** | ** **               | ** ** | **Fair value in millions** | ** **    |
| **Type of collateral:** | ** ** | **Instrument  category** | ** ** | **Pesos**                  | ** **    | **USD** | ** ** | **Euros** | ** ** |
| Cash                    |       | —                   |       | Ps.                        |  102     |   | 164 |   | — |   |
| CETES                   |       | Trading                  |       | 120                        |          | — |   | — |   |
| UMS                     |       | Held to maturity         |       | —                     |          | 167 |   | — |   |
| PEMEX  bonds            |       | Held to maturity         |       | —                     |          | 353 |   | 20 |   |
| UMS                     |       | Available for sale       |       | —                     |          | 13 |   | — |   |
| PEMEX  bonds            |       | Available for sale       |       | —                     |          | 56 |   | — |   |
| Bank  Bonds             |       | Available for sale       |       | —                     |          | 116 |   | — |   |
| ** **              | ** ** | ** **               | ** ** | **Ps.**                    | ** 222** | ** ** | **869** | ** ** | **20** | ** ** |

 
| ** **              | ** ** | ** **               | ** ** | **2008**                   | ** **    |
|-------------------------|------------|--------------------------|------------|----------------------------|---------------|
| ** **              | ** ** | ** **               | ** ** | **Fair value in millions** | ** **    |
| **Type of collateral:** | ** ** | **Instrument  category** | ** ** | **Pesos**                  | ** **    | **USD** | ** ** | **Euros** | ** ** |
| Cash                    |       | —                   |       | Ps.                        |  160     |   | 238 |   | — |   |
| ITS  BPAS               |       | Held to maturity         |       | 176                        |          | — |   | — |   |
| UMS                     |       | Held to maturity         |       | —                     |          | 189 |   | — |   |
| PEMEX  bonds            |       | Held to maturity         |       | —                     |          | 366 |   | 20 |   |
| UMS                     |       | Available for sale       |       | —                     |          | 22 |   | — |   |
| Bank  Bonds             |       | Available for sale       |       | —                     |          | 299 |   | — |   |
| ** **              | ** ** | ** **               | ** ** | **Ps.**                    | ** 336** | ** ** | **1,114** | ** ** | **20** | ** ** |

 

As of December 31,2009 and 2008, the Financial Group had no instruments received as collateral.

 

As of December 31,2009 and 2008, interest income was Ps. 14,174 and Ps. 5,862, respectively.

 

F-108

----

Table of Contents

 

As of December 31,2009, accrued interest income from impaired instruments was Ps. 13.

 

The amount recorded forthe impairment of available for sale and held to maturity securities as of December 31,2009 and 2008 was:

 
| **Concept**                   | ** ** | **2009** | ** ** | **2008**   | ** ** |
|-------------------------------|------------|----------|------------|------------|------------|
| Available for sale securities |       | Ps.      | 81         |       | Ps.        | — |   |
| Held to maturity securities   |       | 59       |       | —     |       |
|                          | ** ** | **Ps.**  | **140**    | ** ** | **Ps.**    | **—** | ** ** |

 

**7 - CREDITOR BALANCES UNDER REPURCHASE AND RESALE AGREEMENTS**

 

As of December 31,2009 and 2008, the debtor and creditor balance in repurchase transactionsconsist of:

 

Acting as seller of securities

 
| ** **                  | ** ** | **2009**                             | ** **        | **2008**                               | ** ** |
|-----------------------------|------------|--------------------------------------|-------------------|----------------------------------------|------------|
| ** **                  | ** ** | ** **                           | ** **        | **Asset   position**                   | ** ** | **Liability   position** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Instrument**              | ** ** | **Creditor  repurchase   agreement** | ** **        | **Value of   securities   receivable** | ** ** | **Creditor   repurchase   agreement** | ** ** | **Debit   difference** | ** ** | **Credit   difference** | ** ** |
| CETES                       |       | Ps.                                  |  697         |                                   | Ps.        |  — |   | Ps. |  3 |   | Ps. |  — |   | Ps. |  3 |   |
| Development bonds           |       | 36,159                               |              | 3,987                                  |       | 37,085 |   | — |   | 33,098 |   |
| Bonds 182                   |       | —                               |              | —                                 |       | 5 |   | — |   | 5 |   |
| Bonds IPAB                  |       | 654                                  |              | —                                 |       | 351 |   | — |   | 351 |   |
| Quarterly IPAB bonds        |       | 86,513                               |              | 7,102                                  |       | 106,967 |   | 1 |   | 99,866 |   |
| Semi-annual IPAB bonds      |       | 25,587                               |              | 26,970                                 |       | 51,252 |   | 1 |   | 24,283 |   |
| 7-year bonds                |       | —                               |              | —                                 |       | 2 |   | — |   | 2 |   |
| 10-year bonds               |       | 625                                  |              | 627                                    |       | 1,275 |   | — |   | 648 |   |
| 20-year bonds               |       | 491                                  |              | —                                 |       | 5 |   | — |   | 5 |   |
| UDIBONOS                    |       | 1                                    |              | —                                 |       | — |   | — |   | — |   |
| 10-year UDIBONDS            |       | 3                                    |              | —                                 |       | 4 |   | — |   | 4 |   |
| **Government securities**   | ** ** | **150,730**                          | ** **        | **38,686**                             | ** ** | **196,949** | ** ** | **2** | ** ** | **158,265** | ** ** |
| Promissory notes            |       | 5,055                                |              | 537                                    |       | 537 |   | — |   | — |   |
| CEDES                       |       | 9,035                                |              | 716                                    |       | 10,985 |   | — |   | 10,269 |   |
| CEBUR Bank                  |       | 7,628                                |              | —                                 |       | 8,892 |   | — |   | 8,892 |   |
| **Bank securities**         | ** ** | **21,718**                           | ** **        | **1,253**                              | ** ** | **20,414** | ** ** | **—** | ** ** | **19,161** | ** ** |
| Private paper               |       | 9,114                                |              | —                                 |       | 11,428 |   | — |   | 11,428 |   |
| CEBUR government short term |       | 2,481                                |              | —                                 |       | — |   | — |   | — |   |
| Mortgage certificates       |       | 212                                  |              | —                                 |       | — |   | — |   | — |   |
| CEBUR government            |       | 1,200                                |              | —                                 |       | 3,602 |   | — |   | 3,602 |   |
| Securitization certificates |       | 25                                   |              | —                                 |       | 269 |   | — |   | 269 |   |
| **Private securities**      | ** ** | **13,032**                           | ** **        | **—**                             | ** ** | **15,299** | ** ** | **—** | ** ** | **15,299** | ** ** |
| ** **                  | ** ** | **Ps.**                              | ** 185,480** | ** **                             | **Ps.**    | ** 39,939** | ** ** | **Ps.** | ** 232,662** | ** ** | **Ps.** | ** 2** | ** ** | **Ps.** | ** 192,725** | ** ** |

 

F-109

----

Table of Contents

 

With the Financial Groupacting as the vendor, accrued premiums were charged to the results ofoperations up to December 31, 2009 and 2008, total Ps. 13,434 and Ps.18,320, respectively.

 

During 2009 and 2008, theperiod of repurchase transactions entered into by the Financial Group in itscapacity as vendor ranged from 1 to 177 days.

 

Acting as securities purchaser

 
| ** **                | ** ** | **2009**                                   | ** ** | **2008**                                          | ** ** |
|---------------------------|------------|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | ** **                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Liability  position** | ** ** | **Asset   position** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Instrument**            | ** ** | **Repurchase  agreement   from   debtors** | ** ** | **Received,   sold   collateral in   repurchase** | ** ** | **Debit   difference** | ** ** | **Credit   difference** | ** ** | **Value of   securities   deliverable** | ** ** | **Repurchase   agreement   from   debtors** | ** ** | **Debit   difference** | ** ** | **Credit   difference** | ** ** |
| CETES                     |       | Ps.                                        |  400  |                                              | Ps.        |  400 |   | Ps. |  — |   | Ps. |  — |   | Ps. |  1,667 |   | Ps. |  1,667 |   | Ps. |  — |   | Ps. |  — |   |
| Development bonds         |       | 7,113                                      |       | 7,114                                             |       | 1 |   | 2 |   | 3,992 |   | 3,987 |   | 5 |   | — |   |
| Quarterly IPAB bonds      |       | 1                                          |       | —                                            |       | 1 |   | — |   | 6,014 |   | 5,992 |   | 22 |   | — |   |
| Semi-annual IPAB bonds    |       | 390                                        |       | 390                                               |       | — |   | — |   | 25,865 |   | 25,751 |   | 115 |   | 1 |   |
| 7-year bonds              |       | —                                     |       | —                                            |       | — |   | — |   | 1,248 |   | 1,248 |   | — |   | — |   |
| 10-year bonds             |       | 221                                        |       | 219                                               |       | 2 |   | — |   | 1,193 |   | 1,194 |   | 2 |   | 3 |   |
| 20-year bonds             |       | 73                                         |       | 73                                                |       | — |   | — |   | 4,001 |   | 4,001 |   | — |   | — |   |
| 10-year UDIBONDS          |       | 1,120                                      |       | 1,120                                             |       | — |   | — |   | — |   | — |   | — |   | — |   |
| **Government securities** | ** ** | **9,318**                                  | ** ** | **9,316**                                         | ** ** | **4** | ** ** | **2** | ** ** | **43,980** | ** ** | **43,840** | ** ** | **144** | ** ** | **4** | ** ** |
| Promissory notes          |       | 1,785                                      |       | 1,785                                             |       | — |   | — |   | — |   | — |   | — |   | — |   |
| CEDES                     |       | —                                     |       | —                                            |       | — |   | — |   | 568 |   | 565 |   | 3 |   | — |   |
| **Bank securities**       | ** ** | **1,785**                                  | ** ** | **1,785**                                         | ** ** | **—** | ** ** | **—** | ** ** | **568** | ** ** | **565** | ** ** | **3** | ** ** | **—** | ** ** |
| ** **                | ** ** | **Ps.**                                    | **11,103** | ** **                                        | **Ps.**    | ** 11,101** | ** ** | **Ps.** | ** 4** | ** ** | **Ps.** | ** 2** | ** ** | **Ps.** | **44,548** | ** ** | **Ps.** | **44,405** | ** ** | **Ps.** | ** 147** | ** ** | **Ps.** | ** 4** | ** ** |

 

With the Financial Groupacting as the purchaser, accrued premiums were charged to the results of operationsup to December 31, 2009 and 2008, total Ps. 2,173 and Ps. 2,521,respectively.

 

During 2009 and 2008, theperiod of repurchase transactions entered into by the Financial Group in itscapacity as purchaser ranged from 1 to 21 days.

 

By December 31, 2009,the amount of goods corresponding to the guarantees given and received inrepurchasing transactions that involved the transfer of property totaled Ps.120 and Ps. 4, respectively, and by December 31, 2008, the totals were Ps.179 in guarantees given and Ps. 14 in guarantees received.

 

**8 -DERIVATIVE FINANCIAL INSTRUMENTS**

 

The transactions enteredinto by the Financial Group involving derivative financial instrumentscorrespond mainly to futures, swap and option contracts. These transactions aredone to hedge various risks and for trading purposes.

 

As of December 31,2009, the Financial Group has evaluated the effectiveness of derivatives’transactions for hedging purposes and has concluded that they are highlyeffective.

 

F-110

----

Table of Contents

 

As of December 31,2009 and 2008, the positions of the Financial Group’s derivative financialinstruments held for trading purposes are as follows:

 
| ** **                 | ** ** | **2009**           | ** **        | **2008**           | ** ** |
|----------------------------|------------|--------------------|-------------------|--------------------|------------|
| **Asset position**         | ** ** | **Nominal amount** | ** **        | **Asset position** | ** ** | **Nominal amount** | ** ** | **Asset position** | ** ** |
| **Futures**                |       |               |              |               |       |   |   |   |   |
| TIIE-rate futures          |       | Ps.                |  600         |               | Ps.        |  — |   | Ps. |  1,500 |   | Ps. |  — |   |
| **Forwards**               |       |               |              |               |       |   |   |   |   |
| Foreign  currency forwards |       | 3,454              |              | 313                |       | 1,892 |   | 40 |   |
| **Options**                |       |               |              |               |       |   |   |   |   |
| Foreign  currency options  |       | 283                |              | 2                  |       | — |   | — |   |
| Interest rate options      |       | 8,485              |              | 126                |       | 9,683 |   | 76 |   |
| **Swaps**                  |       |               |              |               |       |   |   |   |   |
| Interest  rate swaps       |       | 194,317            |              | 2,612              |       | 173,097 |   | 1,999 |   |
| Exchange rate swaps        |       | 7,377              |              | 1,771              |       | 9,829 |   | 3,210 |   |
| **Total trading**          | ** ** | **214,516**        | ** **        | **4,824**          | ** ** | **196,001** | ** ** | **5,325** | ** ** |
|                       |       |               |              |               |       |   |   |   |   |
| **Options**                |       |               |              |               |       |   |   |   |   |
| Interest rate options      |       | 24,200             |              | 188                |       | 24,200 |   | 179 |   |
| **Swaps**                  |       |               |              |               |       |   |   |   |   |
| Interest  rate swaps       |       | 27,648             |              | 8                  |       | 19,298 |   | 10 |   |
| Exchange rate swaps        |       | 9,996              |              | 860                |       | 10,474 |   | 2,654 |   |
| **Total hedging**          | ** ** | **61,844**         | ** **        | **1,056**          | ** ** | **53,972** | ** ** | **2,843** | ** ** |
| **Total position**         | ** ** | **Ps.**            | ** 276,360** | ** **         | **Ps.**    | ** 5,880** | ** ** | **Ps.** | ** 249,973** | ** ** | **Ps.** | ** 8,168** | ** ** |

 
| ** **                 | ** ** | **2009**           | ** **  | **2008**               | ** ** |
|----------------------------|------------|--------------------|-------------|------------------------|------------|
| **Liability position**     | ** ** | **Nominal amount** | ** **  | **Liability position** | ** ** | **Nominal amount** | ** ** | **Liability position** | ** ** |
| **Futures**                |       |               |        |                   |       |   |   |   |   |
| TIIE-rate futures          |       | Ps.                | 600         |                   | Ps.        |  — |   | Ps. |  1,500 |   | Ps. |  — |   |
| **Forwards**               |       |               |        |                   |       |   |   |   |   |
| Foreign  currency forwards |       | 2,825              |        | 88                     |       | 129 |   | 46 |   |
| **Options**                |       |               |        |                   |       |   |   |   |   |
| Foreign  currency options  |       | 287                |        | 2                      |       | 67 |   | 2 |   |
| Interest rate options      |       | 9,168              |        | 71                     |       | 10,827 |   | 64 |   |
| **Swaps**                  |       |               |        |                   |       |   |   |   |   |
| Interest  rate swaps       |       | 194,340            |        | 2,713                  |       | 173,114 |   | 2,024 |   |
| Exchange rate swaps        |       | 7,322              |        | 1,679                  |       | 9,774 |   | 3,133 |   |
| **Total trading**          | ** ** | **214,542**        | ** **  | **4,553**              | ** ** | **195,411** | ** ** | **5,269** | ** ** |
|                       |       |               |        |                   |       |   |   |   |   |
| **Swaps**                  |       |               |        |                   |       |   |   |   |   |
| Interest  rate swaps       |       | 27,650             |        | 980                    |       | 19,298 |   | 663 |   |
| Exchange rate swaps        |       | 4,146              |        | 2,842                  |       | 7,479 |   | 4,814 |   |
| **Total hedging**          | ** ** | **31,796**         | ** **  | **3,822**              | ** ** | **26,777** | ** ** | **5,477** | ** ** |
| **Total position**         | ** ** | **Ps.**            | **246,338** | ** **             | **Ps.**    | ** 8,375** | ** ** | **Ps.** | ** 222,188** | ** ** | **Ps.** | ** 10,746** | ** ** |

 

F-111

----

Table of Contents

 

Thehedging instruments operated and main underlyings are as follows:

 
| **Forwards** | ** ** | **Options** | ** ** | **Swaps** | ** ** | **Cross Currency 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 instruments transactions are described in Note 32.

 

Transactions for hedgingpurposes have maturities from 2010 to 2018 and are intended to mitigate thefinancial risk derived from long-term loans offered by the Financial Group atfixed nominal rates, as well as the exchange rate risk generated by marketinstruments in the Financial Group’s portfolio.

 

The book value ofcollateral used to ensure compliance with obligations derived from currencyswap contracts as of December 31, 2009, is USD 704,841 thousand and EUR20,255 thousand, and as of December 31, 2008 total USD ****876,379****thousand and EUR 20,110 thousand. Futures transactions are made throughrecognized markets, and as of December 31, 2009 they represent 0.85% ofthe nominal amount of all the derivatives’ operations contracts; the remaining99.15% correspond to option and swap transactions in OTC markets.

 

As of December 31,2009 and 2008, the collateral was comprised mainly of cash, CETES, ITS BPAS,PEMEX bonds, UMS bonds and bank bonds restricted under the categories oftrading, held to maturity and available for sale securities. The restrictionmaturity date for this collateral is from 2010 to 2018. Their fair value isshown in Note 6 c).

 

As of December 31,2009 and 2008, the Financial Group had no instruments received as collateral inderivative transactions.

 

As of December 31,2009 and 2008, the net income on financial assets and liabilities associatedwith derivatives was Ps. 200 and Ps. 256, respectively.

 

The net amount ofestimated gains or losses originated by transactions or events that arerecorded in cumulative other comprehensive income to date in the financialstatements and that are expected to be reclassified to earnings within the next12 months totals Ps. 4.

 

As of December 31, 2009 and 2008, the mainpositions hedged by the Financial Group and the derivatives designated to coversuch positions are:

 

*Cash flow hedging.*The Financial Group has cash flow hedgesas follows:

 

·                  Forecast funding using TIIE rate Caps andSwaps.

·                  Recorded liabilities in Mexican pesosusing TIIE rate Swaps.

·                  Recorded liabilities in foreign currencyusing Cross Currency Swaps.

·                  Recorded assets in foreign currency usingCross Currency Swaps.

 

As of December 31, 2009, there are 25 filesrelated to hedging transactions. Their effectiveness ranges between 85% and100%, well within the range established by the accounting standards in effect(80% to 125%). Furthermore, there is no overhedging on any of the derivatives,so as of December 31, 2009, there are no ineffective portions that theFinancial Group has to record in earnings.

 

F-112

----

Table of Contents

 

The following are theFinancial Group’s hedged cash flows as of December 31, 2009, expected tooccur and affect earnings:

 
| **Concept**                    | ** ** | **Up to 3   months** | ** **    | **More than 3   months and up to  1 year** | ** ** | **More and 1 and   up to 5 years** | ** ** | **More than 5   years** | ** **       |
|--------------------------------|------------|----------------------|---------------|--------------------------------------------|------------|------------------------------------|------------|-------------------------|------------------|
| Forecasted  funding            |       | Ps.                  |  261     |                                       | Ps.        |  837                          |       | Ps.                     |  5,464      |   | Ps. |  483 |   |
| Liabilities in Mexican pesos   |       | 90                   |          | 309                                        |       | 1,389                              |       | 19                      |             |
| Liabilities denominated in USD |       | —               |          | 240                                        |       | 4,160                              |       | —                  |             |
| Assets denominated in USD      |       | 278                  |          | 1,991                                      |       | 4,368                              |       | 9,328                   |             |
| Assets denominated in Euros    |       | —               |          | 23                                         |       | 445                                |       | —                  |             |
| ** **                     | ** ** | **Ps.**              | ** 629** | ** **                                 | **Ps.**    | ** 3,400**                    | ** ** | **Ps.**                 | ** 15,826** | ** ** | **Ps.** | ** 9,830** | ** ** |

 

As of December 31, 2009 and 2008, Ps. 1,404 andPs. 1,746, respectively, were recognized in other comprehensive income instockholders’ equity.  Furthermore, Ps.127 and Ps. 51, respectively, were reclassified from stockholders’ equity toresults.

 

Trading and hedgingderivatives: the loan risk is minimized by means of contractual compensationagreements, in which asset and liability derivatives with the same counterpartyare settled for their net balance. Similarly, there may be other types ofcollateral such as credit lines, depending on the counterparty’s solvency andthe nature of the transaction.

 

**9 - LOAN PORTFOLIO**

 

As of December 31,2009 and 2008, the loan portfolio by loan type is as follows:

 
| ** **                       | ** ** | **Performing portfolio** | ** **        | **Past-due portfolio** | ** ** | **Total**    | ** ** |
|----------------------------------|------------|--------------------------|-------------------|------------------------|------------|--------------|------------|
| ** **                       | ** ** | **2009**                 | ** **        | **2008**               | ** ** | **2009**     | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Commercial  loans                |       |                     |              |                   |       |         |       |   |   |   |   |   |   |
| Denominated in domestic currency |       |                     |              |                   |       |         |       |   |   |   |   |   |   |
| Commercial                       |       | Ps.                      | 90,189            |                   | Ps.        |  93,123 |       | Ps. |  2,325 |   | Ps. |  1,482 |   | Ps. |  92,514 |   | Ps. |  94,605 |   |
| Rediscounted portfolio           |       | 4,831                    |              | 6,129                  |       | —       |       | — |   | 4,831 |   | 6,129 |   |
| Denominated in USD               |       |                     |              |                   |       |         |       |   |   |   |   |   |   |
| Commercial                       |       | 21,471                   |              | 27,041                 |       | 838          |       | 221 |   | 22,309 |   | 27,262 |   |
| Rediscounted portfolio           |       | 746                      |              | 505                    |       | —       |       | — |   | 746 |   | 505 |   |
| **Total  commercial loans**      | ** ** | **117,237**              | ** **        | **126,798**            | ** ** | **3,163**    | ** ** | **1,703** | ** ** | **120,400** | ** ** | **128,501** | ** ** |
|                             |       |                     |              |                   |       |         |       |   |   |   |   |   |   |
| Loans to  financial institutions |       | 7,131                    |              | 10,860                 |       | —       |       | — |   | 7,131 |   | 10,860 |   |
| Consumer loans                   |       |                     |              |                   |       |         |       |   |   |   |   |   |   |
| Credit card                      |       | 11,801                   |              | 15,067                 |       | 1,610        |       | 2,140 |   | 13,411 |   | 17,207 |   |
| Other consumer  loans            |       | 13,911                   |              | 14,302                 |       | 332          |       | 359 |   | 14,243 |   | 14,661 |   |
| Mortgage loans                   |       | 49,881                   |              | 46,282                 |       | 1,049        |       | 746 |   | 50,930 |   | 47,028 |   |
| Government loans                 |       | 38,993                   |              | 26,989                 |       | —       |       | — |   | 38,993 |   | 26,989 |   |
| ** **                       | ** ** | **121,717**              | ** **        | **113,500**            | ** ** | **2,991**    | ** ** | **3,245** | ** ** | **124,708** | ** ** | **116,745** | ** ** |
| **Total  loan portfolio**        | ** ** | **Ps.**                  | ** 238,954** | ** **             | **Ps.**    | **240,298**  | ** ** | **Ps.** | **6,154** | ** ** | **Ps.** | ** 4,948** | ** ** | **Ps.** | **245,108** | ** ** | **Ps.** | **245,246** | ** ** |

 

As of December 31,2009, the deferred balance of fees is Ps. 1,521, and the amount recorded inresults was Ps. 584. Furthermore, the deferred balance of costs and expensesassociated with the initial loan origination is Ps. 167, and the amountrecorded in results was Ps. 33. The average term over which the deferred feebalance and the costs and expenses will be recorded is equivalent to theaverage term of the portfolio balance.

 

The average terms of theportfolio’s main balances are: a) commercial, 5.4 years; b) financialinstitutions, 3.8 years; c) mortgage, 17.7 years; d) government loans, 9.3years; and e) consumer, 2.4 years.

 

During the periods endedon December 31, 2009 and 2008, the balance of fully reserved past-dueloans that was written off was Ps. 8,278 and Ps. 3,400, respectively.

 

F-113

----

Table of Contents

 

On December 31, 2009and 2008, revenues from recoveries of previously written-off loan portfolioswere Ps. 848 and Ps. 687, respectively.

 

The loan portfoliogrouped into economic sectors as of December 31, 2009 and 2008, is shownbelow:

 
| ** **                          | ** ** | **2009**   | ** **        | **2008**                 | ** ** |
|-------------------------------------|------------|------------|-------------------|--------------------------|------------|
| ** **                          | ** ** | **Amount** | ** **        | **Reserve   percentage** | ** ** | **Amount** | ** ** | **Reserve  percentage** | ** ** |
| Private (companies and individuals) |       | Ps.        |  120,400     |                     | 49.12      | % | Ps. |  128,501 |   | 52.40 | % |
| Financial institutions              |       | 7,131      |              | 2.91                     | %          | 10,860 |   | 4.43 | % |
| Credit card and  consumer           |       | 27,654     |              | 11.28                    | %          | 31,868 |   | 12.99 | % |
| Mortgage                            |       | 50,930     |              | 20.78                    | %          | 47,028 |   | 19.18 | % |
| Government                          |       | 38,993     |              | 15.91                    | %          | 26,989 |   | 11.00 | % |
| ** **                          | ** ** | **Ps.**    | ** 245,108** | ** **               | **100**    | **%** | **Ps.** | ** 245,246** | ** ** | **100** | **%** |

 

**Loansupport programs**

 

Special accountingconsideration of various support programs granted during the influenza outbreak

 

Given the negative impactof the decline in economic activity due to the actions taken by the federal andlocal authorities in the face of the influenza outbreak in Mexico during 2009,the Financial Group decided to support the affected economic entities andsectors with various programs carried out in two phases:

 

I.       Emergency SMEs support plan, consisting of:

 

·                  3-month deferment of principal paymentfor affected companies and businesses especially in Mexico City, State ofMexico and San Luis Potosi.

