Operating Expenses - Interceramic USA16 More selling points 18 Distribution Network 20 Social Responsability 24 Board of Directors ... gross margin for 2008 dropped down to 33.3 percent

2

4

6

8

Report of the Chief Executive Officer

Financial Results

12 Vision

12 Mission

14 More efficient

16 More selling points

18 Distribution Network

20 Social Responsability

24 Board of Directors

26 Independent Auditors’ Report and Consolidated Financial Statements

Report of the Board of Directors

Report of the Audit and Corporate Practices Committee

INDEX

Despite the global economic collapse and a relatively poor fourth quarter of the year, Interceramic ended 2008 posting another year of record sales, exceeding US $500 million for the first time in Company history. Our net sales for 2008 were US $508.2 million, an increase of 2.8 percent over sales of US $494.2 million for 2007. While this was a good result, the shocking onset of the world financial crisis towards the end of the year resulted in fourth quarter 2008 sales dropping by 13.6 percent over the same quarter last year. Primarily but not exclusively because of the downturn in the fourth quarter, our gross margin for 2008 dropped down to 33.3 percent compared to 34.8 percent last year. Margin was further impacted by heavy discounting of many products sold in the United States market to cleanup inventories, as well as lower capacity utilization that resulted in higher absorption of fixed costs.

Operating income dropped to US $10.5 million for the year compared to the US $24.0 million posted last year, a 56.3 percent decrease. Operating expenses as a percentage of sales climbed to 31.2 percent in 2008, up from 29.9 percent in 2007, and operating margin decreased as well, down to 2.1 percent for the year as opposed to 4.9 percent last year. As might be expected, the Company’s EBITDA for 2008 decreased in 2008 from 2007, down 20.5 percent to US $40.8 million from US $51.3 million in 2007. Lower EBITDA and the impact of the devaluation of the Mexican Peso during the course of the year on our substantially all, Dollar denominated debt adversely impacted our key financial ratios, and our debt service coverage ratio at the end of 2008 was 3.8 times, compared to 5.6 at the end of last year, while debt to EBITDA rose to 5.6 times in 2008 from 3.1, where it stood at the end of 2007.

The erosion in our financial ratios over the latter part of 2008 resulted in technical violations of certain covenants contained in our major loan documentation, first at the end of the third quarter of the year and continuing to the end of 2008. These technical defaults have not involved the Company’s payment obligations on its indebtedness, and we are and have been current on all principal and interest requirements under our loan documentation, including payment of a scheduled US $8.0 million principal amortisation in December 2008. The Company has been in negotiations with its lenders over the past months to extend the amortisation of its outstanding syndicated credit facility and amend the financial covenants and other terms of the credit agreement to reflect the changing circumstances. It is likely that this renegotiation will also involve the pledging of certain of the Company’s assets to secure the facility.

Because the Company was in violation of certain covenants

last year, under applicable Mexican accounting rules the entire principal amount of our outstanding debt in technical default must be classified as short term as of the end of 2008. The adverse effect of this on our financial statements will be removed when, as we anticipate, the renegotiation of our credit agreement is completed.

The Mexican markets proved surprisingly resilient over the course of 2008 and although sales dropped in the fourth quarter in Mexico as well, Interceramic posted Mexican sales of US $308.9 million, a 4.2 percent increase over sales of US $296.5 million in 2007. As a general matter, our costs and expenses in Mexico are considerably less than in the United States, and our Mexican operations are key to our profitability. In the International markets, primarily the United States, we continue to struggle in the face of strong competition, higher cost structures and a severely depressed housing market. Our International sales for 2008 were pretty much flat over 2007, rising just 0.8 percent to US $199.3 million for the year compared to US $197.7 million last year. A bright spot for the year in the International markets was the contribution made by our late-2007 acquisition of the “IMC” granite and marble business in the Southwest United States, which materially assisted us in holding sales firm for the year.

Financial Results

Net Sales

For 2008, our consolidated sales increased 2.5 percent over the previous year, up from $5,503.4 million pesos in 2007 to $5,640.7 million pesos in 2008. The sales in 2008 were severely impacted by the housing market crisis in the United States.

Regarding the results obtained in Mexico, we had an increase in sales of 3.8 percent over the sales in 2007, up from $3,301.5 million pesos in 2007 to $3,427 million pesos in 2008.

Our sales in the international market in 2008 showed an increase of 0.8 percent over the sales in 2007, up from $197.7 million dollars in 2007 to $199.3 million dollars in 2008.

Cost of Goods Sold

The cost of goods sold increased 5.2 percent during the year up from $3,588.0 million pesos in 2007 to $3,774.9 million pesos in 2008. As a percentage over sales, the cost of goods sold during 2008 represented 66.9 percent compared to 65.3

percent the year before. This increase occurred basically because of an increase in sales over the previous year, and an increase in the cost of products sold mainly caused by the rising of natural gas costs, the heavy discounts for discontinued products in the United States, and the reduction of our capacity utilization that resulted in higher absorption of fixed costs, and hence resulting in an increase of the cost of production.

Operating Expenses

Operating expenses during 2008 increased 7.1 percent over 2007, up to $1,764.6 million pesos in 2008 from $1,647.5 million pesos in 2007. Operating expenses as a percentage of sales climbed to 31.3 percent in 2008 compared to 29.9 percent in 2007, 1.3 points up from the previous year. The increase in operating expenses was generated mainly by the integration of the subsidiary IMC, acquired in September 2008. Another important factor was the effect of the devaluation of the Mexican Peso in the last quarter in dollar denominated expenses generated by our United States operations.

Integral Result of Financing

The integral result of financing for 2008 represented a loss of $525.6 million pesos compared to a loss of $50.6 million pesos in 2007. The exchange rate of the Mexican Peso against the U.S. dollar suffered a significant devaluation and, consider-ing the passive monetary position of the company, the exchange rate loss in 2008 was $409.4 million pesos compared to a loss of $1.4 million pesos in 2007.

Debt

As of December 31, 2008, the Company had $2,465.9 million pesos of debt. Of this debt, $0.2 million pesos were long term and $2,465.7 million pesos were short term. The total debt is denominated in dollars.

As mentioned earlier, the erosion in our financial ratios in the last months of the year resulted in technical violations of certain covenants contained in our major loan documentation. During the last months and up to date, we continue the negotiation process with creditor banks to extend the term of the loan amortization and modify the financial ratios and other conditions to reflect the volatile economy. Due to the above mentioned failure and under applicable Mexican accounting rules, the entire principal amount of our outstanding debt in technical default must be classified as short term as of the end of 2008, for a total of $145.3 million dollars ($2,000 million pesos). The adverse effect of this on our financial statements

will be removed when, as we anticipate, the renegotiation of our credit agreement is completed.

We are working hard to reduce our costs and expenses, particularly in the United States, in order to ensure that Interceramic weathers the global economic storm ready to seize the opportunities that must arise as the construction markets, as they must, return. As always, we thank our investors, our customers and our employees for their continued support.

Victor D. Almeida Chief Executive Officer

2 Interceramic 3Interceramic

REPORT OF THE CHIEF EXECUTIVE OFFICER

Thousands of Nominal US Dollars

2003

2004

2005

2006

2007

2008 508.2

494.2

465.3

406.0

341.2

306.4

CAC 03-0810.6%

CAC 03-0812.5%

CAC 03-088.2%

Ventas Consolidadas

Domestic

International

2003

2004

2005

2006

2007

2008 308.9

296.5

263.4

230.5

190.4

171.8

Domestic Sales

2003

2004

2005

2006

2007

2008 199.3

197.7

201.9

175.5

150.8

134.6

International Sales

2003

2004

2005

2006

2007

2008 40.8

51.3

60.5

52.3

41.0

36.2

0 10 20 30 40 50 60 70 80

EBITDA

FINANCIAL RESULTS


2007 2008 Var %

Sales 5,503.4 5,640.7 2.5%

Domestic 3,301.5 3,427.1 3.8%

International 197.7 199.3 0.8%

Gross Income 1,915.6 1,865.8 -2.6%

Gross Margin 34.8% 33.1%

Operating Income 268.1 101.2 -62.3%

Operating Margin 4.9% 1.8%

Nat Majority Income 28.6 (604.2) NA

Total Assets 5,359.8 5,778.2 7.8%

Total Liabilities 3,006.6 4,031.4 34.1%

Total Equity 2,353.1 1,746.8 -25.8%

Book value per share 14.5 10.7 -25.8%

EBITDA 572.1 437.8 -23.5%

Weighted Average Number of Shares Outstanding (Thousands) 162,664 162,664 0%


The Board of Directors of Internacional de Cerámica, S.A.B. de C.V., in accordance with the provisions of the Stock Market Law and with its Bylaws, is providing the following report which details the actions taken by the Board as well as the Report of the Independent Auditors in regard to the audit conducted as to the Company’s activities for the year ended December 31 2008.

During the course of this year the Board has, apart from its monthly monitoring of the Company’s operations and financial statements, taken the following actions:

a. Approval of the Company’s operations budget, including the review and approval of the Company’s financial and operational goals, as well as investment capital to be made during the year.

b. The Board was fully apprised and aware of the Report by the Chief Executive Officer for the year 2007.

c. The Board was fully apprised and aware of the Report of the Auditors and Social Practices for the year ended December 31, 2007.

d. Approval of the audited financial statements of the Company for the year 2008, for its presentation to the Special and Ordinary Annual Shareholders Meeting on the recommendation by the Auditors and Social Practices Committee.

e. Approval of the convening of the Special and Ordinary Shareholders Meeting held in April 2008, and approved at said Meetings of the proposals that the Board resolved to submit at the Meetings for their approval.

f. Approval of the procurement of the interest rate swap with the objective of reducing the risk of important variations in the cost of the Company’s Libor rate denominated obliga-tions.

g. Approval of the holding of various hedging contracts of fixed prices for natural gas with the objective of covering a percentage of the consumption of this input and to mitigate the risk associated with the volatile price in the market.

h. Approval of the write-off of the remaining book value of the oven Number 8 of Plant Number 1 for the amount of $2,000,000 dollars, as a consequence of shutting down the most inefficient ovens of the Company.

i. The Board was fully apprised and aware of the status of the credit negotiations with banks that have the objective to

extend the term of the loan amortization and to change the financial covenants and other conditions to reflect the volatile situations of the economy. It is noteworthy to mention that as of the date of this report, the negotiations have not yet concluded.

j. Approval of the integral remuneration received by the President of the Board of Directors.

k. Approval of, with the prior favorable opinion and approval of the Auditors and Social Practices Committee, the hiring of Mancera, S.C., as independent auditors for the review of the Company’s financial statements.

l. The Board was fully apprised and aware of the Company’s operations and financial plan, as well as the strategies which were to be implemented in 2008.

m. The Board of Directors, in accordance with Article 28, paragraph IV, subsection c) of the Stock Market Law, is of the opinion that the Report, as presented by the Chief Executive Officer, is compliant with all legal requirements and demonstrates the Company’s positive performance during its last fiscal year.

Regarding to (i) Policies for the Use of Assets for Related Parties; (ii) Guidelines for Internal Control and Internal Auditing of the Company and its Subsidiaries; (iii) Policies for Granting Loans or any type of Credits or Guaranties to Related Parties; (iv) Policies for the appointment of the General Director and Relevant Executives, as well as the remuneration for the President of the Board of Directors, General Director, and Relevant Executives of the Company; and (v) Communication Policies with Shareholders and the Market, as well as the Board and Relevant Directors of the Company, these were not modified during the year 2008, the year covered by this Report.

With respect to the Company’s Stock Repurchase fund, which was approved for an amount up to $180.6 million pesos, the Board informed the shareholders that during the year 2008 no operation was executed.

As set out in the Stock Market Law, and having been discussed and approved by the Board of Directors at a meeting held on April 13, 2008, this Report will be presented for its approval and ratification at the Annual Ordinary Shareholders meeting.

