ac prospectus final

8/3/2019 AC Prospectus Final

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PROSPECTUS

AYALA CORPORATION

Primary Offer in the Philippines of up to 8,000,000 Preferred

Shares

with an Oversubscription Option for

an additional 4,000,000 Preferred Shares

at an Offer Price of P500.00 per Share

to be listed and traded on the

First Board of the Philippine Stock Exchange

Issue Manager

Joint Lead Underwriters

BDO Capital and Investment Corporation

BPI Capital CorporationFirst Metro Investment CorporationThe Hongkong and Shanghai Banking Corporation Limited

Participating Underwriters

Insular Investment and Trust CorporationRCBC Capital Corporation

Vicsal Investment IncorporatedSelling Agents

Trading Participants of the Philippine Stock Exchange

The date of this Prospectus is November 10, 2008



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AYALA CORPORATION33/F, TOWER ONEAYALA AVENUE CORNER PASEO DE ROXASMAKATI CITY 1200PHILIPPINESTELEPHONE NUMBER: (632) 848-5643

This Prospectus relates to the offer and sale by way of a primary offer (the “Offer”) of 8,000,000,cumulative, non-voting Preferred Class “A” Shares (the “Preferred Shares” or “Shares”) of AyalaCorporation (“Ayala,” the “Company” or the “Issuer”), a corporation organized under Philippine law. Inthe event of an oversubscription, the Joint Lead Underwriters in consultation with the Issuer, reservethe right to subscribe to an additional 4,000,000 Preferred Shares, for an aggregate Offer Size of upto 12,000,000 Preferred Shares, subject to the registration requirements of the Securities andExchange Commission (“SEC”) ( the “Oversubscription Option”). The Preferred Shares will be issuedon November 25, 2008 (the “Listing Date”) by the Company from its 12,000,000 authorized andunissued new Class “A” preferred share capital. Each Preferred Share has a par value of P100 and aliquidation right equivalent to P500.00 (the “Liquidation Right”).

The Preferred Shares are being offered for subscription solely in the Philippines through the JointLead Underwriters and Participating Underwriters (the “Underwriters”) and Selling Agents namedherein at a subscription price of P500.00 per share (the “Offer Price” or the “Issue Price”).

Following the Offer, the Company will have (a) 496,152,534 common shares, (b)8,000,000 Class “A”preferred shares (“Class ‘A’ shares”) and (c) 58,000,000 Class “B” Preferred Shares issued andoutstanding, if the Oversubscription Option is not exercised.. The holders of the Preferred Shares donot have identical rights and privileges with holders of the existing common shares of the Company

The declaration and payment of Dividends on the Shares on each Dividend Payment Date will besubject to the sole and absolute discretion of the Issuer’s Board of Directors (the “Board”) to theextent permitted by law. The declaration and payment of dividends (except stock dividends) do notrequire any further approval from the shareholders.

As and if declared by the Board, dividends on the Shares shall be at a fixed rate of 8.88% per annumcalculated in respect of each Share by reference to the Offer Price thereof in respect of each DividendPeriod (as defined herein)(also the “Dividend Rate”). Subject to the limitations described in thisProspectus, dividends on the Shares will be payable quarterly in arrears on February 25, May 25,August 25 and November 25 of each year (each a “Dividend Payment Date” as defined herein).Unless the Shares are redeemed by the Issuer on Optional Redemption Date (as defined herein), thedividends on the Shares shall be adjusted on the Optional Redemption Date (as defined herein) to thehigher of: (a) the Dividend Rate or (b) the 10-year Fixed Rate Treasury Note benchmark yields asdisplayed on the “PDST-R2” screen of the PDEX page (or such successor page) of Bloomberg (orsuch successor electronic service provider) at approximately 4:15 p.m. for the date corresponding tothe Optional Redemption Date plus a spread of 88 basis points (see “Summary of the Offering” onpage 15).

Dividends on the Shares will be cumulative. If for any reason the Issuer’s Board does not declare adividend on the Shares for a dividend period, the Issuer will not pay a dividend on the DividendPayment Date for that dividend period. However, on any future Dividend Payment Date on which

dividends are declared, holders of the Shares must receive the Dividends due them on such DividendPayment Date as well as all Dividends accrued and unpaid to the holders of the Shares prior to suchDividend Payment Date (see “Description of the Preferred Shares” on page 22).

As and if declared by the Board, the Issuer may redeem the Preferred Shares on the fifth anniversaryfrom Listing Date (the “Optional Redemption Date”) or on any Dividend Payment Date thereafter inwhole (but not in part only), at a redemption price equal to the Issue Price of the Shares plus accruedand unpaid dividends for all dividend periods up to date of actual redemption by the Issuer.



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The Issuer may purchase the Shares at any time in the open market or by public tender or by privatecontract at any price through the Philippine Stock Exchange (“PSE”). The Shares so purchased mayeither be redeemed and cancelled (after the Redemption Date, as defined herein) or kept as treasuryshares.

All payments in respect of the Preferred Shares are to be made free and clear of any deductions orwithholding for or on account of any present or future taxes or duties imposed by or on behalf of the

Government of the Republic of the Philippines (the “Government”), including but not limited to, stamp,issue, registration, documentary, value added or any similar tax or other taxes and duties, includinginterest and penalties. If such taxes or duties are imposed, the Issuer will pay additional amounts sothat holders of Preferred Shares will receive the full amount of the relevant payment which otherwisewould have been due and payable, provided, however, that the Issuer shall not be liable for (a) thefinal withholding tax applicable on dividends earned on the Preferred Shares prescribed under theNational Internal Revenue Code of 1997, (b) expanded value added tax which may be payable by anyholder of the Preferred Shares on any amount to be received from the Issuer under the Offer and (c)any withholding tax of any amount payable to any holder of Shares or any entity which is a non-resident foreign corporation. If payments become subject to additional withholding or any new tax as aresult of certain changes in law, rule or regulation, or in the interpretation thereof, and such tax cannotbe avoided by use of reasonable measures available to the Issuer, the Issuer may redeem of theShares in whole, but not in part, on any Dividend Payment Date (having given not more than 60 norless than 30 days’ notice) at the Issue Price plus all accrued and unpaid dividends, if any (see“Summary of the Offering” on page 15; the taxes applicable on the Preferred Shares are discussed inthe section on “Taxation ” on page 146).

The Shares will constitute direct and unsecured subordinated obligations of the Issuer ranking at leastpari passu in all respects and rateably without preference or priority among themselves with all otherPreferred Shares issued by the Issuer.

The Shares will be issued in scripless form. Title to the Shares shall pass by endorsement anddelivery to the transferee and registration in the registry of shareholders to be maintained by theRegistrar and Depository Agent (as defined herein). Settlement of the Shares in respect of suchtransfer or change of title to the Shares, including the settlement of documentary stamp taxes, if any,arising from subsequent transfers, shall be similar to the transfer of title and settlement procedures forlisted securities in the PSE (see “Summary of the Offering” on page 15 ).

The gross proceeds of the Offer are expected to reach approximately P4,000,000.00 orP6,000,000,000.00,should the Joint Lead Underwriters exercise in full their Oversubscription Option..The net proceeds from the Offer, estimated to be at P3,962,807,710.00 or P5,950,020,559.00, shouldthe Joint Lead Underwriters exercise in full their Oversubscription Option, are determined bydeducting from the gross proceeds the total issue management, underwriting and selling fees, listingfees, taxes and other related fees and out-of-pocket expenses, will be used by the Company toexpand its direct investments in various business process outsourcing companies(see “Use of Proceeds” on page 40 ). BPI Capital Corporation (“BPI Capital”) acting as Issue Manager (the “IssueManager”), shall receive estimated underwriting fees of 0.40% of the gross proceeds of the Offer,inclusive of amounts to be paid to the Joint Lead Underwriters, Participating Underwriter and SellingAgents.

Some of the Company’s existing loan agreements contain covenants that restrict the declaration or

payments of dividends under certain circumstances, such as the occurrence of an event of defaultunder such loan agreements or if such payment would cause an event of default to occur, if certainfinancial ratios are not met or payment would cause them not to be met, requiring revenues of theCompany to be applied toward certain expenses prior to the payment of dividends and othercircumstances (see “Description of the Preferred Shares” on page 22).

No dealer, salesman, or any other person has been authorized to give any information or to make anyrepresentation not contained in this Prospectus. If given or made, any such information orrepresentation must not be relied upon as having been authorized by the Company, the IssueManager or any of the Underwriters. The distribution of this Prospectus and the offer and sale of the



iv

Preferred Shares may, in certain jurisdictions, be restricted by law. The Company and the IssueManager require persons into whose possession this Prospectus comes, to inform themselves of andobserve all such restrictions. This Prospectus does not constitute an offer of any securities, or anyoffer to sell, or a solicitation of any offer to buy any securities of the Company in any jurisdiction, to orfrom any person to whom it is unlawful to make such offer in such jurisdiction. [Prior to the Offer, therehas been no public market for the Preferred Shares. Accordingly, there has been no market price forthe Preferred Shares derived from day-to-day trading. Unless otherwise stated, the information

contained in this Prospectus has been supplied by the Company. To the best of its knowledge andbelief, the Company (which has taken all reasonable care to ensure that such is the case) confirmsthat the information contained in this Prospectus is correct, and that there is no material statement oromission of fact which would make any statement in this Prospectus misleading in any materialrespect. The Company hereby accepts full and sole responsibility for the accuracy of the informationcontained in this Prospectus. The Joint Lead Underwriters and Bookrunners confirm that it hasexerted reasonable efforts to verify the information contained herein but do not make anyrepresentation, express or implied, as to the accuracy or completeness of the materials containedherein.

Unless otherwise indicated, all information in this Prospectus is as of November 10, 2008. Neither thedelivery of this Prospectus nor any sale made pursuant to this Prospectus shall, under anycircumstances, create any implication that the information contained herein is correct as of any datesubsequent to the date hereof or that there has been no change in the affairs of the Company and its

subsidiaries since such date. Market data and certain industry forecasts used throughout thisProspectus were obtained from internal surveys, market research, publicly available information andindustry publications. Industry publications generally state that the information contained therein hasbeen obtained from sources believed to be reliable, but that the accuracy and completeness of suchinformation is not guaranteed. Similarly, internal surveys, industry forecasts and market research,while believed to be reliable, have not been independently verified, and none of the Company, theIssue Manager and the Joint Lead Underwriters make any representation as to the accuracy of suchinformation.

Each person contemplating an investment in the Preferred Shares should make his own investigationand analysis of the creditworthiness of Ayala and his own determination of the suitability of any suchinvestment. The risk disclosure herein does not purport to disclose all the risks and other significantaspects of investing in the Shares. A person contemplating an investment in the Preferred Sharesshould seek professional advice if he or she is uncertain of, or has not understood any aspect of the

securities to invest in or the nature of risks involved in trading of securities, especially those high-risksecurities. Investing in the Preferred Shares involves a higher degree of risk compared to debtinstruments. For a discussion of certain factors to be considered in respect of an investment in thePreferred Shares, see the section entitled “Risk Factors ” beginning on page 30.

An application to list the Preferred Shares has been filed with the PSE but has not yet been approved.The PSE assumes no responsibility for the correctness of any statements made or opinionsexpressed in this Prospectus. The PSE makes no representation as to its completeness andexpressly disclaims any liability whatsoever for any loss arising from reliance on the entire or any partof this Prospectus. The listing of the Preferred Shares is subject to the approval of the Board ofDirectors of the PSE. Such approval for listing is permissive only and does not constitute arecommendation or endorsement of the Preferred Shares by the PSE.

ALL REGISTRATION REQUIREMENTS HAVE BEEN MET AND ALL INFORMATION CONTAINEDHEREIN ARE TRUE AND CURRENT.



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Forward Looking Statements ……………………………………………………………………….. 1

Definition of Terms …………………………………………………………………………………… 2Summary ………………………………………………………………………………….…………… 5

Summary of the Offering……………………………………………………………………………... 15

Description of the Preferred Shares ……………………………………………………………….. 22

Risk Factors …………………………………………………………………………………………… 30

Use of Proceeds …………………………………………………………………………..…….……. 40

Plan of Distribution ……………………………………………………………………….…………... 42

Determination of Offer Price ……………………………………………………………..…….……. 44

Dilution ……………………………………………………………………………………...…………. 45

The Company …………………………………………………………………………….…………… 47

Business ………………………………………………………………………………………………. 56

I. Real Estate and Hotels………………………………………………………………………… 56

II. Financial Services………………………………………………………………………….…... 68

III. Telecommunications……………………………………………………………………….…... 73

IV. AC Capital………………………………………………………………………………………. 90

Employees and Labor Relations ……………………………………………………………………. 101

Legal Proceedings ……………………………………………………………………….…………… 103

Ownership …………………………………………………………………………………………….. 107

Management’s Discussion and Analysis of Results of Operations and Financial Condition…. 108

Management ………………………………………………………………………………………….. 127

Matters Affecting Liquidity and Capital Expenditure ……………………………………………… 137

Named Experts and Counsel ……………………………………………………………………….. 140The Philippine Stock Market………………………………………………………………………… 141

Taxation ……………………………………………………………………………………………….. 146

Philippine Foreign Investment, Foreign Ownership and Exchange Controls ………………….. 150

Annexes………………………………………………………………………………………………... 151



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This Prospectus contains certain “forward-looking statements”. These forward-looking statementsgenerally can be identified by use of statements that include words or phrases such as “believes”,“expects”, “anticipates”, “intends”, “plans”, “foresees”, or other words or phrases of similar import.Similarly, statements that describe Ayala’s objectives, plans or goals are also forward-lookingstatements. All such forward-looking statements are subject to certain risks and uncertainties thatcould cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Important factors that could cause actual results to differ materially from theexpectations of Ayala include, among others:

General economic and business conditions in the Philippines;

Holding company structure;

Intensive capital requirements of subsidiaries and affiliates of Ayala in the course of business;

Increasing competition in the industries in which Ayala’s subsidiaries and affiliates operate;

Industry risk in the areas in which Ayala’s subsidiaries and affiliates operate;

Changes in laws and regulations that apply to the segments or industries in which Ayala, itssubsidiaries and affiliates operate;

Changes in political conditions in the Philippines;

Changes in foreign exchange control regulations in the Philippines; and

Changes in the value of the Philippine Peso.

For further discussion of such risks, uncertainties and assumptions, see “Risk Factors ”.Prospective purchasers of the Preferred Shares are urged to consider these factors carefully inevaluating the forward-looking statements. The forward-looking statements included herein aremade only as of the date of this Prospectus, and Ayala undertakes no obligation to update such

forward-looking statements publicly to reflect subsequent events or circumstances.



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Unless otherwise indicated, the following terms shall have the meanings set forth below:

3G Third generation radio frequency spectra

AAHC Ayala Automotive Holdings Corporation

ACC Alabang Commercial Corporation

ACIFL AC International Finance Ltd.

AHI Ayala Hotels, Inc.

Affiliates Associates and Jointly Controlled Entities

Affinity Affinity Express, Inc.

AG Holdings, Ltd. AG Holdings Limited

AIHC Ayala Insurance Holdings Corporation

AIPL Ayala International Pte Ltd.

ALI Ayala Land, Inc.

APMC Ayala Property Management Corporation

Asiacom Asiacom Philippines, Inc.

ASTI Ayala Systems Technology, Inc.

Avida Avida Land Corporation, whose former corporate name was LagunaProperty Holdings, Inc.

Ayala Ayala Corporation (also the “Company” or the “Issuer”)

Ayala Greenfield Ayala Greenfield Development Corporation

Azalea Azalea Technology Investments, Inc.

Azalea International Azalea International Venture Partners Ltd.