·                  6-month principal deferment including3-month interest deferment for the companies affected in the tourist regions ofthe Mayan Riviera, Nayarit, Jalisco and Baja California Sur.

 

As a result of the above,the Commission issued a special accounting standard in document number100/014/2009 on May 8, 2009, authorizing the Financial Group to notconsider as restructured loans those in effect on March 31, 2009, whoseprincipal and interest payments were deferred, as per Circular B-6 paragraph24, “Loan Portfolio”, and to keep them as performing loans for the term statedin the plan.

 

II.   Housing, car, credit card and consumer loan supportconsisting of:

 

·                  Principal and interest payment defermentfor up to 4 months for mortgage loans.

·                  Principal and interest payment defermentfor up to 3 months for car and consumer loans.

·                  3-month minimum payment deferment forcredit card loans.

 

In that regard, theCommission issued a special accounting standard in document number 100/021/2009on June 12, 2009, applicable as of the document date and up to the termaccording to the borrowers’ support program for mortgage, car, credit card,personal and payroll loans whose payment source corresponds to the MayanRiviera, Nayarit Riviera, Mazatlan and Los Cabos. This special standardauthorizes the Financial Group to:

 

a)              Loans subject to renewal are consideredas performing when the renewal takes place without applying the requirementestablished in Circular B-6 paragraph 52 and 53, “Loan Portfolio”, consistingon the need for the borrower to settle all the accrued interest as per theterms and conditions originally agreed and 25% of the original loan amount. Theabove is applicable to performing loans as of April 15, 2009, as perparagraph 8 of Circular B-6.

 

The authorization is notapplicable to loans participating in the Bank Debtor Support Programs set forthby the Federal Government and Banks.

 

F-114

----

Table of Contents

 

b)             Performing loans granted a principal andinterest deferment will not be considered as restructured as per Circular B-6paragraph 24 and can be maintained as performing loans for the deferment term.Therefore, those loans are considered performing loans in order to determinethe allowance for loan losses.

 

If such special standardshad not been authorized, the Financial Group would have presented the followingloan amounts in the December 31, 2009 balance sheet:

 
| **PERFORMING LOAN PORTFOLIO**        |       |        |        |
|--------------------------------------|------------|-------------|-------------|
| Commercial loans                     |       |        |        |
| Business loans                       |       | Ps.         | 116,589     |   |
| Loans to financial institutions      |       | 7,131       |        |
| Government loans                     |       | 38,993      |        |
| Consumer loans                       |       | 25,711      |        |
| Mortgage loans                       |       | 49,881      |        |
| **TOTAL PERFORMING LOAN  PORTFOLIO** | ** ** | **238,305** | ** **  |
|                                 | ** ** | ** **  | ** **  |
| **PAST-DUE LOAN PORTFOLIO**          | ** ** | ** **  | ** **  |
| Commercial loans                     |       |        |        |
| Business loans                       |       | 3,867       |        |
| Consumer loans                       |       | 1,943       |        |
| Mortgage loans                       |       | 1,049       |        |
| **TOTAL PAST-DUE LOAN PORTFOLIO**    | ** ** | **6,859**   | ** **  |
|                                 |       |        |        |
| **LOAN PORTFOLIO**                   | ** ** | **245,164** | ** **  |
| (Minus) Allowance for loan losses    |       | 7,750       |        |
| **LOAN PORTFOLIO, net**              | ** ** | **237,414** | ** **  |
| **ACQUIRED COLLECTION  RIGHTS**      | ** ** | **2,548**   | ** **  |
| **TOTAL LOAN PORTFOLIO, net**        | ** ** | **Ps.**     | **239,962** | ** ** |

 

Moreover, the period’snet income would have been Ps. 5,597 as a result of an additional Ps. 215 inallowance for loan losses and a Ps. 42 reduction in interest income from thesuspension of accrued interest derived from transferring loans to the past-dueportfolio that would have been created without providing this support toborrowers.

 

As of December 31,2009, the renewed commercial loans amounted to Ps. 704.

 

**Policiesand Procedures for Granting Loans**

 

The granting, control andrecovery of loans is 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 Managements (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)     Productdesign

b)    Promotion

c)     Evaluation

d)    Formalization

 

F-115

----

Table ofContents

 

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 theCommission’s Circular B-6, “Loan Portfolio”, distressed portfolio is defined asthe commercial loans which, based on the current information and facts as wellas on the loan revision process, are very unlikely to be fully recovered (bothprincipal and interest) pursuant to the original terms and conditions. Theperforming and past-due portfolios are susceptible to be identified as adistressed portfolio. The commercial loan rating D and E risk degrees are asfollows:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Distressed portfolio                        |       | Ps.      | 1,373      |     | Ps.        |  1,774 |   |
| Total rated portfolio                       |       | 253,660  |       | 254,495  |       |
| Distressed  portfolio/total rated portfolio |       | 0.54     | %          | 0.70     | %          |
|                                             |            |          |            |          |            |  |  |

 

The Financial Group’sTreasury Department is the central unit responsible for balancing resourcerequirements and eliminating the interest rate risk derived from fixed ratetransactions through the use of hedging and arbitrage strategies.

 

**10 - LOANS RESTRUCTURED IN UDIS**

 

The loans restructured inUDIS correspond to mortgage loans. The balance on December 31, 2009 and2008 is detailed below:

 
| ** **                 | ** ** | **2009** | ** **    | **2008**   | ** ** |
|----------------------------|------------|----------|---------------|------------|------------|
| Performing portfolio       |       | Ps.      | 542           |       | Ps.        |  622 |   |
| Current  accrued interest  |       | 2        |          | 2          |       |
| Past-due  portfolio        |       | 14       |          | 35         |       |
| Past-due  accrued interest |       | 1        |          | 1          |       |
| ** **                 | ** ** | **Ps.**  | ** 559** | ** ** | **Ps.**    | ** 660** | ** ** |

 

F-116

----

Table of Contents

** **

**11 - ALLOWANCE FOR LOAN LOSSES**

 

The Financial Group’sportfolio classification, which serves as the basis for recording the allowancefor loan losses, is detailed below:

 
| ** **                          | ** ** | **2009**           | ** **        |
|-------------------------------------|------------|--------------------|-------------------|
| ** **                          | ** ** | ** **         | ** **        | **Required allowances for losses** | ** ** |
| **Risk category**                   | ** ** | **Loan portfolio** | ** **        | **Commercial   portfolio** | ** ** | **Consumer   portfolio** | ** ** | **Mortgage   portfolio** | ** ** | **Total** | ** ** |
| Exempt  portfolio                   |       | Ps.                |  56          |   | Ps. |  — |   | Ps. |  — |   | Ps. |  — |   | Ps. |  — |   |
| Risk  A                             |       | 58,169             |              | — |   | 63 |   | 159 |   | 222 |   |
| Risk  A1                            |       | 106,990            |              | 495 |   | — |   | — |   | 495 |   |
| Risk  A2                            |       | 57,118             |              | 520 |   | — |   | — |   | 520 |   |
| Risk  B                             |       | 6,269              |              | — |   | 102 |   | 184 |   | 286 |   |
| Risk  B1                            |       | 5,700              |              | 74 |   | 266 |   | — |   | 340 |   |
| Risk  B2                            |       | 8,249              |              | 84 |   | 509 |   | — |   | 593 |   |
| Risk  B3                            |       | 2,579              |              | 269 |   | — |   | — |   | 269 |   |
| Risk  C                             |       | 2,494              |              | — |   | 795 |   | 132 |   | 927 |   |
| Risk  C1                            |       | 1,404              |              | 301 |   | — |   | — |   | 301 |   |
| Risk  C2                            |       | 803                |              | 380 |   | — |   | — |   | 380 |   |
| Risk  D                             |       | 2,592              |              | 245 |   | 1,356 |   | 264 |   | 1,865 |   |
| Risk  E                             |       | 1,272              |              | 1,008 |   | 272 |   | — |   | 1,280 |   |
| Unclassified                        |       | (35                | )                 | — |   | — |   | — |   | — |   |
| ** **                          | ** ** | **Ps.**            | ** 253,660** | ***** | **Ps.** | ** 3,376** | ** ** | **Ps.** | ** 3,363** | ** ** | **Ps.** | ** 739** | ** ** | **Ps.** | ** 7,478** | ** ** |
| **Less:********recorded allowance** |       |               |              |   |   |   |   |   | ** ** | **7,535** | ** ** |
| **Additional allowance**            | ** ** | ** **         | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ps.** | ** 57** | ** ** |

 
| ** **                          | ** ** | **2008**           | ** **        |
|-------------------------------------|------------|--------------------|-------------------|
| ** **                          | ** ** | ** **         | ** **        | **Required allowances for losses** | ** ** |
| **Risk category**                   | ** ** | **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** | ** ** |
| **Less:********recorded allowance** |       |               |              |   |   |   |   |   | ** ** | **6,690** | ** ** |
| **Additional allowance**            | ** ** | ** **         | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ps.** | ** 339** | ** ** |

 

----

*The sum of the ratedloan portfolio includes Ps. 5,114 and Ps. 5,991 in loans granted tosubsidiaries whose balance was eliminated in the consolidation process as of December 31,2009 and 2008, respectively.

 

The total portfoliobalance used as the basis for the classification above includes amounts relatedto credit commitments, which is recorded in memorandum accounts.

 

F-117

----

Table of Contents

 

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 31,2009 and 2008, the estimated allowance for loan losses is determined based onportfolio balances at those dates. As of December 31, 2009 and 2008, theallowance for loan losses includes a reserve for 100% of delinquent interestowed.

 

As of December 31,2009 and 2008, the allowance for loan losses represents 122% and 135%,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, 2009 and 2008.

 

**Credit card rating**

 

Modification of thecredit card consumer loan rating methodology

 

On August 12, 2009the Commission issued a resolution to the General Criteria for BankingInstitutions modifying the applicable revolving consumer loan rating so thatthe allowance for loan loss parameters may reflect, based on the currentsituation, the expected 12-month loss from credit cards.

 

Consequently, theFinancial Group decided to record the initial cumulative financial effectderived from applying the aforementioned criteria as per temporary article twosection I against the results of previous periods. This effect was recorded in September 2009.

 

The Financial Grouprecorded the aforementioned effect with a charge of Ps. 1,102 to “Retainedearnings from prior years” in stockholders’ equity and a credit for the sameamount to the “Allowance for loan losses”. Furthermore, the corresponding deferredtax asset of Ps. 419 was also recorded through “Retained earnings from prioryears “ in stockholders’ equity.

 

If the aforementionedeffect had been recorded in the results of 2009, the affected items and amountsthat the Financial Group would have recorded in the balance sheet and statementof income would be:

 
| ** **                                           | ** ** | ** ** | ** **       | **Effect** | ** ** | **Would be  presented** | ** ** |
|------------------------------------------------------|------------|------------|------------------|------------|------------|-------------------------|------------|
|                                                 |       |       |             |       |       |                    |       |
| **Balance Sheet**                                    | ** ** | ** ** | ** **       | ** ** | ** ** | ** **              | ** ** |
| ** **                                           | ** ** | ** ** | ** **       | ** ** | ** ** | ** **              | ** ** |
| **Stockholders’ Equity:**                       | ** ** | ** ** | ** **       | ** ** | ** ** | ** **              | ** ** |
| Retained  earnings from prior years                  |       | Ps.        |  20,681     |       | Ps.        |  683               |       | Ps. |  21,364 |   |
| Controlling  interest net income                     |       | 5,854      |             | (683       | )          | 5,171                   |       |
| **Total stockholders’ equity**                  | ** ** | **Ps.**    | ** 44,974** | ** ** | **Ps.**    | ** —**        | ** ** | **Ps.** | ** 44,974** | ** ** |
| ** **                                           |       |       |             |       |       |                    |       |
| **Statement of Income**                              |       |       |             |       |       |                    |       |
|                                                 |       |       |             |       |       |                    |       |
| Provision for loan losses                            |       | 8,286      |             | 1,102      |       | 9,388                   |       |
| **Financial margin after allowance for loan losses** | ** ** | **14,897** | ** **       | **(1,102** | **)**      | **13,795**              | ** ** |
| Deferred income taxes (net)                          |       | (536       | )                | (419       | )          | (955                    | )          |
| **Net income**                                       | ** ** | **Ps.**    | ** 5,854**  | ** ** | **Ps.**    | **(683**                | **)**      | **Ps.** | ** 5,171** | ** ** |

 

F-118

----

Table of Contents

 

**Rollforwardof allowance for loan losses**

 

A rollforward of theallowance for loan losses is detailed below:

 
| ** **                                             | ** ** | **2009** | ** **      | **2008**   | ** ** |
|--------------------------------------------------------|------------|----------|-----------------|------------|------------|
| Balance  at the beginning of the year                  |       | Ps.      |  6,690     |       | Ps.        |  3,786 |   |
| Increase  charged to results                           |       | 8,208    |            | 6,835      |       |
| Reserve release                                        |       | —   |            | (16        | )          |
| Debt  forgiveness and write-offs                       |       | (8,464   | )               | (4,085     | )          |
| Valuation  in foreign currencies and UDIS              |       | (19      | )               | 108        |       |
| Rebates  granted to housing debtors                    |       | (46      | )               | (74        | )          |
| Created  with profit margin (UDIS Trusts)              |       | 59       |            | 48         |       |
| Benefits  from FOPYME and FINAPE programs              |       | —   |            | (3         | )          |
| Recognized  against retained earnings from prior years |       | 1,136    |            | 103        |       |
| Other                                                  |       | (29      | )               | (12        | )          |
| **Year-end  balance**                                  | ** ** | **Ps.**  | ** 7,535** | ** ** | **Ps.**    | ** 6,690** | ** ** |

 

As of December 31,2009, the net amount of preventive loan loss reserves charged to the incomestatement totals Ps. 8,282 and is comprised of Ps. 8,286 directly credited tothe estimate and Ps. 4 charged to other operating expenses. As of December 31,2008, the net amount of preventive loan loss reserves charged to the incomestatement totals Ps. 6,883 and is comprised of Ps. 6,896 directly credited tothe estimate and Ps. 13 charged to other operating expenses.

 

**12 - ACQUIRED PORTFOLIOS**

 

As of December 31,2009 and 2008, the acquired portfolios are comprised as follows:

 
| ** **                     | ** ** | **2009** | ** ** | **2008**   | ** ** | **Valuation  Method**                                       | ** ** |
|--------------------------------|------------|----------|------------|------------|------------|-------------------------------------------------------------|------------|
| Bancomer  III                  |       | Ps.      | 125        |       | Ps.        |  141                                                   |       | Cash Basis Method |   |
| Bancomer  IV                   |       | 456      |       | 561        |       | Cash Basis Method                                           |       |
| Bital  I                       |       | 171      |       | 229        |       | Cash Basis Method                                           |       |
| Bital  II                      |       | 72       |       | 82         |       | Cash Basis Method                                           |       |
| Banamex  Mortgage              |       | 302      |       | 330        |       | Cash Basis Method                                           |       |
| GMAC  Banorte                  |       | 66       |       | 95         |       | Cash Basis Method                                           |       |
| Serfin  Comercial I            |       | 92       |       | 127        |       | Cash Basis Method                                           |       |
| Serfin Comercial II            |       | 105      |       | 94         |       | Interest Method                                             |       |
| Serfin  Mortgage               |       | 160      |       | 197        |       | Cash Basis Method                                           |       |
| Santander                      |       | 70       |       | 73         |       | Interest Method  (Commercial); Cash Basis Method (Mortgage) |       |
| Banorte Mortgage               |       | 196      |       | 234        |       | Interest Method                                             |       |
| Meseta                         |       | —   |       | 47         |       | Cash Basis Method                                           |       |
| Vipesa                         |       | —   |       | 6          |       | Cash Basis Method                                           |       |
| Goldman  Sachs                 |       | 145      |       | 183        |       | Cash Basis Method                                           |       |
| Confia  I                      |       | 80       |       | 93         |       | Cost Recovery Method                                        |       |
| Banorte Sólida Commercial |       | 35       |       | 40         |       | Cost Recovery Method                                        |       |
| Solida Mortgage                |       | 473      |       | 517        |       | Interest Method                                             |       |
| ** **                     | ** ** | **Ps.**  | **2,548**  | ** ** | **Ps.**    | **3,049**                                                   | ** ** | ** ** | ** ** |

 

As of December 31,2009, the Financial Group recognized income from credit asset portfolios of Ps.718, together with the respective amortization of Ps. 448, the effects of whichwere recognized under the “Other income” heading in the consolidated statementof income. For the year ended December 31, 2008, the Financial Grouprecognized income of Ps. 1,156, together with the respective amortization ofPs. 546.

 

F-119

----

Table of Contents

 

Since 2008, mortgageloans that are amortized under the interest method are evaluated jointly as asector given the features that they commonly share. 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’sresults for the amount that such expected cash flows are lower than the bookvalue of the receivable.

 

Assets other than cashthat the Financial Group has received as part of portfolio collection orrecovery have been mainly in real property.

 

The main featureconsidered for segmenting acquired portfolios has been the type of loan.

 

**13 - OTHER ACCOUNTS RECEIVABLE, NET**

 

As of December 31,2009 and 2008, the other accounts receivable balance is as follows:

 
| ** **                           | ** ** | **2009**   | ** **       | **2008**   | ** ** |
|--------------------------------------|------------|------------|------------------|------------|------------|
| Loans to officers and employees      |       | Ps.        |  1,134      |       | Ps.        |  1,162 |   |
| Debtors from  liquidation settlement |       | 2,706      |             | 2,643      |       |
| Real property  portfolios            |       | 1,183      |             | 982        |       |
| Fiduciary rights                     |       | 4,104      |             | 3,083      |       |
| Sundry debtors in Mexican pesos      |       | 1,182      |             | 1,284      |       |
| Sundry debtors in foreign currency   |       | 928        |             | 86         |       |
| Other                                |       | 380        |             | 386        |       |
|                                 | ** ** | **11,617** | ** **       | **9,626**  | ** ** |
| Allowance for doubtful accounts      |       | (293       | )                | (112       | )          |
| ** **                           | ** ** | **Ps.**    | ** 11,324** | ** ** | **Ps.**    | ** 9,514** | ** ** |

 

The real propertyportfolios include Ps. 300 that correspond to the collection rights of theINVEX trust that is valued applying the interest method.

 

Loans to officers andemployees mature in 2 to 30 years and accrue a 6% to 10% interest.

 

**14 - FORECLOSED ASSETS, NET**

 

As of December 31,2009 and 2008, the foreclosed assets balance is as follows:

 
| ** **                                | ** ** | **2009**  | ** ** | **2008**   | ** ** |
|-------------------------------------------|------------|-----------|------------|------------|------------|
| Personal property                         |       | Ps.       | 67         |       | Ps.        |  71 |   |
| Real property                             |       | 1,230     |       | 1,100      |       |
| Goods pledged for sale                    |       | 14        |       | 26         |       |
|                                      | ** ** | **1,311** | ** ** | **1,197**  | ** ** |
| Allowance for losses on foreclosed assets |       | (383      | )          | (334       | )          |
| ** **                                | ** ** | **Ps.**   | **928**    | ** ** | **Ps.**    | ** 863** | ** ** |

 

F-120

----

Table of Contents

 

**15 - PROPERTY, FURNITURE AND FIXTURES, NET**

 

As of December 31,2009 and 2008, the property, furniture and fixtures balance is as follows:

 
| ** **                                        | ** ** | **2009**   | ** **      | **2008**   | ** ** |
|---------------------------------------------------|------------|------------|-----------------|------------|------------|
| Furniture  and fixtures                           |       | Ps.        |  5,207     |       | Ps.        |  4,902 |   |
| Property  intended for offices                    |       | 5,272      |            | 5,396      |       |
| Installation costs                                |       | 2,750      |            | 2,407      |       |
| ** **                                        | ** ** | **13,229** | ** **      | **12,705** | ** ** |
| Less  - Accumulated depreciation and amortization |       | (4,607     | )               | (4,276     | )          |
| ** **                                        | ** ** | **Ps.**    | ** 8,622** | ** ** | **Ps.**    | ** 8,429** | ** ** |

 

The depreciation recordedin the results of 2009 and 2008 was Ps. 997 and Ps. 945, respectively.

 

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 |       |

 

**16 - PERMANENT STOCK INVESTMENTS**

 

Investment inunconsolidated subsidiaries and associated companies are valued according tothe equity method, as detailed below:

 
| ** **                                                  | ** ** | **Share %** | ** ** | **2009** | ** ** | **2008**   | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|----------|------------|------------|------------|
| Seguros Banorte  Generali, S.A. de C.V.                     |       | 51          | %          | Ps.      | 1,209      |       | Ps.        |  1,086 |   |
| Fondo Solida Banorte  Generali, S.A. de C.V., SIEFORE       |       | 99          | %          | 719      |       | 558        |       |
| Pensiones Banorte  Generali, S.A. de C.V.                   |       | 51          | %          | 518      |       | 503        |       |
| Banorte Investment  funds                                   |       | Various     |       | 121      |       | 114        |       |
| Controladora Prosa,  S.A. de C.V.                           |       | 19.73       | %          | 49       |       | 60         |       |
| Servicio Pan Americano  de Protección, S.A. de C.V.    |       | 8.50        | %          | 115      |       | 97         |       |
| Transporte Aéreo Técnico Ejecutivo, S.A. de  C.V. |       | 45.33       | %          | 72       |       | 89         |       |
| Fideicomiso Marhnos (Sólida)                           |       | 100         | %          | 156      |       | —     |       |
| Others                                                      |       | Various     |       | 77       |       | 52         |       |
| ** **                                                  | ** ** | ** **  | ** ** | **Ps.**  | **3,036**  | ** ** | **Ps.**    | **2,559** | ** ** |

 

The Financial Groupexercises significant influence over its affiliates valued under the equitymethod by means of its representation on the board of directors or equivalentadministrative body, as well as by means of significant intercompanytransactions.

 

F-121

----

Table of Contents

 

**17 - 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.1,411 and Ps.471 as of December 31,2009 and 2008, respectively, as detailed below:

 
| ** **                                                             | ** ** | **2009**        | ** **      | **2008**            | ** ** |
|------------------------------------------------------------------------|------------|-----------------|-----------------|---------------------|------------|
| ** **                                                             | ** ** | **Temporary**   | ** **      | **Deferred Effect** | ** ** | **Temporary** | ** ** | **Deferred Effect** | ** ** |
| ** **                                                             | ** ** | **Differences** | ** **      | **ISR**             | ** ** | **PTU** | ** ** | **Differences** | ** ** | **ISR** | ** ** | **PTU** | ** ** |
| Temporary  Differences - Assets                                        |       |            |            |                |       |   |   |   |   |   |   |   |   |
| Allowance for loan losses                                              |       | Ps.             | 315             |                | Ps.        |  110 |   | Ps. |  — |   | Ps. |  196 |   | Ps. |  68 |   | Ps. | — |   |
| Unrealized  loss (gain) on securities available for sale               |       | (190            | )               | (67                 | )          | — |   | 78 |   | 22 |   |   |   |
| Tax  loss carryforwards                                                |       | 118             |            | 42                  |       | — |   | 111 |   | 38 |   | — |   |
| State  tax on deferred assets                                          |       | 6               |            | 2                   |       | — |   | — |   | — |   | — |   |
| Surplus  preventive allowances for credit risks over the net tax limit |       | 4,757           |            | 1,332               |       | 476 |   | 936 |   | 262 |   | 94 |   |
| Excess  of tax over book value of foreclosed and fixed assets          |       | 1,132           |            | 308                 |       | 52 |   | 1,160 |   | 317 |   | 69 |   |
| PTU                                                                    |       | 775             |            | 232                 |       | 77 |   | 896 |   | 252 |   | 90 |   |
| Other  assets                                                          |       | 1,422           |            | 427                 |       | 135 |   | 1,308 |   | 363 |   | 121 |   |
| **Total assets**                                                       | ** ** | **Ps.**         | ** 8,335** | ** **          | **Ps.**    | ** 2,386** | ** ** | **Ps.** | ** 740** | ** ** | **Ps.** | ** 4,685** | ** ** | **Ps.** | ** 1,322** | ** ** | **Ps.** | ** 374** | ** ** |
| Temporary Differences -  Liabilities                                   |       |            |            |                |       |   |   |   |   |   |   |   |   |
| Excess  of book over tax value of fixed assets and expected expenses   |       | Ps.             | 16              |                | Ps.        | 4 |   | Ps. | — |   | Ps. | 4 |   | Ps. | 1 |   | Ps. | — |   |
| Unrealized  capital gain from special allowance                        |       | 125             |            | 38                  |       | — |   | 87 |   | 24 |   | — |   |
| ISR  payable on UDI trusts                                             |       | 145             |            | 40                  |       | — |   | 139 |   | 39 |   |   |   |
| Portfolios acquired                                                    |       | 2,302           |            | 655                 |       | 111 |   | 2,083 |   | 583 |   | 100 |   |
| Capitalizable project expenses                                         |       | 528             |            | 159                 |       | 53 |   |   |   |   |   |   |   |
| Reversal of sales costs                                                |       | 16              |            | 4                   |       | — |   | 18 |   | 5 |   | — |   |
| Contribution to pension fund                                           |       | 1,500           |            | 420                 |       | 150 |   | 1,000 |   | 280 |   | 100 |   |
| Other                                                                  |       | 260             |            | 81                  |       | — |   | 302 |   | 93 |   | — |   |
| **Total liabilities**                                                  | ** ** | **Ps.**         | ** 4,892** | ** **          | **Ps.**    | ** 1,401** | ** ** | **Ps.** | ** 314** | ** ** | **Ps.** | ** 3,633** | ** ** | **Ps.** | ** 1,025** | ** ** | **Ps.** | ** 200** | ** ** |
| ** **                                                             | ** ** | ** **      | ** **      | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  accumulated asset**                                             | ** ** | **Ps.**         | ** 3,443** | ** **          | **Ps.**    | ** 985** | ** ** | **Ps.** | ** 426** | ** ** | **Ps.** | ** 1,052** | ** ** | **Ps.** | ** 297** | ** ** | **Ps.** | ** 174** | ** ** |
| ** **                                                             | ** ** | ** **      | ** **      | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Deferred  tax, net**                                                 | ** ** | ** **      | ** **      | ** **          | ** ** | **Ps.** | **1,411** | ** ** | ** ** | ** ** | ** ** | ** ** | **Ps.** | ** 471** | ** ** |
|                                                                        |            |                 |                 |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As discussed in Note 26,as of December 31, 2009, the applicable income tax rate was 28%, and itwill be 30% for 2010 to 2012 and 29% for 2013. Pursuant to the provisions ofNIF D-4, “Income Taxes”, and INIF 8, “Effects of the Business Flat Tax”, basedon financial forecasts, the Administration adjusted their balances based on therates likely to be in effect at the time of their recovery. Additionally, itmade forecasts for the IETU and compared it to ISR, and concluded that theFinancial Group and its subsidiaries will continue to pay ISR. Thus no changewas made to the deferred tax calculations.