Oscar Almeida ChabreChairman of the Board of Directors

For the year ended December 31 2008REPORT OF THE BOARD OF DIRECTORS


Internacional de Cerámica, S.A.B. de C.V.’s management is responsible for all internal controls applied over all processes of the company as well as those entities it controls. It is also responsible for preparing their financial information. Mancera, S.C. (Member of Ernst & Young Global), external auditors for Internacional de Cerámica, S.A.B. de C.V. and entities controlled by Interceramic, is responsible for examining the annual consolidated financial statements, under the Financial Information Norms, and issue an opinion on said financial statements regarding the presentation of the financial situation of the company, according to the Mexican Financial Informa-tion Norms (NIF). The Committee for Auditing and Company Practices (hereinafter referred to as “the Committee”) will watch over and supervise said processes and is who, among other activities, recommends to the Board of Directors for their approval, the independent accounting firm that will serve as the Company’s external auditor. As a part of the monitoring processes, the Committee met with the Company’s management and the external independent auditors to discuss the effectiveness of the internal controls applied to the operating and accounting processes, and to evaluate the accounting policies and practices as well as the results derived by the annual audits. Additionally, the Committee undertook the following actions: A Transactions or Dealings with Related Parties.- The

transactions carried out by the Company with Related Parties were reviewed and the opinions were that said transactions are not more or less favorable for the Company than if they had been performed by any other supplier.

Transactions with related parties constituted contracting services from the following companies: (i)Construcciones Especializadas de Chihuahua, S.A. de C.V., in the amount of $13.1 million pesos for the construction of the new plant that began operation s in November 2007; (ii) Arquitectura Habitacional e Industrial, S.A. de C.V., in the amount of $0.6 million pesos for several construction services in different plants; (iii)Corporación Administraativa y Técnica, S.A. de C.V. in the amount of $35.2 million pesos, for security services, rental fees and office services, office expenses the President of the Board and IT services; (iv) Corporación Aerea Cencor, S.A. de C.V., in the amount of $20.1 million pesos for aerial taxi services; (v) Autocamiones de Chihua-hua, S.A. de C.V. in the amount of $1.7 million pesos for the purchase and maintenance service of company vehicles; (vi) Autos Internacionales de Chihuahua, S.A. de C.V., in the amount of $0.8 million pesos for the purchase and mainte-nance services of company vehicles; (vii) Vehiculos Toy, S.de R.L. de C.V., in the amount of $1.0 million pesos for the purchase of company vehicles; and (viii) Inmobiliaria Chihuahuense, S.A. de C.V., in the amount of $1.3 million

pesos for warehouse space rental. Operations (iii), (iv), (viii) and part of operations (v) and (vi) refer to costs and operating expenses, and represent 1.0% over the total costs and consolidated operating expenses. Transactions (i), (ii) and part of transactions (v) and (vi) refer to investments which represent 10.7% of total capital investments performed in 2008. In addition of the before mentioned operations, ceramic tile sales operation were also performed to Daltile International, Inc. in the amount of $71.4 million pesos, transactions for the purchasing of inventory to Kohler Co and Custom Building Products, Inc in the amount of !132.7 and $112.1 million pesos respectively.

Payments for honorary fees to Arquitectura Habitacional e Industrial, S.A. de C.V. and Construcciones Especializadas de Chihuahua, S.A. de C.V., owned by Mr. Augusto Champion (member of the Board) during 2007 and 2008, refer to the construction of the plant. This operation was approved by the Board of Directors at the meeting held on December 11, 2006 with the previous recommendation of the Committee.

B Waivers for Officers and Executives to Participate in Business Opportunities.- During 2008 no waivers were granted for Members of the Boards, Chief Executive Officer or Relevant Executives to participate in business operations that may correspond to the Company because there were no operations to revise.

C Opinion as to the Chief Executive Officer’s Report.- The Committee, after reviewing and analyzing the Chief Executive Officer’s report, issued its favorable opinion as to the Chief Executive Officer’s report, thus recommending that the Board of Directors present such report at the Annual Shareholders Meeting for its consideration and approval.

D Opinion as to the Company’s Financial Statements and as to the role of the independent Auditors.- As to its review of the Company’s Financial Statements, the Committee undertook the following:

a Financial statements for the fiscal year ending December 31, 2008 were reviewed and discussed with the Company’ Management and external auditors.

b Discussions were held with the independent auditors as to all matters pertaining to and relevant to the carrying out of the audit of the Company’s consolidated financial statements, including the scope of such audit, any observations stemming from the audit and the results derived from the audit.

c The economic and decision-making independence of the independent auditors was reviewed and evaluated.

Based upon the discussions between Company management and the independent auditors, the statements made by the Company’s management to the Committee, and subject to the favorable opinion of the independent auditors as to the mentioned financial statements, the Committee recom-mended the Board of Directors that it presents the annual consolidated and audited financial statements for their approval to the Shareholders at the next Annual Sharehold-ers Meeting, noting that the role of the independent auditors was carried out adequately and sufficiently, and similarly noting that the results derived from the audit reasonably presented, as to all relevant and important aspects, the Company’s and all the persons controlled by the Company, financial picture or situation, as required by the Rules and Regulations of the Mexican Counsel for Financial Informa-tion for the Investigation and Development of Rules and Regulations of Financial Information (“CINIF”).

E Internal Controls Report.- During 2008 the Company conducted several actions for the revision and control of procedures, policies, registries, operational flows, etc. for the different activities both of the Company and the entities it controls, such as the departments of Sales, Costs, Treasury, Administration Inventory management, Fixed Assets, Organizational Development, and found several opportuni-ties for improvement in different areas; the corrective measures were taken. Also, the Internal Control Plan for 2009 was approved; this plan will follow up on the items identified during the previous year, going over the main operations of the Company.

F Monitoring of Corrective and Preventive Measures.- During the fiscal year ending December 31, 2008, there were certain violations to the guidelines and operational policies which were presented before this Committee on the Internal Control Report. Also in this inform, preventive and correc-tive measures were presented in order to avoid and/or repair these violations. In regards to the accounting record policies, no breaches were found neither by the Company nor by the entities it controls and thus, it was not necessary to follow up on the preventive or corrective measures that would have been brought upon by those causes.

G Monitoring of Shareholders and Board Meeting Agree-ments.- The Committee attended the Board meetings held during 2008, monitored and followed up on all agreements reached at said meetings. Also, the Committee had access to all the information and resolutions of all shareholder

meetings held in 2008.

H Actions Taken in Response to Relevant Observations made to the Company.– During the fiscal year ending December 31, 2008, the external auditors issued a letter of recommen-dation to the Company following the audit made for the year 2007. The Committee received this letter which, in addition to the observations made by the external auditor, included comments made by management referring to measures taken on these observations. The Committee will also receive from the external auditors a letter of recommenda-tion for the fiscal year 2008 which will be followed up during 2009.

I Description and Effects Caused by Modifications Applied to the Company’s Accounting Policies.- During the fiscal year ending on December 31, 2008, the Company’s accounting policies were modified according to the adoption of the new regulations of Mexican Financial Information (NIF) issued by the Mexican Council for the Research and Development of Financial Information Norms (CINIF) that became effective on January 1, 2008 and that are mentioned hereinafter. The Company considers that the application of these new items does not bring important changes in its financial information

NIF B-2 Cash Flow StatementNIF B-10 Effects of InflationNIF B-15 Foreign Currency TranslationNIF D-3 Employee BenefitsNIF D-4 Income TaxINIF 9 Presentation of Comparative Financial Statements as NIF B-10 coming into effectINIF 15 Financial Statements with same currency used to inform as for accounting record, but different functional currency

Also, during 2008 the Mexican Council for Research and Development of Financial Information Norms (CINIF) issued the following financial information norms (NIF) and interpretations to the Financial Information Norms (NIF) effective on January 1, 2009.

NIF B-7 Business acquisitionsNIF B-8 Consolidated and Combined Financial StatementsNIF C-7 Investments in Associates and other Permanent InvestmentsNIF C-8 Intangible AssetsBIF D-8 Share-Based PaymentINIF 16 Category Transfer of Financial Instruments for Trading Purposes

REPORT OF THE AUDIT ANDCORPORATE PRACTICES COMMITTEE For the Year Ended 31 December 2008


For the Year Ended 31 December 2008

The Company has made the modifications to its accounting policies to reflect the above mentioned changes.

J Review of Performance of and Actions Taken by Relevant Directors.- The Committee, in fulfillment of its obligations to the Company, performed a revision of the performance of the Relevant Directors of the society and concluded that the Chief Executive Officer and all Relevant Directors acted according to the terms established by the law, to all authorized policies and activities entrusted to them for the year of 2008 and thus recommends the Board of Directors requests approval and ratification of all acts performed by the Management of the Company to the Board of Directors at the Annual Shareholders Meeting.

K Compensation of Chief Executive Officer and Relevant Executives.- In accordance with the Company’s “Policies for the Designation of the Chief Executive Officer and of the Relevant Executives as well as the establishment of compen-sation for the President of the Board of Directors, the Chief Executive Officer and the Relevant Executives”, the Commit-tee issued a favorable opinion regarding the ratification of Mr. Victor David Almeida García as Chief Executive Officer of the Company. During 2008, the combined amount of earnings and compensation received by the Chief Executive Officer and the Company’s Relevant Executives totaled $31,369,019 Pesos.

L Opinion and Recommendation regarding awarding a contract to the Company who Provided External Audit Services and, if applicable, additional or complementary services.

The Committee agreed and ratified the selection of Mancera, S.C., as the independent auditors for Internacional de Cerámica, S.A.B. de C.V., to examine the Company’s consolidated financial statements and issue a report to be presented at the Company’s next Annual Shareholders Meeting.

Additionally, the Committee issued a favorable opinion regarding the proposal for fees submitted by Mancera, S.C. for its services in auditing the Company’s and its subsidiar-ies’ Financial Statements.

The Committee also issued a favorable opinion regarding awarding a contract to Mancera, S.A., so that in addition to its services stemming from the Audit, Mancera S.A. will also conduct a taxes review, an audit of the Company’s transac-tions to the IMSS and the INFONAVIT, and will also conduct a reconciliation of the United States Generally Accepted Accounting Principles (“USGAAP”) of the company

Adhesivos y Boquillas Interceramic, S. de R.L. de C.V.

During the fiscal year ending December 31 2008, no independent specialists were hired nor contracted for any transaction or operation, and therefore no funds were expended for such services.

M Review of the Interceramic Code of Ethics.- The Committee reviewed Interceramic’ Code of Ethics and was duly aware of its characteristics, purposes and contents. The Committee also reviewed the implementation and diffusion phases of the code, as well as the responsibilities of the Ethic Commit-tee of the Company.

N Review of the “ETHOS” System.- Mechanism of Disclosure of Undue Events and Protection to Informants.- The Committee reviewed the Company’s “Ethos” System, the procedure by which employees are able to consult or report unethical behavior or situations in a confidential or open manner. The questions and complaints made through this system were reviewed, and were revised as per the Ethics Committee which subsequently carried out the actions or corrective measures.

O Information Contingency and Recovery Plan.- The Commit-tee reviewed the Information Contingency and Recovery Plan, which was prepared by the management and the Information Technology department of the Company and contains plans and sufficient measures to reduce to a minimum the impact to normal operation of the Company in case of an unforeseen event that could affect computer equipment, communications, and/or information systems critical to the area of Information Technology.

P Review of the Legal Situation of the Company.- The Committee received from the attorneys of the Company, the reports referring to legal situations of the Company, which discuss lawsuits, litigation, regulatory demands or require-ments and other legal topics. The Committee is of the opinion that within the reports, there are no lawsuits, litigation, regulatory demands or requirements, or other legal matters which could potentially unfavorably affect the operation or the financial situation of the Company.

The Committee determined, based on the actions taken during the year ended December 31, 2008, to give a favorable opinion regarding the issues mentioned in this report, and to recommend to the Board of Directors that the report be presented at the Shareholders Meeting for its consideration and approval.

Carlos Elias TerrazasPresident of the Audit and Corporate Practices Commitee

REPORT OF THE AUDIT ANDCORPORATE PRACTICES COMMITTEE

Be the Best Manufacturer of ceramic tile and related products in the world, providing our customers with total satisfaction through commitment to our values of respect, loyalty, humility and integrity. We will dedicate ourselves to working responsibly communicating effectively and working together as a team. We will create high value for our shareholders through effective leadership, strategic partnerships, employing the best people, the best technology, and distribution systems worldwide, thus being Simply the Best.