Banking Day A day, excluding Saturdays, Sundays and holidays, when banks arenot allowed to close for business in Metro Manila, Philippines

BayanTrade BayanTrade Dotcom, Inc.

BCDA Bases Conversion Development AuthorityBDO Banco De Oro Unibank, Inc.

BDO Capital BDO Capital and Investment Corporation

BMA Bridge Mobile Alliance

Board The Board of directors of Ayala

BPI Bank of the Philippine Islands

BPI Capital BPI Capital Corporation

BPI Group BPI and its subsidiaries

BPO Business Processing Outsourcing

BSP Bangko Sentral ng Pilipinas

CAGR Compounded Annual Growth Rate

CAR Capital Adequacy RatioCHI Cebu Holdings, Inc.

CII Community Innovations, Inc.

Class “A” shares Ayala’s Class “A” preferred shares

Class “AA” shares Ayala’s Class “AA” preferred shares

Common shares Ayala’s common shares

CPVDC Cebu Property Ventures Development Corporation

Director A director of Ayala

DOSRI Directors, Officers, Stockholders and other Related Interests



Definition of Terms

3

DBS Development Bank of Singapore

EMS Electronics Manufacturing Services

eTelecare eTelecare Global Solutions, Inc.

FBDC Fort Bonifacio Development Corporation

Globe Globe Telecom, Inc.

HSBC The Hongkong and Shanghai Banking Corporation Limited

IAS International Accounting Standards

IDD International Direct Dialing

IMI Integrated Microelectronics, Inc.

Innove Innove Communications, Inc.

Integreon Integreon Managed Solutions, Inc.

IPO Initial Public Offering

Issue Manager BPI Capital

Joint Lead Underwriters BDO Capital, BPI Capital, FMIC and HSBC

Liquidation Right The preference granted to the holders of Preferred “A” shares underthe Issuer’s Articles of Incorporation, as amended, over the holdersof common stock in the distribution of corporate assets in the event of

dissolution and liquidation of the Issuer and in the payment of thedividend at the rate specified at the time of issuance

Listing Date November 25, 2008

MDC Makati Development Corporation

Mitsubishi Mitsubishi Corporation

MMS Multimedia Messaging Service

MWC Manila Water Company, Inc.

MWSS Metropolitan Waterworks and Sewerage System

NDD National Direct Dialing

NPL Non-performing Loans

NTC National Telecommunications Commission

OEM Original Equipment Manufacturers

Offer Period November 12, 2008 to 18, 2008

Offer Price P500.00 per Preferred Share

OFW Overseas Filipino Workers

Oversubscription Option The right of the Joint Lead Underwriters, in the event of anoversubscription, to subscribe up to an additional 4,000,000Preferred Shares, for an aggregate, overall size of the Offer of up to12,000,000 Preferred Shares, after consultation with the Issuer andsubject to the SEC’s registration requirements and the availability ofPreferred Shares from the Issuer’s authorized capital stock.

Participating Underwriters Insular Investment and Trust Corp., RCBC Capital Corporation andVicsal Investment, Inc.

Underwriters Shall refer collectively to the Joint Lead Underwriters and

Participating UnderwritersPAS Philippine Accounting Standards

PCBA Printed Circuit Board Assembly

PDTC Philippine Depository and Trust Corporation. This is the newcorporate name of the Philippine Depository Corporation (“PDC”)

PFRS Philippine Financial Reporting Standards

Preferred Shares 8,000,000 Preferred Class “A” Shares of Ayala (also “Shares” or“Preferred A Shares”), if the Oversubscription Option is not exercised

PSE Philippine Stock Exchange



Definition of Terms

4

PSE Trading Participant Member-brokers of the PSE

RCBC Rizal Commercial Banking Corporation

RCBC Capital RCBC Capital Corporation

SEC Securities and Exchange Commission

Securities Regulation Code The Philippines’ Securities Regulation Code, Republic Act No. 8799(2000)

Selling Agents The PSE’s duly-accredited member-brokers

SMS Short Message Service

Speedy-Tech Speedy-Tech Electronics Ltd.

STI Singapore Telecom International

TM Touch Mobile

UMRe Universal Malayan Reinsurance

UNIRE Universal Reinsurance Corporation

VAT Value-added Tax

WAP Wireless Application Protocol

WiFi Wireless Fidelity



Summary

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The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Because it is a summary, it

does not contain all of the information that a prospective purchaser should consider before investing.Prospective investors should read the entire Prospectus carefully, including the section entitled “Risk

Factors and Other Considerations” and the financial statements and the related notes to those statements included in this Prospectus.

THE COMPANY

The Company was incorporated in the Philippines on January 23, 1968 as a limited liabilitycorporation having a renewable term of 50 years. It is organized as a holding company holding equityinterests in the Ayala Group (the “Group”), one of the most significant business groups in thePhilippines. Ayala’s business activities are divided into four key areas of activity: (a) real estate andhotels, (b) financial services, (c) telecommunications and (d) a portfolio of other investments heldunder an internal development division called AC Capital (“AC Capital”).

Ayala’s real estate and hotels business is primarily conducted through its subsidiary, Ayala Land, Inc.(“ALI”), a diversified real estate company in the Philippines (see “Business - Real Estate and Hotels ”).Its involvement in financial services and insurance businesses is done through an affi liate, the Bank ofthe Philippine Islands (“BPI”), which, together with its subsidiaries (together, the “BPI Group”), form auniversal banking group in the Philippines (see “Business - Financial Services ”). Ayala’stelecommunications business is carried out through an affiliate, Globe Telecom, Inc. (“Globe”), one ofthe leading telecommunications companies in the Philippines (see “Business - Telecommunications ”).Under AC Capital are Ayala’s investments in water distribution, electronics manufacturing, businessprocess outsourcing (“BPO”), automotive dealerships, joint ventures in international real estateassets, information technology-related ventures and various non-core assets and investments througha variety of subsidiary and affiliated companies (see “Business - AC Capital ”).

Ayala became a publicly listed corporation in 1976 when it listed its common shares with the thenMakati Stock Exchange. As of June 30, 2008, Ayala had a market capitalization of P128 billion basedon its closing price of P257.50 per share. In addition, certain members of the Ayala Group, namelyALI, BPI, Globe, Manila Water Company, Inc. (“MWC”), Cebu Holdings, Inc. (“CHI”), and CebuProperty Ventures Development Corporation (“CPVDC”) are likewise publicly listed corporations.Some of Ayala’s subsidiaries and affiliates have extensive holdings in the equity of other subsidiariesand affiliates.

Members of the Zobel de Ayala family, individually and through their control of Mermac, Inc., a privateholding company incorporated in the Philippines (which held 51.01% of Ayala as of June 30, 2008),are the dominant shareholders of, and effectively control, Ayala. Ayala’s other current principalshareholders are Mitsubishi Corporation (“Mitsubishi”) (which held 10.59% of Ayala as of June 30,2008), and Shoemart, Inc. (which held 3.28% of Ayala as of June 30, 2008).

Financial Highlights

For the six months ended June 30, 2008, Ayala’s unaudited consolidated revenues were at P39.3billion, and its unaudited consolidated net income attributable to the equity holders of the parent wasat P6.3 billion. Unaudited consolidated total assets were valued at P201.1 billion and its unauditedequity attributable to equity holders of the parent was at P90.4 billion. Consolidated net incomeattributable to the equity holders of the parent P6.3 billion was driven by a combination of factors:



Summary

6

• Net income of certain operating units softened amidst a more challenging economicenvironment. The table below shows the net income of Ayala’s business units for the periodended June 30, 2008 vs. the same period of the prior year. Among the listed companies,Ayala Land posted the highest growth rate of 37%. This robust financial performance wasdriven by strong growth in operating revenues, improved equity earnings from affiliates,

higher interest and other income, and effective cost control. Globe’s net income was 3%lower due to lower operating earnings, higher income tax provisions, partially offset by lowerfinancing costs during the current period. BPI’s net income declined 33% as margins andsecurities trading income were tighter amidst a rising interest rate environment. This resultedin a 6% drop in net interest income and a 22% decline in non-interest income. The netincome of Manila Water Company, Inc. (“MWC”) increased by 17% as a result of higher billedvolumes and increases in its effective tariff rates. Equity earnings from companies under ACCapital were lower mainly due to a decline in earnings of Ayala Auto, AG HoldingsInternational, and one time loss provisions of Integrated Micro Electronics (“IMI”).

• During the period earnings were enhanced by capital gains from the sale of Ayala’s shares inGlobe. The Company booked P2.7 billion from the sale of its common shares in Globe.

Ayala continues to receive dividends with dividend flows reaching P3.9 billion in the first half of 2008.

Dividend Flows(in billion P)

0

2

4

6

8

10

12

14

16

2004 2005 2006 2007 1H08

ALI

BPI

Globe AC Capital

4.6

6.7

3.9

10.0

5.5



Summary

7

Source of Revenues by Business Segment

Revenue Share

1H 2008 (39.3 billion pesos)

18%

39%

28%

1%

14% Parent company/Financialservices/ Telecommunications/Water

utilities

Real estate and hotels

Electronics, Informationtechnology and Businessprocess outsourcing services

International

Automotive and others

Revenue Share

1H 2007 (41.0 billion pesos)

30%

30%

26%

1%

13% Parent company/Financial

services/

Telecommunications/Water

utilities

Real estate and hotels

Electronics, Information

technology and Business

process outsourcing services

International

Automotive and others

Net Income/(Loss) of Major Subsidiaries and Affiliates

(P millions)

June 30, 2008 June 30, 2007 ChangeAyala Land* 2,909 2,126 37%

BPI* 3,833 5,715 -33%

Globe 6,214 6,425 -3%

AC Capital

Manila Water 1,259 1,074** 17%

IMI* (700)*** 639*** -210%

Ayala Automotive* 80 84 -5%

AG Holdings* 130 332 61%

Azalea (134) (19) 605%

*Net income/(loss) attributable to equity holders of the parent **As restated for the adoption of Philippine Interpretation IFRIC 12, Service Concession Arrangement.***Translated to Philippine peso using average exchange rate of P43.64 and P45.92 for 2008 and 2007, respectively.

STRATEGY

Ayala seeks to ensure that the Group maintains its commitment to its business activities in thePhilippines and to explore possible international initiatives on a selective and opportunistic basis.Ayala intends to build on its leadership position in the Group's existing core businesses in real estate,financial services and telecommunications, and actively manage its portfolio of other investments andassets under AC Capital with a view toward maximum value creation and realization. Ayala expectsits real estate, financial services and telecommunications businesses to remain its principal sources ofdividend income, but contributions from its water distribution, electronics manufacturing and autodealership operations are increasing. Ayala is presented from time to time with opportunities to investin new business areas and will continue to consider such opportunities to the extent that suchbusinesses would contribute to the overall strategic objectives of the Group.

FUTURE PLANS AND PROSPECTS

Ayala is confident that its financial prospects remain sound and are expected to strengthen further inthe coming years as the Philippine economy gathers momentum and external global uncertaintiessubside. Ayala’s earnings are expected to remain stable in the near-term underpinned by thesustained recovery of the real estate industry, strong fundamentals of the banking sector, and theincreasing demand for telecommunications services. In the long-term, improved earnings prospectsare expected from these key business units, given these are well-positioned in their respectiveindustries and are expected to benefit from sectoral growth.



Summary

8

Ayala is committed to reducing its gearing and strengthening its balance sheet further. Dividend flowsto the Company have increased significantly over the past few years and this is a trend that isexpected to be sustained as the operating cash flow at the subsidiary and affiliate level continues toimprove. The increase in dividend flows to Ayala, in addition to any additional liquidity arising frompossible capital reallocation and value realization in Ayala’s investment portfolio, are expected tofacilitate Ayala’s plans to build new businesses and establish new growth platforms. As a holding

company, Ayala is committed to explore new investment opportunities that will be the source ofcompany growth and value moving forward.



Summary

9

SUMMARY FINANCIAL INFORMATION

The following tables set forth financial and operating information on Ayala. Prospective purchasers of the Preferred Shares should read the summary financial data below together with the financial

statements, including the notes thereto, included in this Prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operation”. The summary financial data for the

two years ended December 31, 2007 and December 31, 2006 under the columns “(Audited) Pre- IFRIC 12” are derived from Ayala’s audited financial statements, including the notes thereto, which are found elsewhere in this Prospectus. The summary financial data for the two years ended December 31, 2007 and December 31, 2006 under the columns “Post IFRIC 12” reflect the restated

balances of Ayala after the adoption by Manila Water of Philippine Interpretation IFRIC 12.

Consolidated Income

Statement Data

In P millions

(Unaudited)For the Period ended

June 30

(Audited)Pre-IFRIC 12

For the Year endedDecember 31

(Unaudited)Post IFRIC 12


2008 2007 2007 2006 2007 2006

Revenues 39,284 40,382 78,708 70,166 78,767 70,162

Net income 7,588 12,792 19,003 14,468 19,062 14,464

Net income attributable to:

Equity holders of the parent

Minority interest

6,2931,295

11,491

1,301

16,198

2,805

12,177

2,291

16,2572,805

12,173

2,291

Consolidated Balance Sheet

Data

(Unaudited)Post IFRIC 12

As of December 31In P millions

(Unaudited)As of June 30)


As of December 31

2008 2007 2006 2007 2006

Assets

Total current assets 74,988 69,759 57,800 69,759 57,800

Noncurrent accounts and notesreceivables

2,962 4,010 2,520 4,010 2,520

Land and improvements – net 16,932 16,201 16,587 16,201 16,587

Investments in associates and jointlycontrolled entities – net

69,150 71,560 68,569 71,272 68,221

Investments in bonds and othersecurities

2,440 2,493 3,462 2,493 3,462

Investment properties – net 17,523 17,416 16,795 17,416 16,795

Property, plant and equipment - net 9,453 8,493 9,057 8,493 9,057

Other noncurrent assets 7,631 6,487 7,542 6,487 7,542

Total assets 201,079 196,419 182,332 196,131 181,984

Liabilities

Total current liabilities 38,432 36,245 32,407 36,245 32,407

Long-term debt - net of currentportion

35,244 37,885 38,518 37,885 38,518

Cumulative redeemable preferredshares

– – 2,500 – 2,500

Other noncurrent liabilities 8,510 7,505 7,073 7,505 7,073

Minority interest 28,503 27,609 24,699 27,609 24,699

Equity attributable to equity holdersof the parent

90,390 87,176 77,135 86,887 76,787

Total liabilities and equity 201,079 196,419 182,332 196,131 181,984

*These figures are audited except for the effect of the restatements resulting from adoption of IFRIC 12



Summary

10

CAPITALIZATION

The following table sets forth Ayala’s audited consolidated cash position, short-term and long-term debt and capitalization as at December 31, 2007. This table should be read in conjunction with the

notes thereto located elsewhere in this Prospectus.