 

Derived fromconsolidating Banorte USA, a net amount of Ps. 2 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.According to this method, the net liability of deferred taxes was determinedbased on the tax effects of temporary differences between the book and tax baseof assets and liabilities.

 

F-122

----

Table of Contents

 

**18 - OTHER ASSETS**

 

As of December 31,2009 and 2008, other assets are as follows:

 
| ** **                                   | ** ** | **2009** | ** **      | **2008**   | ** ** |
|----------------------------------------------|------------|----------|-----------------|------------|------------|
| Plan  assets held for employee pension plans |       | Ps.      | 4,255           |       | Ps.        |  3,482 |   |
| Other amortizable expenses                   |       | 2,200    |            | 2,352      |       |
| Accumulated  amortization of other expenses  |       | (93      | )               | (480       | )          |
| Goodwill                                     |       | 3,121    |            | 5,377      |       |
| ** **                                   | ** ** | **Ps.**  | ** 9,483** | ** ** | **Ps.**    | ** 10,731** | ** ** |

 

As of December 31,2009, goodwill was Ps. 3,121 and was comprised of the following: Ps. 29 for thepurchase of Banorte Generali, S.A. de C.V., AFORE; Ps. 2,838 for the purchaseof INB and Ps. 254 for the purchase of Uniteller. As of December 31, 2008,the goodwill was Ps. 5,377 and was comprised as follows: 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 mentioned in Note 4,goodwill is not amortized and is subject to annual impairment tests.  No impairment to goodwill value was detectedby December 31, 2009 and 2008.

 

As a result of theacquisition disussed in Note 2 c., Banorte recorded a reduction of goodwill andother accounts payable in the amount of Ps.2,082. This amount represented thevalue of the option agreement to purchase the remaining 30% of INB’s shares,which was originally recorded as goodwill as authorized by the Commission. MFRSrequires recording this type of transaction as the acquisition of anoncontrolling interest, which is a transaction among stockholders.

 

**19 - 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 2009 and 2008 the Financial Group generated a liquidityrequirement of USD 755,917 thousand and USD 412,843 thousand, respectively, andheld investments in liquid assets of USD 1,230,740 thousand and USD 661,95thousand, representing a surplus of USD 474,823 thousand and USD 249,116thousand, respectively.

 

**Deposits**

The liabilities derivedfrom traditional deposits are comprised as follows:

 
| ** **                                                                      | ** ** | **2009** | ** **        | **2008**   | ** ** |
|---------------------------------------------------------------------------------|------------|----------|-------------------|------------|------------|
| **Immediately due and payable deposits**                                        |       |     |              |       |       |
| **Checking accounts earning no interest:**                                      |       |     |              |       |       |
| Cash deposits                                                                   |       | Ps.      | 59,334            |       | Ps.        |  56,247 |   |
| Checking  accounts in US dollars for individual residents of the Mexican border |       | 662      |              | 573        |       |
| Demand deposits accounts                                                        |       | 4,142    |              | 3,433      |       |
| **Checking accounts earning interest:**                                         |       |     |              |       |       |
| Other  bank checking deposit                                                    |       | 35,395   |              | 35,471     |       |
| Savings accounts                                                                |       | 268      |              | 234        |       |
| Checking  accounts in US dollars for individual residents of the Mexican border |       | 2,055    |              | 2,166      |       |
| Demand deposits accounts                                                        |       | 35,705   |              | 30,212     |       |
| IPAB  checking accounts                                                         |       | 20       |              | 14         |       |
| ** **                                                                      | ** ** | **Ps.**  | ** 137,581** | ** ** | **Ps.**    | ** 128,350** | ** ** |

 

F-123

----

Table of Contents

 
| ** **                                                                               | ** ** | **2009**    | ** **  | **2008**    | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **Time  deposits**                                                                       |       |        |        |        |       |
| **General  public:**                                                                     |       |        |        |        |       |
| Fixed-term deposits                                                                      |       | 25,711      |        | 20,681      |       |
| Over-the-counter  investments                                                            |       | 49,156      |        | 43,436      |       |
| Promissory  note with interest payable at maturity (PRLV) primary market for individuals |       | 57,819      |        | 53,270      |       |
| PRLV  primary market for business entities                                               |       | 1,195       |        | 1,056       |       |
| Foreign resident deposits                                                                |       | 83          |        | 78          |       |
| Provision  for interest                                                                  |       | 177         |        | 219         |       |
| ** **                                                                               | ** ** | **134,141** | ** **  | **118,740** | ** ** |
| **Money  market:**                                                                       |       |        |        |        |       |
| Fixed-term deposits                                                                      |       | 459         |        | 188         |       |
| Over  the counter promissory notes                                                       |       | 1,430       |        | 12,323      |       |
| Provision  for interest                                                                  |       | 1,297       |        | 1,168       |       |
| ** **                                                                               | ** ** | **3,186**   | ** **  | **13,679**  | ** ** |
| ** **                                                                               | ** ** | **137,327** | ** **  | **132,419** | ** ** |
| ** **                                                                               | ** ** | **Ps.**     | **274,908** | ** **  | **Ps.**    | ** 260,769** | ** ** |
|                                                                                          |            |             |             |             |            |  |  |

 

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:**

** **
| ** **                | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| **Foreign  exchange**     | ** ** | **1Q**   | ** ** | **2Q**   | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| Mexican pesos and  UDIs   |       | 0.99     | %          | 0.73     | %          | 0.60 | % | 0.59 | % | 0.90 | % | 0.96 | % | 1.04 | % | 1.13 | % |
| Foreign currency          |       | 0.05     | %          | 0.04     | %          | 0.03 | % | 0.03 | % | 0.38 | % | 0.27 | % | 0.26 | % | 0.04 | % |
| Banorte  USA              |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits  accounts |       | 0.19     | %          | 0.09     | %          | 0.12 | % | 0.13 | % | 0.43 | % | 0.28 | % | 0.25 | % | 0.19 | % |
| Money market              |       | 1.47     | %          | 1.30     | %          | 1.06 | % | 1.04 | % | 2.79 | % | 1.88 | % | 2.06 | % | 1.66 | % |

 

**Timedeposits:**

** **
| ** **             | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| **Foreign  exchange**  | ** ** | **1Q**   | ** ** | **2Q**   | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| General public         |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican pesos and UDIs |       | 5.68     | %          | 4.45     | %          | 3.55 | % | 3.50 | % | 5.34 | % | 5.32 | % | 5.82 | % | 6.16 | % |
| Foreign currency       |       | 0.91     | %          | 0.79     | %          | 0.90 | % | 0.79 | % | 2.35 | % | 1.48 | % | 1.75 | % | 2.42 | % |
| Money market           |       | 8.59     | %          | 7.54     | %          | 5.72 | % | 6.61 | % | 8.05 | % | 7.89 | % | 8.39 | % | 8.81 | % |
| Banorte USA            |       | 3.84     | %          | 3.56     | %          | 3.19 | % | 2.95 | % | 4.82 | % | 4.53 | % | 4.36 | % | 4.07 | % |

 

F-124

----

Table of Contents

 

As of December 31,2009 and 2008, the terms at which these deposits are traded are as follows:

 
| ** **                                 | ** ** | **2009**      | ** **   |
|--------------------------------------------|------------|---------------|--------------|
| ** **                                 | ** ** | **From 1 to** | ** **   | **From 6 to** | ** ** | **More than** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **179 days**  | ** **   | **12 months** | ** ** | **1 year** | ** ** | **Total** | ** ** |
| **General  public**                        |       |          |         |   |   |   |   |   |   |
| Fixed-term deposits                        |       | Ps.           |  15,740 |   | Ps. |  6,972 |   | Ps. |  2,999 |   | Ps. |  25,711 |   |
| Over  the counter investments              |       | 49,105        |         | 51 |   | — |   | 49,156 |   |
| PRLV  primary market for individuals       |       | 57,337        |         | 418 |   | 64 |   | 57,819 |   |
| PRLV  primary market for business entities |       | 1,170         |         | 25 |   | — |   | 1,195 |   |
| Foreign resident deposits                  |       | 20            |         | 20 |   | 43 |   | 83 |   |
| Provision  for interest                    |       | 162           |         | 13 |   | 2 |   | 177 |   |
| ** **                                 | ** ** | **123,534**   | ** **   | **7,499** | ** ** | **3,108** | ** ** | **134,141** | ** ** |
| **Money  market:**                         |       |          |         |   |   |   |   |   |   |
| Fixed-term deposits                        |       | —        |         | — |   | 459 |   | 459 |   |
| Over  the counter promissory notes         |       | —        |         | — |   | 1,430 |   | 1,430 |   |
| Provision  for interest                    |       | —        |         | 11 |   | 1,286 |   | 1,297 |   |
| ** **                                 | ** ** | **—**    | ** **   | **11** | ** ** | **3,175** | ** ** | **3,186** | ** ** |
| ** **                                 | ** ** | **Ps.**       | **123,534**  | ** ** | **Ps.** | ** 7,510** | ** ** | **Ps.** | ** 6,283** | ** ** | **Ps.** | ** 137,327** | ** ** |

 
| ** **                                 | ** ** | **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 resident 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 |   |
| Over  the counter 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** | ** ** |

 

F-125

----

Tableof Contents

 

**20 - INTERBANK AND OTHER LOANS**

 

The loans received fromother banks as of December 31, 2009 and 2008 are as follows:

 
| ** **                   | ** ** | **Mexican pesos** | ** **       | **Denominated in US   dollars** | ** ** | **Total**        | ** ** |
|------------------------------|------------|-------------------|------------------|---------------------------------|------------|------------------|------------|
| ** **                   | ** ** | **2009**          | ** **       | **2008**                        | ** ** | **2009**         | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Immediately due**          | ** ** | ** **        | ** **       | ** **                      | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domestic  banks (Call money) |       | Ps.               |  21         |                            | Ps.        |  —     |       | Ps. |  — |   | Ps. |  1,245 |   | Ps. |  21 |   | Ps. |  1,245 |   |
| ** **                   | ** ** | **21**            |             | —                          | ** ** | **—**       | ** ** | **1,245** | ** ** | **21** | ** ** | **1,245** | ** ** |
| **Short-term**               |       |              |             |                            |       |             |       |   |   |   |   |   |   |
| Banco de México         |       | —            |             | 11,123                          |       | 1,964            |       | — |   | 1,964 |   | 11,123 |   |
| Commercial  banking          |       | 204               |             | 350                             |       | 220              |       | 1,670 |   | 424 |   | 2,020 |   |
| Development banking          |       | 6,233             |             | 4,755                           |       | 1,593            |       | 2,421 |   | 7,826 |   | 7,176 |   |
| Public  trusts               |       | 2,801             |             | 3,602                           |       | 314              |       | 514 |   | 3,115 |   | 4,116 |   |
| Other  agencies              |       | —            |             | —                          |       | —           |       | 121 |   | — |   | 121 |   |
| Provision  for interest      |       | 54                |             | 228                             |       | 2                |       | 19 |   | 56 |   | 247 |   |
| ** **                   | ** ** | **9,292**         | ** **       | **20,058**                      | ** ** | **4,093**        | ** ** | **4,745** | ** ** | **13,385** | ** ** | **24,803** | ** ** |
| **Long-term**                |       |              |             |                            |       |             |       |   |   |   |   |   |   |
| Commercial  banking          |       | 895               |             | 1,081                           |       | 1,439            |       | 3,533 |   | 2,334 |   | 4,614 |   |
| Development banking          |       | 1,553             |             | 1,335                           |       | 319              |       | 7 |   | 1,872 |   | 1,342 |   |
| Public  trusts               |       | 3,236             |             | 3,664                           |       | 116              |       | 139 |   | 3,352 |   | 3,803 |   |
| Other  agencies              |       | —            |             | —                          |       | —           |       | 876 |   | — |   | 876 |   |
| Provision  for interest      |       | —            |             | —                          |       | 4                |       | — |   | 4 |   | — |   |
| ** **                   | ** ** | **5,684**         | ** **       | **6,080**                       | ** ** | **1,878**        | ** ** | **4,555** | ** ** | **7,562** | ** ** | **10,635** | ** ** |
| ** **                   | ** ** | **Ps.**           | ** 14,997** | ** **                      | **Ps.**    | ** 26,138** | ** ** | **Ps.** | **5,971** | ** ** | **Ps.** | **10,545** | ** ** | **Ps.** | **20,968** | ** ** | **Ps.** | **36,683** | ** ** |

 

These liabilities incurinterest depending on the type of instrument and average balance of the loans.

 

The average interestrates are shown below:

 
| ** **             | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| **Foreign exchange**   | ** ** | **1Q**   | ** ** | **2Q**   | ** ** | **3Q** | ** ** | **4Q** | ** ** | **1Q** | ** ** | **2Q** | ** ** | **3Q** | ** ** | **4Q** | ** ** |
| Call  money            |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican pesos and UDIS |       | 7.52     | %          | 5.53     | %          | 4.53 | % | 4.46 | % | 7.44 | % | 7.48 | % | 7.99 | % | 8.17 | % |
|                   |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other bank loans       |       |     |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Mexican pesos and UDIS |       | 7.61     | %          | 6.51     | %          | 5.66 | % | 5.48 | % | 7.25 | % | 7.17 | % | 7.17 | % | 8.41 | % |
| Foreign  currency      |       | 3.00     | %          | 2.04     | %          | 1.30 | % | 0.92 | % | 5.33 | % | 4.52 | % | 4.51 | % | 6.62 | % |

 

Banorte USA liabilitiesaccrue interest at an average rate of 4.49% and 1.43% as of December 31,2009 and 2008, respectively. Moreover, the Arrendadora y Factor Banorte, S.A.de C.V. loans accrue an average interest rate of 6.46% and 9.21% in Mexicanpesos and 2.86% and 4.44% in U.S. dollars by December 31, 2009 and 2008,respectively.

 

**21 - SUNDRY CREDITORS AND OTHER PAYABLES**

 

As of December 31,2009 and 2008, the balance of sundry creditors and other payables is asfollows:

** **
| ** **                                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cashier  and certified checks and other negotiable instruments |       | Ps.      | 796        |     | Ps.        | 830 |   |
| Provision  for employee retirement obligations                 |       | 2,773    |       | 2,505    |       |
| Provisions  for sundry obligations                             |       | 2,291    |       | 4,510    |       |
| Other                                                          |       | 3,108    |       | 2,871    |       |
|                                                           |       | **Ps.**  | **8,968**  |     | **Ps.**    | **10,716** |   |

 

F-126

----

Tableof Contents

 

**22 - EMPLOYEE RETIREMENTOBLIGATIONS**

 

The Financial Grouprecognizes the liabilities for pension plans and seniority premium 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, 2009 and 2008, related to thedefined benefit pension plan, seniority premiums and retiree medical coverage,determined by independent actuaries, is analyzed below:

 
| ** **                          | ** ** | **2009**                | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **Pension********plan** | ** ** | **Seniority******** premiums** | ** ** | **Medical********services** | ** ** | **Total** | ** ** |
| Projected benefit obligation (PBO)  |       | Ps.                     | (725       | ) | Ps. | (149 | ) | Ps. | (1,633 | ) | Ps. | (2,507 | ) |
| Fund market value                   |       | 1,125                   |       | 269 |   | 1,749 |   | 3,143 |   |
| **Funded  status**                  | ** ** | **400**                 | ** ** | **120** | ** ** | **116** | ** ** | **636** | ** ** |
| Transition asset (obligation)       |       | 22                      |       | (10 | ) | 246 |   | 258 |   |
| Unrecognized prior service cost     |       | 2                       |       | (3 | ) | — |   | (1 | ) |
| Unrecognized actuarial losses       |       | 217                     |       | 4 |   | 488 |   | 709 |   |
| **Net projected asset (liability)** | ** ** | **Ps.**                 | **641**    | ** ** | **Ps.** | **111** | ** ** | **Ps.** | **850** | ** ** | **Ps.** | **1,602** | ** ** |

 
| ** **                          | ** ** | **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 (liability)** | ** ** | **Ps.**                 | **460**    | ** ** | **Ps.** | **76** | ** ** | **Ps.** | **570** | ** ** | **Ps.** | **1,106** | ** ** |
|                                     |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 

The Financial Group has anet prepayment (net prepaid asset) of Ps. 4 generated by transferring personnelfrom Sólida Administradora de Portafolios, S.A. de C.V. (Sólida) to Banorte.Moreover, as of December 31, 2009, a separate fund amounting to Ps. 3,143,(Ps. 2,530 in 2008) has been set aside to meet the above-mentioned obligations,in accordance with NIF D-3 and is recorded under “Other assets”.

 

For the years ended December 31,2009 and 2008, the net periodic pension cost is as follows:

 
| ** **                                           | ** ** | **2009** | ** **    | **2008**   | ** ** |
|------------------------------------------------------|------------|----------|---------------|------------|------------|
| Service  cost                                        |       | Ps.      |  95      |       | Ps.        |  81 |   |
| Interest  cost                                       |       | 197      |          | 181        |       |
| Expected  return on plan assets                      |       | (274     | )             | (216       | )          |
| **Amortizations of unrecognized items:**             |       |     |          |       |       |
| Transition obligation                                |       | 86       |          | 87         |       |
| Effects  of curtailment and reduction of obligations |       | —   |          | 1          |       |
| Variations  in assumptions                           |       | 27       |          | 25         |       |
| **Net  periodic pension cost**                       | ** ** | **Ps.**  | ** 131** | ** ** | **Ps.**    | ** 159** | ** ** |

 

F-127

----

Table of Contents

 

The rates used in thecalculation of the projected benefit obligation and return on plan assets as ofDecember 31, 2009 and 2008, are shown below:

 
| **Concept**                                                                      | ** ** | **2009********Nominal** | ** ** | **2008********Nominal** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Discount  rate                                                                   |       | 9.25                    | %          | 9.25                    | %          |
| Rate  of wage increase                                                           |       | 4.50                    | %          | 4.50                    | %          |
| Rate  of increase in costs and expenses of other postretirement benefits         |       | 5.57                    | %          | 5.57                    | %          |
| Long-term  inflation rate                                                        |       | 3.50                    | %          | 3.50                    | %          |
| Expected  long-term rate of return on plan assets of the Banorte Brokerage House |       | 10.25                   | %          | 10.25                   | %          |
| Expected  long-term rate of return on plan assets                                |       | 10.0                    | %          | 9.75                    | %          |

 

The liability forseverance indemnities due to causes other than restructuring, which was alsodetermined by independent actuaries, is comprised as follows:

 
| **Concept**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Defined  and projected benefit obligations |       | Ps.      | (158       | )        | Ps.        | (156 | ) |
| **Funded status**                          | ** ** | **(158** | **)**      | **(156** | **)**      |
| Transition obligation                      |       | 62       |       | 83       |       |
| **Net  projected liability**               | ** ** | **Ps.**  | **(96**    | **)**    | **Ps.**    | **(73** | **)** |

 

For the years ended December 31,2009 and 2008, the net periodic pension cost is as follows:

 
| **Concept**                    | ** ** | **2009** | ** **   | **2008**   | ** ** |
|--------------------------------|------------|----------|--------------|------------|------------|
| Service  cost                  |       | Ps.      |  27     |       | Ps.        |  25 |   |
| Interest  cost                 |       | 12       |         | 11         |       |
| Transition obligation          |       | 21       |         | 21         |       |
| Variations  in assumptions     |       | 8        |         | (2         | )          |
| **Net  periodic pension cost** | ** ** | **Ps.**  | ** 68** | ** ** | **Ps.**    | ** 55** | ** ** |

 

The balance of theemployee retirement obligations presented in this note refer to the FinancialGroup’s defined benefit pension plan for those employees who remain enrolled.

 

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,this pension plan maintains a fund as of December 31, 2009 and 2008,equivalent to Ps. 1,140 and Ps. 958, respectively, which is recorded under “Otherassets” and is equivalent to the recorded plan liability.

 

F-128

----

Tableof Contents

 

**23 - SUBORDINATED DEBENTURES**

 

As of December 31,2009 and 2008, the subordinated debentures in circulation are as follows:

 
| ** **                                                                                                                                                                                                                     | ** ** | **2009** | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| 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).    |       | Ps.      | —     |       | Ps.        | 4,150 |   |
| 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).   |       | 5,226    |       | 5,533      |       |
| Nonpreferred  subordinated nonconvertible debentures (Q BANORTE 08 debentures), maturing in  February 2018, interest at the 28-day TIIE rate plus 0.60%.                                                                  |       | 3,000    |       | 3,000      |       |
| Preferred  subordinated nonconvertible debentures (Q BANORTE 08-2), maturing in  June 2018, interest at the 28-day TIIE rate plus 0.77%.                                                                                  |       | 2,750    |       | 2,750      |       |
| Preferred  subordinated nonconvertible debentures, BANORTE 09 debentures maturing in  March 2019, interest at the 28-day TIIE rate plus 2%, payable in 130  periods of 28 days each.                                      |       | 2,200    |       | —     |       |
| Nonpreferred  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). |       | 2,613    |       | 2,766      |       |
| Preferred  subordinated nonconvertible debentures, Q BANORTE 08-U maturing in  February 2028, interest at a 4.95% annual rate.                                                                                            |       | 1,941    |       | 1,871      |       |
| Subordinated  debentures, maturing in June 2034, denominated in US dollars, at an  interest rate of 2.75%.                                                                                                                |       | 135      |       | 143        |       |
| Preferred  subordinated debentures maturing in April 2034, denominated in US  dollars, at an interest rate of 2.72%.                                                                                                      |       | 135      |       | 143        |       |
| Accrued interest                                                                                                                                                                                                               |       | 168      |       | 257        |       |
|                                                                                                                                                                                                                           | ** ** | **Ps.**  | **18,168** | ** ** | **Ps.**    | **20,613** | ** ** |
|                                                                                                                                                                                                                                |            |          |            |            |            |  |  |  |  |

 

The costs related tothese debentures are amortized using the straight-line method over the term ofthe debt. The amortization charged to results was Ps. 8 and Ps. 15 in 2009 and2008, respectively.

 

**24 - TRANSACTIONS AND BALANCES WITH SUBSIDIARIES ANDASSOCIATED COMPANIES**

 

The balances andtransactions with subsidiaries and associated companies as of December 31,2009, 2008 and 2007, are as follows:

 
| ** **                             | ** ** | **Revenues** | ** ** | **Accounts receivable** | ** ** |
|----------------------------------------|------------|--------------|------------|-------------------------|------------|
| **Institution**                        | ** ** | **2009**     | ** ** | **2008**                | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Seguros Banorte Generali, S.A. de C.V. |       | Ps.          | 598        |                    | Ps.        | 613 |   | Ps. | 587 |   | Ps. | 9 |   | Ps. | 19 |   |
|                                        |            |              |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **Expenses** | ** ** | **Accounts payable** | ** ** |
|----------------------------------------|------------|--------------|------------|----------------------|------------|
| **Institution**                        | ** ** | **2009**     | ** ** | **2008**             | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Seguros Banorte Generali, S.A. de C.V. |       | Ps.          | 101        |                 | Ps.        | 300 |   | Ps. | 310 |   | Ps. | 5 |   | Ps. | 24 |   |
|                                        |            |              |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

All balances andtransactions with the subsidiaries indicated in Note 3 have been eliminated inconsolidation.

 

Pursuant to article 73 ofthe LIC (Credit Institutions Law), the loans granted by Banorte to any relatedparty cannot exceed 50% of the basic portion of their net capital. For theyears ended December 31, 2009 and 2008, the amount of the loans granted torelated parties is Ps. 7,362 and Ps. 8,216, respectively, representing 46.2%and 54%, respectively, of the limit established by the LIC.

 

F-129

----

Table of Contents

 

**Loanportfolio sales**

 

Sale of loanportfolio 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 loan portfolio sold, Ps. 1,577 of the associated allowance for loan losseswas transferred as well.