VISION

Provide our customers with the most innovative, high-quality ceramic tile and related products and world-class customer service by employing highly qualified professionals, innovative sales strategies, and an efficient technology-driven distribution network.

MISSION


Our investments are aimed to the acquisition of high-technology equipment that will enable us to achieve more efficient processes and thus, better profits for our shareholders.

MORE EFFICIENT


An innovative distribution system of more than 230 stores throughout Mexico, guarantees that Intercerami products will reach the final customer fulfilling quality standards of service.

MORE STORES



DISTRIBUTION NETWORK

Main Warehouse

Distribution centers

Interceramic manufacturing facilities

Interceramic Tile & Stone Galleries

Independent distributors

Interceramic franchise galleries (Mexico)

Interceramic Marble Collection distribution centers

CentralAmerica Operations

Bodega Central

Centros de Distribución

Complejos industriales Interceramic

Tiendas Interceramic Tile & Stone

Distribuidores independientes

Franquicias Interceramic (México)

Centros de distribución Interceramic Marble Collection

Operaciones en Centroamérica

China OfficeOficina en China

IMC

IMC

IMC

IMC

IMC

CHINA

+

CO

MM

UN

IC

ATION RESPON

SIBILITY

TEAM WORK

Inte

r ce

r a

mi c

Message from our CEO

Interceramic’s commitment goes beyond the business environ-ment to reach the communities where we operate.

The issues of Social Responsibility are a very important part of our daily operations. Live up and reflect the company’s values in our decisions gives the meaning to Interceramic’s reason for being.

Ethic behaviors, a safe and fair working environment, to be able to offer our customers products with high levels of quality, working with our community to solve their problems, offering opportunities for growth, generating job options for the members of our society; planting new trees, taking care of non-renewable resources as well as sustainable practices to avoid contamination and deterioration of our planet are some of the topics that we face and approach proactively every day.

As a company, we are convinced that if we work together with our interest groups, we will be able to multiply our efforts and actions.

This report contains the most relevant aspects of our activities to reinforce Interceramic’s commitment with our principles, values and corporate social responsibility. We acknowledge the importance of this commitment to allow us to keep being Simply the Best.

Victor Almeida GarcíaChief Executive Officer

RESPONSABILIDAD SOCIAL

Care and Preservationof the Environment

Ética Empresarial

M O D E L O

F VA

LU

ES

RESPECTLOYALTY

HUMILITYHONESTY

Principles of the World Pact


SOCIAL RESPONSIBILITY

I n t e r c e r a m i c g r e e n[ ]

I care

For five consecutive years, Interceramic has been awarded the emblem as a ESR (Socially Responsible Company) by the CEMEFI (Mexican Center for the Philantropy). As a socially responsible company we focus our efforts towards the following aspects:Ethics; preservation of the environment; Global Compact Principles; Work environment; involvement with the community.

Ethics CodeWe honor the laws and regulations of the countries in which we operate, basing all relationships on the ethic standards described within our Ethics Code.

Philosophy of Operation

Every manufacturing plant in Mexico has been certified as a Clean Industry.

LEED Program

The Leadership in Energy and Environmental Design program (LEED) is administered by the US Green Building Council (USGBC) and is recognized in the commercial and institutional markets. Since 2008, Interceramic participates in this program.

Tile and Stone products manufactured and marketed by can contribute to earn LEED credits.

Human Rights

Interceramic joined the United Nations Global Compact, a strategic policy initiative for business that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption.

I Businesses should support and respect the protection of internationally proclaimed human rights; and

II make sure that they are not complicit in human rights abuses

Labour StandardsIII Businesses should uphold the freedom of association and

the effective recognition of the right to collective bargaining

IV the elimination of all forms of forced and compulsory labour

V the effective abolition of child labour; andVI the elimination of discrimination in respect of employment

and occupation

EnvironmentVII Businesses should support a precautionary approach to

environmental challenges;VIII undertake initiatives to promote greater environmental

responsibility; andIX encourage the development and diffusion of

environmentally friendly technologies.

Anti-CorruptionX Businesses should work against corruption in all its forms,

including extortion and bribery.

Preservation ofthe environmentEthics

Global CompactPrinciples

Involvement withthe community

WorkEnvironment+ + + +

Human resources, always guided by the values of Quality, Innovation and Service is the key that sets Interceramic apart. A strong investment in programs for the development and professionalization of our employees has aided to keep the leadership of the company.

Interceramic University

* Interactive University with more than 1,600 users.

* Agreement with Educational Institutions - Bachelor degree at UTCH (Best practice for social

responsibility award) - ITSM, Tec Milenio, UDEP* Scholarship program - More than 75 scholarships for languages, undergraduate

and graduate scholarships granted to employees* Professionalization Programs - Sales force: More than 775 employees took part of our

sales certification programs. - Manufacturing: Six Sigma: Five Black Belts were certified.

940 technicians and leaders received certification on the Standardization Process

More than 120,000 man/hours of on line training.More than 50 million pesos invested in training programs1% of sales invested in training.

Safety

The physical integrity of our employees is a high priority, and we continue working on programs geared towards our goal for ZERO accidents.

Accident rate was reduced by 90% from 2002 to 2008.

Involvement in the CommunityWork Environment

20020

100

200

300

400

500

600

700

800

2003 2004 2005 2006 2007 2008

787

478

176 136 107 90 87

Accidents per year

SOCIAL RESPONSIBILITY


Through different programs, Interceramic participates actively with the communities in which we operate.

Interceramic Brigades

During 2008, more than 50 employees voluntarily participated in the construction and completion of dwellings and shelters.

Children Christmas Sponsorships

In coordination with DIF, Interceramic donated toys, shoes, personal care items and clothing to needy children.

Donation Program

The company supported 33 organizations with donations to help them achieve their goals.

Over 38 million pesos were donated to the following organizations:

Fundación Vida Digna

For 12 years now, Interceramic supports Fundación Vida Digna with donations in kind and in cash, as well as through counseling, operations, volunteering work and fund raising activities.

In 2008, Interceramic donated Vida Digna $3’040,762 coming from employees, customers at the stores and suppliers.

CHAIRMAN OF THE BOARDOscar E. Almeida Chabre

VICECHAIRMAN / CHIEF EXECUTIVE OFFICEVíctor D. Almeida García (P,R)

VICECHAIRMANAlfredo Harp Calderoni (P,R)

SECRETARYLuis Fernando Mesta Soule

DIRECTORSNorma Almeida de Champion (P,R)

President, Autocamiones de Chihuahua, S.A. de C.V.David Kohler (P,I)

President and Chief Operating Officer, Kohler Co.Federico Terrazas Torres (I)

Chairman of the Board, Grupo Cementos de Chihuahua, S.A. de C.V.Sylvia Almeida (P,R)

President, Corporación Administrativa y Técnica, S.A. de C.V. Diana E. Almeida (P,R)

DirectorPatricia Almeida (P,R)

DirectorMark Blaugrund (I)

President, RECON Real Estate Consultants, Inc.Humberto Valles Hernández (R)

Retired Member of Mancera S.C., Member of Ernst & Young GlobalCarlos Elías Terrazas * (I)

Chairman, Comercial Corporativa del Norte, S.A. de C.V.Carlos Levy Covarrubias (R)

President, Nummos Asesores Financieros S.C.José Luis Barraza González * (I)

Chairman of the Board, Grupo Aeroméxico

DIRECTORS ELECTED BY SERIES “D” SHAREHOLDERSAugusto O. Champion (R)

Chairman & CEO, Arquitectura Habitacional e Industrial, S.A. de C.V.Sergio Mares Delgado* (I)

Chairman & CEO, Grupo Futurama

*Members of the Audit and Corporate Practices Committee

P Board Member with Stock Participation

I Independent Director

R Related Director


BOARD OF DIRECTORS

Ética Empresarial

INTERNACIONAL DE CERAMICA, S.A.B. DE C.V. AND SUBSIDIARIES

Consolidated Financial Statements

For the years ended December 31, 2008 and 2007

and Independent Auditors’ Report

INTERNACIONAL DE CERAMICA, S.A.B. DE C.V. AND SUBSIDIARIESConsolidated Financial Statements

as of December 31, 2008 and 2007

Contents:

Independent Auditors’ Report .................................................................................................... 29

Consolidated Financial Statements:

Balance Sheets ....................................................................................................................... 30 Statements of Income.............................................................................................................. 32 Statements of Changes in Stockholders’ Equity.......................................................................... 33 Statement of Cash Flows (2008) ............................................................................................... 34 Statement of Changes in Financial Position (2007) .................................................................... 35 Notes to Financial Statements .................................................................................................. 36



INDEPENDENT AUDITORS’ REPORT

A la Asamblea General de AccionistasTo the Stockholders ofInternacional de Ceramica, S.A.B. de C.V.

We have audited the accompanying consolidated balance sheets of Internacional de Ceramica, S.A.B. de C.V. and subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of income and of changes in stockholders’ equity for the years then ended, the related statement of cash flows for the year ended December 31, 2008, and the statement of changes in financial position for the year ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We did not audit the financial statements of the subsidiary Interceramic Marble Collection, Inc., which statements represent 5.58% and 4.41% total assets as of December 2008 and 2007, respectively, and 6.07% and 1.73% of operating income for the years then ended. The financial statements this subsidiary were audited by other auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included this subsidiary, is based solely on the reports of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in conformity with Mexican Financial Reporting Standards. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the financial reporting standards used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion

As mentioned in note 8(e), at December 31, 2008, the Company did not comply witch certain covenants contained in its long-term debt agreements. Hence, the long-term portion of the debt was reclassified in the balance sheet to current liabilities, in conformity with Mexican Financial Reporting Standards. Derived from the above mentioned failure to comply, the Company started a renegotiation process with its financial creditors with the purpose of extending the current debt amortization calendar and to modify the covenants subject of the failure to comply that were agreed in its long-term debt agreement. At date, no modifications to the credit agreements resulting from agreed negotiations have been concluded. The Company expects to conclude satisfactorily said modifications to credit agreements. Among other things, these modifications will include providing certain guarantees to obtain waivers and to extend the aforementioned current debt amortization calendar and, therefore, it believes that this situation will not affect its short-term operations.

In our opinion, based on our audits and on the reports of the other auditors referred to above, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Internacional de Ceramica, S.A.B. de C.V. and subsidiaries at December 31, 2008 and 2007, and the consolidated results of operations and changes in stockholders’ equity for the years then ended, as well as cash flows for the year ended December 31, 2008, and changes in financial position for the year ended December 31, 2007, in conformity with Mexican Financial Reporting Standards.

As mentioned in note 3(a) to the financial statements, beginning January 1, 2008, the Company adopted Mexican Financial Reporting Standards (“NIF”) B-2 “Statement of Cash Flows,” B-10 “Effects of Inflation,” B-15 “Foreign Currency Translation,” D-3 “Benefits to Employees,” and D-4 “Income Taxes”. The effects of adopting such standards are described in such note.

Chihuahua, Chih., MexicoMarch 31, 2009

Mancera S.C.Centro Ejecutivo Punto Alto IIValle Escondido 5500Fracc. Desarrollo El Saucito31125 Chihuahua, Chih.