(in P millions) Audited

Pre-IFRIC 12As of December 31, 2007

Short-term debt

Banks and other financial institutions………………………………... 2,634

Current portion of long-term debt ……………………………………. 9,513

Total short-term debt…………………………………………………... 12,147

Long-term debt

Banks and other financial institutions………………………………... 19,636

Bonds due 2008 2,000

Bonds due 2009 81Bonds due 2012………………………………………………………... 6,000

Fixed-rate corporate notes……………………………………………. 14,260

8.125% Guaranteed Euro Notes……………………………………... 5,421

Less: Current portion…………………………………………………... 9,513

Total long-term debt …………………………………………………… 37,885

Minority interest in consolidated subsidiaries………………….. 27,609

Stockholders' equityCapital stock P50 par value

Common Shares

Authorized 600,000,000 sharesIssued and subscribed 414,687,000 shares…………………………… 20,734

Preferred Shares- BAuthorized- 58,000,000Issued and subscribed- 58,000,000 shares……………………… 5,800

Additional paid-in capital………………………………………………. 657Subscription receivable (336)Cumulative translation adjustments………………………………….. (2,297)Retained earnings ……………………………………………………... 60,461Share - based payments………………………………………………. 604Net unrealized gain on available-for-sale financial assets………... 1,712Cost of shares in treasury…………………………………………….. (159)

Equity attributable to equity holders of the parent……………... 87,176



Summary

11

THE OFFER

Ayala, through the Underwriters and Selling Agents named herein, is offering for sale to the public8,000,000 Preferred Class "A" Shares with a par value of P100.00 per share, at an Offer Price ofP500.00 per share. The Offer comprises Preferred Shares to be issued from the Company’s12,000,000 authorized and unissued new Preferred Class "A" shares pursuant to a primary offer. In

the event of an oversubscription, the Joint Lead Underwriters, in consultation with the Issuer, shall have theoption to subscribe for themselves or for their customers account, up to an additional 4,000,000 Preferred

Shares within the Offer Period. The Shares are being offered for subscription solely in the Philippines.

As of June 30, 2008, the Company has an authorized common share capital of 600,000,000 sharesand an authorized preferred share capital stock of 1,258,000,000 shares. On July 9, 2008, the SECapproved amendments to the Company’s Articles of Incorporation embodying the reclassification of1.2 billion redeemed Preferred “A” and “AA” shares with a par value of P1.00 per share into 12.0million new Preferred A shares with a par value of P100.00 per share.

After the Offer, assuming that the Oversubscription Option is not exercised, the Company will have496,152,534 common shares, 8,000,000 Preferred Class “A” Shares and 58,000,000 Preferred Class“B” Shares, respectively, issued and outstanding.

The Offer : 8,000,000 Preferred Class “A” Shares, but subject to the JointLead Underwriters’ option to exercise in full ithe OversubscriptionOption.

Offer Price : P500.00 per share.

Terms of Payment : Full payment upon application.

Minimum Subscription : 100 Shares. Additional Preferred Shares may be bought inmultiples of 20 shares.

Offer Period : The Offer Period will commence at 9:00 a.m. on November 12,

2008 and end at 5:00 p.m. on November 18, 2008, unless

shortened or extended by agreement among the Company and theUnderwriters, subject to the approval of the SEC and the PSE (see“Summary of the Offering ”).

USE OF PROCEEDS

A. With Oversubscription Option

Ayala expects to raise gross proceeds amounting to approximately up to P6,000,000,000.00 from theOffer, if the Oversubscription Option is exercised.

The following are the estimated expenses to be incurred in relation to the Offer:

SEC Registration Fee P 2,083,125.00Taxes P 6,000,000.00

Issue Management, Underwriting, and Selling Fees P 25,806,452.00

PSE Filing and Research Fees P 6,216,000.00

Estimated Professional Expenses P 9,573,864.00

Other related expenses P 300,000.00

Total P 49,979,441.00



Summary

12

The net proceeds from the Offer is estimated to be P5,950,020,559.00 after deducting expensesrelated to the Offer. The principal purpose for the offering is to expand the Company’s directinvestments in various BPO companies such as, but not limited to, eTelecare Global Solutions, Inc.,Affinity Express, Inc. (“Affinity”), and Integreon Managed Solutions, Inc. (“Integreon”).

With respect to the eTelecare investment, the Company together with Providence Equity Partners

plans to make a tender offer not later than the first half of 2009 for almost all of eTelecare’s shares.Ayala’s share in this investment is estimated at around US$100Mn. Around US$90Mn of this sharewill be financed from part of the net proceeds of this Offering, with the balance sourced from theCompany’s internally-generated funds.

The balance of the net proceeds amounting to around P1,630,020,559.00 will be used by Ayala: (a) tofund its investments in 2008 and 2009 in Affinity, Integreon, and other BPO companies; and (b) forgeneral working capital.

The utilization, amounts and schedule of the above investments would depend on favorable marketconditions and business opportunities and would be disclosed to the PSE at the appropriate times.

The foregoing can be summarized as follows:

Amount from NetProceeds

Planned Use/Investment Estimated Timetable

US$90Mn or P4.32b eTelecare Global Solutions, Inc. Not later than first half of 2009Investments in Affinity, Integreonand other BPO companies

2008 and/or 2009, depending onmarket conditions and businessopportunities

P1.63b

General working capital Amounts from the Net Proceedsover the amounts needed orused for the above investmentsmay go to Ayala’s generalworking capital.

Notes:

-Actual investments and utilization, particularly with respect to the allocation of the P1.63b investment between BPO

investments and general working capital, would depend on many factors, including the existence of favorable market conditionsand business opportunities.-Figures and schedules are only estimates and may change.-Exchange rate assumed at P 48/US$1. Actual exchange rate at time of investment may vary.



Summary

13

B. Without Oversubscription Option

If the Oversubscription Option is not exercised, the net proceeds from the Offer is estimated to beP3,962,807,710.00 after deducting expenses related to the Offer. Said expenses are as follows:

SEC Registration Fee P 1,578,125.00

Taxes P 4,000,000.00

Issue Management, Underwriting, and Selling Fees P 17,204,301.00 PSE Filing and Research Fees P 4,536,000.00



Total P 37,192,290.00

Note: Ayala has already paid the SEC Registration Fee and PSE Filing and Research Fees based on anissue size of P6 billion. If the Oversubscription Option is not exercised, Ayala will seek the appropriaterefunds from the SEC and PSE.

The investment type, estimated timetable and the qualifications thereto as discussed above willremain the same. The amounts for the investments will change follows:


Planned Use/Investment

US$50Mn or P2.4b eTelecare Global Solutions, Inc.

Investments in Affinity, Integreonand other BPO companies

P1.56b

General working capitalNotes:

-Actual investments and utilization, particularly with respect to the allocation of theP1.56b investment between BPO investments and general working capital, woulddepend on many factors, including the existence of favorable market conditions andbusiness opportunities.-Figures and schedules are only estimates and may change.-Exchange rate assumed at P 48/US$1. Actual exchange rate at time of investmentmay vary.



Summary

14

STATISTICS RELATING TO THE PREFERRED SHARES

Total authorized number of Class “A”, “AA” and “B” PreferredShares as of June 30, 2008 1,258,000,000

Class “A”Class “AA”

900,000,000300,000,000

Class “B” 58,000,000

Total authorized number of Class “A”, “AA” and “B” PreferredShares as of July 9, 2008

Class “A”

Class “AA”

Class “B”

Total number of Preferred Class “A” Shares outstanding after theOffer, if the Oversubscription Option is not exercised…………

70,000,000

12,000,0000

58,000,000

8,000,000

Preferred Class “A” and “B” Shares outstanding after the Offer, ifthe Oversubscription Option is not exercised

66,000,000

Market Capitalization of the Class “A” Preferred Shares(1), if theOversubscription Option is not exercised

Market Capitalization of the Class “B” Preferred Shares(2)

P4,000,000,000

P6,380,000,000

(1) The Class “A” Preferred Shares’ capitalization is computed at the Offer Price multiplied by the number of Preferred Shares outstanding after the Offer. The PSE computes market capitalization based on the number of listed shares multiplied by the market price per share.

(2) The Class “B” Preferred Shares’ capitalization is computed as at June 30, 2008 with a price of P110.00 per share.

RISKS OF INVESTING

Prospective investors in the Preferred Shares should consider the current and immediate politicaland economic factors in the Philippines as a principal risk for investing. Political instability andthreats to the local and regional currencies may also influence the operation, growth andprofitability of Ayala and its operating companies. Other risks include the following: (a) thestructure of Ayala as a holding company whose revenues and distributable earnings are largelydependent on the operations of its subsidiaries and affiliates and on the dividend declarations ofthese companies; (b) the highly capital intensive nature of some of Ayala’s principal subsidiaries(property development, telecommunications and water utilities) requiring a considerable level ofcapital investments to keep market position and sustain growth; (c) the competitive businessenvironment of Ayala’s operating subsidiaries and affiliates; (d) the distinct industry risksassociated with Ayala’s operations in four key areas; (e) the likely effects of Governmentregulations on Ayala’s businesses in real estate, banking, telecommunications and water utilitieswhich operate in a highly regulated environment; (f) the general political and economic condition ofthe country; (g) the volatility of foreign currency rates in the Philippines; and, (h) the liquidity of thePreferred Shares (see “Risk Factors” ).



15

SSSSSSSSUUUUUUUUMMMMMMMMMMMMMMMMAAAAAAAARRRRRRRRYYYYYYYY OOOOOOOOFFFFFFFF TTTTTTTTHHHHHHHHEEEEEEEE OOOOOOOOFFFFFFFFFFFFFFFFEEEEEEEERRRRRRRRIIIIIIIINNNNNNNNGGGGGGGG

The following is a brief summary of certain terms of the Offer. For a more complete description of the terms of the Preferred Shares, see “Description of the Preferred Shares”.

The Offer The Company, through the Underwriters and Selling Agents namedherein, is offering 8,000,000 ( if the Oversubscription Option is notexercised) cumulative, non-voting peso-denominated PreferredClass “A” Shares with a par value of P100.00 per Preferred Share.

Seven and a half percent (7.5%) of the Offer or 600,000 PreferredShares is being allocated to the Trading Participants of the PSE,acting as Selling Agents for the Offer, for the distribution to theirrespective clients on a firm commitment basis.

Oversubscription Option In the event of an oversubscription, the Joint Lead Underwriters inconsultation with the Issuer, reserve the right to increase the Offersize to up to an additional 4,000,000 Preferred Shares, for anaggregate Offer of up to 12,000,000 Preferred Shares, subject to theregistration requirements of the Philippine Securities and ExchangeCommission (“SEC”) ( the “Oversubscription Option”).

Offer Price The Preferred Shares are being offered at a price of P500.00 perShare.

Dividend Rate As and if dividends are declared by the Board, dividends on theShares shall be at a fixed rate of 8.88% per annum calculated inrespect of each Share by reference to the Offer Price thereof inrespect of each Dividend Period.

Dividend Rate Step-Up Unless the Preferred Shares are redeemed by the Company onOptional Redemption Date, the Dividend Rate shall be adjusted onthe Optional Redemption Date to the higher of (a) the Dividend Rate,or (b) the 10-year Fixed Rate Treasury Note benchmark yields asdisplayed on the “PDST-R2” screen of the PDEX page (or suchsuccessor page) of Bloomberg (or such successor electronic serviceprovider) at approximately 4:15 pm for the date corresponding to theOptional Redemption Date plus a spread of 88 basis points.

Conditions on Payment ofDividends

The declaration and payment of dividends on each DividendPayment Date will be subject to the sole and absolute discretion ofthe Board of Directors to the extent permitted by law.

The Board of Directors will not declare and pay dividends on anyDividend Payment Date where (a) payment of the Dividend wouldcause the Company to breach any of its financial covenants or (b)the profits available to the Company to distribute as dividends arenot sufficient to enable the Company to pay in full both the dividends

on the Preferred Shares and the dividends on all other classes of theCompany’s shares that are scheduled to be paid on or before thesame date as the Dividends on the Preferred Shares and that havean equal right to dividends as the Preferred Shares.

If the profits available to distribute as dividends are, in the Board’sopinion, not sufficient to enable the Company to pay in full on thesame date both dividends on the Preferred Shares and thedividends on other shares that have an equal right to dividends as



Summary of the Offering

16

the Preferred Shares, the Company is required first, to pay in full, orto set aside an amount equal to, all dividends scheduled to be paidon or before that dividend payment date on any shares with a rightto dividends ranking in priority to that of the Preferred Shares; andsecond, to pay dividends on the Preferred Shares and any othershares ranking equally with the Preferred Shares as to participation

in profits pro rata to the amount of the cash dividends scheduled tobe paid to them. The amount scheduled to be paid will include theamount of any dividend payable on that date and any arrears onpast cumulative dividends on any shares ranking equal in the right todividends with the Preferred Shares.

The profits available for distribution are, in general and with someadjustments, equal to the Company’s accumulated, realized profitsless accumulated, realized loss.

Dividends on the Shares will be cumulative. If for any reason theCompany’s Board does not declare a dividend on the Shares for adividend period, the Company will not pay a dividend on theDividend Payment Date for that dividend period. However, on any

future Dividend Payment Date on which dividends are declared,holders of the Shares must receive the Dividends due them on suchDividend Payment Date as well as all Dividends accrued and unpaidto the holders of the Shares prior to such Dividend Payment Date(see “Description of the Preferred Shares” ).

Holders of Shares shall not be entitled to participate in any other orfurther dividends beyond the dividends specifically payable on theShares.

Dividend Payment Dates Subject to limitations described in this Prospectus, dividends on theShares will be payable on February 25, May 25, August 25,November 25 of each year (each a Dividend Payment Date).

The Dividends on the Shares will be calculated on a 30/360-daybasis and will be paid quarterly in arrears on the last day of each 3-month Dividend Period (each a Dividend Payment Date), as and ifdeclared by the Board.

If the Dividend Payment Date is not a Banking Day, Dividends willbe paid on the next succeeding Banking Day, without adjustment asto the amount of dividends to be paid.

Optional Redemption andPurchase

As and if declared by the Board, the Company may redeem thePreferred Shares on the fifth anniversary from the Listing Date (theOptional Redemption Date) or on any Dividend Payment Datethereafter in whole (but not in part only), at a redemption price equalto the Issue Price of the Shares plus accrued and unpaid dividends

for all dividend periods up to date of actual redemption by theCompany.

The Company may purchase the Shares at any time in the openmarket or by public tender or by private contract at any price throughthe PSE. The Shares so purchased may either be redeemed andcancelled (after the Redemption Date) or kept as treasury shares.

Early Redemption Due toTaxation

If payments become subject to additional withholding or any new taxas a result of certain changes in law, rule or regulation, or in theinterpretation thereof, and such tax cannot be avoided by use of




17

reasonable measures available to the Company, the Company mayredeem the Preferred Shares in whole, but not in part, on anyDividend Payment Date (having given not more than 60 nor lessthan 30 days’ notice) at the Issue Price plus all accrued and unpaiddividends, if any.

No Sinking Fund The Company has not established, and currently has no plans toestablish, a sinking fund for the redemption of the Preferred Shares.

Taxation All payments in respect of the Preferred Shares are to be made freeand clear of any deductions or withholding for or on account of anypresent or future taxes or duties imposed by or on behalf of Republicof the Philippines, including but not limited to, stamp, issue,registration, documentary, value added or any similar tax or othertaxes and duties, including interest and penalties. If such taxes orduties are imposed, the Company will pay additional amounts sothat holders of the Preferred Shares will receive the full amount ofthe relevant payment which otherwise would have been due andpayable. Provided, however, that the Company shall not be liablefor: (a) the 10% applicable final withholding tax applicable on

dividends earned on the Preferred Shares prescribed under theNational Internal Revenue Code of 1997, (b) expanded value addedtax which may be payable by any holder of the Preferred Shares onany amount to be received from the Company under the Offer and(c) any withholding tax on any amount payable to any holder ofShares or any entity which is a non-resident foreign corporation.

Documentary stamp tax for the primary issue of the Shares and thedocumentation, if any, shall be for the account of the Company.

The standard taxes applicable to the subsequent sale of thePreferred Shares by any holder of the Preferred Shares shall be forthe account of the said holder.

See also the discussion under “Taxation .”