 

In official letter601-II-323110 dated November 5, 2003, the Commission established 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 2008 and 2009:

 
| ** **                          | ** ** | **Mexican pesos** | ** ** | **Foreign  currency** | ** ** | **Total**  | ** ** |
|-------------------------------------|------------|-------------------|------------|-----------------------|------------|------------|------------|
| **Type of portfolio**               | ** ** | **Aug 02**        | ** ** | **Dec 08**            | ** ** | **Dec 09** | ** ** | **Aug 02** | ** ** | **Dec 08** | ** ** | **Dec 09** | ** ** | **Aug 02** | ** ** | **Dec 08** | ** ** | **Dec 09** | ** ** |
| **Performing portfolio**            |       |              |       |                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                          |       | Ps.               | 5          |                  | Ps.        | —     |       | Ps. | — |   | Ps. | 5 |   | Ps. | — |   | Ps. | — |   | Ps. | 10 |   | Ps. | — |   | Ps. | — |   |
| Mortgage                            |       | 54                |       | 34                    |       | 27         |       | — |   | — |   | — |   | 54 |   | 34 |   | 27 |   |
| **Total**                           | ** ** | **59**            | ** ** | **34**                | ** ** | **27**     | ** ** | **5** | ** ** | **—** | ** ** | **—** | ** ** | **64** | ** ** | **34** | ** ** | **27** | ** ** |
| **Past-due portfolio**              |       |              |       |                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                          |       | 405               |       | 367                   |       | 361        |       | 293 |   | 116 |   | 110 |   | 698 |   | 483 |   | 471 |   |
| Consumer                            |       | 81                |       | 72                    |       | 72         |       | — |   | — |   | — |   | 81 |   | 72 |   | 72 |   |
| Mortgage                            |       | 1,112             |       | 393                   |       | 350        |       | — |   | — |   | — |   | 1,112 |   | 393 |   | 350 |   |
| **Total**                           | ** ** | **1,598**         | ** ** | **832**               | ** ** | **783**    | ** ** | **293** | ** ** | **116** | ** ** | **110** | ** ** | **1,891** | ** ** | **948** | ** ** | **893** | ** ** |
| **Total portfolio**                 | ** ** | **Ps.**           | **1,657**  | ** **            | **Ps.**    | **866**    | ** ** | **Ps.** | **810** | ** ** | **Ps.** | **298** | ** ** | **Ps.** | **116** | ** ** | **Ps.** | **110** | ** ** | **Ps.** | **1,955** | ** ** | **Ps.** | **982** | ** ** | **Ps.** | **920** | ** ** |
| **Allowance for loan losses(1)**    | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial                          |       | 326               |       | 355                   |       | 349        |       | 246 |   | 116 |   | 110 |   | 572 |   | 471 |   | 459 |   |
| Consumer                            |       | 77                |       | 72                    |       | 72         |       | — |   | — |   |   |   | 77 |   | 72 |   | 72 |   |
| Mortgage                            |       | 669               |       | 369                   |       | 336        |       | — |   | — |   | — |   | 669 |   | 369 |   | 336 |   |
| **Total allowance for loan losses** | ** ** | **Ps.**           | **1,072**  | ** **            | **Ps.**    | **796**    | ** ** | **Ps.** | **757** | ** ** | **Ps.** | **246** | ** ** | **Ps.** | **116** | ** ** | **Ps.** | **110** | ** ** | **Ps.** | **1,318** | ** ** | **Ps.** | **912** | ** ** | **Ps.** | **867** | ** ** |
|                                     |            |                   |            |                       |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Allowancesrequired based on the classification methodology applied in Banorte that maintaineda 99.99% equity interest in Sólida during 2009 and 2008.

 

F-130

----

Table of Contents

 

Asof December 31, 2009 and 2008, 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 09**        | ** **  | **Dec 08**            | ** ** | **Dec 09**  | ** ** | **Dec 08** | ** ** | **Dec 09** | ** ** | **Dec 08** | ** ** |
| Comercial  loans              |       | Ps.               | 133,823     |                  | Ps.        | 129,995     |       | Ps. | 11,316 |   | Ps. | 15,377 |   | Ps. | 145,139 |   | Ps. | 145,372 |   |
| Consumer loans                |       | 25,525            |        | 29,116                |       | —      |       | — |   | 25,525 |   | 29,116 |   |
| Mortgage  loans               |       | 47,378            |        | 43,784                |       | —      |       | — |   | 47,378 |   | 43,784 |   |
| **Performing portfolio**      | ** ** | **206,726**       | ** **  | **202,895**           | ** ** | **11,316**  | ** ** | **15,377** | ** ** | **218,042** | ** ** | **218,272** | ** ** |
|                          |       |              |        |                  |       |        |       |   |   |   |   |   |   |
| Comercial  loans              |       | 2,583             |        | 1,738                 |       | 150         |       | 153 |   | 2,733 |   | 1,891 |   |
| Consumer loans                |       | 2,014             |        | 2,570                 |       | —      |       | — |   | 2,014 |   | 2,570 |   |
| Mortgage  loans               |       | 1,151             |        | 1,098                 |       | —      |       | — |   | 1,151 |   | 1,098 |   |
| **Past-due portfolio**        | ** ** | **5,748**         | ** **  | **5,406**             | ** ** | **150**     | ** ** | **153** | ** ** | **5,898** | ** ** | **5,559** | ** ** |
| ** **                    | ** ** | ** **        | ** **  | ** **            | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total portfolio**           | ** ** | **212,474**       | ** **  | **208,301**           | ** ** | **11,466**  | ** ** | **15,530** | ** ** | **223,940** | ** ** | **223,831** | ** ** |
| Allowance  for loan losses    |       | 7,425             |        | 6,950                 |       | 384         |       | 285 |   | 7,809 |   | 7,235 |   |
| **Net portfolio**             | ** ** | **Ps.**           | **205,049** | ** **            | **Ps.**    | **201,351** | ** ** | **Ps.** | **11,082** | ** ** | **Ps.** | **15,245** | ** ** | **Ps.** | **216,131** | ** ** | **Ps.** | **216,596** | ** ** |
| **Allowance for loan losses** | ** ** | ** **        | ** **  | ** **            | ** ** | ** **  | ** ** | ** ** | ** ** | **132.40** | **%** | **130.15** | **%** |
| **% of past-due portfolio**   | ** ** | ** **        | ** **  | ** **            | ** ** | ** **  | ** ** | ** ** | ** ** | **2.63** | **%** | **2.48** | **%** |

 

**25 - INFORMATION BY SEGMENT**

 

To analyze the financialinformation of the Financial Group, the data of the most representativesegments as of December 31, 2009, 2008 and 2007 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:

 
| ** **                          | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Banking sector:**                 |       |       |       |       |       |       |       |
| Net  income                         |       | Ps.        | 5,132      |       | Ps.        | 6,543      |       | Ps. | 6,151 |   |
| Stockholders’  equity          |       | 40,348     |       | 35,526     |       | 30,440     |       |
| Total  portfolio                    |       | 234,878    |       | 236,236    |       | 188,235    |       |
| Past-due  portfolio                 |       | 6,051      |       | 4,836      |       | 2,743      |       |
| Allowance  for loan losses          |       | (7,358     | )          | (6,582     | )          | (3,707     | )          |
| Total  net assets                   |       | 548,560    |       | 562,433    |       | 274,361    |       |
|                                |       |       |       |       |       |       |       |
| **Brokerage sector:**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                         |       | 203        |       | 183        |       | 288        |       |
| Stockholders’  equity          |       | 1,396      |       | 1,143      |       | 1,020      |       |
| Portfolio  balance                  |       | 135,621    |       | 119,286    |       | 180,972    |       |
| Total  net assets                   |       | 5,273      |       | 1,662      |       | 1,333      |       |
|                                |       |       |       |       |       |       |       |
| **Long term savings sector:**       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                         |       | 772        |       | 579        |       | 736        |       |
| Stockholders’  equity          |       | 4,727      |       | 4,216      |       | 3,962      |       |
| Total  net assets                   |       | 32,026     |       | 27,789     |       | 23,701     |       |
|                                |       |       |       |       |       |       |       |
| **Other finance companies sector:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income                         |       | 425        |       | 336        |       | 271        |       |
| Stockholders’  equity          |       | 1,631      |       | 1,308      |       | 1,092      |       |
| Total  portfolio                    |       | 13,461     |       | 13,913     |       | 12,222     |       |
| Past-due  portfolio                 |       | 103        |       | 74         |       | 37         |       |
| Allowance  for loan losses          |       | (177       | )          | (79        | )          | (339       | )          |
| Total  net assets                   |       | Ps.        | 13,645     |       | Ps.        | 14,322     |       | Ps. | 12,587 |   |

 

F-131

----

Table of Contents

 

b. The trading resultsfor the years ended December 31, 2009 and 2008, are as follows:

 
| ** **                                   | ** ** | **2009**  | ** ** | **2008**   | ** ** |
|----------------------------------------------|------------|-----------|------------|------------|------------|
| **Valuation  results**                       |       |      |       |       |       |
| Trading securities                           |       | Ps.       | (17        | )          | Ps.        | 109 |   |
| Repurchase  or resale agreement              |       | (156      | )          | 49         |       |
| Derivative financial instruments             |       | 20        |       | (172       | )          |
| **Total  valuation results**                 | ** ** | **(153**  | **)**      | **(14**    | **)**      |
| ** **                                   |       |      |       |       |       |
| **Purchase-sale  results**                   |       |      |       |       |       |
| Trading securities                           |       | 318       |       | 25         |       |
| Available for sale securities                |       | 23        |       | (178       | )          |
| Derivative financial instruments             |       | 180       |       | 428        |       |
| **Total  securities purchase sale**          | ** ** | **521**   | ** ** | **275**    | ** ** |
|                                         |       |      |       |       |       |
| Spot  foreign currency                       |       | 731       |       | 712        |       |
| Foreign  currency forwards                   |       | 154       |       | 48         |       |
| Foreign  currency futures                    |       | (1        | )          | 1          |       |
| Foreign currency valuation                   |       | (20       | )          | 6          |       |
| Minted  metals purchase and sales            |       | 4         |       | 5          |       |
| Minted metals valuation                      |       | 8         |       | 6          |       |
| **Total foreign currency purchase and sale** | ** ** | **876**   | ** ** | **778**    | ** ** |
| **Total purchase and sale results**          | ** ** | **1,397** | ** ** | **1,053**  | ** ** |
| **Total  trading results**                   | ** ** | **Ps.**   | **1,244**  | ** ** | **Ps.**    | **1,039** | ** ** |

 

c. The performing loanportfolio, grouped by economic sector and geographical location, is as follows

 
| ** **                         | ** ** | **2009**                  | ** ** |
|------------------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **Geographical location** | ** ** |
| **Economic sector**                | ** ** | **North**                 | ** ** | **Central** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
| Agriculture                        |       | Ps.                       | 2,314      |   | Ps. | 1,167 |   | Ps. | 581 |   | Ps. | 732 |   | Ps. | 4,794 |   |
| Mining                             |       | 347                       |       | 18 |   | 14 |   | 13 |   | 392 |   |
| Manufacturing                      |       | 7,872                     |       | 4,725 |   | 1,661 |   | 688 |   | 14,946 |   |
| Construction                       |       | 6,042                     |       | 6,236 |   | 546 |   | 1,828 |   | 14,652 |   |
| Public utilities                   |       | 43                        |       | 252 |   | 2 |   | 1 |   | 298 |   |
| Commerce                           |       | 10,543                    |       | 7,241 |   | 3,307 |   | 6,031 |   | 27,122 |   |
| Transportation                     |       | 1,308                     |       | 6,173 |   | 105 |   | 269 |   | 7,855 |   |
| Financial  services                |       | 8,975                     |       | 11,280 |   | 130 |   | 1,473 |   | 21,858 |   |
| Communal social services           |       | 2,524                     |       | 4,242 |   | 1,514 |   | 369 |   | 8,649 |   |
| Business  groups                   |       | 12                        |       | 457 |   | 2 |   | 6 |   | 477 |   |
| Public administration and services |       | 21,403                    |       | 12,938 |   | 2,070 |   | 2,516 |   | 38,927 |   |
| INB                                |       | —                    |       | — |   | — |   | — |   | 14,100 |   |
| Credit card                        |       | —                    |       | — |   | — |   | — |   | 11,801 |   |
| Consumer                           |       | —                    |       | — |   | — |   | — |   | 13,726 |   |
| Mortgage                           |       | —                    |       | — |   | — |   | — |   | 47,351 |   |
| Other                              |       | —                    |       | — |   | — |   | — |   | 54 |   |
| Arrendadora y Factor Banorte       |       | —                    |       | — |   | — |   | — |   | 11,952 |   |
| **Performing  loan portfolio**     | ** ** | **Ps.**                   | **61,383** | ** ** | **Ps.** | **54,729** | ** ** | **Ps.** | **9,932** | ** ** | **Ps.** | **13,926** | ** ** | **Ps.** | **238,954** | ** ** |

 

F-132

----

 

Table of Contents

 
| ** **                          | ** ** | **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 |   |
| INB                                 |       | —                    |       | — |   | — |   | — |   | 15,618 |   |
| Credit card                         |       | —                    |       | — |   | — |   | — |   | 15,067 |   |
| Consumer                            |       | —                    |       | — |   | — |   | — |   | 14,053 |   |
| Mortgage                            |       | —                    |       | — |   | — |   | — |   | 43,750 |   |
| Other                               |       | —                    |       | — |   | — |   | — |   | 47 |   |
| Arrendadora y Factor Banorte        |       | —                    |       | — |   | — |   | — |   | 12,194 |   |
| Créditos  Pronegocio           |       | —                    |       | — |   | — |   | — |   | 232 |   |
| **Performing  loan portfolio**      | ** ** | **Ps.**                   | **60,251** | ** ** | **Ps.** | **54,485** | ** ** | **Ps.** | **10,457** | ** ** | **Ps.** | **14,144** | ** ** | **Ps.** | **240,298** | ** ** |

 

d. The past-due loanportfolio, grouped by economic sector and geographical location, is summarizedas follows

 
| ** **                   | ** ** | **2009**                  | ** ** |
|------------------------------|------------|---------------------------|------------|
| ** **                   | ** ** | **Geographical location** | ** ** |
| **Economic sector**          | ** ** | **North**                 | ** ** | **Central** | ** ** | **West** | ** ** | **South** | ** ** | **Total** | ** ** |
| Agriculture                  |       | Ps.                       | 77         |   | Ps. | 129 |   | Ps. | 33 |   | Ps. | 20 |   | Ps. |  259 |   |
| Mining                       |       | 2                         |       | 3 |   | 1 |   | 7 |   | 13 |   |
| Manufacturing                |       | 121                       |       | 175 |   | 73 |   | 46 |   | 415 |   |
| Construction                 |       | 89                        |       | 105 |   | 12 |   | 27 |   | 233 |   |
| Commerce                     |       | 363                       |       | 298 |   | 147 |   | 195 |   | 1,003 |   |
| Transportation               |       | 41                        |       | 27 |   | 13 |   | 19 |   | 100 |   |
| Financial  services          |       | 8                         |       | 15 |   | 1 |   | 6 |   | 30 |   |
| Communal social services     |       | 74                        |       | 49 |   | 47 |   | 37 |   | 207 |   |
| Business  groups             |       | 1                         |       | — |   | — |   | — |   | 1 |   |
| INB                          |       | —                    |       | — |   | — |   | — |   | 1,047 |   |
| Credit card                  |       | —                    |       | — |   | — |   | — |   | 1,610 |   |
| Consumer                     |       | —                    |       | — |   | — |   | — |   | 332 |   |
| Mortgage                     |       | —                    |       | — |   | — |   | — |   | 801 |   |
| Arrendadora y Factor Banorte |       | —                    |       | — |   | — |   | — |   | 103 |   |
| **Past-due  loan portfolio** | ** ** | **Ps.**                   | **776**    | ** ** | **Ps.** | **801** | ** ** | **Ps.** | **327** | ** ** | **Ps.** | **357** | ** ** | **Ps.** | **6,154** | ** ** |

 

F-133

----

Table of Contents

 
| ** **                   | ** ** | **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 |   |
| INB                          |       | —                    |       | — |   | — |   | — |   | 225 |   |
| Credit card                  |       | —                    |       | — |   | — |   | — |   | 2,140 |   |
| Consumer                     |       | —                    |       | — |   | — |   | — |   | 359 |   |
| 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** | ** ** |

 

e. Deposit accountsgrouped by product and geographical location are as follows:

 
| ** **                                   | ** ** | **2009**                   | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **Geographical  location** | ** ** |
| **Product**                                  | ** ** | **Monterrey**              | ** ** | **Mexico  City** | ** ** | **West** | ** ** | **Northwest** | ** ** | **Southeast** | ** ** | **Treasury  and  other** | ** ** | **Foreign** | ** ** | **Total** | ** ** |
| Non-interest  bearing checking accounts      |       | Ps.                        | 13,209     |   | Ps. | 19,770 |   | Ps. | 5,845 |   | Ps. | 7,773 |   | Ps. | 7,963 |   | Ps. | 70 |   | Ps. | — |   | Ps. | 54,630 |   |
| Interest-bearing  checking accounts          |       | 6,417                      |       | 23,033 |   | 4,041 |   | 6,192 |   | 8,039 |   | 162 |   | — |   | 47,884 |   |
| Savings  accounts                            |       | 1                          |       | 1 |   | — |   | — |   | — |   | — |   | — |   | 2 |   |
| Current  account in pesos and preestablished |       | 3,449                      |       | 5,232 |   | 1,492 |   | 2,733 |   | 2,556 |   | 122 |   | — |   | 15,584 |   |
| Non-interest  bearing demand deposits, USD   |       | 834                        |       | 848 |   | 199 |   | 1,085 |   | 221 |   | — |   | 3,694 |   | 6,881 |   |
| Interest  bearing demand deposits, USD       |       | 2,454                      |       | 1,570 |   | 577 |   | 2,463 |   | 238 |   | — |   | 5,012 |   | 12,314 |   |
| Savings  accounts in USD                     |       | —                     |       | — |   | — |   | — |   | — |   | — |   | 265 |   | 265 |   |
| Over  the counter promissory notes           |       | 11,362                     |       | 25,040 |   | 6,358 |   | 7,245 |   | 9,009 |   | 1,474 |   | — |   | 60,488 |   |
| Time deposits, USD                           |       | 3,328                      |       | 4,095 |   | 1,775 |   | 2,255 |   | 897 |   | 17 |   | 13,427 |   | 25,794 |   |
| Money desk customers                         |       | 19,366                     |       | 14,858 |   | 6,953 |   | 4,588 |   | 2,877 |   | 127 |   | — |   | 48,769 |   |
| Financial  intermediaries                    |       | —                     |       | — |   | — |   | — |   | — |   | 2,277 |   | — |   | 2,277 |   |
| FOBAPROA  checking accounts bearing interest |       | 20                         |       | — |   | — |   | — |   | — |   | — |   | — |   | 20 |   |
| **Total deposits**                           | ** ** | **Ps.**                    | **60,440** | ** ** | **Ps.** | **94,447** | ** ** | **Ps.** | **27,240** | ** ** | **Ps.** | **34,334** | ** ** | **Ps.** | **31,800** | ** ** | **Ps.** | **4,249** | ** ** | **Ps.** | **22,398** | ** ** | **Ps.** | **274,908** | ** ** |

 

F-134

----

Tableof Contents

 
| ** **                                   | ** ** | **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** | ** ** |

 

**26 - TAX ENVIRONMENT**

 

In 2009 and 2008 theFinancial Group was subject to ISR and IETU and in 2007 to ISR and IMPAC.

 

**Income tax**

 

Income tax (ISR) iscalculated considering as taxable or deductible certain inflation effects; upuntil December 31, 2009 the ISR rate was 28%. On December 7, 2009 thedecree was published reforming, adding and repealing various provisions of theIncome Tax Law that went into effect on January 1, 2010. Temporaryprovisions were established by which the income tax rate from 2010 to 2012 willbe 30%; 29% for 2013 and 28% for 2014.

 

**Book to tax reconciliation**

 

The principal itemsaffecting the determination of the current tax expense of the Financial Groupwere the annual adjustment for inflation, the nondeductible amount of theallowance for loan losses that was over 2.5% of the average loan portfolio andthe valuation of financial instruments.

 

**PTU**

 

The Financial Groupdetermines employee statutory profit sharing based on the criteria establishedin the guidelines set forth by the Mexican Constitution.

 

F-135

----

Table ofContents

 

**Business Flat Tax**

 

Revenues, as well asdeductions and certain tax credits, are determined based on cash flowsgenerated for each period. The rate is 17.0% and 16.5% for 2009 and 2008,respectively, and 17.5% as of 2010. The Asset Tax Law was repealed uponenactment of LIETU; however, under certain circumstances, assets taxes paid inthe ten years prior to the year in which ISR is paid, may be refunded,according to the terms of the law.  As ofDecember 31, 2009, the Financial Group has no recoverable asset taxes.

 

**27 - STOCKHOLDERS’ EQUITY**

 

At the Stockholders’Ordinary General Meetings held on April 30 and October 5, 2009, thefollowing resolutions were adopted, among others:

 

·   To transfer the profits from 2008 equal to Ps. 6,663to earnings from prior years, and increase the legal reserve by Ps. 351.

 

·   Declare cash dividends of Ps. 364, equivalent to Ps.0.180045 Mexican pesos per share.

 

The Financial Group’sstockholders’ common stock as of December 31, 2009, 2008 and 2007 iscomprised as follows:

 
| ** **           | ** ** | **Number of shares with a nominal value of Ps. 3.50** | ** ** |
|----------------------|------------|-------------------------------------------------------|------------|
| ** **           | ** ** | **2009**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| “O” Series |       | 2,017,847,548                                         |       | 2,013,997,548 |   | 2,002,718,738 |   |

 
| ** **                                         | ** ** | **Historical Amounts** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **2009**               | ** ** | **2008** | ** ** | **2007** | ** ** |
| “O” Series                               |       | Ps.                    | 7,000      |   | Ps. | 6,986 |   | Ps. | 7,009 |   |
| Restatement in Mexican pesos of December 2007 |       | 4,956                  |       | 4,955 |   | 4,956 |   |
|                                               |       | Ps.                    | 11,956     |   | Ps. | 11,941 |   | Ps. | 11,965 |   |

 

**Restrictionson profits**

 

Stockholders’ equitydistributions, 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.

 

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. As of December 31, 2009, the legal reserve is Ps. 2,444and represents 20% of paid-in capital.

 

**Capitalizationratio (pertaining to Banorte, 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 31,2009 sent to Banco de México to review is shown below.

 

The capitalization ratioof Banorte as of December 31, 2009 was 16.77% of total risk (market andcredit), and 24.42% 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):

 

F-136

----

Tableof Contents

 
| **Net capital as of December 31, 2009**                  | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|
|                                                          |       |       |       |
| **Stockholders’ equity**                                 | ** ** | **Ps.**    | **40,340** | ** ** |
| **Subordinated debentures and capitalization instruments**    | ** ** | **4,615**  | ** ** |
|                                                          |       |       |       |
| Deduction  of investment in securitized instruments           |       | 161        |       |
| Deduction  of investments in shares of financial entities     |       | 6,235      |       |
| Deduction  of investments in shares of non-financial entities |       | 2,941      |       |
| Deduction  of intangibles and deferred expenses or costs      |       | 237        |       |
| **Basic capital**                                             | ** ** | **35,381** | ** ** |
| Debentures and capitalization instruments                     |       | 13,283     |       |
| Allowance  for loan losses                                    |       | 1,155      |       |
| Deduction  of investment in securitized instruments           |       | 161        |       |
| **Complementary capital**                                     | ** ** | **14,277** | ** ** |
|                                                          |       |       |       |
| **Net capital**                                               | ** ** | **Ps.**    | **49,658** | ** ** |

 

Characteristics of thesubordinated debentures:

 
| **Concept**                              | ** ** | **Issuance  amount** | ** ** | **Maturity** | ** ** | **Basic capital  proportion** | ** ** | **Complementary  capital  proportion** | ** ** |
|------------------------------------------|------------|----------------------|------------|--------------|------------|-------------------------------|------------|----------------------------------------|------------|
| Complementary  capital debentures 2006   |       | Ps.                  | 5,297      |         | 13/10/2016 |                          | 0          | %                                      | 100        | % |
| Basic capital  debentures 2006           |       | Ps.                  | 2,652      |         | 13/10/2021 |                          | 100        | %                                      | 0          | % |
| Basic capital  debentures 2008           |       | Ps.                  | 3,008      |         | 27/02/2018 |                          | 65         | %                                      | 35         | % |
| Complementary  capital debentures 2008   |       | Ps.                  | 1,971      |         | 15/02/2028 |                          | 0          | %                                      | 100        | % |
| Complementary  capital debentures 2008-2 |       | Ps.                  | 2,759      |         | 15/06/2018 |                          | 0          | %                                      | 100        | % |
| Complementary  capital debentures 2009   |       | Ps.                  | 2,211      |         | 18/03/2019 |                          | 0          | %                                      | 100        | % |

 

Assets subject to riskare detailed below:

 

**Assetssubject to market risk**

 
| **Concept**                                                                                 | ** ** | **Positions   weighted by   risk** | ** ** | **Capital  requirement** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------|------------|
| Transactions  in Mexican pesos with nominal interest rate                                   |       | Ps.                                | 51,847     |                     | Ps.        | 4,148 |   |
| Transactions  with debt instruments in Mexican pesos with variable interest rates           |       | 10,879                             |       | 870                      |       |
| Transactions  in Mexican pesos with real interest rates or denominated in UDIS              |       | 1,985                              |       | 159                      |       |
| Transactions  in UDIS or with yields referenced to the National Consumer Price Index (INPC) |       | 5                                  |       | —                   |       |
| Transactions  in Mexican pesos with nominal interest rates                                  |       | 3,294                              |       | 263                      |       |
| Exchange transactions                                                                       |       | 1,607                              |       | 129                      |       |
| **Total**                                                                                   | ** ** | **Ps.**                            | **69,617** | ** **               | **Ps.**    | **5,569** | ** ** |

 

F-137

----

Tableof Contents

 