Tel.: 614 425 3570Fax: 614 425 3580www.ey.com/mx

INDEPENDENT AUDITORS’ REPORT

Mancera, S.C.A Member Practice ofErnst & Young Global

C.P.A. Americo de la Paz de la Garza


INTERNACIONAL DE CERAMICA, S.A.B. DE C.V. AND SUBSIDIARIESConsolidated Balance Sheets(In thousands of Mexican pesos)

December 31,20082008 2007

Assets Current assets: Cash and cash equivalents US$ 16,049 Ps. 220,988 Ps. 224,083 Accounts receivable: Trade accounts 41,834 576,053 466,347 Due from related parties 2,127 29,288 29,101 Other accounts receivable 9,362 128,912 123,771 Less: allowance for doubtful accounts ( 5,430) ( 74,772) ( 34,833) 47,893 659,481 584,386 Inventories, net 157,333 2,166,484 1,694,171 Prepaid expenses and other current assets 6,202 85,401 66,817Total current assets 227,477 3,132,354 2,569,457 Investment in shares of associated companies 697 9,602 9,102 Property, plant and equipment 404,604 5,571,394 5,322,250Less: accumulated depreciation ( 229,022) ( 3,153,628) ( 2,769,169) 175,582 2,417,766 2,553,081 Goodwill 5,768 79,419 74,789 Other assets 9,251 127,389 165,028 Total assets US$ 418,775 Ps. 5,766,530 Ps. 5,371,457

Liabilities Current liabilities: Current portion of long-term debt US$ 179,062 Ps. 2,465,688 Ps. 91,652 Trade accounts payable 33,959 467,621 355,394 Due to related parties 1,459 20,089 27,129 Accrued expenses and other liabilities 31,199 429,609 324,551 Income tax 541 7,454 8,602 Derivative Financial Instruments 4,627 63,718 -Total current liabilities 250,847 3,454,179 807,328 Long-term debt 12 163 1,657,618 Labor obligations 4,186 57,638 60,577 Deferred income tax 36,303 499,887 492,805 Derivative Financial Instruments 573 7,887 -Total liabilities 291,921 4,019,754 3,018,328 Stockholders’ equity Capital stock 63,195 870,190 870,190 Stock premium 143,494 1,975,911 1,975,911 Reserve for repurchase of Company’s own shares 13,115 180,600 185,389 Retained (losses) earnings ( 122,851) ( 1,691,655) 988,308 Other equity accounts 10,173 140,076 ( 1,967,969) Majority stockholders’ equity 107,126 1,475,122 2,051,829 Minority interest 19,728 271,654 301,300Total stockholders’ equity 126,854 1,746,776 2,353,129

Total liabilities and stockholders’ equity US$ 418,775 Ps. 5,766,530 Ps. 5,371,457

The accompanying notes are an integral part of these consolidated financial statements.

Thousands of U.S. dollars

December 31,20082008 2007

Thousands of U.S. dollars

Cap

ital

stoc

kSt

ock

prem

ium

Rese

rve

for

repu

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fco

mpa

ny’s

own

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ined

earn

ings

(loss

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equi

tyac

coun

ts

Maj

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stoc

khol

ders

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Min

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inte

rest

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l s

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com

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870,

190

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1,89

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98

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.( 1,9

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(

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(

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( 60

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( 60

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45

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(

559,

152)

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(

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s

139,

474

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31, 2

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911

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18

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14

0,07

6 P

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475,

122

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27

1,65

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746,

776

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S$

63,1

95

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143

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( 122

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US$

107

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U

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US$

126

,854

INTERNACIONAL DE CERAMICA, S.A.B. DE C.V. AND SUBSIDIARIESConsolidated Statements of Income(In thousands of Mexican pesos)

Years ended December 31

Thousands of U.S. dollars20082008 2007

The accompanying notes are an integral part of these consolidated financial statements.

INTE

RNA

CIO

NA

L D

E C

ERA

MIC

A, S

.A.B

. DE

C.V

. AN

D S

UBS

IDIA

RIES

Con

solid

ated

Sta

tem

ents

of C

hang

es in

Sto

ckho

lder

s’ E

quity

For t

he y

ears

end

ed D

ecem

ber 3

1, 2

008

and

2007

(In th

ousa

nds

of M

exic

an p

esos

)

32 Interceramic

33Interceramic

The

acco

mpa

nyin

g no

tes

are

an in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

Net sales US$ 409,634 Ps. 5,640,663 Ps. 5,503,423Cost of sales ( 274,139) ( 3,774,896) ( 3,587,799)Gross profit 135,495 1,865,767 1,915,624 Operating expenses ( 128,148) ( 1,764,599) ( 1,647,516)Operating income 7,347 101,168 268,108 Other expenses - net ( 5,265) ( 72,509) ( 93,496) 2,082 28,659 174,612 Comprehensive financial cost: Interest income 999 13,750 27,577 Interest expense ( 9,437) ( 129,945) ( 129,752) Exchange loss ( 29,729) ( 409,366) ( 1,400) Monetary position gain - - 52,958 ( 38,167) ( 525,561) ( 50,617) (Loss) income before income tax ( 36,085) ( 496,902) 123,995 Income tax ( 4,521) ( 62,250) ( 51,014) Consolidated net (loss) income ( 40,606) ( 559,152) 72,981Net income of minority stockholders 3,270 45,023 44,413Net (loss) income of majority stockholders US$( 43,876) $( 604,175) Ps. 28,568 Weighted average “Ceramic B” and “Ceramic D” outstanding shares (in thousands) 162,664 162,664 162,664Net (losses) earnings per share US$ ( 0.27) $ ( 3.71) Ps. 0.18


INTERNACIONAL DE CERAMICA, S.A.B. DE C.V. AND SUBSIDIARIESConsolidated Statement of Cash Flows(In thousands of Mexican Pesos)

INTERNACIONAL DE CERAMICA, S.A.B. DE C.V. AND SUBSIDIARIESConsolidated Statements of Changes in Financial Position(In thousands of Mexican Pesos)

Year ended December 31, 2008

Loss before income taxes US$( 36,085) Ps.( 496,902) Non-cash operating items Depreciation 24,450 336,676 Write-off of long-lived assets 3,150 43,381 Income on sale of long-lived assets ( 99) ( 1,363) Increase on direct employee benefits reserve 2,417 33,283 Increase on other reserves 1,666 22,942 Interest expense 9,437 129,945 Foreign exchange loss, net 34,880 480,304 39,816 548,266Working Capital Accounts receivable: Trade accounts, net ( 1,320) ( 18,182) Due from related parties ( 14) ( 187) Other account receivable ( 411) ( 5,659) Inventories, net ( 17,191) ( 236,722) Prepaid expenses ( 839) ( 11,550) Other assets ( 2,121) ( 29,211) Trade accounts payable 1,826 25,151 Due to related parties ( 511) ( 7,040) Direct employee benefits ( 454) ( 6,246) Income tax ( 5,536) ( 76,225) Accrued expenses and other liabilities 5,993 82,528Net cash generated by operating activities 19,238 264,923 Investing activities Purchases of property, plant and equipment ( 12,772) ( 175,870) Proceeds from sale of plant and equipment 175 2,409 Investment in associates ( 36) ( 500)Net cash used in investing activities ( 12,633) ( 173,961) Excess cash to apply to financing activities 6,605 90,962 Financing activities Dividends ( 4,720) ( 65,000) Minority dividends ( 5,092) ( 70,118) Loans received 14,284 196,685 Interest paid ( 9,245) ( 127,309)Net cash used in financing activities ( 4,773) ( 65,742) Net increase in cash and cash equivalents 1,832 25,220Adjustment to cash flows due to exchange rate fluctuations ( 2,056) ( 28,315)Cash and cash equivalents at beginning of year 16,273 224,083Cash and cash equivalents at end of year US$ 16,049 Ps. 220,988

The accompanying notes are an integral part of these consolidated financial statements. The accompanying notes are an integral part of these consolidated financial statements.

Thousands of U.S. dollarsYear ended December 31, 2007

Operating activities Consolidated net income Ps. 72,981 Items that did not require (generate) resources: Depreciation and amortization 304,037 Impairment in long-lived assets 101,141 Deferred income tax ( 1,023) 477,136 Changes in operating assets and liabilities: Accounts receivable ( 10,389) Inventories ( 136,173) Other assets ( 44,537) Trade accounts payable and due to related parties ( 65,851) Accrued expenses and other accounts payable 123,833Resources generated by operating activities 344,019 Financing activities Dividends paid ( 56,458) Dividends paid to minority stockholders ( 48,251) Proceeds from short and long-term debt 442,314 Payment of short and long-term debt ( 95) Inflationary effect on financing activities ( 53,737) Exchange loss generated by short and long-term debt ( 244)Resources generated by financing activities 283,529 Investing activities Investment in IMC, Inc. assets ( 138,587) Acquisition of property, plant and equipment ( 463,103)Resources used in investing activities ( 601,690)

Cash and cash equivalents Increase 25,858 Balance at beginning of year 198,225 Balance at end of year Ps. 224,083


INTERNACIONAL DE CERAMICA, S.A.B. DE C.V. AND SUBSIDIARIESNotes to consolidated financial statements(In thousands of Mexican pesos and thousands of U.S. dollars, except forper share values and unit amounts, minimum dividend per share, market valueper unit and exchange rates, which are stated in Mexican pesos (Ps.))

1. Nature of business

Internacional de Ceramica, S.A.B de C.V., and its subsidiaries Recubrimientos Interceramic, S.A. de C.V., and Interceramic, Inc., located in Garland, Texas, are all engaged in the manufacture and marketing of ceramic floor and wall tiles, marketing of bathroom furniture and the extraction of clay for the manufacture of ceramic tiles.

One of the Company’s subsidiaries, Adhesivos y Boquillas Interceramic, S. de R.L. de C.V., is engaged in manufacturing grouts and adhesive materials used in the installation of ceramic tiles for floors and wall tiles. The other subsidiaries are engaged in marketing ceramic tiles and adhesive materials, in the local market. Internacional de Ceramica, S.A.B. de C.V., and its subsidiaries are hereinafter referred to collectively as “the Company”.

2. Basis of presentation

The information contained in the accompanying consolidated financial statements has been prepared in conformity with Mexican Financial Reporting Standards (“MFRS”).

When reference is made to “pesos”, “Ps.” or “$”, it means Mexican pesos. Except when specific references are made to “earnings per share” and “prices per share” the amounts in these notes are stated in thousands of constant Mexican pesos as of the latest balance sheet date. When reference is made to “U.S. $” or “dollars”, it means dollars of the United States of America (“United States” or “USA”). Except for per share data and, as otherwise noted, all amounts in such currencies are stated in thousands.

The consolidated balance sheet as of December 31, 2008, as well as the statement of income and the statement of cash flows for the year ended December 31, 2008, include the presentation, caption by caption of amounts denominated in dollars. These amounts in dollars have been presented solely for the convenience of the reader at the rate of 13.77 pesos per dollar, the Company accounting exchange rate as of December 31, 2008. These translations are informative data and should not be construed as representations that the amounts in pesos actually represent those dollar amounts or could be converted into dollars at the specified rate.

Likewise, in the accompanying notes to the financial statements, when deemed relevant and only for the convenience of the reader, next to an amount in pesos or dollars the Company includes between parentheses the corresponding translation into dollars or pesos, as applicable. When the amount between parentheses is in dollars, it means that: a) the amounts in pesos disclosed in the notes also appear on the face of financial statements; or b) the amount was originally generated in pesos or in a currency other than dollars. When the amount between parentheses is in pesos, it means that the amount in dollars was originated by a transaction denominated in dollars. These convenience translations were calculated dividing the peso amounts by the closing accounting exchange rate of the respective year and restated into constant pesos as of December 31, 2008.



a) Consolidation of financial statements

The consolidated financial statements include the financial statements of Internacional de Ceramica, S.A.B. de C.V., and those of its subsidiaries. Significant intercompany balances and transactions have been eliminated in these consolidated financial statements.

As of December 31, 2008 and 2007, the subsidiaries included in the consolidated financial statements and its ownership percentage is as follows:

The caption “Minority interest” refers to the interest of the minority stockholders in the Company’s subsidiaries, which are not wholly-owned.

On October 2, 2007, Interceramic Marble Collection, Inc., a subsidiary of Interceramic Holding, Inc., acquired all of the assets of IMC, Inc., whose primary activity is the distribution of granite, marble, and natural stone products for kitchens, bathrooms, and other decorative uses. IMC, Inc., has operations in the United States, mainly in the cities of Dallas and Forth Worth, Texas, and in Phoenix, Arizona. The acquisition cost paid in cash for all of the assets of IMC, Inc., was Ps. 138,587 (US 12,500). It includes goodwill of Ps. 17,884.