Liquidation Rights In the event of a return of capital in respect of the Company’swinding up or otherwise (whether voluntarily or involuntarily) (but noton a redemption or purchase by the Company of any of its sharecapital), the holders of the Preferred Shares at the time outstandingwill be entitled to receive, in Pesos out of the Company’s assetsavailable for distribution to shareholders, together with the holders ofany other of the Company’s shares ranking, as regards repaymentof capital, pari passu with the Preferred Shares and before anydistribution of assets is made to holders of any class of theCompany’s shares ranking after the Preferred Shares as regardsrepayment of capital, liquidating distributions in an amount ofP500.00 per Preferred Share plus an amount equal to any dividends

declared but unpaid in respect of the previous dividend period andany accrued and unpaid dividends for the then-current dividendperiod to (and including) the date of commencement of theCompany’s winding up or the date of any such other return ofcapital, as the case may be. If, upon any return of capital in theCompany’s winding up, the amount payable with respect to thePreferred Shares and any other of the Company’s shares ranking asto any such distribution pari passu with the Preferred Shares are notpaid in full, the holders of the Preferred Shares and of such othershares will share rateably in any such distribution of the Company’sassets in proportion to the full respective preferential amounts to




18

which they are entitled. After payment of the full amount of theliquidating distribution to which they are entitled, the holders of thePreferred Shares will have no right or claim to any of the Company’sremaining assets and will not be entitled to any further participationor return of capital in a winding up.

Form, Title and Registrationof the Preferred Shares

The Preferred Shares will be issued in scripless form through theelectronic book-entry system of PDTC as Registrar for the Offer, andlodged with PDTC as Depository Agent on Listing Date through PSETrading Participants nominated by the Applicants. Applicants shallindicate in the proper space provided for in the Application Form thename of the PSE Trading Participant under whose name theirShares will be registered.

After Listing Date, Shareholders may request the Registrar, throughtheir nominated PSE Trading Participant, to (a) open a scriplessregistry account and have their holdings of the Shares registeredunder their name (“name-on-registry account”), or (b) issue stockcertificates evidencing their investment in the Preferred Shares. Any

expense that will be incurred in relation to such registration orissuance shall be for the account of the requesting Shareholder.

Legal title to the Shares will be shown in an electronic register ofshareholders (the “Registry of Shareholders”) which shall bemaintained by the Registrar. The Registrar shall send a transactionconfirmation advice confirming every receipt or transfer of thePreferred Shares that is effected in the Registry of Shareholders (atthe cost of the requesting Shareholder). The Registrar shall send (atthe cost of the Company) at least once every quarter a Statement ofAccount to all Shareholders named in the Registry of Shareholders,except certificated Shareholders and Depository Participants,confirming the number of Shares held by each Shareholder onrecord in the Registry of Shareholders. Such Statement of Account

shall serve as evidence of ownership of the relevant Shareholder asof a given date thereof. Any request by Shareholders forcertifications, reports or other documents from the Registrar, exceptas provided herein, shall be for the account of the requestingShareholder.

Status of the PreferredShares in the distribution ofassets in the event ofdissolution

The Preferred Shares will constitute the direct and unsecuredsubordinated obligations of the Company ranking at least pari passuin all respects and rateably without preference or priority amongthemselves with all other preferred shares issued by the Company.

Selling and TransferRestrictions

Initial placement of the Preferred Shares and subsequent transfersof interests in the Preferred Shares shall be subject to normal sellingrestrictions for listed securities as may prevail in the Philippines fromtime to time.

Title and Transfer Legal title to the Preferred Shares shall pass by endorsement anddelivery to the transferee and registration in the Registry ofShareholders to be maintained by the Registrar. Settlement of thePreferred Shares in respect of such transfer or change of title to thePreferred Shares, including the settlement of documentary stamptaxes, if any, arising from subsequent transfers, shall be similar tothe transfer of title and settlement procedures for listed securities inthe PSE.

Governing Law The Preferred Shares will be issued pursuant to the laws of the




19

Republic of the Philippines.

Other Terms of the Offer

Offer Period The Offer Period shall commence at 9:00 a.m. on November 12,2008 and end at 5:00 p.m. on November 18, 2008. The Company

and the Underwriters reserve the right to extend or terminate theOffer Period with the approval of the SEC and the PSE.

Applications to subscribe to the Preferred Shares (each an“Application”) must be received by the Receiving Agent, not laterthan 11:00 a.m., Manila time on November 18, 2008 if filed througha Selling Agent, or not later than 5:00 p.m, Manila time on November18, 2008 if filed directly with an Underwriter. Applications receivedthereafter or without the required documents and/or full paymentswill be rejected. Applications shall be considered irrevocable uponsubmission to the any Selling Agent or Underwriter, and shall besubject to the terms and conditions of the offer as stated in thisProspectus and in the application to subscribe and purchase form(the “Application Form”).

Minimum Subscription tothe Preferred Shares

Each Application shall be for a minimum of one hundred (100)Shares, and thereafter, in multiples of twenty (20) Shares. NoApplication for multiples of any other number of Shares will beconsidered.

Eligible Investors The Preferred Shares may be owned or subscribed to by anyperson, partnership, association or corporation regardless ofnationality, provided that at any time, at least 60% of the outstandingcapital stock of the Company shall be owned by citizens of thePhilippines or by partnerships, associations or corporations at least60% of whose voting stock or voting power is owned and controlledby citizens of the Philippines. In addition, under certaincircumstances the Company may reject an Application or reduce the

number of Preferred Shares applied for subscription or purchase.

Law may restrict subscription to the Preferred Shares in certain jurisdictions. Foreign investors interested in subscribing orpurchasing the Preferred Shares should inform themselves of theapplicable legal requirements under the laws and regulations of thecountries of their nationality, residence or domicile, and as to anyrelevant tax or foreign exchange control laws and regulationsaffecting them personally. Foreign investors, both corporate andindividual, warrant that their purchase of the Preferred Shares willnot violate the laws of their jurisdiction and that they are allowed toacquire, purchase and hold the Preferred Shares.

Procedure for Application Application Forms may be obtained from an Underwriter or SellingAgent. All Applications shall be evidenced by the Application Form,duly executed in each case by an authorized signatory of theapplicant and accompanied by two (2) completed signature cards,the corresponding payment for the Shares covered by theApplication and all other required documents including documentsrequired for registry with the Registrar and Depository Agent. Theduly executed Application Form and required documents should besubmitted to the Underwriters or Selling Agents on or prior to the setdeadline for submission of Applications for Underwriters and SellingAgents, respectively. If the Applicant is a corporation, partnership, or




20

trust account, the Application must be accompanied by the followingdocuments:

A certified true copy of the Applicant’s latest articles ofincorporation and by-laws and other constitutive documents(each as amended to date);

A certified true copy of the Applicant’s SEC certificate ofregistration; and

A duly notarized corporate secretary’s certificate setting forththe resolution of the Applicant’s board of directors or equivalentbody authorizing the purchase of the Preferred Sharesindicated in the application, the designated signatoriesauthorized for the purpose, including their respective specimensignatures.

Payment for the PreferredShares

The Preferred Shares must be paid in full upon submission of theApplication.

Acceptance/Rejection ofApplications

The actual number of Preferred Shares that an Applicant will beallowed to subscribe to is subject to the confirmation of theUnderwriters. The Company reserves the right to accept or reject, inwhole or in part, or to reduce any Application due to any groundsspecified in the Issue Management and Underwriting Agreemententered into by the Company, the Issue Manager and Underwriters.Applications which were unpaid or where payments were insufficientand those that do not comply with the terms of the Offer shall berejected. Moreover, any payment received pursuant to theApplication does not mean approval or acceptance by the Companyof the Application.

An Application, when accepted, shall constitute an agreementbetween the Applicant and the Company for the subscription to thePreferred Shares at the time, in the manner and subject to termsand conditions set forth in the Application Form and those describedin this Prospectus. Notwithstanding the acceptance of anyApplication by the Company, the actual subscription by the Applicantfor the Preferred Shares will become effective only upon listing ofthe Preferred Shares on the PSE and upon the obligations of theUnderwriters under the Issue Management and UnderwritingAgreement becoming unconditional and not being suspended,terminated or cancelled, on or before the Listing Date, in accordancewith the provision of the said agreements. If such conditions havenot been fulfilled on or before the periods provided above, allApplication payments will be returned to the Applicants withoutinterest.

Refunds of Application

Payments

In the event that the number of Preferred Shares to be allotted to an

Applicant, as confirmed by an Underwriter, is less than the numbercovered by its Application, or if an Application is wholly or partiallyrejected by the Company, then the Company shall refund, withoutinterest, within five (5) Banking Days from the end of the OfferPeriod, all, or a portion of the payment corresponding to the numberof Preferred Shares wholly or partially rejected. All refunds shall bemade through the Underwriter or Selling Agent with whom theApplicant has filed the Application.

Registration of Foreign The Bangko Sentral ng Pilipinas (“BSP”) requires that investments in




21

Investments shares of stock funded by inward remittance of foreign currency beregistered with the BSP if the foreign exchange needed to servicecapital repatriation or dividend remittance will be sourced from thedomestic banking system. The registration with the BSP of allforeign investments in the Preferred Shares shall be theresponsibility of the foreign investor (see “Philippine Foreign

Investment, Foreign Ownership and Exchange Controls ”).

Tentative Listing andTrading Date

The Preferred Shares are expected to be listed on the PSE onNovember 25, 2008. Trading of the Preferred Shares shallcommence on the same date. Shareholders may trade theirPreferred Shares by giving appropriate written instructions to anyPSE Trading Participant.

Receiving Agent BPI Capital CorporationRegistrar and DepositoryAgent

Philippine Depository and Trust Corporation

Paying Agent Bank of the Philippine Island – Stock Transfer Office

Offer Period The Offer is scheduled as follows:

Start of Offer Period 9:00 a.m. of November12, 2008

Deadline for Submission of Applications

For Selling Agents 11 a.m. of November 18,2008

For Underwriters 5:00 p.m. of November18, 2008

End of Offer Period for Underwriters 5:00 p.m. of November18, 2008



22

DDDDDDDDEEEEEEEESSSSSSSSCCCCCCCCRRRRRRRRIIIIIIIIPPPPPPPPTTTTTTTTIIIIIIIIOOOOOOOONNNNNNNN OOOOOOOOFFFFFFFF TTTTTTTTHHHHHHHHEEEEEEEE PPPPPPPPRRRRRRRREEEEEEEEFFFFFFFFEEEEEEEERRRRRRRRRRRRRRRREEEEEEEEDDDDDDDD SSSSSSSSHHHHHHHHAAAAAAAARRRRRRRREEEEEEEESSSSSSSS

Set forth below is information relating to the Preferred Shares. This description is only a summary and

is qualified by reference to Philippine law and Ayala’s Articles of Incorporation (“Articles”) and By-laws,

copies of which are available at the SEC.

AYALA’S SHARE CAPITAL

A Philippine corporation may issue common or preferred shares, or such other classes of shares withsuch rights, privileges or restrictions as may be provided for in the articles of incorporation and the by-laws of the corporation.

On April 30, 2007, the SEC approved the application for an increase in capital stock from P26 Billionto P37 Billion and the corresponding Amendment of Articles of Incorporation.

The BOD approved on January 31, 2008, and the stockholders confirmed and ratified on April 4,2008, the re-issuance and reclassification of 1.2 billion redeemed Preferred A and AA shares with a

par value of P1.00 per share into 12.0 million new Preferred A shares. The new Preferred A shareshave a par value of P100 per share with the same features as the existing Preferred B shares, excepton the issue price and dividend rate. The stockholders and the BOD also approved the amendmentof the Company’s amended Articles of Incorporation to reflect the reclassification of the redeemedPreferred A and AA shares into new Preferred A shares. The SEC approved the amendments to theArticles embodying the reclassification on July 9, 2008. On May 21, 2008, the Company paid a stockdividend of 20% to common shareholders on record as of April 24, 2008.

As of June 30, 2008, the Company had an authorized capital stock consisting of (a) 600,000,000common shares with a par value of P50.00 per share, of which 496,152,534 were issued andoutstanding; (b) 900,000,000 Preferred Class “A” shares with a par value of P1.00 per share, of whichnone were outstanding, (c) 300,000,000 Preferred Class “AA” shares, of which none wereoutstanding, and (d) 58,000,000 Preferred Class “B” Shares with a par value of P100.00 per share, ofwhich 58,000,000 were issued and outstanding.

As of July 9, 2008, and following SEC approval of the Amendments to the Articles embodying thereclassification of the Preferred A and AA shares, the Company had an authorized capital stockconsisting of (a) 600,000,000 common shares with a par value of P50.00 per share, of which496,152,534 were issued and outstanding; (b) 12,000,000 Preferred Class “A” shares with a par valueof P100.00 per share, of which none were outstanding and (c) 58,000,000 Preferred Class “B” Shareswith a par value of P100.00 per share, of which 58,000,000 were issued and outstanding.

Following the Offer, and if the Oversubscription is not exercised, the Company will have (a)496,152,534 common shares, (b) 8,000,000 Preferred Class “A” shares and (c) 58,000,000 PreferredClass “B” Shares issued and outstanding.

THE PREFERRED SHARES

GENERAL FEATURES

Under the Articles, Preferred Class “A” Shares (which include the Preferred Shares) have thefollowing features, rights and privileges:

The issue value of the Preferred Class “A” Shares will be determined by the Board at the time ofissuance;



Description of the Preferred Shares

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The dividend yield of the Preferred Class “A” Shares will be determined by the Board at the timeof issuance;

Cumulative in payment of current dividends as well as any unpaid back dividends; Non-convertible into common shares; Preference over holders of common stock in the distribution of corporate assets in the event of

dissolution and liquidation of the Company and in the payment of the dividend at the rate specified

at the time of issuance; Non-participating in any other or further dividends beyond the dividends specifically payable on

the Preferred Class “A” Shares; Non-voting except in those cases specifically provided by law; No pre-emptive rights to any issue of the Company’s shares, whether common or Preferred; and Redeemable at the option of the Company under such terms as the Board may approve at the

time of the issuance of the Preferred Class “A” Shares. Re-issuable when fully redeemed.

The holders of the Preferred Shares do not have identical rights and privileges with holders of theexisting common shares of the Company.

FEATURES SPECIFIC OR PARTICULAR TO THE PREFERRED SHARES

Following are certain features specific or particular to the Preferred Shares.

I N G ENERAL: N O V OTING R IGHTS

Under the Articles, the holders of the Preferred Shares shall have no voting rights except asspecifically provided by law. Thus, holders of the Preferred Shares shall not be eligible, for example,to vote for or elect the Company’s Directors or to vote for or against the issuance of a stock dividend.

Holders of Preferred Shares, however, may vote on matters which the Corporation Code considerssignificant corporate acts that may be implemented only with the approval of shareholders, includingthose holding shares denominated as non-voting in the articles of incorporation. These acts, whichrequire the approval of shareholders representing at least two-thirds of the issued and outstandingcapital stock of the Company in a meeting duly called for the purpose, are as follows:

Amendment of the Articles (including any increase or decrease of capital stock); Amendment of the Company’s By-laws; Sale, lease, exchange, mortgage, pledge or other disposition of all or a substantial part of the

Company’s assets; Incurring, creating or increasing bonded indebtedness; Increase or decrease of capital stock; Merger or consolidation of the Company with another corporation or corporations; and Investment of corporate funds in any other corporation or business or for any purpose other than

the primary purpose for which the Company was organized; Dissolution of the Company.

D IVIDEND P OLICY IN R ESPECT OF THE P REFERRED S HARES

The declaration and payment of dividends on each Dividend Payment Date will be subject to the soleand absolute discretion of the Board to the extent permitted by law.

As and if declared by the Board, dividends on the Shares shall be at a fixed rate of 8.88% per annumcalculated in respect of each Share by reference to the Offer Price thereof (the Dividend Rate).