**Assets subject to credit risk**

** **
| **Concept**                                                                                    | ** ** | **Assets  weighted by   risk** | ** **  | **Capital  requirement** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|--------------------------|------------|
| Group  III (weighted at 10%)                                                                   |       | Ps.                            | 1           |                     | Ps.        | — |   |
| Group  III (weighted at 20%)                                                                   |       | 6,336                          |        | 507                      |       |
| Group  III (weighted at 23%)                                                                   |       | 409                            |        | 33                       |       |
| Group  III (weighted at 50%)                                                                   |       | 2,261                          |        | 181                      |       |
| Group  III (weighted at 57.5%)                                                                 |       | 370                            |        | 30                       |       |
| Group  IV (weighted at 20%)                                                                    |       | 6,669                          |        | 533                      |       |
| Group  V (weighted at 10%)                                                                     |       | 14                             |        | 1                        |       |
| Group  V (weighted at 20%)                                                                     |       | 6,100                          |        | 488                      |       |
| Group  V (weighted at 50%)                                                                     |       | 3,813                          |        | 305                      |       |
| Group  V (weighted at 150%)                                                                    |       | 3,659                          |        | 293                      |       |
| Group  VI (weighted at 50%)                                                                    |       | 6,050                          |        | 484                      |       |
| Group  VI (weighted at 75%)                                                                    |       | 5,134                          |        | 411                      |       |
| Group  VI (weighted at 100%)                                                                   |       | 51,313                         |        | 4,105                    |       |
| Group  VII (weighted at 20%)                                                                   |       | 776                            |        | 62                       |       |
| Group  VII (weighted at 50%)                                                                   |       | 17                             |        | 1                        |       |
| Group  VII (weighted at 100%)                                                                  |       | 55,269                         |        | 4,421                    |       |
| Group  VII (weighted at 115%)                                                                  |       | 7,022                          |        | 562                      |       |
| Group  VII (weighted at 150%)                                                                  |       | 506                            |        | 40                       |       |
| Group  VIII (weighted at 125%)                                                                 |       | 2,070                          |        | 166                      |       |
| Group  IX (weighted at 100%)                                                                   |       | 31,849                         |        | 2,548                    |       |
| **Sum**                                                                                        | ** ** | **189,638**                    | ** **  | **15,171**               | ** ** |
| For  permanent shares, furniture and real property, and advance payments and  deferred charges |       | 13,667                         |        | 1,093                    |       |
| **Total**                                                                                      | ** ** | **Ps.**                        | **203,305** | ** **               | **Ps.**    | **16,264** | ** ** |
|                                                                                                |            |                                |             |                          |            |  |  |  |  |

 

Assets subject to creditrisk:

 
| **Concept** | ** ** | **Assets   weighted by  risk** | ** ** | **Capital  requirement** | ** ** |
|-------------|------------|--------------------------------|------------|--------------------------|------------|
| **Total**   | ** ** | **Ps.**                        | **23,124** | ** **               | **Ps.**    | **1,850** | ** ** |
|             |            |                                |            |                          |            |  |  |

 

**28 - FOREIGN CURRENCY POSITION**

 

As of December 31,2009 and 2008, the Financial Group holds certain assets and liabilities inforeign currency, mainly US dollars, converted to the exchange rate issued byBanco de México at Ps. 13.0659 and Ps. 13.8325 per USD 1.00, respectively, asshown below:

 
| ** **                              | ** ** | **Thousands of US dollars** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Assets                                  |       | 5,497,623                   |       | 5,179,560 |   |
| Liabilities                             |       | 5,166,587                   |       | 4,894,904 |   |
| **Net asset position in US dollars**    | ** ** | **331,036**                 | ** ** | **284,656** | ** ** |
| **Net asset position in Mexican pesos** | ** ** | **Ps.**                     | **4,325**  | ** ** | **Ps.** | **3,938** | ** ** |
|                                         |            |                             |            |  |  |  |  |

 

F-138

----

Table ofContents

 

**29 - POSITION IN UDIS**

 

As of December 31,2009 and 2008, the Financial Group holds certain assets and liabilitiesdenominated in UDIS, converted to Mexican pesos based on the currentequivalency of Ps. 4.340166 and Ps. 4.184316, per UDI, respectively, as shownbelow:

 
| ** **                                          | ** ** | **Thousands of UDIS** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Assets                                              |       | 207,824               |       | 152,453 |   |
| Liabilities                                         |       | 544,676               |       | 548,366 |   |
| **Net (liability) asset position in UDIS**          | ** ** | **(336,852**          | **)**      | **(395,913** | **)** |
| **Net asset (liability) position in Mexican pesos** | ** ** | **Ps.**               | **(1,462** | **)** | **Ps.** | **(1,657** | **)** |
|                                                     |            |                       |            |  |  |  |  |

 

**30 - 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, 2009, 2008 and 2007 are shown below:

 
| ** **            | ** ** | **2009**       | ** ** | **2008**                    | ** **    | **2007**                | ** ** |
|-----------------------|------------|----------------|------------|-----------------------------|---------------|-------------------------|------------|
| ** **            | ** ** | **Net Income** | ** ** | **Weighted share  average** | ** **    | **Earnings per  share** | ** ** | **Earnings per  share** | ** ** | **Earnings per  share** | ** ** |
| Net  income per share |       | Ps.            | 5,854      |                        | 2,017,132,134 |                    | Ps.        | 2.9021 |   | Ps. | 3.4775 |   | Ps. | 3.3744 |   |
|                       |            |                |            |                             |               |                         |            |  |  |  |  |  |  |  |  |

 

**31 - 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.

 

The CPR is composed ofregular members of the Board of Directors, the CEO of the Financial Group, theManaging of Comprehensive Risk Management, the Managing Director of Long TermSavings, and the Managing Director of the Brokerage House, as well as theManaging Director of Internal Audit, who has voice but not 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

 

F-139

----

Tableof Contents

 

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.

 

**32 - COMPREHENSIVE RISK MANAGEMENT UNIT (UAIR) (unaudited,regarding Banorte, the Financial 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 RiskManagement

·      Market Risk and Liquidity Management;

·      Operational Risk Management, and

·      Risk PolicyManagement

 

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.

 

F-140

----

Tableof Contents

 

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.

 

Operational 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.

 

**Creditrisk**

 

Credit Risk is the riskthat the customers, issuers or counterparts will not comply with their paymentobligations; therefore, adequate risk management is essential to maintain ahigh quality loan portfolio.

 

The Financial Groupmanagement credit risk objectives are as follows:

 

·      Improve the quality, diversification and compositionof the loan portfolio to optimize the risk-return ratio.

·      Provide senior management with reliable and timelyinformation to support decision-making in credit matters.

·      Provide the business departments with clear andsufficient tools to support credit placement and follow up.

·      Support the creation of economic value for stockoldersby means of efficient credit risk management.

·      Define and constantly update the regulatory frameworkfor credit risk management.

·      Comply with the credit risk management reportingrequirements established by the relevant authorities.

·      Perform risk management in accordance with bestpractices; implementing models, methodologies, procedures and systems based onthe latest international advances.

 

**Individualcredit risk**

 

The Financial Groupsegments the loan portfolio into two large groups: the consumer and corporateportfolios.

 

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 RiskRating (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.

 

F-141

----

Tableof Contents

 

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.

 

**Portfoliocredit risk**

 

The Financial Group hasdesigned a portfolio credit risk methodology which, while also including the bestand 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. The probability of default is theprobability that a borrower will not comply with its debt obligation to theFinancial Group on the terms and conditions originally agreed. The probabilityof default is based on the transition matrixes which the Financial Groupcalculates as of the migration of the borrowers to different riskclassification levels. The recovery level is the percentage of the totalexposure 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.

 

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, 2009, the total portfolio of the Financial Group is Ps.223,019. The expected loss represents 2.4% and the unexpected loss represents3.9% of the total operating portfolio. The average expected loss was 2.5% forthe period between October and December 2009. As of December 31,2008, the Financial Group’s total operating portfolio is Ps. 222,849. Theexpected loss represents 2.6% and the unexpected loss represents 4.4% of thetotal operating portfolio. The average expected loss was 2.4% for the periodbetween October and December 2008.

 

**Creditrisk of financial instruments**

 

There are specificpolicies for the origination, analysis, authorization and management offinancial instruments to identify, measure, keep track of and control creditrisk.

 

The origination policiesdefine the type of financial instruments to operate and how to evaluate thecredit quality of different types of issuers and counterparts. Credit qualityis assigned by means of a rating obtained by an internal methodology, 

 

F-142

----

Table of Contents

 

external ratingevaluations or a combination of both. Additionally, there are maximum operatingparameters depending on the type of issuer or counterpart, rating and operationtype.

 

Analysis policies includethe type of information and variables considered to analyze operations withfinancial instruments when they’re presented for their authorization by thecorresponding committee, including information about the issuer or counterpart,financial instrument, operation destination and market information.

 

The Credit Committee isthe body that authorizes operation lines with financial instruments accordingto the authorization policies. The authorization request is submitted by thebusiness area and the areas involved in the operation with all the relevantinformation to be analyzed and, if applicable, authorized by the Committee.

 

The financial instrumentoperating lines management policy contemplates the procedures for registration,instrumentation, regulation compliance, revision, consumer monitoring, linemanagement and responsibility of the areas and bodies involved in operatingfinancial instruments.

 

Credit risk is measuredby means of the rating associated with the issuer, issue or counterpart, whichhas an assigned degree of risk measured based on two elements:

 

1) The probability ofdelinquency by the issuer, issue or counterpart; expressed as a percentagebetween 0% and 100%. The higher the rating, the lower the probability ofdelinquency and vice versa.

 

2) The severity of theloss with respect to the operation’s total in the event of noncompliance,expressed as a percentage between 0% and 100%. The better the sureties orcredit structure, the lower the severity of the loss and vice versa.

 

As of December 31,2009, the investment in securities exposure to credit risk is Ps. 213,274, ofwhich 99.4% has a rating greater than or equal to A-(mex) on the local scale.This places them in investment grade and the three main issuers other than theFederal Government, Semi-Private agencies and Domestic Financial Institutionsrepresent 23% of the basic capital as of September 2009. Additionally, theinvestment exposure with the same issuer other than the Federal Government thatrepresents a concentration greater than or equal to 5% of the net capital as ofSeptember 2009 has a rating of at least AA+(mex) as is made up of (termand weighted average interest rate): 3-month Bancomer stock certificates forPs. 14,001 at 4.8%; 5-month Pemex stock certificates and bonds for Ps. 8,445 at6.2%; 3-month certificates of deposit of the Federal Mortgage Association forPs. 5,012 at 4.8%; 27-year State and Municipal Governments securitized loancertificates for Ps. 4,321 at 5.3%; 4-month Banobras stock certificates andbonds for Ps. 4.043 at 4.8%; and 11-day Banco Inbursa promissory notes for Ps.3,004 at 4.6%.

 

For derivatives, theexposure is (Ps. 2,669), of which 99.9% is rated at least A-(mex) on the localscale, which places them at an investment grade and the three main counterpartsother than the Federal Government, Semi-Private agencies and Domestic FinancialInstitutions represent 5% of the basic capital as of September 2009.

 

As of December 31,2008, the investment in securities exposure to credit risk is Ps. 236,192, ofwhich 99.8% has a rating greater than or equal to A-(mex) on the local scale.This places them in investment grade and the three main issuers other than theFederal Government, Semi-Private agencies and Domestic Financial Institutionsrepresent 24% of the basic capital as of September 2008. Additionally, theinvestment exposure with the same issuer other than the Federadl Governmentthat represents a concentration greater than or equal to 5% of the net capitalas of September 2008 has a rating of at least A+(mex) as is made up of:Bancomer Ps. 16,126; Pemex Ps. 8,977; Banco Inbursa Ps. 5,551; SociedadHipotecaria Federal Ps. 5,002; Banobras Ps. 4,707; Securitization of State andMunicipal Governments Ps. 4,498, and HSBC Ps. 2,616.

 

For derivatives, theexposure is (Ps. 2,835), of which 98.9% is rated at least A-(mex) on the localscale, which places them at an investment grade and the three main counterpartsrepresent 8% of the basic capital as of September 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.

 

F-143

----

Table of Contents

 

In compliance with therisk diversification rules for asset and liability transactions, thefollowing information is provided below:

 
| **Basic capital as of September 30, 2009**                                            | ** ** | **Ps.31,844** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------|------------|
|                                                                                       |       |          |       |
| **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                                                     |       | 4,532         |       |
| % in  relation to basic capital                                                            |       | 14            | %          |
|                                                                                       |       |          |       |
| Money market transactions                                                                  |       |          |       |
| Number of financings                                                                       |       | 1             |       |
| Amount  of financings taken as a whole                                                     |       | 4,321         |       |
| % in  relation to basic capital                                                            |       | 14            | %          |
|                                                                                       |       |          |       |
| Overnight  transactions                                                                    |       |          |       |
| Number of financings                                                                       |       | 1             |       |
| Amount  of financings taken as a whole                                                     |       | 5,618         |       |
| % in  relation to basic capital                                                            |       | 18            | %          |
|                                                                                       |       |          |       |
|                                                                                       |       |          |       |
| **II. Maximum amount of financing with the three largest  debtors and common risk groups** | ** ** | **Ps.**       | **15,945** | ** ** |
|                                                                                            |            |               |            |  |

 

**Market risk**

 

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 day loss that could begenerated in the valuation of the portfolios at a given date. This methodologyis used both for the calculation of market risk and for the establishment andcontrol 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 for theportfolio of financial instruments was Ps. 2,584 for the last quarter 2009.

 
| ** **                | ** ** | **4Q08** | ** **  | **1Q09** | ** ** | **2Q09**    | ** ** | **3Q09** | ** **  | **4Q09** | ** ** |
|---------------------------|------------|----------|-------------|----------|------------|-------------|------------|----------|-------------|----------|------------|
| VaR  Banorte*             |       | Ps.      |  2,430 |     | Ps.        |  2,357 |       | Ps.      |  2,861 |     | Ps.        |  3,123 |   | Ps. |  2,584 |   |
| Banorte net capital***    |       | 43,248   |        | 44,198   |       | 45,949      |       | 46,898   |        | 49,679   |       |
| VaR / net capital Banorte |       | 5.62     | %           | 5.33     | %          | 6.23        | %          | 6.66     | %           | 5.20     | %          |
|                           |            |          |             |          |            |             |            |          |             |          |            |  |  |  |  |  |

 

----

* Quarterly Average

*** Sum of net capital atthe close of the quarter

 

F-144

----

Table of Contents

 

Also, the average of theVaR per risk factor for the Financial Group’s portfolio of securities behavedas follows during the fourth quarter of 2009:

 
| **Risk factor**        | ** ** | **VaR** | ** ** |
|------------------------|------------|---------|------------|
| Domestic interest rate |       | Ps.     | 2,582      |   |
| Foreign interest rate  |       | 648     |       |
| Exchange rate          |       | 122     |       |
| Capital                |       | 131     |       |
| Total  VaR             |       | Ps.     | 2,584      |   |

 

The VaR for each of the risk factors presented is determined bysimulating 500 historical scenarios of the variables comprising each of suchfactors, maintaining constant the variables that affect the other risk factorsshown. By the same token, the consolidated VaR for the Financial Groupconsiders the correlations of all the risk factors influencing the valuation ofthe portfolios, for which reason the arithmetical sum of the VaR Factor doesnot match.

 

**Operations with derivative products**

 

The one-day individual VaR that the Financial Group has for each typeof trading and hedging derivatives for the fourth quarter of 2009 was:

 
| **Trading derivatives**             | ** ** | **4Q08** | ** ** | **4Q09**   | ** ** |
|-------------------------------------|------------|----------|------------|------------|------------|
| **Futures**                         |       |     |       |       |       |
| MEXDER rate futures                 |       | Ps.      | —     |       | Ps.        | — |   |
| **Exchange  rate derivatives**      |       |     |       |       |       |
| Forwards                            |       | 2        |       | 15         |       |
| Options                             |       | 1        |       | —     |       |
| **Interest  rate options**          |       | 6        |       | 4          |       |
| **Swap options**                    |       | —   |       | 2          |       |
| **Swaps**                           |       |     |       |       |       |
| TIIE  swaps                         |       | 19       |       | 12         |       |
| LIBOR  swaps                        |       | —   |       | 2          |       |
| Cross  currency exchange rate swaps |       | 212      |       | 207        |       |
| **Total  trading derivatives**      | ** ** | **Ps.**  | **240**    | ** ** | **Ps.**    | **242** | ** ** |

 
| **Hedging derivatives**                                            | ** ** | **4Q08** | ** ** | **4Q09**   | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|------------|------------|
| **Swaps**                                                          |       |     |       |       |       |
| Cross  currency exchange rate swaps for portfolio hedging in USD   |       | Ps.      | 10         |       | Ps.        | 8 |   |
| Cross  currency exchange rate swaps for obligations hedging in USD |       | 179      |       | 145        |       |
| Cross  currency exchange rate swaps for bonds hedging in USD       |       | 305      |       | 304        |       |
| TIIE  swaps for obligations hedging in Mexican pesos               |       | 30       |       | 63         |       |
| TIIE  swaps for promissory note hedging in Mexican pesos           |       | 139      |       | 265        |       |
| Rate  operations for portfolio hedging at a fixed rate             |       | 40       |       | 59         |       |
| **Total  hedging derivatives**                                     | ** ** | **Ps.**  | **703**    | ** ** | **Ps.**    | **844** | ** ** |

 

To calculate the VaR foreach of the derivatives listed, the non-parametric historic simulation methodis applied to a 99% level of confidence and a one-day horizon. For instance,the Value at Risk for TIIE Swaps is Ps. 21. This means that under normalcondition, 99 days out of every 100 the maximum potential loss is Ps. 21 in oneday.

 

The trading and hedgingderivatives totals are the arithmetic sum of the VaR of each withoutconsidering any correlation among them.

 

F-145

----

Table of Contents

 

**Investmentsin securities**

 

The one-day individual VaR that the Financial Group has for each typeof securities for the fourth quarter of 2009 was:

 
| **Trading securities**          | ** ** | **4Q08** | ** ** | **4Q09**   | ** ** |
|---------------------------------|------------|----------|------------|------------|------------|
| Variable  rate government bonds |       | Ps.      | —     |       | Ps.        | 7 |   |
| Fixed  rate government bonds    |       | —   |       | 2          |       |
| Bank  bonds                     |       | 2        |       | 3          |       |
| Securitization  certificates    |       | 36       |       | 37         |       |
| Capital                         |       | 8        |       | 13         |       |
| US  treasury bonds              |       | —   |       | 3          |       |
| PEMEX  Eurobonds                |       | 5        |       | 28         |       |
| UMS                             |       | 12       |       | 12         |       |
| Bank  eurobonds                 |       | 110      |       | 107        |       |
| Private company eurobonds       |       | 18       |       | 11         |       |
| **Total**                       | ** ** | **Ps.**  | **191**    | ** ** | **Ps.**    | **223** | ** ** |

 
| **Securities at maturity**      | ** ** | **4Q08** | ** ** | **4Q09**   | ** ** |
|---------------------------------|------------|----------|------------|------------|------------|
| Variable  rate government bonds |       | Ps.      | 108        |       | Ps.        | 92 |   |
| Fixed  rate government bonds    |       | 2        |       | 4          |       |
| Securitization  certificates    |       | 40       |       | 42         |       |
| CEDES                           |       | 1        |       | 4          |       |
| Bank  bonds                     |       | 3        |       | —     |       |
| PEMEX  eurobonds                |       | 140      |       | 157        |       |
| UMS                             |       | 52       |       | 89         |       |
| Zero coupon bank bonds          |       | 11       |       | 11         |       |
| Private company eurobonds       |       | 3        |       | 4          |       |
| **Total**                       | ** ** | **Ps.**  | **360**    | ** ** | **Ps.**    | **403** | ** ** |

 

To calculate the VaR foreach of the types of securities listed, the non-parametric historic simulationmethod is applied to a 99% level of confidence and a one-day horizon. Forinstance, the Value at Risk for trading UMS is Ps. 12. This means that undernormal condition, 99 days out of every 100 the maximum potential loss is Ps. 12in one day.

 

The trading and hedgingderivatives totals are the arithmetic sum of the VaR of each withoutconsidering any correlation among them.

 

**Backtestinganalysis**

 

To validate theeffectiveness of the measurements of the calculation of the daily VaR as ameasurement of market risk, the Backtesting analysis is updated each week. Thisanalysis makes it possible to compare the estimated results through the VaRwith the actual results generated.

 

As a result ofBacktesting during 2009, the following three events showed losses that exceededthe one-day VaR calculations:

 
| **Event  date**        | ** ** | **Affected risk factor** |
|------------------------|------------|--------------------------|
| February 19, 2009 |       | Interest rate increase   |
| February 20, 2009 |       | Interest rate increase   |
| February 26, 2009 |       | Interest rate increase   |

 

F-146

----

Table of Contents

 

**Sensitivityanalysis and tests under 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.

 

**Sensitivityfor derivative transactions**

 

Sensitivity analysis on derivative transactions is carried out asfollows:

 

·      Estimate gain or loss of the securities valuation inthe event of:

 

·    A parallel change of +100 basis points ofdomestic interest rates

·    A parallel change of +100 basis points offoreign interest rates

·    A 5% devaluation in the MXP/USD and MXP/EURexchange rate.

 

The results may be gains or losses depending on the nature of thederivative.

 
| **Trading derivatives**             | ** ** | **+100 bp domestic   rates** | ** ** | **+100 bp********foreign rates** | ** ** | **+5%********exchange  rate** | ** ** |
|-------------------------------------|------------|------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| **Futures**                         |       |                         |       |                             |       |                          |       |
| MEXDER rate futures                 |       | Ps.                          | (1         | )                                | Ps.        | —                        |       | Ps. | — |   |
| **Exchange  rate derivatives**      |       |                         |       |                             |       |                          |       |
| Forwards                            |       | (1                           | )          | 1                                |       | (26                           | )          |
| **Interest  rate options**          |       | (22                          | )          | —                           |       | —                        |       |
| **Swap options**                    |       | (2                           | )          | —                           |       | —                        |       |
| **Swaps**                           |       |                         |       |                             |       |                          |       |
| TIIE  swaps                         |       | 30                           |       | —                           |       | —                        |       |
| LIBOR  swaps                        |       | —                       |       | —                           |       | 1                             |       |
| Cross  currency exchange rate swaps |       | (146                         | )          | 194                              |       | (270                          | )          |
| **Total  trading derivatives**      | ** ** | **Ps.**                      | **(142**   | **)**                            | **Ps.**    | **195**                       | ** ** | **Ps.** | **(295** | **)** |

 
| **Hedging derivatives**                                            | ** ** | **+100 bp   domestic rates** | ** ** | **+100 bp foreign  rates** | ** ** | **+5%  exchange  rate** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|-------------------------|------------|
| **Swaps**                                                          |       |                         |       |                       |       |                    |       |
| Cross  currency exchange rate swaps for portfolio hedging in USD   |       | Ps.                          | (1         | )                          | Ps.        | 2                       |       | Ps. | (13 | ) |
| Cross  currency exchange rate swaps for obligations hedging in USD |       | 51                           |       | (71                        | )          | 252                     |       |
| TIIE  swaps for obligations hedging in Mexican pesos               |       | 162                          |       | —                     |       | —                  |       |
| TIIE  swaps for promissory note hedging in Mexican pesos           |       | 562                          |       | —                     |       | —                  |       |
| Rate  operations for portfolio hedging at a fixed rate             |       | 64                           |       | —                     |       | —                  |       |
| **Total  hedging derivatives**                                     | ** ** | **Ps.**                      | **838**    | ** **                 | **Ps.**    | **(69**                 | **)**      | **Ps.** | **239** | ** ** |

 

In the event of any ofabove scenarios, the losses or gains of the trading securities will directlyimpact the Financial Group’s statement of income and capital hedgingderivatives.

 

Based on the aboveanalysis, it can be concluded that the trading derivatives portfolio is exposedmainly to increases in domestic interest rates and exchange rate devaluations.However, the hedging derivatives portfolio is exposed to foreign interest rateincreases without considering the gain of the hedged liability.

 

F-147

----

Table of Contents

 

**Sensitivityfor securities transactions**

 

Sensitivity analysis on securities transactions is carried out asfollows:

 

·      Estimate gain or loss of the securities valuation inthe event of:

 

·        A parallel change of +100 basis points ofdomestic interest rates

·        A parallel change of +100 basis points offoreign interest rates

·        A 5% devaluation in the MXP/USD andMXP/EUR exchange rate.

·        A change of +5 basis points in governmentbond surcharges

·        A change of +50 basis points in sovereignrisk

 

The results may be gains or losses depending on the nature of theinstrument.