The acquisition cost assigned to acquired assets and assumed liabilities as of the date of acquisition, based on their fair value, are presented below:

Current assets Ps. 185,585Fixed assets - net 10,837Other 11,087Total assets 207,509 Current liabilities 86,806Total liabilities 86,806 Net assets acquired Ps. 120,703

Ownership percentage

Adhesivos y Boquillas Interceramic, S. de R.L. de C.V. 51.00 51.00Recubrimientos Interceramic, S.A. de C.V. 50.01 50.01Holding de Franquicias Interceramic, S.A. de C.V. 100.00 100.00Holding de Servicios Interceramic, S.A. de C.V. 100.00 100.00Interceramic Holding, Inc. 100.00 100.00Interceramic Trading, Co. 100.00 100.00

2008 2007




b) Translation of financial statements of foreign subsidiaries

According to NIF B-15 “Translation of Foreign Currencies” based on Mexican Financial Reporting Standards, the Company translated the financial statements of foreign subsidiaries from their functional currency into Pesos, as follows:

The amounts reported by foreign subsidiaries (United States of America) were included in consolidated financial statements according to the basis of Mexican Financial Reporting Standards.

The foreign subsidiaries are considered in a non-inflationary economic environment. For this reason, the balance sheet and the statement of income are translated to reporting currency as follows:

- Assets and liabilities were translated into Mexican Pesos using the closing exchange rate in effect at the balance sheet date. Stockholder’s equity is translated into Mexican Pesos using the historical exchange rate.

- Revenues, costs, and expenses are translated using the historical exchange rate of each month.

- The translation effect resulting is recorded as a part of comprehensive income in stockholders’ equity of the foreign operation denominated “cumulative translation effect”.

-In the consolidation process, the variations between the stockholders’ equity of the foreign operation and the net investment in foreign subsidiaries assumed by the holding company is recorded in the majority stockholders’ equity as a “cumulative translation effect” in “other stockholders’ equity accounts”. In the Consolidated Statement of Changes in Stockholders’ Equity is presented under separate caption entitled “Translation effect of foreign subsidiaries”.

c) Comprehensive income

It represents changes in stockholders’ equity during the year, for concepts other than distributions and activity in contributed common stock. It comprises the net income of the year, plus other comprehensive items of the same period, which are presented directly in stockholders’ equity without affecting the consolidated statements of income, such as the translation effects of foreign subsidiaries and the deferred tax effect which is presented directly in stockholders’ equity.

d) Classification of costs and expenses

Costs and expenses presented in the consolidated statements of income were classified according to their function because presenting cost of sales separately from other costs and expenses and income from operations show an objective evaluation of income efficiency levels according to manufacturing segment in which the Company operates.


3. Summary of significant accounting policies

The information contained in the accompanying consolidated financial statements has been prepared in conformity with Mexican Financial Reporting Standards (“MFRS”). The significant accounting policies of the Company are as follows:

a) Accounting changes

NIF B-2 Statement of cash flows. NIF B-2 replaces the statement of changes in financial position as a basic financial statement and establishes the obligation of issuing the statement of cash flows. Even if NIF’s particular rules make restatement of financial information compulsory, this statement will be determined under nominal basis. In addition, this NIF establishes that monetary and non-monetary items represent solely company’s cash inflows and outflows during the period. Also, NIF B-2 allows entities to determine and present their cash flows from operating activities using either the direct or the indirect method.

NIF B-10 Effects of inflation. NIF B-10 establishes general rules to recognize effects of inflation in financial information. It defines two economic environments: a) inflationary environment, when cumulative inflation of the three preceding years is 26% or more, in which case, the effects of inflation should be recognized using the comprehensive method; and b) non-inflationary environment, when cumulative inflation of the three preceding years is less than 26%, in which case, no inflationary effects should be recognized in the financial statements. Additionally, NIF B-10 eliminates the replacement cost and specific indexation methods for inventories and fixed assets, respectively. It also requires that the cumulative gain or loss from holding non-monetary assets be reclassified to Retained Earnings, if such gain or loss is already obtained; and to the Stockholders’ Equity if they are not obtained yet. They will be charge to Current Earnings of the period they are obtained. If it is not practical for the Company to identify if such gain or loss has been obtained, the NIF B-10 allows the reclassification to affect Retained Earnings only.

NIF B-15 Foreign currency translation. NIF B-15 incorporates the concepts of accounting currency, functional currency and reporting currency; instead of the classification of integrated foreign operations and foreign entities and incorporates the concepts of accounting currency, functional currency and reporting currency. NIF B-15 also states the procedures to translate the financial information of a foreign subsidiary: i) from the accounting to the functional currency; and ii) from the functional to the reporting currency, and allows entities to present their financial statements in a reporting currency other than their functional currency.

NIF D-3 Benefits to employees. This NIF includes current and deferred Employees’ Profit Sharing (PTU). Deferred PTU should be calculated using the same methodology established in NIF D-4. It also includes the career salary concept and a reduction in the amortization period for most items. Items will be amortized over a 5-year period, or less, if employees’ remaining labor life is less than the following:

- Beginning balance of the transition liability for severance and retirement benefits. - Beginning balance of past service cost and changes to the plan. - Beginning balance of gains and losses from severance benefits, according to actuarial calculations, should be amor-tized against the results of 2008.- Beginning balance of gains and losses from retirement benefits, according to actuarial calculations, should be amor-tized over a 5-year period (net of the transition liability), with the option to fully amortize such item against the results of 2008.





NIF D-4 Income Taxes. NIF D-4 modifies accounting rules for current and deferred Employees’ Profit Sharing (PTU) to NIF D-3, eliminates the Permanent Difference concept, redefines and incorporates various definitions, and requires that the cumulative Income Tax (ISR) effect be reclassified to retained earnings, unless it is identified with some of the other comprehensive income items that have not been applied against current earnings. As a presentation rule, NIF D-4 establishes that, in the balance sheet, deferred tax assets are offset against deferred tax liabilities and shown as net non-current balance. Further, it is not allowed to offset (net) accounts: a) for different tax-paying components or b) for different tax jurisdictions because offsetting is prohibited unless there is a legal right of setoff.

INIF 9 Presentation of comparative financial statements due to enforcement of NIF B-10. It establishes that comparative financial statements of years prior to 2008 should be expressed in monetary units of purchasing power as of the last statements where the comprehensive method was applied. Consequently, financial statements for 2007 are presented in pesos of purchasing power at December 2007, last date when the comprehensive restatement method was used.

INIF 15 Financial statements where reporting currency is the same as that registered, but different to functional currency. INIF states that, when financial statements are prepared for legal or fiscal purposes, it is possible to prepare financial statements in a type of currency similar to that registered without having to go through the translation process through its functional currency. Disclosure of reasons why translation was not made through the functional currency is required. INIF does not establish any new regulations nor modifies existing ones.

b) Revenue recognition

Based on IFRS 18, revenues are recognized in the period in which the risks and rewards of ownership of the inventories are transferred to customers, which generally coincides when the inventories are delivered or shipped to customer and the customer assumes responsibility for them.

c) Recognition of the effects of inflation

Beginning January 1st., 2008, and as a result of adopting NIF B-10 Effects of Inflation, the Company discontinued inflation accounting during 2008; however, the financial information as of December 31, 2007, is restated to Mexican pesos of purchasing power of 2007.

According to new NIF B-10, the Company modified its economic environment from inflationary environment to non-inflationary environment because the inflation rate in Mexico, based on the Mexican National Consumer Price Index (“NCPI”), was 3.3%, 4.1% and 3.8% during 2005, 2006 and 2007, respectively, and an accumulated of 11.2%.

As a result of new rules established by the standard mentioned before, the Company reclassified Ps. 1,645,571 to retained earnings. This amount corresponds to the entire balance of insufficiency of restated stockholders’ equity as of January 1st., 2008.


d) Use of estimates

The preparation of financial statements in conformity with Mexican Financial Reporting Standards requires management to make estimates and to use certain assumptions that affect the amounts reported in the financial statements and their related disclosures; however, actual results may differ from such estimates. By applying professional judgment, Company manage-ment considers that estimates made and assumptions used were adequate under the circumstances.

e) Concentration of risk

The Company produces and sells its products primarily in the domestic market, which are distributed through Company-owned and independent franchises. In the United States and Canada, the Company distributes its products mainly through its network of wholly-owned Interceramic Tile and Stone Galleries (ITS) stores and a network of 79 independent distributors with a combined 180 locations. The Company periodically evaluates the financial position of its customers and typically obtains personal guarantees or liens to secure accounts receivable due from its customers and distributors. No single customer represents more than 5% of the Company’s consolidated net sales.

f) Cash and cash equivalents

Cash and cash equivalents consist mainly of bank deposits in checking accounts and readily available daily investments of cash surpluses. Cash and cash equivalents are stated at nominal value and foreign currency is valued using the prevailing exchange rate at the balance sheet date. In both cases, plus accrued yields, which are recognized in results as they accrue.

g) Allowance for doubtful accounts

The allowance for doubtful accounts is determined based upon a study of the aging and qualitative analysis of accounts receivable. Historical losses of uncollectible accounts are also taken into consideration, as well as the analysis of market conditions.

To reduce credit risk, a portion of the Company’s sales in Mexico is made through a network of independent distributors, and a pledge contract is required as guarantee. The remaining portion of sales is generally in cash through wholly-owned franchises. In the United States, the allowance for doubtful accounts is determined based upon a study of factors which include, among others, historical bad debts, experience, the periodic evaluation of specific customer accounts, and the analysis of economic conditions in which the Company operates.





h) Inventories and allowance for slow-moving and obsolete inventory

Inventories are stated at the lower of acquisition or production cost that is no higher than realizable value. Beginning on January 1st., 2008, the Company does not restate its inventories at replacement cost, according to new rules of NIF B-10.

The allowance for slow-moving and obsolete inventory is determined based upon an analysis of the Company inventories to determine if, whether, due to events, such as aging, discontinued product lines and slow-moving items, certain portions of such balances have become obsolete or impaired.

i) Property, plant and equipment

Property, plant and equipment are recorded at acquisition cost. Depreciation is calculated using the straight-line basis over the restated value and estimated remaining useful lives of the assets, which is reviewed periodically by Company’s management.

According to new rules of NIF B-10, beginning on January 1st., 2008, the Company suspended the restatement of property, plant and equipment.

The Company reviews the carrying amounts of long-lived assets in use when an impairment indicator suggests that such amounts might not be recoverable. In such cases, an impairment loss should be calculated as the excess of the asset’s book value over its fair market value. Fair value is the amount at which the asset could be sold. As of December 31, 2008 and 2007, the effects of impairment losses of fixed assets are mentioned in note 6 (c).

j) Other assets

In accordance with Bulletin C-8 “Intangible Assets”, costs incurred in the development phase that meet certain requirements and that the Company has determined will have future economic benefits are capitalized and amortized. Pre-operating costs that do not meet such requirements, are recorded directly to results of the period in which they are incurred. Intangible assets with indefinite lives, are not amortized, however, their value is subject to impairment tests.

k) Investments in shares of associated companies

Investments in associates are accounted for by the equity method, when the Company holds between 10% and 50% of the issuer’s capital stock and has significant influence. When the Company holds less than 10% of the issuer’s capital stock, investments in associates are recorded at acquisition cost (and restated based on the Mexican National Consumer Price Index (“NCPI”) through December 31, 2007).


l) Financial instruments

The Company obtains financing under different conditions. If the rate is variable, interest rate swaps are entered into to reduce exposure to the risk of rate volatility, thus converting the interest payment profile from variable to fixed. These instruments are negotiated only with institutions of recognized financial strength and when trading limits have been established for each institution. The Company’s policy is not to carry out transactions with derivative financial instruments for the purpose of speculation.

The Company recognizes all assets or liabilities that arise from transactions with derivative financial instruments at fair value in the consolidated balance sheets, regardless of its intent for holding them. Fair value is determined using prices quoted on recognized markets. If such instruments are not traded, fair value is determined by applying recognized valuation techniques. When derivatives are entered into to hedge risks, and such derivatives meet all hedging requirements, their designation is documented at the beginning of the hedging transaction, describing the transaction’s objective, characteristics, accounting treatment and how the effectiveness of the instrument will be measured.

Changes in the fair value of derivative instruments designated as hedges are recognized as follows: (1) for fair value hedges, changes in both the derivative instrument and the hedged item are stated at fair value and recognized in current earnings; (2) for cash flow hedges, changes in the effective portion are temporarily recognized as a component of other comprehensive income in stockholders’ equity and then reclassified to current earnings when affected by the hedged item. The ineffective portion of the change in fair value is immediately recognized in current earnings.