Unless the Preferred Shares are redeemed by the Company on Optional Redemption Date, theDividend Rate shall be adjusted for the date corresponding to the Optional Redemption Date to thehigher of (a) the Dividend Rate, or (b) the 10-year Fixed Rate Treasury Note benchmark yields asdisplayed on the “PDST-R2 screen of the PDEX page (or such successor page) of Bloomberg (or




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such successor electronic service provider) at approximately 4:15pm for the date corresponding to theOptional Redemption Date plus a spread of 88 basis points.

As and if declared by the Board, the dividends on the Shares will be calculated on a 30/360 day basisand will be paid quarterly in arrears on a Dividend Payment Date, which is the last day of each 3-month Dividend Period. Subject to limitations described in this Prospectus, dividends on the Shares

will be payable on February 25, May 25, August 25 and November 25 of each year (each a DividendPayment Date).

If the Dividend Payment Date is not a Banking Day, Dividends will be paid on the next succeedingBanking Day, without adjustment as to the amount of dividends to be paid.

The Board will not declare and pay dividends on any Dividend Payment Date where (a) payment ofthe Dividend would cause the Issuer to breach any of its financial covenants or (b) the profits availableto the Issuer to distribute as dividends are not sufficient to enable the Issuer to pay in full both thedividends on the Preferred Shares and the dividends on all other classes of the Issuer’s shares thatare scheduled to be paid on or before the same date as the Dividends on the Preferred Shares andthat have an equal right to dividends as the Preferred Shares.

If the profits available to distribute as dividends are, in the Board’s opinion, not sufficient to enable the

Issuer to pay in full on the same date both dividends on the Preferred Shares and the dividends onother shares that have an equal right to dividends as the Preferred Shares, the Issuer is required first,to pay in full, or to set aside an amount equal to, all dividends scheduled to be paid on or before thatdividend payment date on any shares with a right to dividends ranking in priority to that of thePreferred Shares; and second, to pay dividends on the Preferred Shares and any other sharesranking equally with the Preferred Shares as to participation in profits pro rata to the amount of thecash dividends scheduled to be paid to them. The amount scheduled to be paid will include theamount of any dividend payable on that date and any arrears on past cumulative dividends on anyshares ranking equal in the right to dividends with the Preferred Shares.

The profits available for distribution are, in general and with some adjustments, equal to the Issuer’saccumulated, realized profits less accumulated, realized loss. In general, under Philippine law, acorporation can only declare dividends to the extent that it has unrestricted retained earnings.Unrestricted retained earnings represent the undistributed earnings of the corporation which have not

been allocated for any managerial, contractual or legal purposes and which are free for distribution tothe shareholders as dividends.

Dividends on the Preferred Shares will be cumulative. If for any reason the Issuer’s Board does notdeclare a dividend on the Shares for a dividend period, the Issuer will not pay a dividend on theDividend Payment Date for that dividend period. However, on any future Dividend Payment Date onwhich dividends are declared, holders of the Shares must receive the Dividends due them on suchDividend Payment Date as well as all Dividends accrued and unpaid to the holders of the Shares priorto such Dividend Payment Date.

Holders of Preferred Shares shall not be entitled to participate in any other or further dividendsbeyond the dividends specifically payable on the Preferred Shares.

R EDEMPTION OF THE P REFERRED S HARES

As and if declared by the Board, the Issuer may redeem the Preferred Shares on the fifth anniversaryfrom the Listing Date (the Optional Redemption Date) or on any Dividend Payment Date thereafter inwhole (but not in part only), at a redemption price equal to the Issue Price of the Shares plus accruedand unpaid dividends for all dividend periods up to date of actual redemption by the Issuer.

The Issuer has not established, and currently has no plans to establish, a sinking fund for theredemption of the Preferred Shares.




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The Issuer may purchase the Shares at any time in the open market or by public tender or by privatecontract at any price through the PSE. The Shares so purchased may either be redeemed andcancelled (after the Redemption Date) or kept as treasury shares.

Early Redemption due to Taxation

If payments become subject to additional withholding or any new tax as a result of certain changes inlaw, rule or regulation, or in the interpretation thereof, and such tax cannot be avoided by use ofreasonable measures available to the Issuer, the Issuer may redeem the Preferred Shares in whole,but not in part, on any Dividend Payment Date (having given not more than 60 nor less than 30 days’notice) at the Issue Price plus all accrued and unpaid dividends, if any.

Documentary stamp tax for the primary issue of the Preferred Shares and the documentation, if any,shall be for the Issuer’s account.

LIQUIDATION R IGHTS IN R ESPECT OF THE P REFERRED S HARES

The Preferred Shares will constitute direct and unsecured subordinated obligations of the Issuer

ranking at least pari passu in all respects and rateably without preference or priority amongthemselves with all other preferred shares issued by the Issuer.

In the event of a return of capital in respect of the Issuer’s winding up or otherwise (whethervoluntarily or involuntarily) (but not on a redemption or purchase by the Issuer of any of its sharecapital), the holders of the Preferred Shares at the time outstanding will be entitled to receive, inPesos out of the Issuer’s assets available for distribution to shareholders, together with the holders ofany other of the Issuer’s shares ranking, as regards repayment of capital, pari passu with thePreferred Shares and before any distribution of assets is made to holders of any class of the Issuer’sshares ranking after the Preferred Shares as regards repayment of capital, liquidating distributions inan amount of P500.00 per Preferred Share plus an amount equal to any dividends declared butunpaid in respect of the previous dividend period and any accrued and unpaid dividends for the then-current dividend period to (and including) the date of commencement of the Issuer’s winding up or thedate of any such other return of capital, as the case may be. If, upon any return of capital in the

Issuer’s winding up, the amount payable with respect to the Preferred Shares and any other of theIssuer’s shares ranking as to any such distribution pari passu with the Preferred Shares are not paidin full, the holders of the Preferred Shares and of such other shares will share rateably in any suchdistribution of the Issuer’s assets in proportion to the full respective preferential amounts to which theyare entitled. After payment of the full amount of the liquidating distribution to which they are entitled,the holders of the Preferred Shares will have no right or claim to any of the Issuer’s remaining assetsand will not be entitled to any further participation or return of capital in a winding up.

P AYMENTS ON THE P REFERRED S HARES

All payments in respect of the Preferred Shares are to be made free and clear of any deductions orwithholding for or on account of any present or future taxes or duties imposed by or on behalf ofRepublic of the Philippines, including but not limited to, stamp, issue, registration, documentary, value

added or any similar tax or other taxes and duties, including interest and penalties. If such taxes orduties are imposed, the Issuer will pay additional amounts so that holders of the Preferred Shares willreceive the full amount of the relevant payment which otherwise would have been due and payable.Provided, however, that the Issuer shall not be liable for: (a) the final withholding tax applicable ondividends earned on the Preferred Shares prescribed under the National Internal Revenue Code of1997, (b) expanded value added tax which may be payable by any holder of the Preferred Shares onany amount to be received from the Issuer under the Preferred Shares and (c) any withholding tax onany amount payable to any holder of the Share or any entity which is a non-resident foreigncorporation.




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Documentary stamp tax for the primary issue of the Shares and the documentation, if any, shall be forthe account of the Issuer.

The standard taxes applicable to the subsequent sale of the Preferred Shares by any holder of the

Preferred Shares shall be for the account of the said holder.

N O P RE - EMPTIVE R IGHTS

The Articles currently deny pre-emptive rights to holders of Preferred Shares over all issuances of theCompany’s common, Class “A” or Class “B” Shares. However, shareholders representing at least two-thirds of the Company’s issued and outstanding capital stock voting at a shareholders’ meeting dulycalled for the purpose may amend the Articles to grant pre-emptive rights to subscribe to a particularissue or other disposition of shares from Ayala’s capital. Pre-emptive rights may not extend to sharesto be issued in compliance with laws requiring stock offerings or minimum stock ownership by thepublic; or to shares to be issued in good faith with the approval of the shareholders representing two-thirds of the outstanding capital stock in exchange for property needed for corporate purposes or inpayment of a previously contracted debt.

T RANSFER OF S HARES AND S HARE R EGISTER

The Preferred Shares will be issued in scripless form.

Legal title to the Preferred Shares will be shown in the Register of Shareholders which shall bemaintained by the Registrar. The Registrar shall send (at the cost of the Issuer) at least once everyquarter a Statement of Account to all Shareholders named in the Register of Shareholders confirmingthe number of Shares held by each Shareholder on record in the Register of Shareholders. SuchStatement of Account shall serve as evidence of ownership of the relevant Shareholder as of a givendate thereof. Any request by Shareholders for certifications, reports or other documents from theRegistrar, except as provided herein, shall be for the account of the requesting Shareholder.

Initial placement of the Preferred Shares and subsequent transfers of interests in the PreferredShares shall be subject to normal Philippine selling restrictions for listed securities as may prevailfrom time to time.

After Listing Date, Shareholders of the Shares may request the Registrar and Depository Agent toissue stock certificates evidencing their investment in the Preferred Shares. Any expense that will beincurred in relation to such issuance shall be for the account of the requesting shareholder.

Philippine law does not require transfers of the Preferred Shares to be effected on the PSE, but anyoff-exchange transfers will subject the transferor to a capital gains tax that may be significantly greaterthan the stock transfer tax applicable to transfers effected on an exchange. See “Taxation ”. Alltransfers of shares on the PSE must be effected through a licensed stock broker in the Philippines.

N OT C ONVERTIBLE INTO C OMMON S HARES

The Preferred Shares shall not be convertible into Ayala’s common shares.

OTHER RIGHTS AND INCIDENTS RELATING TO THE PREFERRED SHARES

Following are other rights and incidents relating to the Preferred Shares, which may also apply toother classes of Ayala’s stock.

R ESTRICTIONS ON FOREIGN OWNERSHIP OF AYALA’ S S HARES BY NON -P HILIPPINE NATIONALS

Under Philippine law, no more than 40% of the capital of corporations holding land may be owned bynon-Philippine nationals. Ayala currently owns certain parcels of land. Accordingly, the PreferredShares and Ayala’s other shares may be owned or subscribed by or transferred to any person,




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partnership, association or corporation regardless of nationality, provided that at anytime at least 60%of the Company’s outstanding capital stock shall be owned by citizens of the Philippines or bypartnerships, associations or corporations 60% of the voting stock or voting power of which is ownedand controlled by citizens of the Philippines.

D IRECTORS

Unless otherwise provided by law or the Articles, the Company’s corporate powers are exercised, itsbusiness is conducted, and its property is controlled by the Board. Ayala has seven Directors who areelected by holders of shares entitled to voting rights under the Articles during each annual meeting ofthe shareholders for a term of one year. As mentioned, holders of Preferred Shares are not entitled tovote for and elect the Company’s Directors.

Ayala’s By-laws currently disqualify or deem ineligible for nomination or election to the Board anyperson who is engaged in any business which competes with or is antagonistic to that of theCompany. Without limiting the generality of the foregoing, a person shall be deemed so engaged:

(a) If he is an officer, manager or controlling person of, or the owner (either of record or beneficially)of 10% or more of any outstanding class of shares of, any corporation (other than one in which

the Company owns at least 30% of the capital stock) engaged in a business which the Board, byat least three-fourths vote, determines to be competitive or antagonistic to that of the Company;

(b) If he is an officer, manager, controlling person of, or the owner (either of record or beneficially of10% or more of any outstanding class of shares of any other corporation or entity engaged in anyline of business of the Company, when in the judgment of the Board, by at least three-fourthsvote, the laws against combinations in restraint of trade shall be violated by such person’smembership in the Board.

(c) If the Board, in the exercise of its judgment in good faith, determines by at least three-fourths votethat he is the nominee of any person set forth in (a) or (b).

In determining whether or not a person is a controlling person, beneficial owner, or the nominee ofanother, the Board may take into account such factors as business and family relations.

The Company conforms to the requirement to have at least one independent director or such number

of independent directors as may be required by law. As of the date of this Prospectus, the Company’sindependent director was Mr. Meneleo J. Carlos, Jr.

Directors may only act collectively; individual Directors have no power as such. A majority of theDirectors constitutes a quorum for the transaction of corporate business and every decision of amajority of the quorum duly assembled as a board is valid as a corporate act. Any vacancy created bythe death or resignation of a Director prior to expiration of his term may be filled by the remainingmembers of the Board, if still constituting a quorum. Any Director elected in this manner by the Boardshall serve only for the unexpired term of the Director whom he replaces. Any such vacancy may alsobe filled by the shareholders entitled to vote, by ballot, at any meeting or adjourned meeting heldduring such vacancy, provided that the notice of the meeting mentions such vacancy or expectedvacancy.

APPRAISAL R IGHTS

Philippine law recognizes the right of a shareholder to institute, under certain circumstances,proceedings on behalf of the corporation in a derivative action in circumstances where the corporationitself is unable or unwilling to institute the necessary proceedings to redress wrongs committedagainst the corporation or to vindicate corporate rights, as for example, where the directorsthemselves are the malefactors.

In addition, the Corporation Code grants a shareholder a right of appraisal in certain circumstanceswhere he has dissented and voted against a proposed corporate action, including:




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an amendment of the articles of incorporation which has the effect of adversely affecting the rightsattached to his shares or of authorizing preferences in any respect superior to those ofoutstanding shares of any class or of extending or shortening the term of corporate existence;

the sale, lease, exchange, transfer, mortgage, pledge or other disposal of all or substantially allthe assets of the corporation;

the investment of corporate funds in another corporation or business or for any purpose otherthan the primary purpose for which the corporation was organized; and

a merger or consolidation.

In these circumstances, the dissenting shareholder may require the corporation to purchase hisshares at a fair value which, in default of agreement, is determined by three disinterested persons,one of whom shall be named by the stockholder, one by the corporation, and the third by the two thuschosen. The SEC will, in the event of a dispute, determine any question about whether a dissentingshareholder is entitled to this right of appraisal. The dissenting stockholder will be paid if the corporateaction in question is implemented and the corporation has unrestricted retained earnings sufficient tosupport the purchase of the shares of the dissenting shareholders.

S HAREHOLDERS ’ M EETINGS

At the annual meeting or at any special meeting of the Company’s shareholders, the latter may beasked to approve actions requiring shareholder approval under Philippine law.

Q UORUM

The Corporation Code provides that, except in instances where the assent of shareholdersrepresenting two-thirds of the outstanding capital stock is required to approve a corporate act (usuallyinvolving the significant corporate acts where even non-voting shares may vote, as identified above)or where the by-laws provide otherwise, a quorum for a meeting of shareholders will exist ifshareholders representing a majority of the capital stock are present in person or by proxy.

V OTING

At each shareholders’ meeting, each shareholder shall be entitled to vote in person, or by proxy, allshares held by him which have voting power, upon any matter duly raised in such meeting.

The Company’s By-laws provide that proxies shall be in writing and signed and in accordance with theexisting laws, rules and regulations of the SEC. Duly accomplished proxies must be submitted to theoffice of the Corporate Secretary not later than seven business days prior to the date of thestockholders’ meeting. Validation of proxies shall be conducted by the Proxy Validation Committee atleast five business days prior to the date of the stockholders’ meeting.

F IXING R ECORD D ATES

The Board has the authority to fix in advance the record date for shareholders entitled: (a) to notice of,to vote at, or to have their votes voted at, any shareholders’ meeting; (b) to receive payment of

dividends or other distributions or allotment of any rights; or (c) for any lawful action or for making anyother proper determination of shareholders’ rights. No transfer will be recorded in the stock andtransfer book on the date of a shareholders’ meeting and within five working days from the recorddate of such meeting.

I SSUES OF S HARES

Subject to applicable limitations, the Company may issue additional shares to any person forconsideration deemed fair by the Board, provided that such consideration shall not be less than thepar value of the issued shares.