** **
| **Trading securities**                 | ** ** | **+100 bp  domestic  rates** | ** **    | **+100 bp  foreign rates** | ** ** | **+5%  exchange  rate** | ** ** | **+5 bp  sur-  charges** | ** **    | **+50 bp  sovereign  risk** | ** ** |
|----------------------------------------|------------|------------------------------|---------------|----------------------------|------------|-------------------------|------------|--------------------------|---------------|-----------------------------|------------|
| Variable  rate government bonds        |       | Ps.                          |  (13     | )                          | Ps.        |  —            |       | Ps.                      |  —  |                        | Ps.        |  (14 | ) | Ps. |  — |   |
| Fixed  rate government bonds           |       | (8                           | )             | —                     |       | —                  |       | —                   |          | —                      |       |
| Securitization  certificates           |       | (7                           | )             | —                     |       | —                  |       | —                   |          | —                      |       |
| Promissory  note payable upon maturity |       | (4                           | )             | —                     |       | —                  |       | —                   |          | —                      |       |
| US  treasury bonds                     |       | —                       |          | (8                         | )          | 6                       |       | —                   |          | —                      |       |
| PEMEX  eurobonds                       |       | —                       |          | (33                        | )          | 48                      |       | —                   |          | (19                         | )          |
| UMS                                    |       | —                       |          | (7                         | )          | 21                      |       | —                   |          | (3                          | )          |
| Bank  eurobonds                        |       | —                       |          | (126                       | )          | 195                     |       | —                   |          | —                      |       |
| Private company eurobonds              |       | —                       |          | (6                         | )          | 19                      |       | —                   |          | —                      |       |
| **Total**                              | ** ** | **Ps.**                      | ** (32** | **)**                      | **Ps.**    | ** (180**          | **)**      | **Ps.**                  | ** 289** | ** **                  | **Ps.**    | ** (14** | **)** | **Ps.** | ** (22** | **)** |

 
| **Securities at maturity**             | ** ** | **+100 bp  domestic  rates** | ** ** | **+100 bp  foreign rates** | ** ** | **+5%  exchange  rate** | ** ** | **+5 bp sur-  charges** | ** **    | **+50 bp  sovereign  risk** | ** ** |
|----------------------------------------|------------|------------------------------|------------|----------------------------|------------|-------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| Variable  rate government bonds        |       | Ps.                          | (170       | )                          | Ps.        |  —            |       | Ps.                     |  —  |                        | Ps.        |  (154 | ) | Ps. |  — |   |
| Fixed  rate government bonds           |       | (16                          | )          | —                     |       | —                  |       | —                  |          | —                      |       |
| Securitization  certificates           |       | (32                          | )          | —                     |       | —                  |       | —                  |          | —                      |       |
| Zero  coupon government bonds          |       | (1                           | )          | —                     |       | —                  |       | —                  |          | —                      |       |
| Promissory  note payable upon maturity |       | (4                           | )          | —                     |       | —                  |       | —                  |          | —                      |       |
| CEDES                                  |       | (1                           | )          | —                     |       | —                  |       | —                  |          | —                      |       |
| PEMEX  eurobonds                       |       | —                       |       | (214                       | )          | 280                     |       | —                  |          | (109                        | )          |
| UMS                                    |       | —                       |       | (132                       | )          | 154                     |       | —                  |          | (67                         | )          |
| Zero coupon bank bonds                 |       | (1                           | )          | (44                        | )          | —                  |       | —                  |          | —                      |       |
| Private company eurobonds              |       | —                       |       | (3                         | )          | 2                       |       | —                  |          | —                      |       |
| **Total**                              | ** ** | **Ps.**                      | **(225**   | **)**                      | **Ps.**    | ** (393**          | **)**      | **Ps.**                 | ** 436** | ** **                  | **Ps.**    | ** (154** | **)** | **Ps.** | ** (176** | **)** |

 

In the event of any ofabove scenarios, the losses or gains of the operations with trading securitiesand securities at maturity will directly impact the Financial Group’s results.

 

In conclusion, tradingsecurities and securities at maturity are exposed to domestic interest rateincreases, foreign rate increases, surcharges and deterioration of thesovereign risk.

 

F-148

----

Table of Contents

 

**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). Liquid assetsinclude cash and cash equivalents, trading securities and available for salesecurities. By the same token, liquid liabilities include immediate demanddeposits, immediate demand interbank loans and short-term loans. The liquidityratio at the end of the fourth quarter of 2009 is 63.9%, while the averageduring the quarter is 71.0%, as shown below:

 
| ** **          | ** ** | **End of  quarter** | ** ** |
|---------------------|------------|---------------------|------------|
| ** **          | ** ** | **4Q08**            | ** ** | **1Q09** | ** ** | **2Q09** | ** ** | **3Q09** | ** ** | **4Q09** | ** ** |
| Liquid  assets      |       | Ps.                 | 72,557     |   | Ps. | 73,101 |   | Ps. | 90,359 |   | Ps. | 85,221 |   | Ps. | 91,931 |   |
| Liquid  liabilities |       | 147,498             |       | 143,671 |   | 142,566 |   | 136,930 |   | 143,834 |   |
| Liquidity ratio     |       | 49.2                | %          | 50.9 | % | 63.4 | % | 62.2 | % | 63.9 | % |
|                     |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **          | ** ** | **Average** | ** ** |
|---------------------|------------|-------------|------------|
| ** **          | ** ** | **4Q08**    | ** ** | **1Q09** | ** ** | **2Q09** | ** ** | **3Q09** | ** ** | **4Q09** | ** ** |
| Liquid  assets      |       | Ps.         | 64,453     |   | Ps. | 60,386 |   | Ps. | 74,492 |   | Ps. | 83,046 |   | Ps. | 92,729 |   |
| Liquid  liabilities |       | 127,061     |       | 125,844 |   | 129,632 |   | 127,571 |   | 130,575 |   |
| Liquidity ratio     |       | 50.7        | %          | 48.0 | % | 57.5 | % | 65.1 | % | 71.0 | % |
|                     |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Average calculationconsidering 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.

 

F-149

----

Table of Contents

 

The operation withderivatives allows leveling the differentials between assets and liabilities indifferent maturity gaps, minimizing the Liquidity Risk. Considering only thecontractual obligations of the different types of hedging and trading swapsthat the Financial Group operates, a maturity analysis is found below:

 
| **Net position** | ** ** |
|------------------|------------|
| ** **       | ** ** | **Asset position** | ** ** | **Liability  position** | ** ** | **Net** | ** ** |
| **Gap**          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 1  month         |       | Ps. | 271 |   | Ps. | (289 | ) | Ps. | (18 | ) |
| 3  months        |       | 3 |   | — |   | 3 |   |
| 6  months        |       | 2 |   | (12 | ) | (10 | ) |
| 1  year          |       | 5 |   | (247 | ) | (242 | ) |
| 2  years         |       | 655 |   | (70 | ) | 585 |   |
| 3  years         |       | 1 |   | (40 | ) | (39 | ) |
| 4  years         |       | 166 |   | (259 | ) | (93 | ) |
| 5 years          |       | 460 |   | (411 | ) | 49 |   |
| 7  years         |       | 361 |   | (709 | ) | (348 | ) |
| 10  years        |       | 4 |   | (1,051 | ) | (1,047 | ) |
| 15  years        |       | 6 |   | — |   | 6 |   |
| 20  years        |       | 8 |   | (12 | ) | (4 | ) |
| >  20 years   |       | 3 |   | (13 | ) | (10 | ) |
| **Total**        | ** ** | **Ps.** | **1,945** | ** ** | **Ps.** | **(3,113** | **)** | **Ps.** | **(1,168** | **)** |

 

**Operationalrisk**

 

As of January 2003,the Financial Group established a formal operational risk departmentdenominated “Operational Risk Management Department” as part of its RiskManagement Strategy.

 

The Financial Groupdefines operational risk as the potential loss due to failures or deficienciesin internal 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).

 

Operating risk management’sobjectives are: a) to enable and support the organization to reach itsinstitutional objectives through operational risk prevention and management; b)to insure that the existing operational risks and the required controls areduly identified, evaluated and aligned with the organization’s risk strategy;and c) to insure that operational risks are duly quantified in order to assignthe proper capital for operational risk.

 

**Operational risk management’s cornerstones**

 

**I.****             ****Policies, objectives and guidelines**

 

The Financial Group hasdocumented the operational risk policies, objectives, guidelines, methodologiesand responsible areas.

 

The Operational RiskDepartment works closely with the Controllership Department to promoteeffective Internal Control that defines the proper procedures and controls tomitigate Operational 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.

 

F-150

----

Tableof Contents

 

**II.****                                    ****Quantitative andqualitative measuring tools**

 

Operating Losses 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.

 

Legal and taxcontingencies 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.

 

Risk management 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 capital requirement**

 

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.

 

F-151

----

Table of Contents

** **

**IV.****                               ****Information andreporting**

 

The information generatedby the databases and the Management 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.

 

**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.

 

**33 - MEMORANDUM ACCOUNTS**

** **
| ** **                                                         | ** ** | **2009** | ** **  | **2008**   | ** ** |
|--------------------------------------------------------------------|------------|----------|-------------|------------|------------|
| Bank  customers (current accounts)                                 |       | Ps.      | 4           |       | Ps.        | 74 |   |
| Settlement of customer transactions                                |       | (80      | )           | 35         |       |
| Customer  valuables received in custody                            |       | 134,480  |        | 118,537    |       |
| Customer repurchase agreements                                     |       | 35,680   |        | 35,688     |       |
| Customer call options transactions                                 |       | —   |        | 274        |       |
| Managed  trusts                                                    |       | 4,641    |        | 2,378      |       |
| ** **                                                         | ** ** | **Ps.**  | **174,725** | ** ** | **Ps.**    | **156,986** | ** ** |
| Other  contingent assets and liabilities                           |       | Ps.      | 273         |       | Ps.        | 266 |   |
| Credit  commitments                                                |       | 2,272    |        | 2,793      |       |
| Deposits of assets                                                 |       | 1,632    |        | 3,006      |       |
| Financial  Group securities delivered into custody                 |       | —   |        | 886        |       |
| Financial  Group government securities held in custody             |       | —   |        | 101        |       |
| Assets  in trusts or under mandate                                 |       | 112,942  |        | 90,469     |       |
| Managed  assets in custody                                         |       | 158,547  |        | 131,886    |       |
| Investment  banking transactions on account of third parties (net) |       | 74,646   |        | 84,615     |       |
| Collateral  received by the institution                            |       | 33,464   |        | 31,567     |       |
| Collateral  received and sold or given as a pledge by the entity   |       | 43,165   |        | —     |       |
| Past-due  loan portfolio accrued and uncollected interest          |       | 198      |        | 137        |       |
| ** **                                                         | ** ** | **Ps.**  | **427,139** | ** ** | **Ps.**    | **345,726** | ** ** |
| Securities  to be received in repurchase agreements                |       | Ps.      | —      |       | Ps.        | 39,939 |   |
| Less:  Creditor repurchase and resale agreement                    |       | —   |        | (40,176    | )          |
| ** **                                                         | ** ** | **Ps.**  | **—**  | ** ** | **Ps.**    | **(237** | **)** |
| Repurchase  agreement from debtors                                 |       | Ps.      | —      |       | Ps.        | 35,054 |   |
| Less:  Securities to be received in repurchase agreements          |       | —   |        | (34,908    | )          |
| ** **                                                         | ** ** | **Ps.**  | **—**  | ** ** | **Ps.**    | **146** | ** ** |
|                                                                    |            |          |             |            |            |  |  |  |  |  |  |

 

F-152

----

Tableof Contents

 

**34 - COMMITMENTS**

 

Asof December 31, 2009 and 2008, the Financial Group had the followingcontingent obligations and commitments:

 

·                  Other contingent obligations andopening of credits totaling Ps. 2,545 (Ps. 3,059 in 2008), which are recordedin memorandum accounts.

 

·                  Certain real property and operatingequipment are leased. Total property lease payments for the periods ended December 31,2009 and 2008, were Ps. 197 and Ps. 159, respectively.

 

**35 - CONTINGENCIES**

 

As of December 31,2009, 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. 77 is recorded for such contentiousmatters.

 

**36 - 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 2009 and 2008, theamount of contributions to the IPAB payable by Banorte for fees amounted to Ps.1,073 and Ps. 938, respectively.

 

F-153

----

Table of Contents

 

**37 —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 theeffect on consolidated net income and consolidated stockholders’ equity arepresented below with an explanation of the adjustments. This information is notrequired by Mexican Banking GAAP

 

**Reconciliationof stockholders’ equity:**

 
| ** **                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Stockholders’ equity under Mexican Banking GAAP**     |       | Ps.                   | 44,974     |   | Ps. | 39,746 |   |
|                                                         |       |                  |       |   |   |
| Adjustments:                                                 |       |                  |       |   |   |
| Loan  loss reserves (See B)                                  |       | (198                  | )          | (97 | ) |
| Loan  origination fees and costs (See A)                     |       | 275                   |       | 149 |   |
| Reserve  for foreclosed assets (See C)                       |       | 45                    |       | (45 | ) |
| Insurance  and postretirement activities (See A)             |       | 1,857                 |       | 1,738 |   |
| Derivatives  (See A)                                         |       | —                |       | (75 | ) |
| Business  combinations (See D)                               |       | —                |       | (2,035 | ) |
| Purchased  loan portfolio (See A)                            |       | (163                  | )          | (383 | ) |
| Securitizations  (See E)                                     |       | (179                  | )          | (331 | ) |
| Repurchase  agreements (See A)                               |       | —                |       | (24 | ) |
| Investment  valuation (See A)                                |       | 7                     |       | (11 | ) |
| Capitalized  costs (See A)                                   |       | —                |       | (53 | ) |
| Total  adjustments                                           |       | 1,644                 |       | (1,167 | ) |
| Tax  effect on adjustments (See G)                           |       | (439                  | )          | (176 | ) |
| Noncontrolling  interest attributable to adjustments (See H) |       | (645                  | )          | (513 | ) |
| ** **                                                   |       |                  |       |   |   |
| **Stockholders’ equity under MFRS**                     |       | Ps.                   | 45,534     |   | Ps. | 37,890 |   |

 

**Reconciliationof net income:**

 
| ** **                                                   | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Net income under Mexican Banking GAAP**                    |       | Ps.                              | 5,854      |   | Ps. | 7,014 |   |
|                                                         |       |                             |       |   |   |
| Adjustments:                                                 |       |                             |       |   |   |
| Loan  loss reserves (See B)                                  |       | (101                             | )          | 95 |   |
| Loan  origination fees and costs (See A)                     |       | 126                              |       | 4 |   |
| Reserve  for foreclosed assets (See C)                       |       | 90                               |       | (210 | ) |
| Insurance  and postretirement activities (See A)             |       | 119                              |       | 286 |   |
| Derivatives  (See A)                                         |       | 75                               |       | (93 | ) |
| Purchased  loan portfolio (See A)                            |       | 220                              |       | 278 |   |
| Securitizations  (See E)                                     |       | 152                              |       | (149 | ) |
| Repurchase  agreements (See A)                               |       | 24                               |       | 46 |   |
| Investment  valuation (See A)                                |       | 19                               |       | (16 | ) |
| Capitalized  costs (See A)                                   |       | —                           |       | 68 |   |
| Change  in credit card loan rating methodology (F)           |       | (1,102                           | )          | — |   |
| Total  adjustments                                           |       | (378                             | )          | 309 |   |
| Tax  effect on adjustments (See G)                           |       | 157                              |       | (150 | ) |
| Noncontrolling  interest attributable to adjustments (See H) |       | (31                              | )          | (91 | ) |
| ** **                                                   |       |                             |       |   |   |
| **Net income under MFRS**                                    |       | Ps.                              | 5,602      |   | Ps. | 7,082 |   |

 

F-154

----

Table of Contents

 

***Explanation of reconciling items:***

 

**A)General**

 

This difference between MexicanBanking GAAP and MFRS is explained further in Note 38, 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 and constitutionof preventive allowances for loan losses for each type of loan and allowscredit institutions to rate and develop preventive allowances based on internalmethodologies, 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) Reserve for 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 the correspondingloan’s book value or the fair value of the foreclosed asset. Potentialimpairment should also be evaluated and recognized, as necessary, on theseassets.

 

**D) Business combinations**

 

As disclosed in Note 2c),in April 2009 the Financial Group exercised its call option acquiring theremaining 30% of INB’s shares and as of December 31, 2009 is now the 100%owner. For purposes of Mexican Banking GAAP this resulted in cancelling thevalue of the call option that had been recorded upon initial recognition.Through December 31, 2008,  theFinancial Group had recorded the value of the put option held by the INBnoncontrolling interest at its contractual value under Mexican Banking GAAP,which increased the amount of goodwill recorded in the purchase priceallocation. Under MFRS, changes in the value of the put option were reflectedin stockholders’ equity given that it occurred between common shareholders.Changes in the recorded value of the put option liability do not affect netincome for either Mexican Banking GAAP or MFRS; as such no adjustment to netincome is reflected 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 Groupconcludes that it has neither transferred nor retained substantially all therisks and rewards of ownership of the transferred asset, it assesses whether ithas retained control over the transferred asset. If it has retained control, itcontinues to recognize the transferred asset to the extent of its continuinginvolvement in the transferred asset. If it has not retained control, itderecognizes the transferred asset.

 

Under MRFS, thesecuritization transactions entered into by the Financial Group, were evaluatedunder the “transfer of risks and rewards” approach, concluding that all of suchrisks and rewards were not transferred, thus, the adjustment represents thereinstatement of the assets and liabilities to the Financial Group’s balancesheet.

 

F-155

----

Table of Contents

 

**F) Changein credit card loan rating methodology**

 

As disclosed in Note 11,the cumulative effect of the consumer loan rating methodology for credit cardoperations was recorded prior year retained earnings with the Commission’sexpressed authorization. MFRS requires that such transactions be recorded incurrent earnings.

 

**G) Incometaxes**

 

MFRS differences asdescribed above, to the extent taxable, are reflected in the MFRS deferred taxbalances.

 

**H)Noncontrolling interest**

 

The effects of the MFRSdifferences as described in this Note reflect the amounts assigned to thenoncontrolling interests.

 

**38 —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”).Through December 31, 2007, the Mexican Banking GAAP consolidated financialstatements include the effects of inflation as provided for under NIF 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 NIF B-10 represented a comprehensive measure of the effectsof price level changes in the inflationary Mexican economy and, as such, wasconsidered a more meaningful presentation than historical cost-based financialreporting for both Mexican and U.S. accounting purposes. Beginning on January 1,2008, and through December 31, 2009, in accordance with NIF B-10, “Effectsof Inflation”, the Financial Group discontinued the recognition of inflation inits financial statements under Mexican Banking GAAP as the cumulative inflationfor the preceding three years was less than 26%. Notwithstanding the priorcomments, the following reconciliation to U.S. GAAP for the year ended December 31,2007 does not include the reversal of the adjustments required under NIF B-10,as permitted by the rules and regulations of the Securities and ExchangeCommission (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.

 

F-156

----

Table of Contents

 

**Reconciliationof stockholders’ equity:**

 
| ** **                                                             | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Stockholders’ equity under Mexican Banking GAAP**               |       | Ps.                   | 44,974     |   | Ps. | 39,746 |   |
|                                                                   |       |                  |       |   |   |
| U.S. GAAP adjustments:                                                 |       |                  |       |   |   |
| Loan loss reserves (See A)                                             |       | 3,034                 |       | 1,366 |   |
| Loan origination fees and costs (See B)                                |       | 275                   |       | 149 |   |
| Purchased loan portfolio (See C)                                       |       | (163                  | )          | (383 | ) |
| Derivatives (See D)                                                    |       | —                |       | (75 | ) |
| Reserve for foreclosed assets (See E)                                  |       | 45                    |       | (45 | ) |
| Insurance and postretirement activities (See F)                        |       | 1,857                 |       | 1,738 |   |
| Business combinations (See G)                                          |       | 969                   |       | 25 |   |
| Employee retirement obligations (See H)                                |       | (1,029                | )          | (848 | ) |
| Capitalized costs (See I)                                              |       | —                |       | (53 | ) |
| Securitizations (See J)                                                |       | (22                   | )          | (136 | ) |
| Other adjustments (See K)                                              |       | 322                   |       | 86 |   |
| Fair value measurements (See L)                                        |       | (63                   | )          | (137 | ) |
| IFC transaction (See M)                                                |       | (3,651                | )          | — |   |
| Income taxes (See N)                                                   |       | (1,617                | )          | (1,614 | ) |
| Total U.S. GAAP adjustments                                            |       | (43                   | )          | 73 |   |
| Tax effect on U.S. GAAP adjustments (See N)                            |       | (1,794                | )          | (491 | ) |
| Noncontrolling interest attributable to U.S. GAAP  adjustments (See O) |       | (689                  | )          | (539 | ) |
| **Stockholders’ equity under U.S.  GAAP**                         |       | Ps.                   | 42,448     |   | Ps. | 38,789 |   |

 

**Reconciliationof net income:**

 
| ** **                                                             | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                             | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net income under Mexican Banking  GAAP**                             |       | Ps.                               | 5,854      |   | Ps. |  7,014 |   | Ps. | 6,810 |   |
| U.S. GAAP adjustments:                                                 |       |                              |       |   |   |   |   |
| Loan loss reserves (See A)                                             |       | 1,668                             |       | 225 |   | (245 | ) |
| Loan origination fees and costs (See B)                                |       | 126                               |       | 4 |   | 438 |   |
| Purchased loan portfolio (See C)                                       |       | 220                               |       | 278 |   | 343 |   |
| Derivatives (See D)                                                    |       | 75                                |       | (93 | ) | (31 | ) |
| Reserve for foreclosed assets (See E)                                  |       | 90                                |       | (210 | ) | (95 | ) |
| Insurance and postretirement activities (See F)                        |       | 119                               |       | 286 |   | 139 |   |
| Business combinations (See G)                                          |       | 29                                |       | (318 | ) | 229 |   |
| Employee retirement obligations (See H)                                |       | 129                               |       | 55 |   | 8 |   |
| Capitalized costs (See I)                                              |       | —                            |       | 68 |   | 125 |   |
| Securitizations (See J)                                                |       | 114                               |       | (134 | ) | — |   |
| Other adjustments (See K)                                              |       | (413                              | )          | (814 | ) | 60 |   |
| Fair value measurements (See L)                                        |       | 74                                |       | (137 | ) | — |   |
| Income taxes (See N)                                                   |       | (3                                | )          | 11 |   | 62 |   |
| Total U.S. GAAP adjustments                                            |       | 2,228                             |       | (779 | ) | 1,033 |   |
| Tax effect on U.S. GAAP adjustments (See N)                            |       | (825                              | )          | 362 |   | (390 | ) |
| Noncontrolling interest attributable to U.S. GAAP  adjustments (See O) |       | (183                              | )          | (121 | ) | (90 | ) |
| **Net income under U.S. GAAP**                                         |       | Ps.                               | 7,074      |   | Ps. | 6,476 |   | Ps. | 7,363 |   |

 

A rollforwardof the Financial Group’s U.S. GAAP stockholders’ equity balance is as follows:

 

F-157

----

Tableof Contents

 
| ** **                                              | ** ** | **2009** | ** **   | **2008** | ** ** |
|---------------------------------------------------------|------------|----------|--------------|----------|------------|
|                                                    |       |     |         |     |       |
| Balance at the beginning of the year                    |       | Ps.      | 38,789       |     | Ps.        |  33,168 |   |
| Net income under U.S. GAAP                              |       | 7,074    |         | 6,476    |       |
| Dividends declared                                      |       | (364     | )            | (949     | )          |
| (Repurchase) issuance of shares                         |       | (451     | )            | 103      |       |
| Acquisition of the remaining 30% of the subsidiary  INB |       | (811     | )            | —   |       |
| Other comprehensive loss                                |       | (1,789   | )            | (9       | )          |
| ** **                                              |       |     |         |     |       |
| **Balance at the end of the year**                      |       | Ps.      |  42,448 |     | Ps.        | 38,789 |   |

 

***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.

 

The U.S. GAAP methodologyfor recognition of loan losses is provided by the Financial AccountingStandards Board (“FASB”) Accounting Standards Codification (“ASC”) 450, “Contingencies”,(previously SFAS No. 5, “Accounting for Contingencies”), and ASC 310 “Receivables”(previously SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”),which establish that an estimated loss should be accrued when, based oninformation available prior to the issuance of the financial statements, it isprobable that a loan has been impaired at the date of the financial statementsand the amount of the loss can be reasonably estimated.

 

For larger nonhomogeneousloans, the Financial Group assesses for impairment all individual loans with anoutstanding balance greater than 4 million UDI or its equivalent in MexicanPesos. Under U.S. GAAP, estimated losses on impaired loans, which areindividually assessed, are required to be measured at the present value ofexpected future cash flows discounted at the loan’s effective rate, the loan’sobservable market price or at the fair value of the collateral if the loan iscollateral 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.

 

As disclosed in Note 4,on August 12, 2009, the Commission issued a resolution modifying the “GeneralProvisions applicable to Banking Institutions”, which modifies the consumerloan rating methodology to show the expected loss in these operations based onthe current environment.

 

This new methodologyrequires separating the consumer loan portfolio into two groups: those thatrefer to credit card operations and those that do not. The consumer loanportfolio that does not include credit card operations will consider the 

 

F-158

----

Table of Contents

 

number of unpaid billingperiods established by the Financial Group as well as the probability ofnoncompliance and the severity of the loss according as percentages establishedby the Commission. If this portfolio has collateral or means of payment infavor of the Financial Group, the covered balance will be considered to havezero unpaid periods for the provisioning purposes.

 

Regarding credit cardrelated consumer loans, such portfolio shall be provisioned and rated on aloan-by-loan basis taking into consideration the probability of noncompliance,the severity of the loss and the exposure to noncompliance. If there are lessthan 10 consecutive delinquent payments at the calculation date, the severity ofthe loss will be considered as 75%; if there are 10 or more, 100%. Exposure tononcompliance is determined by applying a formula that considers both the totalbalance of the creditor’s debt and its credit limit. In the case of inactiveaccounts, a provision equivalent to 2.68% of the credit limit shall beconstituted.  The resulting effect ofapplying the revised consumer loan rating method for credit card operations isshown in Note 11.  Given that themethodology remained unchanged for purposes of U.S. GAAP, the adjustmentrelated to the loan loss reserve for credit cards increased when compared to2008.

 

U.S. GAAP loan lossreserves are as follows:

 
| **Loan loss reserves**                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Loan loss reserves for ASC 310          |       | Ps.      | 388        |     | Ps.        | 523      |       | Ps. | 3 |   |
| Loan loss reserves for ASC 450          |       | 4,113    |       | 4,728    |       | 2,569    |       |
| Total loan loss reserves US GAAP        |       | 4,501    |       | 5,251    |       | 2,572    |       |
| Mexican Banking GAAP loan loss reserves |       | 7,535    |       | 6,690    |       | 3,786    |       |
| Adjustment to INB reserves (1)          |       | —   |       | (73      | )          | (73      | )          |
| Adjusted loan loss reserves             |       | 7,535    |       | 6,617    |       | 3,713    |       |
|                                    |       |     |       |     |       |     |       |
| Stockholders’ equity adjustment    |       | 3,034    |       | 1,366    |       | 1,141    |       |
| Net Income adjustment                   |       | Ps.      | 1,668      |     | Ps.        | 225      |       | Ps. | (245 | ) |

 

----

(1) In2006, as a result of the Financial Group’s 70% acquisition of INB as disclosedin Note 38 G), additional reserves were recorded with an offset to goodwill inits Mexican Banking GAAP consolidated financial statements. Those reserves werecancelled in the second quarter of 2009 when the Financial Group acquired theremaining 30% of INB. As of December 31, 2009, 2008 and 2007 theadditional reserves recorded under Mexican Banking GAAP were Ps. 0, Ps. 73 andPs. 73, respectively.