As of December 31, 2008, the Company entered into derivative financial instruments to reduce its exposure to the market risk and to have a fixed price plan in the price of the fuel that the Company uses to produce. The Company also entered into an interest-rate swap agreement.

m) Goodwill

Goodwill represents the difference between the purchase price and the fair value of the net assets acquired at purchase date. Goodwill is subject to impairment evaluations.

n) Statutory employee profit sharing (“PTU”)

Statutory employee profit sharing (“PTU”) is recorded in the results of the year in which it is incurred and presented under other income and expenses in the accompanying consolidated statements of income. PTU is determined based on taxable income, according to Section I of Article 10 of the Income Tax Law. Deferred PTU derived from temporary differences between the accounting and tax basis of assets and liabilities is recognized only when it can be reasonably assumed that such difference will generate a liability or benefit, and there is no indication that circumstances will change in such a way that the liabilities will not be paid or benefits will not be realized.





o) Foreign currency balances and transactions

Foreign currency transactions are recorded at the applicable exchange rate in effect at the transaction date. Exchange differences between the transaction date and the time of actual payment o receipt and those whose origin is the translation of foreign currency balances into Mexican pesos at the applicable exchange rate in effect at the balance sheet date, are recorded in the results of the year.

p) Direct employee benefits

Direct employee benefits are calculated based on the services rendered by employees, considering their most recent salaries. The liability is recognized as it accrues. These benefits include mainly PTU payable, compensated absences, such as vacation and vacation premiums, and incentives.

q) Employee benefits from termination, retirement and other

Liabilities from seniority premiums, pension plans and severance payments are recognized as they accrue and are calculated by independent actuaries using nominal interest rates in 2008 and real (inflation-adjusted) interest rates in 2007. Accordingly, the liability is being accrued which, at present value, will cover the obligation from benefits projected to the estimated retirement date of the Company’s employees.

r) Earnings per share

Basic earnings per common share are calculated by dividing consolidated net income of majority stockholders by the weighted average number of shares “B” and shares “D” outstanding during the year.

s) Income taxes

Income taxes are recorded in the results of the year in which these are incurred and represent the tax payable in a short-term (less than a one-year term).

Beginning on January 1st., 2008, deferred taxes are calculated under assets and liability method, as mentioned NIF D-4, Income Taxes. Under this method deferred taxes are calculated by applying the corresponding tax rate, ISR or IETU, based on the tax it will pay and that is into effect on the balance sheet date or in the date that the Company estimates that deferred assets and liabilities will be realized. In 2007, the method before mentioned was applicable to the temporary differences resulting from comparing the accounting and tax basis of assets and liabilities. Periodically, recoverability of deferred asset tax is evaluated by the Company to determinate if it is necessary to adjust the allowance valuation that corresponding.

4. Related parties

The Company carries out transactions with its related parties in the normal course of business. Related parties are those in which the Company’s principal stockholders have significant equity interests or control of management. Transactions with related parties result primarily from the sale of ceramic tile for resale in Mexico and United States of America.

a) As of December 31, 2008 and 2007, transactions between related parties were as follows:

b) Sales of ceramic tile to joint venture companies result from sales in the United States. Bathroom fixtures and complementary adhesive products, respectively, are purchased to stockholders and joint venture companies for sale in Mexico.

2008 2007

Sales of ceramic tile Joint venture: Dal-Tile International, Inc. Ps. 71,410 Ps. 116,918 Ps. 71,410 Ps. 116,918

Purchase of inventories Stockholders: Kohler, Co. Ps. 132,651 Ps. 132,247 Joint venture: Custom Building Products, Inc. 112,099 145,457 Ps. 244,750 Ps. 277,704 Fees paid for administrative services and other expenses Affiliated companies: Arquitectura Habitacional e Industrial, S.A. de C.V. Ps. 575 Ps. 3,768 Autocamiones de Chihuahua, S.A. de C.V. 1,684 5,870 Autos Internacionales de Chihuahua, S.A. de C.V. 788 4,507 Vehículos Toy, S. de R.L. de C.V. 1,041 - Inmobiliaria Chihuahuense, S.A. de C.V. 1,270 1,040 Construcciones Especializadas de Chihuahua, S.A. de C.V. 13,110 59,357 Corporacion Administrativa y Tecnica, S.A. de C.V. 35,156 32,554 Corporacion Aerea Cencor, S.A. de C.V. 20,058 14,598 Ps. 73,682 Ps. 121,694




4. Related parties

c) Fees paid are related to security services, system consulting, expenses made by the Chairman of the Board of Directors, air taxi services and leasing fees, among others. All these services were provided by related parties.

d) Payments made to Construcciones Especializadas de Chihuahua, S.A. de C.V., are related to the construction of a plant which started up operations in November, 2007, even though construction was concluded during early 2008.

e) As of December 31, 2008 and 2007, balances due from and to related parties will be paid in cash and are as follows:

f) Benefits granted to Company key management and prominent executives were as follows:

Due from related parties: Dal-Tile International, Inc. Ps. 17,068 Ps. 16,412 Officers and employees 10,300 11,926 Other 1,920 763 Ps. 29,288 Ps. 29,101Due to related parties: Kohler, Co. Ps. 15,307 Ps. 24,928 Custom Building Products, Inc. 4,764 2,189 Other 18 12 Ps. 20,089 Ps. 27,129

2008 2007

Short-term direct benefits Ps. 31,369 Ps. 30,723

2008 2007

5. Inventories

The components of inventories as of December 31, 2008 and 2007, are as follows:

6. Property, plant and equipment

a) Following is a summary of property, plant and equipment as of December 31 2008 and 2007:

b) As of December 31, 2008, approximately Ps. 18,182 and Ps. 7,000 of the investment project balance correspond to investment on projects in process of manufacturing plants and wholly-owned franchises, respectively, which will be completed during the first semester of 2009.

c) During 2008 and 2007, the Company replaced a part of its obsolete manufacturing capacity through permanent suspension of some equipment. This decision was taken based on the efficiency and savings that the production of the new plant represented. The effect was recognized in the statement of income as other expense for Ps. 25,320 and Ps. 71,613, respectively, due to impairment loss. See note 12 (b).

d) Depreciation expense for the years ended December 31, 2008 and 2007, was Ps. 313,081 and Ps. 283,857, respectively.

2008 2007

Finished goods Ps. 1,930,436 Ps. 1,487,701Work in process 110,286 104,760Raw material and supplies 145,740 121,186Allowance for obsolete and slow-moving inventories ( 131,113) ( 122,055) 2,055,349 1,591,592Merchandise in transit 111,135 102,579 Ps. 2,166,484 Ps. 1,694,171

2008 2007

Buildings Ps. 1,407,219 Ps. 607,567 Ps. 1,316,284 Ps. 532,052Industrial machinery and equipment 3,292,360 2,044,501 3,160,338 1,813,449Office furniture and equipment 497,399 395,395 426,681 327,950Automotive equipment 176,384 106,165 148,745 95,718 Ps. 5,373,362 Ps. 3,153,628 Ps. 5,052,048 Ps. 2,769,169 Land 172,850 166,781 Investment projects 25,182 103,421 Total property, plant and equipment Ps. 5,571,394 Ps. 5,322,250

InversiónDepreciaciónacumulada Inversión

Depreciaciónacumulada




6. Property, plant and equipment

e) During 2008, the average depreciation rates were as follows:

7. Other assets

The components of other assets as of December 31, 2008 and 2007, are as follows:

Amortization expense for the years ended December 31, 2008 and 2007, was Ps. 23,595 and Ps. 20,180, respectively.

8. Long-term debt

a) As of December 31, 2008 and 2007, all long-term debt was denominated in U.S. dollars. Long-term debt is summarized as follows:

Amortizable assets, net Ps. 45,955 Ps. 51,368Intangible asset for labor obligations - 23,268Deferred charges 36,273 34,889Accounts receivable and refundable tax 9,527 21,027Guaranty deposits 9,879 8,709Other 25,755 25,767 Ps. 127,389 Ps. 165,028

2008 2007

Buildings 5%Industrial machinery and equipment 9%Office furniture and equipment 23%Automotive equipment 25%

2008

2007

Debtamount

Current portionof long-term

debtLong

term debtInterest

rate

8. Long-term debt

b) The Company entered into a credit line with Wells Fargo for US 15,000 (Ps. 206,550) each, available through March 2010. As of December 31, 2008, the Company had used the amount of US 14,000 (Ps. 192,780) from the above-mentioned credit line.

c) On December 2007, the Company entered into a credit line with BBVA Bancomer for US 25,000 (Ps. 344,250) available through June 2012. At December 31, 2008, the Company had used the amount of US 12,500 (Ps. 172,125). The rest of the credit line was not used by the Company because it expired in November 2008. Principal is due and payable in six-month periods from March, 2009, and through September 2012.

d) On June 13, 2006, the Company entered into a US 160,000 unsecured, new syndicated loan. BBVA Bancomer serves as administrative agent for said loan. Principal is due and payable in six-month periods from December 15, 2008, and through June 15, 2011. Said loan was used primarily to prepay the previous syndicated loan of US 120,000.

e) The syndicated loan and other credit agreements contain certain covenants and restrictions with respect to significant transactions, dividend payment, mergers and joint ventures, disposal of assets, and financial information requirements, among others. The Company should also maintain certain financial ratios. At December 31, 2008, the Company is in technical default of certain financial ratios and for this reason the long-term debt has been reclassified to short-term. The Company was in compliance with the rest of the obligations and restrictions established in such agreement. The Company has complied on time with all the interest and principal payments. That situation includes a principal payment of US 8,000 (Ps. 105,457) on December 2008. Currently the Company is negotiating an amendment with the Lenders of the Syndicated Loan, considering extending the amortization schedule and modifying the financial covenants, which are in default since September 2008. The company expects to have this amended agreement signed during the first semester of 2009, which will include, among others, providing certain guarantees, to obtain waivers and to expand the aforementioned current debt amortization calendar and, therefore, considers that this situation will not affect its short-term operations.

Syndicated loan Ps. 2,097,545 Ps. 2,097,545 Ps. - 3.63%Unsecured loan Wells Fargo 193,859 193,859 - 4.29%Unsecured loan BBVA Bancomer 173,970 173,970 - 6.57%Other unsecured loans 477 314 163 8.11%Total Ps. 2,465,851 Ps. 2,465,688 Ps. 163

Refaccionarios Ps. 1,012 Ps. 194 Ps. 818 8.11%Préstamo sindicado 1,748,258 91,458 1,656,800 6.12%Total Ps. 1,749,270 Ps. 91,652 Ps. 1,657,618



8. Long-term debt

f) Although restrictive covenants in the syndicated loan limit dividend payment, the Company obtained waivers from its creditor to declare and pay dividends in April 2008 and 2007, as mentioned in note 13.

g) The Company contracted derivative financial instruments to manage interest rate risk to hedge the syndicated loan, as explained in Note 9.

9. Hedge derivative instruments

a) The Company entered into an interest-rate swap agreement with Wells Fargo to manage the interest-rate risk on the syndicated loan. Such loan was entered into on October 8th., 2008, for a one-year term to be computed beginning January 15, 2009. The company receives a floating LIBOR rate and pays a fixed rate of 2.395% on a notional amount of US 172,500.

b) The swap was classified as cash flow hedge; therefore, exchange gains or losses from the swap are recorded in the comprehensive financing cost to offset the exchange gains or losses derived from the hedged liability.

c) The swap is recorded at fair value. As of December 31, 2008, the liability generated by the swap is US 614 (Ps. 8,455) and it is presented in the consolidated balance sheet as derivative financial instruments.

d) The Company enters into derivative financial instruments to reduce its exposure to the market risk and to have a fixed price plan. Market risks consist of fluctuations in the price of the fuel that the Company uses to produce and establishes as a price in its financial and commercial transactions. During 2008, the Company entered into derivative financial instru-ment contracts to reduce the potentially adverse effect that the volatility of price of natural gas may have on its operating results. Derivative instruments are negotiated with institutions with significant financial capacity; therefore, the Company considers the risk of non-performance of the obligations agreed to by such counterparties to be minimal. As of December 31, 2008, this hedge was classified as a cash flow hedge and the Company recognized a liability in the consolidated balance sheet of US 4,586 (Ps. 63,150) that arises from this hedge at fair value.

e) During 2008 and 2007, due to the fluctuation stipulated in such agreements against market price changes in the MMBTU price, the Company showed losses of Ps. 2,421 and Ps. 1,168, respectively, which were recognized as a manufac-turing cost in the results of the period.