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M ANDATORY T ENDER O FFERS

Under the Securities Regulation Code and its implementing rules, subject to certain exceptions:

A. Any person or group of persons acting in concert, who intends to acquire thirty five percent

(35%) or more of equity shares in a public company shall disclose such intention andcontemporaneously make a tender offer for the percent sought to all holders of such class. In theevent that the tender offer is oversubscribed, the aggregate amount of securities to be acquired at theclose of such tender offer shall be proportionately distributed across both selling shareholder withwhom the acquirer may have been in private negotiations and minority shareholders.

B. Any person or group of persons acting in concert, who intends to acquire thirty five percent(35%) or more of equity shares in a public company in one or more transactions within a period oftwelve (12) months, shall be required to make a tender offer to all holders of such class for thenumber of shares so acquired within the said period.

C. If any acquisition of even less than thirty five percent (35%) would result in ownership of overfifty one percent (51%) of the total outstanding equity securities of a public company, the acquirershall be required to make a tender offer for all the outstanding equity securities to all remaining

stockholders of the said company at a price supported by a fairness opinion provided by anindependent financial advisor or equivalent third party. The acquirer in such a tender offer shall berequired to accept any and all securities thus tendered.

ACCOUNTING AND AUDITING R EQUIREMENTS /R IGHTS OF I NSPECTION

Philippine stock corporations are required to file copies of their annual financial statements with theSEC. Corporations whose shares are listed on the PSE are also required to file quarterly and annualreports with the SEC and the PSE. Shareholders are entitled to request copies of the most recentfinancial statements of the corporation which include a balance sheet as of the end of the most recenttax year and a profit and loss statement for that year. Shareholders are also entitled to inspect andexamine the books and records that the corporation is required by law to maintain.

The Board is required to present to shareholders at every annual meeting a financial report of the

operations of the corporation for the preceding year. This report is required to include audited financialstatements.



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RRRRRRRRIIIIIIIISSSSSSSSKKKKKKKK FFFFFFFFAAAAAAAACCCCCCCCTTTTTTTTOOOOOOOORRRRRRRRSSSSSSSS

The price of securities can and does fluctuate, and any individual security may experience upward or downward movements, and may even become valueless. An investment in the Preferred Shares involves a higher degree of risk compared to debt instruments. There is an inherent risk that losses may be incurred rather than profit

made as a result of buying and selling securities. Past performance is not a guide to future performance and there may be a large difference between the price and selling price of these securities. Investors deal with a range of investments, each of which may carry different levels of risk. Investors should carefully consider all the information contained in this Prospectus, including the risk factors described below before deciding to invest in the Preferred Shares.

PRUDENCE REQUIRED

The risk disclosure does not purport to disclose all the risks and other significant aspects of investing in these securities. An investor should undertake its, his or her own research and study on the trading of securities before commencing any trading activity. Investors may request information on the securities and Issuer thereof from the SEC which are available to the public.

PROFESSIONAL ADVICE

An investor should seek professional advice if he or she is uncertain of, or has not understood, any aspect of the securities to invest in or the nature of risks involved in trading of securities especially high risk securities.

RISK FACTORS

An investment in the Preferred Shares described in this Prospectus involves a certain degree of risk.A prospective purchaser of the Preferred Shares should carefully consider the following factors, in addition to the other information contained in this Prospectus, in deciding whether or not to invest in the Preferred Shares. This Prospectus contains forward-looking statements that involve risks and uncertainties. Ayala Corporation adopts what it considers conservative financial and operational controls and policies to manage its business risks. Ayala Corporation’s actual results may differ significantly from the results discussed in the forward-looking statements. See section “Forward- Looking Statements” of this Prospectus. Factors that might cause such differences, thereby making

the offering speculative or risky, may be summarized into those that pertain to the business and operations of Ayala Corporation, in particular, and those that pertain to the over-all political,economic, and business environment, in general. These risk factors and the manner by which these risks shall be managed are presented below.

Investors should carefully consider all the information contained in this Prospectus including the risk factors described below, before deciding to invest in the Preferred Shares. The Company's business,financial condition and results of operations could be materially adversely affected by any of these risk factors.

RISKS ASSOCIATED WITH THE COMPANY

Holding Company Structure

As a holding company, Ayala operates principally through its subsidiaries and affiliates. Claims ofcreditors of Ayala’s subsidiaries and affiliates, including trade creditors, bank lenders and othercreditors, will have priority over any claims of Ayala and holders of the Preferred Shares with respectto the assets of such subsidiaries and affiliates.

Substantially all of Ayala’s cash flow is dependent on cash distributions from, or the proceeds of therealization of, its investments in subsidiaries and affiliates. The ability of Ayala’s subsidiaries andaffiliates to pay dividends to stockholders is subject to applicable law and restrictions contained in



Risk Factors

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debt instruments of such subsidiaries and affiliates and may also be subject to deduction for taxes. Inaddition, the declaration of dividends by Philippine banks is subject to approval by the BSP, therebyaffecting the payment of dividends from Ayala’s banking affiliate, the BPI Group, to Ayala. To theextent possible, Ayala monitors and supervises the performance of its subsidiaries and affiliates tohelp generate or improve such cash distributions and proceeds. There is no assurance, however, thatAyala can generate sufficient cash flow from dividends or other payments to allow it meet its

obligations under the Preferred Shares. Any shortfall would have to be made up from other availablesources of cash, such as a sale of investments or proceeds from other refinancing activities availableto Ayala.

Ayala, its subsidiaries and affiliates have a substantial number of contractual and workingarrangements with each other. While Ayala believes that all contractual arrangements between andamong itself, its subsidiaries and affiliates, are entered into on an arms-length basis, there can be noassurance that any such contract is on terms as favorable as could have been obtained in atransaction with an unrelated third party. There is also no assurance that future working arrangementsbetween related parties will not involve conflicts of interest.

Intensive Capital Requirements

A number of Ayala’s principal operating companies operate in highly capital intensive industries whereit is critical to be able to keep up considerable levels of capital investments in order to maintain marketposition and sustain growth. These industries include property development, telecommunications andwater utilities. Ayala believes however that its principal operating companies will be able to meet theirrespective future capital expenditure requirements from their own internally generated cash flows andborrowing capacity with minimal or no additional funding support from Ayala.

Foreign Exchange Risk

Ayala incurs foreign exchange risk as part of its business as it may elect to finance its investments inforeign currency. To manage this exposure, Ayala may utilize short- to medium-term hedges. Inaddition, the Company maintains part of its liquid assets in short-term foreign currency denominatedinvestments.

Competition

All of Ayala’s main operating subsidiaries and affiliates operate in highly competitive industries.Changes in Philippine laws such as increased liberalization and tariff reductions may result in loweringthe barriers to entry in industries where Ayala’s subsidiaries and affiliates operate resulting inincreased competition. No assurance can be given that increased competition in the various industrysegments will not adversely affect Ayala’s financial condition and results of operations.

Industry Risks

Ayala operates in four key areas: real estate and hotels, financial services, telecommunications and aportfolio of other investments which includes water utilities, electronics and information technology, aswell as automotive and international operations. These areas have inherent risks, to wit:

Real Estate and Hotels

The Philippine property market has, in recent years, shown remarkable year-on-year growth, in termsof the number of development projects being undertaken. The steady rise in the Philippine economyover the past several years, coupled with massive interest from Overseas Filipino Workers wanting toestablish permanent or temporary residence in the Philippines, is expected to support this growth.Construction is widespread not only in Metro Manila but also in outlying provinces and other majorcities as well. The current property boom indicates that the industry is now recovering from the effectsof the Asian Financial Crisis. Any changes in demand, however, may result in a glut, which mayagain depress prices, similar to what happened in 1997.



Risk Factors

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Financial Services

The Philippine banking industry has seen a significant increase in the number of commercial banks,especially since the liberalization of operations by foreign banks. The number of commercial banksincreased from approximately 30 prior to liberalization to more than 50. However, as of end 2007, the

number of universal and commercial banks had declined to 36 as a result of mergers and closures.Competition has remained intense despite the industry consolidation.

Corporate lending remained very competitive resulting in even narrower spreads. Pockets of growthwere seen in the middle corporate market segment; yields in this segment were wider but continued tobe highly vulnerable to economic shocks.

Telecommunications

The Philippine telecommunications industry, particularly wireless communications, has been notablycompetitive as competitors have sought to increase market share by attracting new subscribers. Theprincipal players in Philippine telecommunications are Globe, Philippine Long Distance TelephoneCompany (“PLDT”) and its wireless subsidiary Smart Communications, Inc. (“Smart”) and Digitel

Communications Philippines, Inc. (“Digitel”) which launched its wireless “Sun Cellular” mobile servicein 2003. Other players include Bayan Telecommunications Philippines, Inc. (“Bayantel”) and ExpressTelecommunications Company (“Extelcom”), which are both licensed to provide wireless mobileservices, and Infocom Communications Network, Inc. a licensed wireless trunked radio serviceoperator.

While wireless subscriber growth is expected to continue, it may not continue to grow at the same rateas in the past. Further reductions in rates, wider penetration into lower-usage subscriber segments,and intense competition may also result in declining average revenues per subscriber.

Other industry considerations include the capital-intensive nature of the business, the rapid pace ofchange in telecommunications technology, and the regulated nature of the industry.

Others

Ayala’s portfolio of investments includes an investment in a water utility business, MWC. MWCoperates in a highly regulated environment under the terms of the Concession Agreement enteredinto with the Government. Among others, the operations of this business will be materially affected byMWC’s ability to implement rate increases, meet capital expenditure requirements and concession feepayments (to the Government), comply with operating and performance targets specified under theConcession Agreement, and the availability of adequate raw water supply.

Ayala is also involved in electronics contract manufacturing through the Integrated Microelectronics,Inc. (“IMI”), which is engaged in electronics assembly and product and engineering design. IMI’sprincipal products comprise printed circuit board assemblies (“PCBAs”), computer peripherals andstorage devices and other electronic sub-assemblies for export to various consumer and industrialapplications. IMI’s principal customers operate in a highly competitive global environment dominatedby several large participants. Global downturns in industry demand and increasing competition fromcountries such as China could also materially impact IMI’s operating performance moving forward.

Azalea Technology Investments, Inc. (“Azalea”) is Ayala’s investment vehicle in mobile and e-commerce opportunities, communications, technologies and other IT-enabled services. The industriesin which Azalea’s investment companies operate are emerging industries which, while offeringsignificant growth opportunities, are also exposed to significant technology risks and competition.There can be no assurance that these investments will deliver Ayala with adequate returns.

Ayala also maintains investments in the automotive industry through its ownership of car dealershipsfor Honda passenger cars and Isuzu Asian utility vehicles, commercial vehicles and trucks. These



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operations depend largely on the market demand for commercial vehicles and passenger cars, aswell as the market acceptance of new product offerings.

Recently, Ayala made investments in business process outsourcing to take advantage of the growthpotential of the sector. The country’s supply of skilled personnel for BPO may not be sufficient to fillthe sector’s growing demand for labor, which can pose challenges in recruitment and employee

retention, and provide pressure on training and wage cost for BPO companies.

Through AG Holdings Ltd., Ayala also makes overseas real estate investments within the Asia-Pacificregion and the United States. Global downturns in the property market will materially affect the abilityof these investments to deliver their anticipated returns.

Government Regulation

A material part of Ayala’s businesses including real estate, banking, telecommunications and waterutilities, operate in an environment with various degrees of Government regulation. The introduction ofinconsistent or unpredictable application of, or changes in, Government regulations may from time totime materially affect the operations of Ayala’s businesses.

Litigation

Being one of the largest and most diverse companies in the Philippines, Ayala is exposed to the riskof legal proceedings against it.

Data Management Systems

Ayala relies on the latest information communication technologies for its operations and themanagement of data. There is a risk that these systems may fail for reasons such as naturalcalamity.

Management of Risks Related to the Company

Ayala applies conservative financial and operational controls in the management of its business risks.

Organizationally, it is the lead directors/company presidents/chief risk officers who have ultimateaccountability and responsibility to ensure risk management initiatives at subsidiaries are aligned withAyala and are responsible for submission of risk reports to ensure key risks are well-understood,assessed/measured and reported. Providing support are the internal audit units who regularly processaudits and process improvements.

The Audit and Risk Committee of the Board meets regularly and performs its oversight role inmanaging the risks involved in the operations of Ayala. In addition, a Chief Risk Officer oversees theentire risk management function and is responsible for overall continuity.

In terms of internal control risks, control mechanisms, systems and policies had been put in place inorder to address any control lapses. The Audit and Risk Committee sees to it that these internalcontrol risks are properly addressed through strict compliance with these system controls, policies andprocedures. Moreover, Ayala has a culture and systems for transparency, corporate governance,

disclosure and checks-and-balances between various decision-making personnel that minimize therisks described above.

With respect to legal proceedings, Ayala’s Senior Counsel, General Counsel and CorporateGovernance & Legal Affairs group analyze its transactions and activities to ensure compliance withlaw, regulation, and contractual obligations. In the event that material litigation against it does arise,Ayala assesses the merits of the case and its impact on company operations. If needed, Ayalaretains external counsel to help in the analysis or handle the actual litigation of the case.



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Ayala has a Business Continuity Plan composed of, among other components, the ICT SystemsContinuity Plan and the Disaster Recovery Plan. The Company backs-up data in its servers on adaily basis. It has a back-up site which is production-ready, meaning that all productions systems inits principal office may be recovered in the event said office becomes unavailable due to a disaster.Critical systems are recoverable within one to two hours; regular systems can be recovered within 24hours. Ayala continually invests in business continuity technology in order to reduce the recovery

time of servers at the back-up site, maximize the reliability, efficiency and manageability of the back-up system, and ensure the automatic back-up of all data stored in Company desktops and laptops.

RISKS RELATED TO THE ORGANIZATION

1. The Company depends significantly on the services of members of its management team,and the departure of any of these persons is not expected to cause any significant effect on its operating results.

The Company's success depends significantly on the continued individual and collective contributionsof each member of its management team. Most of its managers have acquired a high level oftechnical expertise through many years of experience working with the Company. The loss of theservices of any member of the Company's senior management, and the inability to immediately hireand retain experienced management personnel, while it could have an adverse effect on its business

and results of operations, is not expected to be material.

2. Unauthorized, negligent or fraudulent acts of any of the Company’s employees may result in financial or economic losses for the company.

As part of its overall strategy, the Company has empowered its managers to perform and/or engage incertain transactions with third parties. The Company tries to maintain an appropriate balance betweeninternal controls and organizational empowerment. While the Company has put in place internalcontrols (such as limits in approval authority, regular audits, system controls and appropriate penaltiesfor violations), certain employees may act negligently or in bad faith, commit certain acts which maybe detrimental to the interests of the Company.

Management of Risks Related to the Organization

While Ayala is sometimes portrayed in the media as a family corporation, it must be stressed that itsBoard of Directors represents a mix of business, legal and finance competencies, with each directorcapable of adding value and rendering independent judgment in relation to the formulation of soundcorporate policies. Directors are committed to the collective decision making processes of the Board.Decision-making at the Board level adheres to an objective process that does not undermine theindependence and integrity of judgment of each individual director.

Good corporate governance is the cornerstone of Ayala’s sustained success over the past 174 years.The Company’s primary mission and mandate is to create long-term value for its business andstakeholders. In pursuit of this, Ayala has committed to the highest level of governance throughoutthe organization as well as fostering a corporate culture of integrity and empowering leadership.

Ayala constantly reviews and revises its human resource policies and employee benefits structures toensure that its employees, whether rank-and-file or management, experience the best possible

working environment, thereby reducing employee turn-over. The Company also has processes inplace for the identification and hiring of the best available talent, whether inside or outside Ayala.