 

**Rollforward of loan loss reserves:**

** **
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Beginning of the year         |       | Ps.      | 5,251      |     | Ps.        | 2,572    |       | Ps. | 2,169 |   |
| Charge-offs net of recoveries |       | (7,560   | )          | (4,002   | )          | (2,341   | )          |
| Charges to income of the year |       | 6,810    |       | 6,681    |       | 2,823    |       |
| Restatement effect            |       | —   |       | —   |       | (79      | )          |
|                          |       |     |       |     |       |     |       |
| End of the year               |       | Ps.      | 4,501      |     | Ps.        | 5,251    |       | Ps. | 2,572 |   |

 

F-159

----

Tableof Contents

 

**Ratios:**

 
| ** **                          | ** ** | **December 31,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------|------------|
| **Loan loss reserves for ASC 310**  | ** ** | **2009**              | ** ** | **2008**       | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                  |       |           |       |   |   |   |   |   |   |   |   |
| Total reserves                      |       | Ps.                   | 388        |           | Ps.        | 523 |   | Ps. | 3 |   |   |   |   |   |   |   |
| Total balances of impaired loans    |       | Ps.                   | 387        |           | Ps.        | 153 |   | Ps. | 87 |   | 100.26 | % | 341.83 | % | 3.45 | % |
| Total balances of outstanding loans |       | Ps.                   | 7,596      |           | Ps.        | 1,256 |   | Ps. | 87 |   | 5.11 | % | 41.64 | % | 3.45 | % |

 
| ** **                              | ** ** | **December 31,** | ** ** | **Percentage** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|----------------|------------|
| **Loan loss reserves for ASC 450**      | ** ** | **2009**              | ** ** | **2008**       | ** ** | **2007** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                    |       |                  |       |           |       |   |   |   |   |   |   |   |   |
| Total reserves                          |       | Ps.                   | 4,113      |           | Ps.        | 4,728 |   | Ps. | 2,569 |   |   |   |   |   |   |   |
| Total balances of impaired loans        |       | Ps.                   | 4,717      |           | Ps.        | 4,548 |   | Ps. | 2,637 |   | 87.22 | % | 103.96 | % | 97.42 | % |
| Total balances of outstanding loans (1) |       | Ps.                   | 237,512    |           | Ps.        | 243,990 |   | Ps. | 196,445 |   | 1.73 | % | 1.94 | % | 1.31 | % |

 

----

(1) The Financial Group has also recorded loan loss reserves in accordance with ASC 450 related to items such as guarantees and other off-balance sheet liabilities. Such balances, which are not included in the total balance of outstanding loans, amounted to Ps. 2,272, Ps. 2,793 and Ps. 2,365 as of December 31, 2009, 2008 and 2007, 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. Until December 31, 2006, loan origination fees were recognized on a cash basis. This change in accounting principle was applied retrospectively. Costs and expenses associated with the initial granting of the loan are recorded as a deferred charge to be amortized as interest expense over the same period in which the fee income is recognized. This applies only to those costs and expenses that are considered incremental. Until December 31, 2007 loan origination costs were expensed as incurred. This change was applied prospectively given the practical impossibility of determining them for prior years. In addition, annual credit card fees, the fees for unused credit lines, as well as the associated costs and expenses, are amortized in 12 months. Under U.S. GAAP, as required by ASC 310 “Receivables” (previously SFAS No. 91 “Accounting for Nonrefudable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”), 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.

 

F-160

Table of Contents

 

**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 ASC 310 “Receivables” (previously SOP 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”) for its Mexican Banking GAAP financial statements and applied it prospectively to all existing portfolios held. U.S. GAAP addressed 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 guidance and began to apply its requirements 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, ASC 310 “Receivables” (previously APB 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.

 

F-161

Table of Contents

 

The Financial Group’s portfolio disclosures and U.S. GAAP methodology applied are disclosed in the following table:

** **

 
| ** **          | ** ** | **Stockholders’  equity** | ** ** | **Net income**                   | ** ** | **Methodology applied under U.S.** | ** ** |
|---------------------|------------|--------------------------------|------------|----------------------------------|------------|------------------------------------|------------|
| ** **          | ** ** | **December 31,**          | ** ** | **Year ended December 31,** | ** ** | **GAAP**                           | ** ** |
| **Portfolio**       | ** ** | **2009**                       | ** ** | **2008**                         | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | ** ** |
|                |       |                           |       |                             |       |                               |       |   |   |   |   |   |   |
| Bancrecer I         |       | Ps.                            | (131       | )                                | Ps.        |  (155                         | )          | Ps. | 21 |   | Ps. | 13 |   | Ps. | (28 | ) | Cost-recovery method |   |
| Serfin Santander    |       | (57                            | )          | (60                              | )          | 3                                  |       | 10 |   | 21 |   | Cost-recovery method |   |
| Meseta              |       | 33                             |       | (15                              | )          | 48                                 |       | 23 |   | 34 |   | Cost-recovery method |   |
| Bancrecer II        |       | (2                             | )          | (2                               | )          | —                             |       | — |   | 6 |   | Cost-recovery method |   |
| Goldman Sachs       |       | (147                           | )          | (186                             | )          | 39                                 |       | 42 |   | 81 |   | Cost-recovery method |   |
| Cremi               |       | (41                            | )          | (49                              | )          | 8                                  |       | 13 |   | (2 | ) | Cost-recovery method |   |
| Banorte Sólida |       | (128                           | )          | (151                             | )          | 23                                 |       | 46 |   | 11 |   | Cost-recovery method |   |
| Bancrecer III       |       | —                         |       | —                           |       | —                             |       | — |   | 8 |   | Cost-recovery method |   |
| Bancomer I          |       | (153                           | )          | (136                             | )          | (17                                | )          | (27 | ) | (32 | ) | Cost-recovery method |   |
| Bancomer II         |       | 1                              |       | 9                                |       | (8                                 | )          | (2 | ) | (3 | ) | Interest method |   |
| Banco Unión    |       | 10                             |       | 6                                |       | 4                                  |       | (5 | ) | (3 | ) | Interest method |   |
| Bital I             |       | (17                            | )          | (47                              | )          | 30                                 |       | 19 |   | (8 | ) | Interest method |   |
| Bancomer III        |       | 36                             |       | 34                               |       | 2                                  |       | 6 |   | 28 |   | Interest method |   |
| Bancomer IV         |       | 243                            |       | 175                              |       | 68                                 |       | 71 |   | 104 |   | Interest method |   |
| Bital II            |       | 13                             |       | 14                               |       | (1                                 | )          | (6 | ) | 20 |   | Interest method |   |
| Banamex Hipotecario |       | 80                             |       | 82                               |       | (1                                 | )          | 20 |   | 62 |   | Interest method |   |
| GMAC Banorte        |       | 14                             |       | 25                               |       | (10                                | )          | 7 |   | 18 |   | Interest method |   |
| Serfin Comercial I  |       | 10                             |       | 16                               |       | (6                                 | )          | 27 |   | (11 | ) | Interest method |   |
| Serfin Hipotecario  |       | 73                             |       | 60                               |       | 14                                 |       | 17 |   | 43 |   | Interest method |   |
| Vipesa              |       | —                         |       | (3                               | )          | 3                                  |       | 4 |   | (6 | ) | Interest method |   |
|                |       |                           |       |                             |       |                               |       |   |   |   |   |   |   |
|                |       | Ps.                            | (163       | )                                | Ps.        | (383                               | )          | Ps. | 220 |   | Ps. | 278 |   | Ps. | 343 |   |   |   |

 

**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.The Financial Group accounts the hedge instruments as follows:

 

·                  For fair value hedges, the transactions are recordedas follows: the fair value of the derivative instrument is recorded in thebalance sheet, and changes in the fair value of both the derivative instrumentand the hedged item are recognized in current earnings.

 

·                  For cash flow hedges, the transactions are recorded asfollows: the fair value of the derivative instrument is recorded in the balancesheet and changes in the effective portion are temporarily recognized as acomponent of other comprehensive income in stockholders’ equity andsubsequently reclassified to current earnings when affected by the hedged item.The ineffective portion of the gain or loss on the hedging instrument isrecognized in current earnings.

 

Under Mexican BankingGAAP, through December 31, 2008, the Financial Group was not required tobifurcate its embedded derivatives related to service contracts and purchaseand sale transactions from their host contracts and record them at their fairvalue for financial statement purposes.

 

Through December 31,2008, under Mexican Banking GAAP, the designation of a derivative instrument asa hedge of a net position (“macro hedging”) was allowed. However, macro hedgingis not permitted under U.S. GAAP.

 

ASC 815, “Derivatives and Hedging” (previously SFAS 133, “Accountingfor Derivative Instruments and Hedging Activities”), of U.S. GAAP providesthat:

 

·                  Derivativefinancial instruments considered to be an effective hedge from an economicperspective that have not been designated as a hedge for accounting purposesare recognized in the balance sheet at fair value with changes in the fairvalue recognized in earnings concurrently with the change in fair value of theunderlying assets and liabilities.

 

·                  For all derivativeinstruments that qualify as fair value hedges for accounting purposes, ofexisting assets, liabilities 

 

F-162

----

Table of Contents

 

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 derivativecontracts that qualify as hedges of future cash flows for accounting purposes,the change in the fair value of the derivative should be initially recorded inother comprehensive income in stockholders’ equity. Once the effects of the underlyinghedged transaction are recognized in earnings, the corresponding amount in OCIis reclassified to the statement of income to offset the effect of the hedgedtransaction. All derivative instruments that qualify as hedges are subject toperiodic effectiveness testing. Effectiveness is the derivative instrument’sability to generate offsetting changes in the fair value or cash flows of theunderlying hedged item. The ineffective portion of the change in fair value fora hedged derivative is immediately recognized in earnings, regardless ofwhether the hedged derivative is designated as a cash flow or fair 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)****            ****Reserve for foreclosedassets**

 

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.

 

Until December 31, 2006, 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 ASC 310 “Receivables” (previously SFAS No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructurings”), assets repossessed or received as payment in kind are reported at the time of foreclosure or physical possession at their fair value less estimated costs to sell. Subsequent impairment adjustments should be recognized if the fair value of these assets decreases below the value measured when repossessed or received, determined on an asset by asset basis. Those assets not eligible for being considered as ‘available-for-sale’ are depreciated based on their useful life and are subject to impairment tests.

 

**F)****            ****Insurance andpostretirement activities**

 

According to the accounting practices prescribed by the Mexican National Insurance and Surety Commission (Mexican Insurance GAAP), commissions and costs at the origination of each policy are charged to income as incurred. In addition, for life insurance policies, any amount received from individuals is considered as premium income. As required by U.S. GAAP, commissions and costs at origination are capitalized and amortized over the life of the policy using the effective interest method (deferred acquisition costs). Furthermore, premiums received in excess for life insurance policies are recorded as premium income.

 

Also, under the accounting practices prescribed by the National System of Saving for the Retirement Commission, the direct costs associated with the reception of new clients for the administration of the bills of retirement is recognized in income as incurred. Under U.S. GAAP the costs are capitalized and amortized over the time in which the borrowed service is yielded, which the time is based on average in which the clients remain active in the company.

 

F-163

----

Table of Contents

 

Accumulated deferred acquisition costs (DAC) as of December 31, 2009, 2008 and 2007 under U.S. GAAP are as follows:

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                  |       |   |   |   |   |
| Life                                   |       | Ps.                   | 22         |   | Ps. | 20 |   | Ps. | 20 |   |
| P&C                                |       | 287                   |       | 255 |   | 225 |   |
| Health                                 |       | 58                    |       | 197 |   | 30 |   |
| Afore                                  |       | 1,351                 |       | 1,397 |   | 1,223 |   |
| Total accumulated DAC                  |       | Ps.                   | 1,718      |   | Ps. | 1,869 |   | Ps. | 1,498 |   |
| DAC - net amount charged to net income |       | Ps.                   | (151       | ) | Ps. | 371 |   | Ps. | 426 |   |

 

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,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                   |       |                  |       |   |   |
| Life                   |       | Ps.                   | 68         |   | Ps. | 93 |   |
| P&C                |       | (267                  | )          | (273 | ) |
| Health                 |       | (125                  | )          | (290 | ) |
| LAE                    |       | (107                  | )          | (98 | ) |
| Afore                  |       | (308                  | )          | (381 | ) |
| Pensions               |       | 696                   |       | 611 |   |
| Total                  |       | (43                   | )          | (338 | ) |
|                   |       |                  |       |   |   |
| Catastrophic reserve:  |       |                  |       |   |   |
| P&C                |       | 252                   |       | 185 |   |
|                   |       | 252                   |       | 185 |   |
|                   |       |                  |       |   |   |
| Reinsurance activities |       | (70                   | )          | 22 |   |
|                   |       |                  |       |   |   |
| Total reserves         |       | Ps.                   | 139        |   | Ps. | (131 | ) |

 

**Summary:**

** **
| ** **        | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2009**              | ** ** | **2008** | ** ** |
|              |       |                  |       |   |   |
| DAC               |       | Ps.                   | 1,718      |   | Ps. | 1,869 |   |
| Total reserves    |       | 139                   |       | (131 | ) |
| Total adjustments |       | Ps.                   | 1,857      |   | Ps. | 1,738 |   |

 

F-164

----

Table of Contents

 

**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, NIF 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, ASC 805, “Business Combinations” (previously SFAS No. 141), 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 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 ASC 350, “Intangibles — Goodwill and Other” (previously 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.

 

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 ASC 480 “Distinguishing Liabilities from Equity” (previously 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.

 

As disclosed in Note 2c), in April 2009 the Financial Group exercised its call option acquiring the remaining 30% of INB’s shares and as of December 31, 2009 is now the 100% owner. For purposes of Mexican Banking GAAP this resulted in cancelling the value of the call option that had been recorded upon initial recognition. Under U.S. GAAP, the acquisition of the remaining 30% of the shares of INB, is treated as an equity transaction with no further valuation of the assets or liabilities of INB Financial Corp, and thus no recording of additional goodwill.

 

F-165

Table of Contents

 

**H)****          ****Employee retirementobligations**

 

Under Mexican BankingGAAP NIF D-3 requires the recognition of a severance indemnity liabilitycalculated based on actuarial computations. Similar recognition criteria underU.S. GAAP are established in ASC 712 “Compensation — NonretirementPostemployment Benefits” (previously SFAS No. 112, “Employers’ Accountingfor Postemployment Benefits”), which requires that a liability for certaintermination benefits provided under an ongoing benefit arrangement such asthese statutorily mandated severance indemnities, be recognized when thelikelihood of future settlement is probable and the liability can be reasonablyestimated. Prior to 2008, Mexican Banking GAAP allows for the Financial Groupto amortize the transition obligation related to the adoption of NIF D-3 over theexpected service life of the employees. Beginning in 2008, an amendment to NIFD-3 requires the amortization of the unrecognized transition as of January 1,2008 over the lesser of the expected remaining service period of employees orover five years. However, U.S. GAAP required the Financial Group to recognizesuch effect upon 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 NIF D-3. For U.S. GAAP, such costs areaccounted for in accordance with ASC 715 “Compensation — Retirement Benefits”(previously SFAS No. 87, “Employers’ Accounting for Pension”), whereby theliability is measured, similar to Mexican Banking GAAP, using the projectedunit credit method at net discount rates. Those requirements became effectiveon January 1, 1989 whereas NIF D-3 became effective on January 1,1993. Therefore, a difference between Mexican Banking GAAP and U.S. GAAP existsdue to the accounting for the transition obligation at different implementationdates.

 

Postretirement benefits are accounted for under U.S. GAAP inaccordance with ASC 715 “Compensation — Retirement Benefits” (previously SFAS No. 106,*“*Employers’ Accounting forPostretirement Benefits Other Than Pensions”)*,*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 NIF D-3,the Financial Group accounts for such benefits in a manner similar to U.S.GAAP. The requirements in ASC 715 became effective on January 1, 1993whereas NIF D-3became effective on January 1, 2003. Therefore, a difference betweenMexican Banking GAAP and U.S. GAAP exists due to the accounting for thetransition obligation at different implementation dates.

 

The Financial Group has adopted the provisions of ASC 715 “Compensation— Retirement Benefits” (SFAS No. 158, “Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans”).  This statement requires the Financial Groupto (1) fully recognize, as an asset or liability, the overfunded orunderfunded status of defined pension and other postretirement benefit plans; (2) recognizechanges in the funded status through other comprehensive income in the year inwhich the changes occur; and (3) measure the funded status of definedpension and other postretirement benefit plans as of the date of the its fiscalyear-end.

 

**I)****               ****Capitalizedcosts**

 

Under Mexican Banking GAAP, prior to the issuance of NIF C-8, “IntangibleAssets”, all expenses incurred in the preoperating or development stages werecapitalized. Upon adoption of NIF C-8, research costs andpreoperating costs should be expensed as a period cost, unless they can beclassified as development costs to be amortized on a straight-line basis afteroperations commence for a period not exceeding 20 years. Under U.S. GAAP, inaccordance with ASC 730, “Accounting for Research and Development”, and and ASC340, “Other Assets and Deferred Cost” (previously SFAS No. 2, “Accountingfor Research and Development Costs,” and SOP 98-5, “Reporting on the Costs ofStart-Up Activities”), such research and preoperating expenses are expensed asincurred.

 

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 ASC 350 “Intangibles— Goodwill and Other” (previously SOP 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use”). This standardestablishes that computer software costs incurred in the preliminary projectstage should be expensed as incurred. Once the capitalization criteria of thestandard have been met, external direct costs of materials and servicesconsumed in developing or obtaining internal-use computer software; payroll andpayroll-related costs for employees who are directly associated with and whodevote time to the internal-use computer software project (to the extent of thetime spent directly on the project); and interest costs incurred whendeveloping computer software for internal use should be capitalized. Generally,training costs and data conversion costs should be expensed as incurred. As theU.S. GAAP standard is more stringent, the reconciling item represents anadjustment for items that have been capitalized for Mexican Banking GAAPpurposes that do not qualify for capitalization under U.S. GAAP.

 

F-166

----

Tableof Contents

 

**J)****            ****Securitizations**

 

**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 was recorded atits nominal value and classified as an available-for-sale security. UnderMexican Banking GAAP, this securitization was accounted for as a sale and as aresult of recognizing the retained interest represented by the subordinatedcertificate at nominal value no gain or loss on the sale was recognized. As of January 2007,subsequent increases or decreases in the fair value of the subordinatedcertificate are reflected by an adjustment, net of taxes, being charged orcredited to the other comprehensive income portion of stockholders’ equity,which conforms to the accounting established by U.S. GAAP.

 

Under US GAAP, the securitization met the criteriaestablished by ASC 860 for sale accounting and the securitizedloans were derecognized by the Financial Group as of the date of sale. TheFinancial Group allocated the previous book carrying amount between the loanssold and the subordinated certificate (the retained interest) in proportion totheir relative fair values on the date of transfer. The Financial 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 ASC320. Subsequentincreases or decreases in the fair value of the subordinated certificate arereflected by an adjustment, net of taxes, being charged or credited to theother comprehensive income portion of stockholders’ 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 wasrecorded at its fair value and classified as a trading security. Under MexicanBanking GAAP, this securitization was accounted for as a sale and generated a gain,resulting from the difference between the fair value of the assets received andthe 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 ASC 860 and as a result were accounted for assecured borrowings.

 

In 2009, the Financial Group reclassify both subordinatedcertificates from securities to a specific line in the Balance sheet.

 

**K)****          ****Other adjustments**

 

These include thefollowing:

 
| ** **                   | ** ** | **Stockholders’  equity** | ** ** | **Net income**                   | ** ** |
|------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **December 31,**          | ** ** | **Year ended December 31,** | ** ** |
| ** **                   | ** ** | **2009**                       | ** ** | **2008**                         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                         |       |                           |       |                             |       |   |   |   |   |   |   |
| 1) Non-accrual loans         |       | Ps.                            | 326        |                             | Ps.        | 168 |   | Ps. | 157 |   | Ps. | 142 |   | Ps. | 64 |   |
| 2) Guarantees                |       | (11                            | )          | 6                                |       | (18 | ) | 29 |   | (7 | ) |
| 3) Repurchase agreements     |       | —                         |       | (24                              | )          | 24 |   | 46 |   | (19 | ) |
| 4) Investment valuation      |       | 7                              |       | (11                              | )          | (629 | ) | (1,121 | ) | 62 |   |
| 5) Equity method investments |       | —                         |       | (53                              | )          | 53 |   | 90 |   | 23 |   |
| 6) Discontinued operations   |       | —                         |       | —                           |       | — |   | — |   | (63 | ) |
|                         |       | Ps.                            | 322        |                             | Ps.        | 86 |   | Ps. | (413 | ) | Ps. | (814 | ) | Ps. | 60 |   |

 

F-167

Table of Contents

 

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 ASC 460 “Guarantees”, which requires that an entity recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. For Mexican Banking GAAP purposes, the Financial Group does not record the fair value of such guarantees in its consolidated financial statements.

 

3)             The repurchase and resale agreements are transactions by which the purchaser acquires ownership of credit instruments for a sum of money and is obligated to transfer instruments of the same kind to the seller of the securities within the agreed term and in exchange for the same price, plus a premium. Under Mexican Banking GAAP repurchase transactions are recorded according to their economic substance, which is financing with collateral, by which the Financial Group, acting as the purchaser, gives cash as financing in exchange for financial assets as guarantee in the event of noncompliance. Prior to September, 2008, repurchase and resale agreements represented 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 and were recorded as sales and purchases of securities, respectively.  A net asset or liability was 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)             Until December 31, 2008, the investment valuation adjustment was 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 recognized income based on the straight line method. Additionally, under Mexican Banking GAAP, the Financial Group recognizes the effect of exchange rate fluctuations of its securities available for sale in the results. Under U.S. GAAP, this impact is recognized in comprehensive income.

 

5)              Until December 31, 2008, under Mexican Banking GAAP, investments in associated companies in which the Financial Group had more than a 10% ownership, were 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 100% of the shares of Fianzas Banorte on March 31, 2007.

 

Mexican Banking GAAP as defined by NIF 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. NIF 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.

 

F-168

----

Table of Contents

 

U.S. GAAP as defined by ASC 360, “Property Plant and Equipment” (previously 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 ASC 360 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.

 

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.

 

**L)****           ****Fair value measurements**

 

For purposes of U.S.GAAP, the Financial Group applies the accounting provisions of ASC 820 “FairValue Measurment and Disclosure” (previously SFAS No. 157, Fair ValueMeasurements). U.S. GAAP establishes a framework for measuring fair value andexpands disclosures about fair value measurements and clarifies the definitionof exchange price as the price between market participants in an orderlytransaction to sell an asset or transfer a liability in the market in which thereporting entity would transact for the asset or liability, that is, theprincipal or most advantageous market for the asset or liability. The changesto current practice resulting from the application of this statement relate tothe definition of fair value, the methods used to measure fair value, and theexpanded disclosures about fair value measurements. This guidance was effectivefor fiscal years beginning after November 15, 2007 and interim periodswithin those fiscal years for financial assets and liabilities. On October 10,2008, the FASB issued guidance included in ASC 820 (Staff Position (“FSP”) FAS No. 157-3“Determining the Fair Value of aFinancial Asset When the Market for That Asset is Not Active”), whichwas effective upon issuance. The provisions of ASC 820 were deferred untilfiscal years beginning after November 15, 2008 for nonfinancial assets andliabilities. The adoption ofASC 820 as it relates to the Financial Group’s financial assets and liabilitiesis included in the reconciliation between Mexican Banking GAAP and U.S. GAAP.There was no impact to the Financial Group’s U.S. GAAP balances as a result ofadopting this standard related to its nonfinancial assets and liabilities.

 

The Financial Groupapplied the following hierarchy for fair value.

 

Level 1. - Assetsand liabilities for which an identical instrument is negotiated in an activemarket, such as publicly negotiated instruments or futures contracts (highlyliquid and actively traded).

 

Level 2. - Assetsand liabilities 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.

 

F-169

----

Table of Contents

 

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 U.S. GAAP, the impact of theFinancial Group’s own credit spreads is also considered when measuring the fairvalue of liabilities, including OTC derivative contracts. Where appropriate,valuation adjustments are made to account for various factors such as liquidityrisk (bid-ask adjustments), credit quality and model uncertainty. Theseadjustments are subject to judgment, are applied on a consistent basis and are basedupon observable inputs where available. The Financial Group generally subjectsall valuations and models to a review process initially and on a periodic basisthereafter.

 

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.

 

Certain assets aremeasured at fair value on a non recurring basis. These assets are not measuredat fair value on an ongoing basis but are subject to fair value adjustmentsonly in certain circumstances. These include property, furniture and fixtures,foreclosed assets and goodwill that are written down to fair value when theyare determined to be impaired. As mentioned in Note 4, 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. No impairment to property, furniture, fixtures,foreclosed assets or goodwill was identified for the year ended December 31,2009, as a result no fair value adjustments to these assets were recorded andthe related fair value disclosures were not necessary.

 

As of December 31,2009 and 2008, the Financial Group did not have any liabilities measured on anon recurring basis; as such, no disclosure was necessary.

 

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 and the financial instruments arenegotiated in liquid organized markets, they are considered level 1 in the fairvalue hierarchy. If market price is not available or is available solely ininactive 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 infair value hierarchy level 2.