10. Foreign currency balances and transactions

a) As of December 31, 2008 and 2007, the foreign currency position is as follows:

b) Mexican peso exchange rates in effect at the dates of the consolidated balance sheets and at the date of the related independent auditors’ report were as follows:

c) Sales denominated in foreign currency amounted Ps. 2,213,566 (US 199,282) in 2008 and Ps. 2,201,954 (US197,664) in 2007. The portions of the Company’s net sales were 39.24% and 40.01%, respectively.

d) Import purchases of inventories and machinery during the years ended December 31, 2008 and 2007, were US 67,696 and US 53,541, respectively. During the same periods, import purchases of inventories and machinery in Euros totaled EUR 4,706 y EUR 7,802, respectively.

e) Most of the Company’s machinery and equipment is imported, primarily from Italy and Spain.

2008 2007Thousands of U.S. dollars Monetary assets US 57,313 US 8,355 Current liabilities 180,063 20,719 Long-term liabilities 14,012 152,075 Monetary liabilities US 194,075 US 172,794 Net short position US( 136,762) US( 164,439) Thousands of Euros Monetary assets EUR 84 EUR 103 Monetary liabilities 1,621 1,744 Net short position EUR( 1,537) EUR( 1,641)

March 31, 2009

December 31,2008

December 31,2007

U.S. Dollar 14.39 13.77 10.90Euro 19.00 19.55 15.80



11. Employee retirement obligations

a) The Company maintains a defined pension plan, in addition to the plan granted by the Mexican Social Security Institute, for all employees who reach 65 years of age; however, such employees should be working full time under a permanent work contract. Benefits consist of a lump sum payment of three months of salary plus 20 days for each year worked (based on the most recent monthly salary) from the employee’s hiring date through retirement date.

b) Seniority premium plan consist of a lump sum payment of 12 days’ wage for each year worked, calculated using the most recent salary, not to exceed twice the legal minimum wage established by law. Severance plan is for all employees who work full time. It applies when an employee is dismissed without justified cause or when the cause is not clearly proven in conformity with current labor laws. The benefits of such plan consist of a lump sum payment of three-month salary plus 20 days for each year worked.

c) A summary of the results of the actuarial calculations used to determine the consolidated liability at present value for labor obligations as of December 31, 2008 and 2007, is as follows:

d) Components of the net periodic cost during 2008 and 2007, are as follows:


2008 2007Vested benefit obligation Ps. 36,245 Ps. 35,803Non-vested benefit obligation 54,838 51,550Defined benefit obligations 91,083 87,353Unrecognized transition liability ( 24,487) ( 34,835)Actuarial gains ( 8,958) ( 21,918) 57,638 30,600Additional labor liability - 29,977Net liability Ps. 57,638 Ps. 60,577

2008 2007Projected benefit obligation at beginning of year Ps. 30,600 Ps. 21,201Net periodic cost: Service cost 6,095 5,501 Interest cost 7,222 3,701Amortization of transition liability 9,048 2,114Amortization of actuarial loss 10,918 1,077Inflation effects - 309Net periodic cost 33,283 12,702Benefits paid by the Company ( 8,762) ( 14,071)Gain on liabilities reduction 2,517 10,768Projected benefit obligation at end of year Ps. 57,638 Ps. 30,600

11. Employee retirement obligations

e) Assumptions used to determine net periodic cost as of December 31, 2008 and 2007, are as follows:

f) The subsidiary, Interceramic, Inc., located in the United States, has a 401(k) retirement savings plan with defined contributions open to substantially all of its employees. Under this plan, the Company contributes US 0.50 for every US 1.00 of employee contributions up to a maximum of 3% of certain employee incomes. The approximated contributions to the plan were Ps. 6,486 (US 471) in 2008 and Ps. 4,894 (US 449) in 2007.

g) Beginning on January 1, 2008, the subsidiary, IMC, Inc., located in the United States, has a 401(k) retirement savings plan with defined contributions open to substantially all of its employees. Under this plan, the Company contributes US 0.50 for every US 1.00 of employee contributions up to a maximum of 6% of certain employee incomes. The approximated contributions to the plan were Ps. 1,058 (US 77) in 2008.

12. Other expenses

a) As of December 31, 2008 and 2007, detailed information is as follows:

b) As of December 31, 2008, impairment loss includes Ps. 25,320 and Ps. 18,061 of write off, because the Company replaced a portion of obsolete capacity, by suspending the operation of some industrial equipment in Mexico and U.S.A. plants, respectively. The remaining portion corresponds to impairment in wholly-owned franchises assets. As of December 31, 2007 impairment loss includes Ps. 71,613 and Ps. 25,910 of write off, respectively, by the same concepts. The remaining amount corresponds to write off in some asset value of wholly-owned franchises.

c) According to new rules of NIF D-3 “Employee benefits” which became effective on January 1st., 2008, liability from severance benefits, was recognized in the results of 2008, as other income and expenses

2008 2007Discount rate 8.50% 5.00%Rate of salary increase 4.50% 1.00%Inflation rate 3.50% 3.50%

2008 2007Impairment loss Ps. 43,381 Ps. 101,141Unrecognized actuarial losses at January 1st., 2008 10,551 -Severance payments arising from reorganization 9,569 -Syndicated loan expenses 8,206 -Statutory employee profit sharing 1,477 1,200Gain on sale of fixed assets ( 1,363) ( 2,910)Other expenses (income), net 688 ( 5,935) Ps. 72,509 Ps. 93,496



13. Stockholders’ equity

a) Common stock

Common stock is variable with a non-withdrawable fixed minimum of Ps. 251,883 (Ps. 8,000 par value), comprised of Series “B” and Series “D” shares.

Series “B” shares are common, issued and outstanding, without par value and have no ownership limitations (traded as “Ceramic B”). Series “D” shares are nominative, preferred, registered shares, with limited voting rights, without par value and have no ownership limitations. (Traded as “Ceramic D”).

Series “D” shares are entitled to a minimum annual preferred dividend of Ps. 0.025 per share. In any given period in which no minimum preferred dividend is declared or is only partially paid, such dividend or the outstanding amount shall be accumulated for future periods. At December 31, 2008 and 2007, the accumulated minimum preferred dividend is Ps. 822.

As of December 31, 2008 and 2007, shares comprising capital stock are as follows:

b) Statutory legal reserve

Retained earnings include the statutory legal reserve. The General Corporate Law requires that at least 5% of net income of the year be transferred to the legal reserve until the reserve equals 20% of capital stock. As of December 31, 2008 and 2007, the legal reserve, was Ps. 81,266 y Ps. 79,838, respectively.

c) Reserve for repurchase of company’s own shares

Pursuant to a resolution of the general ordinary stockholders’ meeting held in April 2008, it was agreed that the amount of Ps. 180,600 was to be used as a top amount in the fund to acquire Company shares.

d) Majority dividends

Pursuant to resolutions of the general ordinary stockholders’ meetings held in April 2008 and 2007, the stockholders declared cash dividends of Ps. 65,000 and Ps. 56,458 (Ps. 55,000 historical value), equivalent to Ps. 0.40 and Ps. 0.35 per share regardless of whether they are Series “B” or Series “D” shares. Such dividend in cash covered the minimum preferred dividend that the stockholders of Series “D” shares are entitled to. The fact that dividends paid during 2008 were higher than the accounting balance of retained earnings is considered as a capital reimbursement.


Numberof shares

Serie “B” shares 129,785,378Serie “D” shares 32,878,746Subscribed and paid shares 162,664,124 Authorized shares 162,800,072

13. Stockholders’ equity

e) Minority dividends

Pursuant to resolutions of the general ordinary partners’ meetings of the subsidiary Adhesivos y Boquillas Interceramic, S. de R.L. de C.V., on January, August and December 2008, the partners declared cash dividends of Ps. 37,730, Ps. 5,395, and Ps. 4,798, respectively. Likewise, pursuant to resolutions of the general extraordinary and ordinary Stockholders’ meetings of the subsidiary Adhesivos y Boquillas Interceramic, S. de R.L. de C.V., in September and March 2007, partners approved payment of cash dividends of Ps. 16,584 and Ps. 20,364, respectively.

Pursuant to resolutions of the general ordinary stockholders’ meetings of the subsidiary Recubrimientos Interceramic, S.A. de C.V. held in April 2008 and 2007, the stockholders declared and paid cash dividends of Ps. 21,995 and Ps. 11,303, respectively.

Pursuant to resolution of the general ordinary stockholders’ meeting of the subsidiary Mosaicos y Terrazos del Sureste, S.A. de C.V., held in April 2008, the stockholders’ declared and paid cash dividends of Ps. 200.

f) Earnings distribution

Any distribution of earnings in excess of the Net Tax Profit Account (“CUFIN”) will be subject to income taxes payable by the Company, at the rate in effect upon distribution. Any tax paid on such distribution may be credited against annual and estimated income taxes of the year in which the tax on dividends is paid and the following two fiscal years.

14. Income taxes

a) Internacional de Ceramica, S.A.B. de C.V., and each of its subsidiaries in Mexico, are subject to income tax (“ISR”) and, through 2007, asset tax (“IMPAC”) on an individually entity basis. IMPAC is payable only to the extent that it exceeds ISR payable for the same period. Beginning on 2007, income tax was determined at the 28% rate.

b) On October 1st., 2007, the Business Flat Tax Law (“LIETU”) was enacted and went into effect on January 1st., 2008. The Asset Tax Law was repealed upon enactment of LIETU. IETU applies to the sale of goods, the provision of independent services, and the granting of use or enjoyment of goods, according to the terms of the LIETU, less certain authorized deductions. IETU payable is calculated crediting against annual tax, the tax credit generated by investments, the payroll credit, and an amount equal to the income tax of the year. Tax will be determined by applying the corresponding tax rate to determined income based on cash flows. The IETU payment basis is the amount obtained by subtracting authorized deductions from the total revenues generated by the aforementioned activities. Tax payable is determined by subtracting from determined tax certain items that can be credited against annual tax, such as: tax credit generated by investments, payroll credit, and an amount equal to the income tax of the year.



14. Income taxes

LIETU establishes that the IETU rate will be 16.5% in 2008, 17% in 2009, and 17.5% in 2010. Likewise, the Asset Tax Law (“LIA”) will be eliminated following the enactment of the LIETU. However, a temporary provision establishes that taxpayers can request the refund of restated asset tax effectively paid during the ten fiscal years preceding that in which income tax is payable, provided these amounts have not already been refunded and the right to request this refund has not expired according to the LIA. The refunded amount must not exceed the difference between the ISR effectively paid during the fiscal year in question and the lowest IA paid during 2005, 2006 or 2007.