As part of its succession planning initiatives, the Company has instituted various employeedevelopment programs, including cross-posting, foreign immersions, educational assistance,mentoring and leadership development training. These programs equip the middle-managers with theright tools needed not only for their present responsibilities, but also those required for them toassume higher positions in the organization. These programs minimize the risks associated with theturn-over of experienced management, as Ayala would be able to find competent people to take theirplace.



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In terms of internal control risks, control mechanisms, systems and policies had been put in place inorder to address any control lapses. The Audit and Risk Committee sees to it that these internalcontrol risks are properly addressed through strict compliance with these system controls, policies andprocedures. Moreover, Ayala has a culture and systems for transparency, corporate governance,disclosure and checks-and-balances between various decision-making personnel that minimize the

risks described above.

RISKS ASSOCIATED WITH THE PHILIPPINES

Ayala’s businesses will be influenced by the general political and economic situation of thePhilippines. Any political and/or economic instability in the future may have a negative effect onAyala’s financial condition and result of operations.

1. Any political or social instability in the future may have an effect on the financial results of the Company.

The Philippines has from time to time experienced political, social and military instability. In February1986, a peaceful civilian and military uprising ended the 21-year rule of President Ferdinand Marcosand installed Corazon Aquino as President of the Philippines. Between 1986 and 1989, there were anumber of attempted coups d'etat against the Aquino administration, none of which was successful.

Political conditions in the Philippines were generally stable during the mid to late 1990s following theelection of Fidel Ramos as President in 1992. However, during 2000, his successor, Joseph Estrada,was subject to allegations of corruption. This led to impeachment proceedings, mass public protestsin Manila, the withdrawal of support of the military and Estrada’s eventual resignation from office.Following Estrada’s resignation, the then Vice President, Gloria Macapagal-Arroyo, was sworn in asPresident on January 20, 2001.

In 2005, the country again experienced political tension following President Macapagal-Arroyo'sadmission that she called a high ranking official of the Commission on Elections during the May 2004election campaign. This was followed by the resignation of the Administration’s key Cabinet officialsas well as the filing of three impeachment complaints alleging that she rigged the 2004 elections,none of which prospered.

A new impeachment complaint was filed on October 5, 2007 against President Arroyo in connectionwith bribery allegations involving a government contract awarded to a Chinese telecommunicationscompany. Thus far, no substantial evidence has been found directly linking President Arroyo to thealleged bribery.

On November 29, 2007, a Philippine Senator and former lieutenant, Antonio Trillanes IV led a groupof military officers in walking out of a trial for the occupation of the Oakwood Premier Ayala Centerand seizing a hotel in Makati to demand President Arroyo to step down. The group peacefullysurrendered after a 6-hour standoff with government forces.

The next presidential elections will be held in 2010 and the Filipino people are hoping for politicalstability given the change in the administration. Overall, any future economic, political or socialinstability in the Philippines may affect Ayala’s business, financial condition or results of operations.

2. A slowdown in the economic growth, coupled with high inflation and interest rates in the Philippines, could materially adversely affect the Company’s business.

In the past, the Philippines has experienced periods of slow or negative growth, high inflation,significant depreciation of the Philippine peso and electricity shortages. The regional Asian financialcrisis in 1997 also affected the Philippine economy resulting in, among others, the depreciation of thePhilippine peso, higher interest rates, slower growth and a reduction in the country’s credit ratings.These affected the ability of a number of Philippine companies to meet their debt servicingobligations. While the Philippine economy registered economic growth since the Asian financial crisis,



Risk Factors

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the economy faced significant challenges such as a ballooning budget deficit, inflation, commodityand oil price hikes, volatile exchange rates and a relatively weak banking sector. Overall public sectorperformance also remained mixed, with the government encumbered with sizable guaranteed andnon-guaranteed contingent liabilities that complicate fiscal prospects.

Despite entrenched special interests, Government managed to address certain challenges. In

November 2005, a new VAT law took effect, expanding VAT coverage to previously exempt productsand services; and in February 2006, the Government increased the VAT rate to 12% from 10%.These tax changes helped to raise revenue collections by around P162 billion in 2006 and P157billion in 2007.

The Government has been successful thus far in reducing its budget deficit. With tighter spending andimproved revenue collection, the budget deficit in 2007 was P12.4 billion, lower than the P67 billionprogram for the year. The Government projects the budget deficit to reach between P 40 to P75 billionin 2008.

Real gross domestic product (“GDP”) rose by 5.4% in 2006, versus a 4.9% growth registered in 2005.In 2007, GDP posted a 7.3% increase, the fastest in three decades, due to the robust performance ofthe industrial and services sectors.

While the Philippine economy performed well in 2007, macroeconomic conditions significantlychanged in the first half of 2008. Inflation rate in the first six months of 2008 rose to an average of7.6%, compared to an annual average of 3% in 2007. Rising food commodity and oil prices globallyhave driven up consumer prices domestically. With increasing food and energy prices, theGovernment is forecasting a lower GDP growth of 5.7-6.5% in 2008.

Recently, global developments have also affected the Philippine financial markets. The United States(US) is a major trading partner of the Philippines, and it is likely that a slowdown in the US economymay adversely affect the Philippine economy. Recent events have already affected the Philippinestock market, as well as the debt capital market. It is not certain how the global events will impact thePhilippines in the long run.

Fitch Ratings (“Fitch”) has assigned a long-term foreign currency debt rating to the Philippines of “BB”(two notches below investment grade), while Standard & Poor’s (“S&P”) has assigned a “BB-“ (three

notches below investment grade) rating and Moody’s Investors Service (“Moody’s”) has assigned “B1”(four notches below investment grade) rating to the Philippines. Due to the Government’simplementation of tax reforms and drive to reduce its budget deficit, Fitch and S&P upgraded theirratings outlook on the Philippines from “negative” to “stable” in February 2006. Moody’s on the otherhand maintained its “negative” outlook, citing the need for the Government to demonstrate asustained commitment to implement tax reforms and achieve a much improved fiscal position.

While a new VAT law is in place and the Government has achieved lower budget deficits, there is noassurance that the Government’s fiscal position will continue to improve. Should economic conditionsof the Philippines deteriorate, such deterioration could affect Ayala’s financial condition and results ofoperations.

3. Depreciation in the value of the Peso against the U.S. dollar and other currencies may affect the Company's business.

Ayala’s revenues are predominantly denominated in Pesos, while some investment initiatives andcertain expenses including debt obligations, are denominated in currencies other than Pesos(principally U.S. Dollars). To fund its foreign currency requirements, Ayala taps the internationalmarket to raise needed funds and capitalize on the offshore’s flexibility in volume and in pricing. Tohedge against this minimal foreign currency exposure, Ayala utilizes short to medium term hedges toprotect itself from any Peso depreciation. Furthermore, Ayala also keeps short term U.S. Dollarinvestments as part of its liquid assets.



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During the last decade, the Philippines, from time to time, has experienced devaluations of the Pesoand limited foreign exchange. From 1996 to 2004, the Peso depreciated at a rate of 10% per annumfrom P26.288 per U.S. Dollar at end-1996 to P56.341 at end-2004. Owing to the implementation ofthe new VAT law as well as strong inflows of OFW remittances, the Peso strengthened to P 49.03 perU.S. Dollar at end-2006, and further rose to P41.28 per U.S. Dollar by end-2007. The peso managedto appreciate to an 8-year high during the first quarter of 2008, reaching 40.330 on February 27, 2008.

However, the local currency's momentum stalled during the height of the Senate's inquiry on thecorruption charges leveled by whistleblower Jun Lozada on key members of the Arroyo Administrationregarding the NBN-ZTE Broadband deal. The peso made a slight recovery afterwards, but theunexpected rise in global fuel and food prices early in the second quarter of 2008 as investorschanneled their liquidity towards commodities drove importation costs higher, undermining the peso'sinterest rate differential advantage versus the U.S. dollar. Subsequent risk aversion following thecollapse of several financial institutions in the U.S. and Europe has pushed the currency pair back tothe 47.000 level where it is seen consolidating in the near -term.

There can be no assurance that future Peso devaluations will not occur or that the availability offoreign exchange will not be limited. Recurrence of these conditions may affect Ayala’s financialcondition and results of operations.

Management of Risks related to the Philippines

The Company has been able to overcome major crises brought about by economic and politicalfactors affecting the country. The strong corporate governance structure of the Company and itsprudent management team are the foundations for its continued success. Ayala also constantlymonitors its macroeconomic risk exposure, identifies unwanted risk concentrations, and modifies itsbusiness policies and activities to navigate such risks. Severe macroeconomic contractions mayconceivably lead Ayala to tweak its investment decisions to meet the downturn. As a holdingcompany, Ayala will affirm the principles of fiscal prudence and efficiency in operations to thecompanies in which it has a stake in.

RISKS ASSOCIATED WITH THE PREFERRED SHARES

Payment of Dividends on Preferred Shares

Dividends on the Preferred Shares may not be paid in full, or at all. Under the terms and conditionsgoverning the Preferred Shares, the Company may pay no dividends or less than full dividends on aDividend Payment Date. Holders of the Preferred Shares will not receive dividends on a DividendPayment Date or for any period during which the Issuer does not have retained earnings out of whichto pay dividends.

Subordination to the Issuer ’ ’’ ’ s Other Indebtedness

Ayala’s obligations in respect of the Preferred Shares are subordinated to all of the Company’sindebtedness, and it will not make any payments under the Preferred Shares unless it can satisfy infull all of its other obligations that rank senior to the Preferred Shares.

Ayala’s obligations under the Preferred Shares are unsecured and will, in the event of the winding-upof the Company, rank junior in right of payment to all indebtedness of the Company and junior in rightof payment to securities of, or claims against, the Company which rank or are expressed to ranksenior to the Preferred Shares. Accordingly, Ayala’s obligations under the Preferred Shares will not besatisfied unless Ayala can satisfy in full all of its other obligations ranking senior to the PreferredShares.

There are no terms in the Preferred Shares that limit Ayala’s ability to incur additional indebtedness,including indebtedness that ranks senior to or pari passu with the Preferred Shares.



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Unavailability of the Assets of Subsidiaries for Making Payments under the Preferred Shares

A significant portion of Ayala’s business is operated through its subsidiaries, and Ayala’s right toparticipate in any distribution of the assets of certain of its subsidiaries, upon a subsidiary’sdissolution, winding-up, liquidation or reorganization or otherwise, and thus a Preferred Share holder’s

ability to benefit indirectly from such distribution, is subject to the prior claims of creditors of thatsubsidiary, except to the extent that Ayala may be a creditor of that subsidiary and its claims arerecognized. There are legal limitations to the extent to which some of Ayala’s subsidiaries may extendcredit, pay dividends or otherwise supply funds to, or engage in transactions with, the Company orsome of its other subsidiaries. Accordingly, the Preferred Shares will be effectively subordinated to allexisting and future liabilities of Ayala’s subsidiaries.

Insufficient Distributions upon Liquidation

Upon any voluntary or involuntary dissolution, liquidation or winding up of Ayala, holders of PreferredShares will be entitled only to the available assets of the Company remaining after the Company’sindebtedness is satisfied. If any such assets are insufficient to pay the full amount due to the holdersof the Preferred Shares, then holders of Preferred Shares shall share ratably in any such distribution

of assets in proportion to the full distributions to which they would otherwise be respectively entitled.

Ability to Make Payments Under the Shares is Limited by Terms of Ayala ’ ’’ ’ s Other Indebtedness

Ayala has and will continue to have a certain amount of outstanding indebtedness. The current termsof Ayala’s financing agreements contain provisions that could limit the ability of the Company to makepayments on the Preferred Shares. For example, if Ayala were in default on its payment obligations toone or more of its lenders, or if it is non-compliant with certain covenants and such non-compliance isuncured for a period of 30 days, the Company may be prohibited from making cash payments inrespect of the Preferred Shares. Also, Ayala may in the future, directly or indirectly through itssubsidiaries, enter into other financing agreements which may restrict or prohibit the ability of theCompany to make payments on the Preferred Shares. There can be no assurance that existing orfuture financing arrangements will not adversely affect Ayala’s ability to make payments on thePreferred Shares.

No Stated Maturity Date and Issuer has the Sole Right to Redemption

The Preferred Shares have no fixed maturity date, and the Preferred Shares are not repayable incash unless the Issuer, at its sole discretion, redeems them for cash. Furthermore, holders of thePreferred Shares have no right to require the Issuer to redeem the Preferred Shares. The PreferredShares are only redeemable at the option of the Issuer on or after November 25, 2013, (the fifthanniversary of the date the Preferred Shares were listed on the PSE), or at any time in the event thatDividend Payments become subject to additional withholding tax as a result of certain changes in law,rule or regulation, or in the interpretation thereof, and such tax cannot be avoided by use ofreasonable measures available to Ayala. Accordingly, if a Preferred Share holder wishes to obtainthe cash value of the investment, the holder will have to sell the Preferred Shares in the secondarymarket.

Lack of Public Market for the Shares

The Philippine securities markets are substantially less liquid and more volatile than major securitiesmarkets in other jurisdictions, and are not as highly regulated or supervised as some of these othermarkets. The Company cannot guarantee that the market for the Preferred Shares will always beactive or liquid upon their listing on the PSE. The nationality restriction on ownership of the PreferredShares may also restrict the trading and liquidity of the Shares.



Risk Factors

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Limited Liquidity

The Underwriters are not obligated to create a trading market for the Preferred Shares and any suchmarket making will be subject to the limits imposed by applicable law, and may be interrupted ordiscontinued at any time without notice. Accordingly, the Company cannot predict whether an active

or liquid trading market for the Preferred Shares will develop or if such a market develops, if it can besustained. Consequently, a holder may be required to hold his Preferred Shares for an indefiniteperiod of time or sell them for an amount less than the Offer Price.

NON-PAYMENT OF DIVIDENDS MAY AFFECT THE TRADING PRICE OF THE PREFERRED SHARES

If dividends on the Preferred Shares are not paid in full, or at all, the Preferred Shares may trade at alower price than they might otherwise have traded if dividends had been paid. The sale of PreferredShares during such a period by a holder of Preferred Shares may result in such holder receiving lowerreturns on the investment than a holder who continues to hold the Preferred Shares until dividendpayments resume. In addition, because of the dividend limitations, the market price for the PreferredShares may be more volatile than that of other securities that do not have these limitations.

Inability to Reinvest at a Similar Return on Investment

On the fifth anniversary of the Issue Date, or any Dividend Payment Date thereafter, or at any timeredemption due to taxation occurs, Ayala may redeem the Preferred Shares for cash at theredemption price, as described in ‘‘Description of the Shares’’ . At the time of redemption, interestrates may be lower than at the time of the issuance of the Preferred Shares and, consequently, theholders of the Preferred Shares may not be able to reinvest the proceeds at a comparable interestrate or purchase securities otherwise comparable to the Preferred Shares.

No Voting Rights

Holders of Preferred Shares will not be entitled to elect the Directors of the Company. Except asspecifically set forth in the Articles and as provided by Philippine law, holders of Preferred Shares willhave no voting rights (see ‘‘Description of the Shares’’ ).

Restrictions on Foreign Ownership of the Preferred Shares by Non-Philippine Nationals

Under Philippine law, no more than 40% of the capital of corporations holding land may be owned bynon-Philippine nationals. Ayala currently owns certain parcels of land. Accordingly, the PreferredShares may be owned or subscribed by or transferred to any person, partnership, association orcorporation regardless of nationality, provided that at anytime at least 60% of the Company’soutstanding capital stock shall be owned by citizens of the Philippines or by partnerships, associationsor corporations, 60% of the voting stock or voting power of which is owned and controlled by citizensof the Philippines.



40

UUUUUUUUSSSSSSSSEEEEEEEE OOOOOOOOFFFFFFFF PPPPPPPPRRRRRRRROOOOOOOOCCCCCCCCEEEEEEEEEEEEEEEEDDDDDDDDSSSSSSSS

A. With Oversubscription Option

Ayala expects to raise gross proceeds amounting to approximately up to P6,000,000,000.00 from theOffer, if the Oversubscription Option is exercised.