 

F-170

----

Table of Contents

 

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, 2009 and 2008:

** **
| ** **                             | ** ** | **Fair value measurements as of December ****31,  2009**    | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                             | ** ** | **Quoted prices In  active markets for  identical  instruments** | ** ** | **Significant other  observable inputs** | ** ** | **Significant  unobservable  inputs** | ** ** | **December 31,  2009** | ** ** |
| ** **                             | ** ** | **(Level 1)**                                                    | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **Fair value** | ** ** |
| Trading securities                     |       | Ps.                                                              | 24,459     |   | Ps. | — |   | Ps. | — |   | Ps. | 24,459 |   |
| Available for sale securities          |       | 5,098                                                            |       | 6,603 |   |   |   | 11,701 |   |
| Derivative asset position              |       | —                                                           |       | 5,880 |   | — |   | 5,880 |   |
| Derivative liability position          |       | —                                                           |       | (8,375 | ) | — |   | (8,375 | ) |
| Securitization transaction receivables |       | —                                                           |       | — |   | 432 |   | 432 |   |
| IFC Transaction                        |       | —                                                           |       | — |   | 3,651 |   | 3,651 |   |
| Total                                  |       | Ps.                                                              | 29,557     |   | Ps. |  4,108 |   | Ps. |  4,083 |   | Ps. |  37,748 |   |

 
| ** **                             | ** ** | **Fair value measurements as of December ****31,  2008**    | ** **  |
|----------------------------------------|------------|------------------------------------------------------------------|-------------|
| ** **                             | ** ** | **Quoted prices In  active markets for  identical  instruments** | ** **  | **Significant other  observable inputs** | ** ** | **Significant  unobservable  inputs** | ** ** | **December 31,  2008** | ** ** |
| ** **                             | ** ** | **(Level 1)**                                                    | ** **  | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **Fair value** | ** ** |
| Trading securities                     |       | Ps.                                                              |  6,076 |   | Ps. | — |   | Ps. | — |   | Ps. |  6,076 |   |
| Available for sale securities          |       | 5,253                                                            |        | 6,227 |   | — |   | 11,480 |   |
| Derivative asset position              |       | —                                                           |        | 8,168 |   | — |   | 8,168 |   |
| Derivative liability position          |       | —                                                           |        | (10,821 | ) | — |   | (10,821 | ) |
| Securitization transaction receivables |       | —                                                           |        | — |   | 796 |   | 796 |   |
| INB put right                          |       | —                                                           |        | — |   | (937 | ) | (937 | ) |
| Total                                  |       | Ps.                                                              | 11,329      |   | Ps. |  3,574 |   | Ps. | (141 | ) | Ps. | 14,762 |   |

 
| ** **                                      | ** ** | **Fair value measurements using significant  unobservable  inputs (Level 3)** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Securities**                                                                | ** ** |
| Beginning balance                               |       | Ps.                                                                           | (141       | ) |
| Total gains or losses (realized/unrealized)     |       |                                                                          |       |
| Included in earnings (or changes in net assets) |       | 4,224                                                                         |       |
| Included in other comprehensive income          |       | —                                                                        |       |
| Ending balance                                  |       | Ps.                                                                           | 4,083      |   |

 

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, the Financial Group has included areconciling item in U.S. GAAP reconciliation as a result of adopting thisaccounting pronouncement.

 

**M)           IFC transaction**

 

As disclosed in Note 2e),at the Banorte Extraordinary Stockholders’ Meeting held on October 23,2009 both an increase in its ordinary shareholders’ equity and a modificationto its corporate bylaws in order to complete the capitalization of the IFC tobecome a Banorte stockholder with an investment of USD 150 million wereapproved, which was settled in November 2009 by turning over to the IFC3,370,657,357 ordinary nominative “O” Series shares with a nominal valueof Ps. 0.10 (ten cents). The IFC liquidated this operation with USD 82.3million in cash and the capitalization of a credit of USD 67.7 million.Banorte, the IFC and the Financial Group executed a series of agreements inwhich the IFC is compelled to maintain its share in Banorte for at least fiveyears. After five years the IFC may sell its share to the Financial Group,which will have to purchase it with shares of its own or cash, depending on theFinancial Group’s choice and convenience.

 

F-171

----

Table of Contents

 

For US GAAP purposes, theredeemable shares held by the IFC that allow them to exchange their shares inBanorte for cash or shares of the Financial Group (to be determined by theFinancial Group if the IFC excercises their option) has been classified outsidethe permanent equity in accordance with ASC 480 “Distinguishing Liabilitiesfrom Equity”, (previously SFAS No. 150 “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity”) whichrequires securities with redemption features that are not solely within thecontrol of the issuer to be classified outside of permanent equity. The initialcarrying amount of the redeemable equity security should be its fair value atdate of issue. The Financial Group has elected to recognize changes in theredemption value immediately as they occur and adjust the carrying value of thesecurity to equal the redemption value at the end of each reporting period.

 

Under Mexican BankingGAAP, NIF C-12 “Financial Instruments with Characteristics of Liability,Equity, or Both” requires the Financial Group to record the noncontrollinginterest held by the IFC at the original transaction value within stockholders’equity since the IFC is exposed to the same risks and rewards as any other shareholderof Banorte and given that the intention of the Financial Group is to redeem theIFC’s noncontrolling interest in exchange of it’s own shares in the event thatthe IFC exercises its option. Any future transactions between the FinancialGroup and the IFC as it relates to this matter will be accounted for directlyin stockholders’ equity as it is between common shareholders.

 

**N)            Income taxes**

 

Under Mexican BankingGAAP as required by NIF D-4, “Income Taxes”, income tax and employee statutoryprofit sharing (PTU) are charged to results as they are incurred and theFinancial Group recognizes deferred income tax assets and liabilities for thefuture consequences of temporary differences between the financial statementcarrying amounts of assets and liabilities and their respective income taxbasis, measured using enacted rates. The effects of changes in the statutoryrates are accounted for in the period in which the enactment occurs. TheFinancial Group recognizes the benefits related to tax loss carryforwards andasset tax credit carryforwards when such amounts are realized. Deferred taxassets are recognized only when it is highly probable that sufficient futuretaxable income will be generated to recover such deferred tax assets.

 

PTU arises from temporarydifferences between the accounting result and income for PTU purposes and isrecognized only when it can be reasonably assumed that such difference willgenerate a liability or benefit, and there is no indication that circumstanceswill change in such a way that the liabilities will not be paid or benefitswill not be realized.

 

Under U.S. GAAP, asrequired by ASC 740, “Income Taxes” (previously SFAS No. 109 “Accountingfor Income Taxes”), the Financial Group recognizes deferred income tax and PTUassets and liabilities for the future consequences of temporary differencesbetween the financial statement carrying amounts of assets and liabilities andtheir respective income tax or PTU bases, measured using enacted rates. Theeffects of changes in the statutory rates are accounted for in the period whenthe enactment occurs. Deferred income tax assets are also recognized for theestimated future effects of tax loss carryforwards and asset tax creditcarryforwards. Deferred income tax assets are reduced by any benefits that, inthe opinion of management, more likely than not that the tax assets will berealized.

 

U.S. GAAP differences asdescribed above, to the extent taxable are reflected in the U.S. GAAP deferredtax balances.

 

**O)           Noncontrolling interest**

 

The effects of the U.S.GAAP differences as described in this Note reflect the amounts assigned to thenoncontrolling interests.

 

***Consolidation:***

 

Under Mexican BankingGAAP, the Financial Group’s consolidated financial statements include allsubsidiaries under the control of financial holding companies, except those inthe insurance and pension sector. The determination of which companies aredeemed to be within the insurance and pension sector is not based solely on theapplication of a conceptual framework. The SHCP has the right to determine if acompany is or is not within the insurance and pension sector, and thereforecould be required to consolidate.

 

Under U.S. GAAP, thebasic principle is that when a Financial Group has a controlling financial interest(either through a majority voting interest or through the existence of othercontrol factors) of an entity, such entity’s financial statements should beconsolidated, irrespective of whether the activities of the subsidiary arenonhomogeneous with those of the parent.

 

F-172

----

Table of Contents

 

No adjustments toconsolidated net income or consolidated stockholders’ equity result due to thedifferent consolidation principles disclosed above.

 

***Additionaldisclosures:***

 

A)           Earningsper common share (“EPS”) in accordance with U.S. GAAP

 

In accordance with U.S.GAAP, EPS is based on the provisions of ASC 260, “Earnings per Share” (previouslySFAS No. 128), and is calculated using the weighted-average number ofcommon shares outstanding during each period. Basic and diluted earnings pershare are based upon, 2,017,132,134, 2,016,959,232 and 2,018,167,791weighted-average shares outstanding for 2009, 2008 and 2007, respectively.Potentially dilutive common shares for all periods presented are notsignificant. Basic and diluted net income per common share computed inaccordance with U.S. GAAP is presented below:

 
| ** **                            | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                  |       |                             |       |   |   |   |   |
| Basic  and diluted earnings per share |       | Ps.                              | 3.5063     |   | Ps. | 3.2112 |   | Ps. | 3.6483 |   |
|                                       |            |                                  |            |  |  |  |  |  |  |  |

 

B)            Cashflow information

 

Starting on april 2009,an amendment to Mexican Banking GAAP requires the prospectivel presentation ofcash flow statement instead of a statement of changes in financial position.Prior to such date Mexican Banking GAAP established the presentationrequirements related to the statement of changes in financial position. Thestatement of changes in financial position presents the sources and uses offunds during the period measured as the differences, in constant pesos, betweenthe beginning 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, 2009,2008 and 2007, includes the impact of U.S. GAAP adjustments in conformity withrecommendations established by the American Institute of Certified PublicAccountants, SEC Regulations and International Practices Task Force Committees.

 

F-173

----

Table of Contents

 

**GrupoFinanciero Banorte, S.A.B. de C.V. and Subsidiaries**

**Consolidated Statements of CashFlows**

**For the years ended December 31,2009, 2008 and 2007**

**(In millions of Mexican pesos)**

** **
| ** **                                                   | ** ** | **2009** | ** ** | **2008** | ** ** | **2007**    | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------|------------|-------------|------------|
| Cash flows from operating activities:                        |       |     |       |     |       |        |       |
| Net income under U.S. GAAP                                   |       | Ps.      | 7,074      |     | Ps.        |  6,476 |       | Ps. |  7,363 |   |
|                                                         |       |     |       |     |       |        |       |
| Unrealized  investment loss (income)                         |       | 350      |       | 1,171    |       | (204        | )          |
| Allowance  for loan losses                                   |       | 6,616    |       | 6,625    |       | 2,830       |       |
| Depreciation  and amortization                               |       | 953      |       | 1,450    |       | 702         |       |
| Deferred  income taxes and employee profit sharing           |       | 307      |       | (652     | )          | (173        | )          |
| Other  provisions                                            |       | (1,786   | )          | 8        |       | 2,369       |       |
| Equity  in earnings of subsidiaries and associated companies |       | (131     | )          | (125     | )          | (66         | )          |
| Allowance  for doubtful accounts                             |       | 182      |       | 59       |       | (89         | )          |
| Periodic  pension cost                                       |       | 160      |       | 199      |       | 205         |       |
| Gain  on sale of property                                    |       | (8       | )          | —   |       | (22         | )          |
| Loss  on sale of foreclosed assets                           |       | 31       |       | 273      |       | 208         |       |
| Loss  (gain) on sale of trading securities                   |       | 280      |       | (116     | )          | 338         |       |
| (Gain)  loss on sale of available for sale securities        |       | 23       |       | (53      | )          | (36         | )          |
| Amortization  of purchased portfolios                        |       | 566      |       | 680      |       | 679         |       |
| Loss  from monetary position                                 |       | —   |       | —   |       | 1,298       |       |
| Insurance  and postretirement reserves                       |       | (117     | )          | (286     | )          | (139        | )          |
| Amortization  of debt issuance fees and costs                |       | (126     | )          | (4       | )          | (439        | )          |
| Income  recognition of purchased portfolios                  |       | (221     | )          | (278     | )          | (343        | )          |
| Other  non-cash items                                        |       | 535      |       | (2,014   | )          | (334        | )          |
| Changes in operating assets and liabilities:                 |       |     |       |     |       |        |       |
| Trading  securities                                          |       | (23,015  | )          | (1,455   | )          | 4,868       |       |
| Trading  derivative financial instruments                    |       | (82      | )          | 2,435    |       | (2,463      | )          |
| Decrease  in settlement accounts payable                     |       | 182      |       | (649     | )          | (226        | )          |
| Decrease  in settlement accounts receivable                  |       | 63       |       | 1,262    |       | 2,263       |       |
| Increase  in other accounts receivable                       |       | (1,769   | )          | (4,286   | )          | (2,233      | )          |
| Increase  in other accounts payable                          |       | 3,756    |       | 5,709    |       | 5,231       |       |
| Decrease  (increase) in deferred charges                     |       | 623      |       | (1,560   | )          | (2,115      | )          |
| Increase  (decrease) in deferred credits                     |       | 4        |       | 242      |       | (210        | )          |
| Net cash (used in) provided by operating  activities         |       | (5,550   | )          | 15,111   |       | 19,262      |       |
|                                                              |            |          |            |          |            |             |            |  |  |  |

 

F-174

----

Table of Contents

 
| ** **                                                                                  | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Cash flows from investing activities:                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds  from sale of property, furniture and equipment                                    |       | 259        |       | 123        |       | 21         |       |
| Acquisitions  of property, furniture and equipment                                          |       | (1,467     | )          | (1,345     | )          | (1,843     | )          |
| Cash  paid for acquisition of subsidiaries                                                  |       | 129        |       | 753        |       | 521        |       |
| Proceeds  from sale of foreclosed assets                                                    |       | 636        |       | 758        |       | 369        |       |
| Treasury  transactions - held to maturity securities                                        |       | 31,284     |       | (219,851   | )          | 16,087     |       |
| Treasury  transactions - available for sale securities                                      |       | (5,365     | )          | (4,430     | )          | (3,328     | )          |
| Granting  of loans                                                                          |       | (8,698     | )          | (48,294    | )          | (55,758    | )          |
| Purchased  credit portfolios                                                                |       | (391       | )          | (302       | )          | 169        |       |
| Repurchase  agreements — purchases                                                     |       | 5,454      |       | (90        | )          | (15,545    | )          |
| Net cash provided by (used in) investing  activities                                        |       | 21,841     |       | (272,678   | )          | (59,307    | )          |
| Cash flows from financing activities:                                                       |       |       |       |       |       |       |       |
| (Repayments  of) proceeds from subordinated liabilities                                     |       | (2,481     | )          | 10,343     |       | (1,131     | )          |
| Issuance  (repurchase) of shares                                                            |       | (451       | )          | 103        |       | (639       | )          |
| Dividends  paid                                                                             |       | (364       | )          | (949       | )          | (917       | )          |
| Deposits  received                                                                          |       | 15,361     |       | 53,319     |       | 34,044     |       |
| Repayments  of bank debt and other loans                                                    |       | (15,636    | )          | 9,037      |       | 3,909      |       |
| Repurchase  agreements — sales                                                         |       | (7,087     | )          | 196,368    |       | 2,949      |       |
| Debt  issue costs of subordinated liabilities                                               |       | —     |       | —     |       | (9         | )          |
| Net cash (used in) provided by financing  activities                                        |       | (10,658    | )          | 268,221    |       | 38,206     |       |
|                                                                                        |       |       |       |       |       |       |       |
| Effects  of inflation accounting (2007 only) and exchange rates                             |       | (738       | )          | 2,026      |       | (1,610     | )          |
|                                                                                        |       |       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  increase (decrease) in cash and cash equivalents                                       |       | 4,895      |       | 12,680     |       | (3,449     | )          |
|                                                                                        |       |       |       |       |       |       |       |
| Cash  and cash equivalents at the beginning of the year                                     |       | 54,396     |       | 41,716     |       | 45,165     |       |
|                                                                                        |       |       |       |       |       |       |       |
| Cash  and cash equivalents at the end of the year                                           |       | 59,291     |       | 54,396     |       | 41,716     |       |
|                                                                                        |       |       |       |       |       |       |       |
| Supplemental  disclosure of cash flow information:                                          |       |       |       |       |       |       |       |
| Cash  paid during the year for:                                                             |       |       |       |       |       |       |       |
| Income  taxes                                                                               |       | 2,649      |       | 4,013      |       | 2,419      |       |
| Interest                                                                                    |       | 38,934     |       | 44,630     |       | 33,168     |       |
|                                                                                        |       |       |       |       |       |       |       |
| Supplemental  schedule of non-cash investing activities:                                    |       |       |       |       |       |       |       |
| Transfers  from loans to foreclosed assets                                                  |       | 523        |       | 542        |       | 342        |       |
| Transfers  from purchased credit portfolio to foreclosed assets                             |       | 327        |       | 233        |       | 109        |       |
| Transfers  to (from) foreclosed assets from (to) loans and purchased credit portfolio,  net |       | Ps.        | (850       | )          | Ps.        | (775       | )          | Ps. | 451 |   |
|                                                                                             |            |            |            |            |            |            |            |  |  |  |

 

Cash and cash equivalentsinclude all cash balances and highly liquid instruments purchased with anoriginal maturity of three months or less. In addition, the Financial Groupmaintains a minimum capital requirement as required by the Commission(regulatory monetary fund), which is included as a cash equivalent.

 

F-175

----

Table of Contents

 

**C) New accountingpronouncements**

 

In October 2009, theFinancial Group adopted the FASB ASC (“FASB ASC”) 105-10 (SFAS No. 168),The FASB Accounting Standards Codification and the Hierarchy of GenerallyAccepted Accounting Principles.  FASB ASC105-10 (SFAS No. 168) establishes the FASB Accounting StandardsCodification (the “Codification”) as the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial standards in conformity with U.S. GAAP. FASB ASC105-10 (SFAS No. 168) is effective for interim and annual periods endingafter September 15, 2009. On the effective date, all then-existing non-SECaccounting and reporting standards are superseded, with the exception ofcertain items listed in FASB ASC 105-10 (SFAS No. 168). The purpose of theCodification is not to create new accounting and reporting guidance, but ratherto simplify user access to all authoritative U.S. GAAP. Accordingly, theadoption of FASB ASC 105-10 (SFAS No. 168) had no effect on the FinancialGroup’s consolidated financial statements.

 

The Financial Groupadopted the disclosure requirements of ASC 820-10 (SFAS No. 157, FairValue Measurements) in relation to nonfinancial assets and liabilities in2009.  The adoption of this guidance didnot have an impact on the Financial Group’s U.S. GAAP financial information(see Note 38L).

 

In January 2009, theFinancial Group adopted ASC 810-10 (SFAS No. 160, Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51) whichestablishes the accounting and reporting standards for the noncontrollinginterest in a subsidiary and the deconsolidation of a subsidiary, and alsoamends certain consolidation guidance for consistency with revised standardsregarding business combinations. The accounting provisions of ASC 810-10 (SFAS No. 160)must be applied prospectively starting at the beginning of the fiscal year inwhich the provisions are initially adopted, while the presentation anddisclosure requirements must be applied retrospectively, to providecomparability in the financial statements. ASC 810-10 (SFAS No. 160) was effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008.  As a result of adopting thisstandard, the Financial Group reclassified the noncontrolling interest tostockholders’ equity in the year of adoption and in prior periods for purposesof comparability, which resulted in eliminating this difference in thereconciliation of between Mexican Banking GAAP and U.S. GAAP of Ps. 1,944. Inaddition, see Note 38G for the impact of this new standard as it relates to theacquisition of the remaining 30% of the shares of INB Financial Corp, which istreated as an equity transaction with no further valuation of the assets orliabilities of INB Financial Corp, and thus no recording of additionalgoodwill.

 

In January 2009, theFinancial Group adopted ASC 805-10 (SFAS No. 141(R), Business Combinations— a replacement of SFAS No. 141 (R)), which, among other changes, requiresan acquirer in a business combination to (a) recognize assets acquired,liabilities assumed, and any noncontrolling interest in the acquiree at fairvalue as of the acquisition date, and (b) expense all acquisition-relatedcosts. ASC 805-10 also amends ASC 740-10 (SFAS No. 109, Accounting forIncome Taxes) to require that any reductions to an acquired entity’s valuationallowances on deferred taxes and acquired tax contingencies that occur afterthe measurement period be recorded as a component of income tax expense.  FASB ASC 805-10 (SFAS No. 141(R)) mustbe applied prospectively to all business combinations for which the acquisitiondate occurs during fiscal years beginning on or after December 15, 2008,with the exception to the amendments to ASC 740-10, which will also be appliedto business combinations with acquisition dates prior to the effective date ofthis standard. The impact of this standard will be dependent on any futureacquisitions made by the Financial Group.

 

In July 2009, theFinancial Group adopted ASC 855-10 (SFAS 165, Subsequent Events). ASC 855-10(SFAS 165) establishes accounting and reporting standards for events that occurafter the balance sheet date but before financial statements are issued or areavailable to be issued. In addition, ASC 855-10 requires the disclosure of thedate through which an entity has evaluated subsequent events and the basis forselecting that date, that is, whether that date represents the date thefinancial statements were issued or were available to be issued. ASC 855-10 waseffective for fiscal years and interim periods ending after June 15, 2009.The Financial Group’s consolidated financial statements have been approved bythe Board of Directors at their January 28, 2010 meeting in accordancewith the responsibility assigned to them. The Financial Group has evaluated events subsequent to December 31,2009 to assess the need for potential recognition or disclosure in theaccompanying consolidated financial statements. Such events were evaluatedthrough January 28, 2010, the date the Financial Group’s Mexican BankingGAAP consolidated financial statements were available to be issued.

 

On June 12, 2009,the FASB issued ASC 860-10 (SFAS No. 166, Accounting for Transfer ofFinancial Assets — an amendment of FASB Statement No. 140), whicheliminates the concept of a qualifying special purpose entity (“QSPE”) andmodifies the derecognition provisions of a previously issued accountingstandard. ASC 860-10 (SFAS No. 166) also required additional disclosureswhich focus on the transferor’s continuing involvement with the transferredassets and the related risks retained. ASC 860-10 (SFAS No. 166) iseffective for financial asset transfers occurring after the beginning of anentity’s first fiscal year that begins after November 15, 2009. Earlyadoption is prohibited. The Financial Group is in the process of evaluating theimpact of this standard on its consolidated financial position, results ofoperations or cash flows.

 

F-176

----

Table of Contents

 

On June 12, 2009,the FASB issued ASC 810-10 (SFAS No. 167, Amendments to FASBInterpretation No. 46 (R)), which amends the consolidation guidance thatapplies to variable interest entities. The new guidance requires an entity tocarefully reconsider its previous consolidation conclusions, including (1) whetheran entity is a variable interest entity (VIE), (2) whether the enterpriseis the VIE’s primary beneficiary, and (3) what type of financial statementdisclosures are required. ASC 810-10 (SFAS No. 167) is effective as of thebeginning of the first fiscal year that begins after November 15, 2009.The amendments to the consolidation guidance affect all entities andenterprises currently within the scope of ASC 810-10 (SFAS No. 167), aswell as qualifying special-purpose entities that are currently outside thescope of ASC 810-10 (FIN 46(R)). Early adoption is prohibited. The FinancialGroup is in the process of evaluating the impact of this standard on itsconsolidated financial position, results of operations or cash flows.

 

In October 2009, theFASB issued Accounting Standards Update (ASU) 2009-13, which contains newguidance on accounting for revenue arrangements with multiple deliverables.When vendor specific objective evidence or third party evidence fordeliverables in an arrangement cannot be determined, a best estimate of theselling price is required to separate deliverables and allocate arrangementconsideration using the relative selling price method. The new guidanceincludes new disclosure requirements on how the application of the relativeselling price method affects the timing and amount of revenue recognition. Theguidance in the ASU will be effective prospectively for revenue arrangementsentered into or materially modified in fiscal years beginning after June 15,2010. Early adoption is permitted. The adoption of this standard is notexpected to impact the Financial Group’s consolidated financial position,results of operations or cash flows.

 

On January 21, 2010,the FASB issued ASU 2010-06. The ASU amends ASC 820, Fair Value Measurementsand Disclosures (SFAS No. 157) to add new requirements for disclosuresabout transfers into and out of Levels 1 and 2 and separate disclosures aboutpurchases, sales, issuances, and settlements relating to Level 3 measurements.It also clarifies existing fair value disclosures about the level ofdisaggregation and about inputs and valuation techniques used to measure fairvalue. This ASU amends guidance on employers’ disclosures about postretirementbenefit plan assets under ASC 715, Compensation — Retirement Benefits, torequire that disclosures be provided by classes of assets instead of by majorcategories of assets. The guidance in the ASU is effective for the firstreporting period (including interim periods) beginning after December 15,2009, except for the requirement to provide the Level 3 activity of purchases,sales, issuances, and settlements on a gross basis, which will be effective forfiscal years beginning after December 15, 2010, and for interim periodswithin those fiscal years. In the period of initial adoption, entities will notbe required to provide the amended disclosures for any previous periodspresented for comparative purposes. However, those disclosures are required forperiods ending after initial adoption. Early adoption is permitted.

 

**D) International FinancialReporting Standards**

 

In January 2009, theCommission published amendments to the Mexican Securities Law, including theobligation to prepare and present financial statements using InternationalFinancial Reporting Standards (“IFRS”) beginning in 2012. Financialinstitutions such as the Financial Group are prohibited from presenting IFRSfor purposes of their local filings and must continue to present their basicfinancial statements in accordance with Mexican Banking GAAP. However, theFinancial Group’s equity method investor Gruma, S.A.B. de C.V. (“Gruma”) isrequired to comply with the changes to the Mexican Securities Law and thereforethe Financial Group is in the process of assessing the impacts of IFRS on itsfinancial information for purposes of providing such information to Gruma fortheir future filings.

 

F-177

----