Based on its financial projections, the Company determined that over the following years it will basically pay only ISR recognizing, therefore, only deferred Income Tax (“ISR”) on its financial information.

c) As of December 31, 2008 and 2007, income tax charged to results of operations is as follows:

d) As of December 31, 2008 and 2007, the income tax effects of the differences that generate deferred liability are presented below:


Income Tax: Current Ps.( 60,618) Ps.( 52,037)Deferred 12,825 1,023 Business Flat Tax: Current ( 14,457) - Total Ps.( 62,250) Ps.( 51,014)

2008 2007

Deferred tax liabilities Property, plant and equipment Ps. 418,335 Ps. 458,679 Effect of translation of foreign subsidiaries 72,754 21,115 Other 24,767 13,932 515,856 493,726

Deferred tax assets Inventories 42,565 22,274 Allowance for doubtful accounts 21,831 10,993 Effect of derivative financial instruments 20,050 - Accrued expenses 36,423 26,027 Tax loss carryforwards 204,867 67,563 Other 26,985 26,594 ( 352,721) ( 153,451)Valuation allowance 336,752 152,530Net deferred tax Ps. 499,887 Ps. 492,805

2008 2007

14. Income taxes

e) A valuation allowance has been recorded due to the uncertainly of recovering a portion of tax on assets paid and tax loss carryforwards, primarily from its operations in the United States.

f) The main items giving rise to the difference in 2008 and 2007 between income tax computed at the statutory rate and the provision recorded by the Company for income tax and asset tax is as follows:

g) The Company has tax loss carryforwards that pursuant to the Mexican Income Tax Act may be carried forward against taxable income generated over the next ten years. Tax loss carryforwards can be restated for inflation following the procedure specified in this Law. At December 31, 2008, expiration dates and restated amounts are as follows:

Loss (income) before income tax Ps.( 496,902) Ps. 123,995Tax computed over income before income tax ( 139,133) 34,719Difference between book and tax inflation 24,180 2,976Non-deductible items 4,561 2,701Other 9,722 1,908Cost of income tax at current rate ( 100,670) 42,304Change in valuation allowance 162,920 8,710Income tax expense Ps. 62,250 Ps. 51,014Effective tax rate 20% 34%

2008 2007

2014 Ps. 5812015 1402016 38,5482017 17,7632018 263,350 Ps. 320,382

Year of expiration Tax loss carryforwards



14. Income taxes

h) Subsidiaries located in United States have tax loss carryforwards that, if not offset against taxable income in subsequent years, will expire on the dates shown below:

i) The benefits of IMPAC for which recoverable tax has been recognized may be recovered subject to certain conditions. At December 31, 2008, the restated amounts are as follows:

j) The balances of the stockholders’ equity tax accounts as of December 31, 2008 and 2007, are as follows:


2018 Ps. 1,3392019 13,3642020 83,2512021 38,0112024 1772025 2732026 1,5652027 6492028 177,745 Ps. 316,374

Year of expiration Tax loss carryforwards

1998 Ps. 3291999 2092000 2342001 2452002 4,3332003 6,3362004 1,5392005 1,4932006 8132007 6,037 Ps. 21,568 ( 9,887) Ps. 11,681

Year of payment Recoverable IMPAC

2008 Ps. 2,385,986 Ps. 385,835 Ps. 7,154 2007 Ps. 2,239,942 Ps. 383,132 Ps. 6,716

Contributed CapitalAccount(”CUCA”)

Net TaxIncome Account

(”CUFIN”)

Net Reinvested TaxIncome Account

(”CUFINRE”)

15. Information by segment

a) Financial information by geographic operating segment is as follows:

(*) Capital expenditure includes all of the acquired assets of IMC, Inc. (Ps. 10,837)

Net sales: Sales to customers Ps. 3,427,097 Ps. 2,213,566 Ps. - Ps. 5,640,663 Intercompany transfers 2,509,503 - ( 2,509,503) - Ps. 5,936,600 Ps. 2,213,566 Ps. ( 2,509,503) Ps. 5,640,663Interest expense, net of monetary effect ( 110,756) ( 5,439) - ( 116,195)Net income ( 370,814) ( 227,341) ( 6,020) ( 604,175)Depreciation and amortization 289,828 46,848 336,676Capital expenditures 105,888 50,432 - 156,320Total assets 6,188,317 2,129,081 ( 2,539,212) 5,778,186Long-term assets: Property, plant and equipment 2,168,713 249,053 - 2,417,766Other assets and investments in associated companies 1,517,509 68,840 ( 1,369,939) 216,410 Ps. 3,686,222 Ps. 317,893 Ps. ( 1,369,939) Ps. 2,634,176

México United StatesConsolidated

totalEliminations and

other adjustments

For the year ended December 31, 2008

For the year ended December 31, 2007

México United StatesConsolidated

totalEliminations andother adjustments

Net sales: Sales to customers Ps. 3,301,469 Ps. 2,201,954 Ps. - $ 5,503,423 Intercompany transfers 2,530,005 - ( 2,530,005) - Ps. 5,831,474 Ps. 2,201,954 Ps. ( 2,530,005) Ps. 5,503,423Interest expense, net of monetary effect ( 48,395) ( 822) - ( 49,217)Net income 67,108 ( 43,659) 5,119 28,568Depreciation and amortization 263,662 40,375 - 304,037Capital expenditures (*) 439,289 34,651 - 473,940Total assets 6,147,816 1,360,436 ( 2,136,795) 5,371,457Long-term assets: Property, plant and equipment 2,345,819 207,262 - 2,553,081Other assets and investments in associated companies 1,455,938 59,153 ( 1,266,172) 248,919 Ps. 3,801,757 Ps. 266,415 Ps. ( 1,266,172) Ps. 2,802,000

Valuation allowance for IMPAC paid



15. Information by segment

b) Geographical sales by customer location are as follows:

(*) A small portion of these sales are not made in the United States.

c) Sales by product type are as follows:

16. Commitments

The Company has entered into lease agreements mainly for office space, manufacturing facilities, and equipment used in its operations under non-cancelable operating leases. Future minimum lease commitments under these agreements as of December 31, 2008, are as follows:

Lease expense was Ps. 217,135 and Ps. 173,747 for the years ended December 31, 2008 and 2007, respectively. According to certain lease agreements, rental payments will be increased annually based on inflation rate.


Net sales 2008 Ps. 3,427,097 Ps. 1,887,700 Ps. 220,926 Ps. 104,940 Ps. 2,213,566 Ps. 5,640,663 Net sales 2007 Ps. 3,301,469 Ps. 1,747,676 Ps. 332,867 Ps. 121,411 Ps. 2,201,954 Ps. 5,503,423

Net sales 2008 Ps. 4,068,108 Ps. 429,985 Ps. 1,142,570 Ps. 5,640,663 Net sales 2007 Ps. 4,298,413 Ps. 403,104 Ps. 801,906 Ps. 5,503,423

Totalsales

in Mexico

Mexico Sales in United States

Ceramic floorand wall tiles

2009 Ps. 219,603 2010 197,762 2011 187,405 2012 141,3642013 and thereafter 386,710Total future minimum lease commitments Ps. 1,132,844

Amount

Grouts andadhesive

OtherTotalsales

Totalsales

in U.S.

Totalsales

Ownstores

Independentdealers

Other (*)

17. Contingencies

a) The Company is involved in litigation in the regular course of its business. The Company’s Management and its legal advisors believe that the ultimate outcome of these actions will not have a material adverse effect on its financial condition and results of operations.

b) The Company obtained a favorable judgment on May 26th 2008, in which the court granted Interceramic the restitution of a property (land) and a payment of Ps. 767,099 for compensatory damages. Although the ruling of the Agrarian Court is final, the Plaintiff (Communal Land Owners) could appeal to the Federal Court on the ground of unconstitutionality at anytime, since the law does not contemplate an expiration term for such request.

In case the Plaintiff uses its right to appeal, Management and the legal counsels of the Company are confident that Interceramic could easily demonstrate the rightful ownership of the property and get a favorable judgment once more. Therefore, obtaining a final ruling against the unsubstantiated claim from the Plaintiff.

c) Except for the aforementioned issues, neither the Company nor its assets are subject to any legal action other than those that arise in the normal course of business.

18. New accounting principles

In 2008, the Mexican Board for Research and Development of Financial Information Standards (“CINIF”) issued the following (“NIF”), which became effective for fiscal years beginning January 1st., 2009:

NIF B-7, Business Acquisitions. NIF B-8, Consolidated or Combined Financial Statements.NIF C-7, Investments in Associates and Other Permanent Investments.NIF C-8, Intangible Assets.NIF D-8, Share-Based Payments.INIF 16, Transferring category of primary financial instruments with negotiating purposes.

Some of the significant changes established by these standards are as follows:

NIF B-7 Business Acquisitions. NIF B-7 establishes general rules for the initial recognition of net assets, non-controlling interest and other items as goodwill and gain in purchase given in a business acquisition transaction, as of the acquisition date. This statement includes the change in the term “minority interest” by “non-controlling interest” and requires a company to recognize non-controlling interests in the acquisition at fair value as of the acquisition date. In addition, NIF B-7 establishes that purchase and restructuring expenses resulting from acquisition process should not be a part of the consideration, because these expenses are not an amount being shared by the acquired business. Finally this standard sets presentation rules required for financial information.




NIF B-8 Consolidated or Combined Financial Statements. This standard establishes general rules for preparing and presenting consolidated or combined statements. Beginning on January 1st., 2009, standards referred to long-term investments are regulated by NIF C-7, instead of NIF B-8. Under certain circumstances, this NIF allows that intermediate wholly-owned companies do not present consolidated financial information, valuating their investment by the equity method. Also, it establishes that potential voting rights should be analyzed when evaluating the existence of control over an entity, without considering the management interest and its financial capacity to use them.

In addition to the change referred to minority interest discussed in NIF B-7, NIF B-8 sets “controlling interest” instead of “majority interest” and defines accounting rules for “Specific-purpose Entity” (SPE). It also establishes that when an entity has control over a Specific-purpose Entity (“SPE”), this type of entity should be consolidated.

Similar to NIF B-7, this standard establishes that purchase adjustments resulting from acquisition process should not be a part of subsidiary accounting. (This practice is better known as push-down accounting).

NIF C-7 Investments in Associates and Other Permanent Investments. NIF C-7 describes the accounting treatment for investments in associates and other permanent investments, which entity has no control, shared control or significant influence. This NIF sets that significant influence exists in the case that an entity has 10 percent or more of voting-right shares of a public entity or 25 percent or more in a non-public entity.

To define if significant influence exists, similar to NIF B-8, potential voting rights should be analyzed without considering management’s interest and its financial capacity to use them. This rule defines a procedure and a limit for the recognition of losses in associates. It also establishes that investment in associates is subject to impairment evaluations when an impairment indicator exists and modifies Bulletin C-15, Impairment in long-lived assets, because this NIF sets that impairment in permanent investments should be presented as a gain or loss in non-consolidated subsidiary results.

NIF C-8 Intangible assets. It sets general standards for initial and later recognition of intangible assets that are individually acquired or through the acquisition of businesses, which are generated internally during the regular course of operations of the entity. Different from Bulletin C-8, it establishes that severability condition is not essential for an intangible asset to comply with identifiable feature, setting broader criteria for recognition of assets acquired by means of an exchange of assets, eliminating the assumption that the useful life of an intangible asset may not exceed twenty years. It adds as impairment condition the increasing amortization period and modifies the term for pre-operating costs. In addition, it complements treatment that should be given to dispositions of intangible assets due to sale, abandon or exchange.



NIF D-8 Share-Based Payments. It sets the standards for the recognition of payments based on shares. Acquired goods or received services that are to be paid off totally or partially with shares (payments based on shares) are required to be recognized at the time they are obtained or received, with the applicable capital increase for the part payable in capital instruments. In general, it is required that goods or services paid with capital instruments be recognized at their reasonable value or, otherwise, it is established that said value should be determined indirectly based on the reasonable value of the provided capital instruments. When paid in cash, any acquired goods and services and liabilities assumed at reasonable value of reference capital instruments are valued by the entity. The suppletory application of NIF 2 “Transactions with self-owned and group shares”, as well as IFRIC 8, NIF 2 “Scope” become ineffective by NIF D-8.

INIF 16 Transferring category of primary financial instruments with negotiating purposes. In January 2009, CINIF issued INIF 16 in effect for years beginning January 1st., 2009. INIF modifies the existing regulations related to transferring primary financial instruments initially recognized under the category of “available for sale”.

INIF states that in the event that the primary financial instrument does not find a market that stops being active due to irregular circumstances out of the control of the entity, thus losing liquidity, it may be transferred to the category of “main-tained until maturity” (for debt instruments) if it has a definite maturity date and provided that the entity intends and is capable of maintaining it until maturity. This INIF does not apply to derivative financial instruments.

Based on its current evaluation, the Company does not believe that the adoption of these new rules will have a material impact on the consolidated financial statements.

19. Consolidated financial statement issuing authorization

On March 31, 2009, issuing of the consolidated financial statements was authorized by Jesus Alonso Olivas Corral, Chief Financial Officer. These consolidated financial statements are subject to approval by the general ordinary stockholders’ meeting.

Documents

Operating Expenses - Interceramic USA16 More selling points 18 Distribution Network 20 Social Responsability 24 Board of Directors ... gross margin for 2008 dropped down to 33.3 percent