The following are the estimated expenses to be incurred in relation to the Offer:


Taxes P 6,000,000.00

Issue Management, Underwriting, and Selling Fees P 25,806,452.00

PSE Filing and Research Fees P 6,216,000.00



Total P 49,979,441.00

The net proceeds from the Offer is estimated to be P5,950,020,559.00 after deducting expensesrelated to the Offer. The principal purpose for the offering is to expand the Company’s directinvestments in various BPO companies such as, but not limited to, eTelecare Global Solutions, Inc.,Affinity Express, Inc. (“Affinity”), and Integreon Managed Solutions, Inc. (“Integreon”).

With respect to the eTelecare investment, the Company together with Providence Equity Partnersplans to make a tender offer not later than the first half of 2009 for almost all of eTelecare’s shares.Ayala’s share in this investment is estimated at around US$100Mn. Around US$90Mn of this sharewill be financed from part of the net proceeds of this Offering, with the balance sourced from theCompany’s internally-generated funds.

The balance of the net proceeds amounting to around P1,630,020,559.00 will be used by Ayala: (a) to

fund its investments in 2008 and 2009 in Affinity, Integreon, and other BPO companies; and (b) forgeneral working capital.

The utilization, amounts and schedule of the above investments would depend on favorable marketconditions and business opportunities and would be disclosed to the PSE at the appropriate times.

The foregoing can be summarized as follows:


Planned Use/Investment Estimated Timetable

US$90Mn or P4.32b eTelecare Global Solutions, Inc. Not later than first half of 2009Investments in Affinity, Integreonand other BPO companies

2008 and/or 2009, depending onmarket conditions and businessopportunities

P1.63b

General working capital Amounts from the Net Proceedsover the amounts needed orused for the above investmentsmay go to Ayala’s generalworking capital.

Notes:

-Actual investments and utilization, particularly with respect to the allocation of the P1.63b investment between BPOinvestments and general working capital, would depend on many factors, including the existence of favorable market conditionsand business opportunities.-Figures and schedules are only estimates and may change.



Risk Factors

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-Exchange rate assumed at P 48/US$1. Actual exchange rate at time of investment may vary.



42

B. Without Oversubscription Option

If the Oversubscription Option is not exercised, the net proceeds from the Offer is estimated to beP3,962,807,710.00 after deducting expenses related to the Offer. Said expenses are as follows:


Taxes P 4,000,000.00

Issue Management, Underwriting, and Selling Fees P 17,204,301.00 PSE Filing and Research Fees P 4,536,000.00



Total P 37,192,290.00

Note: Ayala has already paid the SEC Registration Fee and PSE Filing and Research Fees based on anissue size of P6 billion. If the Oversubscription Option is not exercised, Ayala will seek the appropriaterefunds from the SEC and PSE.

The investment type, estimated timetable and the qualifications thereto as discussed above willremain the same. The amounts for the investments will change follows:


Planned Use/Investment

US$50Mn or P2.4b eTelecare Global Solutions, Inc.

Investments in Affinity, Integreonand other BPO companies

P1.56b

General working capitalNotes:

-Actual investments and utilization, particularly with respect to the allocation of theP1.56b investment between BPO investments and general working capital, woulddepend on many factors, including the existence of favorable market conditions andbusiness opportunities.-Figures and schedules are only estimates and may change.-Exchange rate assumed at P 48/US$1. Actual exchange rate at time of investmentmay vary.



Plan of Distribution

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PPPPPPPPLLLLLLLLAAAAAAAANNNNNNNN OOOOOOOOFFFFFFFF DDDDDDDDIIIIIIIISSSSSSSSTTTTTTTTRRRRRRRRIIIIIIIIBBBBBBBBUUUUUUUUTTTTTTTTIIIIIIIIOOOOOOOONNNNNNNN

Ayala plans to issue the Preferred Shares through the Joint Lead Underwriters, namely, BDO Capital,BPI Capital, FMIC and HSBC as well as Participating Underwriters, namely, Insular Investment andTrust Corp., RCBC Capital and Vicsal Investment, Inc.. BPI Capital will act as Issue Manager for the

Offer. The PSE Trading Participants, who are member-brokers of the PSE, shall act as Selling Agentsfor the Issue, pursuant to the PSE’s rules and regulations.

OBLIGATIONS OF THE UNDERWRITERS AND SELLING AGENTS

In accordance with the Issue Management and Underwriting Agreement to be entered into with Ayala,the Underwriters have agreed to underwrite up to P4,000,000,000.00 worth of Preferred Shares (if theOversubscription Option is not exercised) on a firm basis, and to distribute and sell the PreferredShares at the Offer Price, and subject to the satisfaction of certain conditions and in consideration forcertain fees and expenses.

Each of the Joint Lead Underwriters has committed to underwrite the Offer up to the amount indicatedbelow:

BDO Capital P1,000,000,000.00

BPI Capital P1,000,000,000.00

FMIC P1,000,000,000.00

HSBC P1,000,000,000.00

The Joint Lead Underwriters may enter into other sub-underwriting agreements with otherunderwriters who may want to participate in the issuance. There is no agreement for any of theUnderwriters to put back to Ayala any unsold Preferred Shares.

Ayala further grants the Joint Lead Underwriters an option, exercisable within the Offer Period, tosubscribe, on a firm basis, up to an additional 4,000,000 Preferred Shares, on the same terms andconditions set forth in this Prospectus, solely to cover oversubscriptions, if any.

The Underwriters are duly licensed by the SEC to engage in the underwriting or distribution of thePreferred Shares. The Underwriters may, from time to time, engage in transactions with and performservices in the ordinary course of its business for Ayala or other members of the Ayala Group.

Except for BPI Capital, the Underwriters have no direct relations with Ayala in terms of ownership byeither of their respective major stockholder/s. BPI Capital is a wholly owned subsidiary of BPI, anaffiliate of Ayala in which Ayala has an effective ownership of 33.5% as of June 30, 2008.Furthermore, BPI Capital has an effective ownership of 1.7% in MWC, also an Ayala affiliate in whichAyala has an effective ownership of 30.0% (excluding BPI Capital’s effective ownership) as of June30, 2008.

No Underwriter has the right to designate or nominate a member of the Board.

SALE AND DISTRIBUTION

(a) The distribution and sale of the Preferred Shares shall be undertaken by the Underwriters whoshall sell and distribute the Preferred Shares to third party buyers/investors. Nothing herein orin the Issue Management and Underwriting Agreement shall limit the rights of the Underwritersfrom purchasing the Preferred Shares for their own respective accounts.

(b) The obligations of each of the Underwriters will be several, and not joint and solidary, andnothing in the Issue Management and Underwriting Agreement shall be deemed to create apartnership or joint venture between and among any of the Underwriters. Unless otherwise



Plan of Distribution

44

expressly provided in the Issue Management and Underwriting Agreement, the failure by anyUnderwriter to carry out its obligations thereunder shall not relieve any other Underwriter of itsobligations thereunder, nor shall any Underwriter be responsible for the obligations of any otherUnderwriter thereunder.

(c) Approximately 7.5% (or 600,000 Shares) of the total Shares shall be allocated to the PSE

Trading Participants, acting as Selling Agents, for the distribution to their respective clients. TheSelling Agents shall be firmly committed to purchase the Shares upon their submission of anundertaking to purchase the Shares.

TERM OF APPOINTMENT

The engagement of the Underwriters shall subsist so long as the SEC’s permit to sell the PreferredShares remains valid, unless otherwise terminated by Ayala and the Underwriters.

BPI Capital acting as Issue Manager, shall receive estimated underwriting fees of 0.40% of the grossproceeds of the Offer, inclusive of amounts to be paid to the Underwriters and Selling Agents.

The Issue Management and Underwriting Agreement may be terminated by the Underwriters prior to

payment being made to Ayala of the net proceeds of the Preferred Shares under certaincircumstances such as (a) a cancellation order from a Government authority, (b) a change or animpending change of law that would materially and adversely affect Ayala’s profitability or (c) financial,political or economic conditions in the Philippines which would materially and adversely affect theOffer.

MANNER OF DISTRIBUTION

The Underwriters shall, at their discretion, determine the manner by which proposals for subscriptionsto, and issuances of, Preferred Shares shall be solicited, with the primary sale of the Preferred Sharesto be effected only through the Underwriters and Selling Agents.

OFFER PERIOD

The Offer Period shall commence at 9:00 a.m. on November 12, 2008 and end at 5:00 p.m. onNovember 18, 2008. The Company and the Underwriters reserve the right to extend or terminate theOffer Period with the approval of the SEC and the PSE.



45

DDDDDDDDEEEEEEEETTTTTTTTEEEEEEEERRRRRRRRMMMMMMMMIIIIIIIINNNNNNNNAAAAAAAATTTTTTTTIIIIIIIIOOOOOOOONNNNNNNN OOOOOOOOFFFFFFFF OOOOOOOOFFFFFFFFFFFFFFFFEEEEEEEERRRRRRRR PPPPPPPPRRRRRRRRIIIIIIIICCCCCCCCEEEEEEEE

The Offer Price of P500.00 is at a premium to the Preferred Shares’ par value per share of P100.00.The Offer Price has been arrived at by dividing the P6 billion amount of gross proceeds desired to begenerated by Ayala from the Offer, if the Oversubscription Option is fully exercised, by the 12,000,000

Preferred Shares available to be issued.



46

DDDDDDDDIIIIIIIILLLLLLLLUUUUUUUUTTTTTTTTIIIIIIIIOOOOOOOONNNNNNNN

Ayala is offering to the public 8,000,000 (if the Oversubscription Option is not exercised) Class “A”Preferred Shares with a par value of P100.00 per share to be issued from a new class of Preferred “A”shares. The issuance of the Preferred shares will not have any dilutive effect on the earnings percommon share (EPS) of Ayala, since the Preferred shares are not convertible to common shares.

Therefore, the outstanding number of common shares that will be used in computing the EPS will notchange.

The BOD approved on January 31, 2008, and the stockholders confirmed and ratified on April 4, 2008the re-issuance and reclassification of 1.2 billion redeemed Preferred A and AA shares with a parvalue of P1.00 per share into 12.0 million new Preferred A shares with a par value of P100 per share,with the same features as the existing Preferred B shares, except on the issue price and dividendrate. The stockholders and the BOD also approved the amendment of the Company’s amendedArticles of Incorporation to reflect the reclassification of the redeemed Preferred A and AA shares intonew Preferred A shares. The SEC approved the amendments to the Articles embodying thereclassification on July 9, 2008. The details of the reclassification are as follows:

(In thousands, except par value)December 31, 2007

(Prior to Reclassification)July 9, 2008

(After Reclassification)

Common Shares

Number of Shares 600,000 600,000 Par Value of per Share P50.00 P50.00

Class “A” Shares

Number of Shares 900,000 12,000 Par Value per Share P1.00 P100.00

Class “AA” Shares

Number of Shares 300,000 0 Par Value per Share P1.00 0

Preferred “B” Shares


Authorized Capital Stock

Number of Shares 1,858,000 670,000Total Value P37,000,000.00 P37,000,000.00

The Offer will increase the total par value of Ayala’s issued and outstanding common and Preferredshares from P26.52 billion to P31.45 billion, if the Oversubscription Option is not exercised. Thebreakdown of the total par value of Ayala’s issued and outstanding stock, prior to and after the offer, isas follows:



Dilution

47

(In thousands, except par value)December 31, 2007

(Prior to Offer)November [●], 2008

(After Offer, if theOversubscription Option is not

exercised)

Common Shares

Number of Shares 414,363 496,984 Par Value of per Share P50.00 P50.00

Class “A” Shares

Number of Shares 0 8,000Par Value per Share P1.00 P100.00

Class “AA” Shares

Number of Shares 0 0 Par Value per Share P1.00 0

Preferred “B” Shares


Issued and Outstanding

Number of Shares 472,363 562,984

Total Value P26,518,150.00 P31,449,200.00



48

TTHHEE CCOOMMPPAANNYY

OVERVIEW

Ayala Corporation (“Ayala”, “AC” or the “Company”) was incorporated in the Philippines on January

23, 1968 as a limited liability corporation having a renewable term of 50 years. The Company isorganized as a holding company holding equity interests in the Ayala Group (the “Group”), one of themost significant business groups in the Philippines. Ayala’s business activities are divided into fourkey areas: (a) real estate and hotels, (b) financial services, (c) telecommunications and (d) a portfolioof other investments held under an internal development division called AC Capital. AC Capital’scurrent holdings include investments in water distribution, electronics manufacturing, automotivedealerships, international real estate investments, IT-related ventures, business process outsourcing,and various other non-core real-estate assets. Ayala’s operating companies are widely recognized asamong the dominant companies in their respective industry sectors. Ayala became a publiccorporation in 1976 and its common shares are currently listed at the Philippine Stock Exchange(“PSE”). As of June 30, 2008, Ayala had a market capitalization of P127.8 billion and an equityattributable to equity holders of the parent of P90.4 billion.

The following table shows Ayala’s direct and effective ownership in its major subsidiaries and affiliates

within business sectors as of June 30, 2008:

Direct ownership

(%)

Effective ownership

(%)

Real Estate and Hotels:Ayala Land, Inc. 53.2 53.2

Ayala Hotels, Inc. 50.0 76.6

Financial services

Bank of the Philippine Islands 21.8 33.5

Telecommunications

Globe Telecom, Inc. 30.5 30.5

AC CapitalAyala Automotive Holdings Corp.

Ayala Aviation Corp.

Azalea International Venture Partners Ltd.Azalea Technology Investments, Inc.

Bestful Holdings Ltd.

Integrated Microelectronics, Inc.

Manila Water Company, Inc.

Philwater Holdings

OthersAC International Finance Ltd. AYC Finance Ltd.

100.0

100.0

97.0

100.0

100.0

67.9

21.7

60.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

67.9

30.0

60.0

100.0

100.0

STRATEGY

Ayala seeks to ensure that the Group maintains its commitment to its business activities in thePhilippines and to explore possible international initiatives on a selective and opportunistic basis.Ayala intends to build on its leadership position in the Group's existing core businesses in real estate,financial services and telecommunications, and actively manage its portfolio of other investments andassets under AC Capital with a view toward maximum value creation and realization. Ayala expects



The Company

49

its real estate, financial services and telecommunications businesses to remain its principal sources ofdividend income, but contributions from its water distribution, electronics manufacturing and autodealership operations are increasing. Ayala is presented from time to time with opportunities to investin new business areas and will continue to consider such opportunities to the extent that suchbusinesses would contribute to the overall strategic objectives of the Group.

GEOGRAPHICAL SEGMENTS

Ayala generates foreign sales through its subsidiaries IMI, AG Holdings, Azalea TechnologyInvestments, Inc. and LiveIt Solutions, Inc. For the full year of 2007, total foreign revenues amountedto P21.8 billion out of the total revenues of P78.7 billion, from P21.0 billion in 2006. The table belowlists the contribution of each geographical market to Ayala’s foreign sales.

2007

Location Contribution toforeign sales

Japan 43%USA 28%

Europe 16%

Others (Mostly Asia) 13%

2006


Japan 50%

USA 23%

Europe 15%


2005


Japan 75%

USA 19%

Europe 5%


INTRA-GROUP TRANSACTIONS

Ayala, its subsidiaries and certain of its affiliates have a substantial number of contractualarrangements with each other. Ayala’s subsidiaries and affiliates are independent entities andaccordingly Ayala’s contractual arrangements with such corporations are entered into on an arm’s-length basis. The Group has, in the ordinary course of its business, entered into transactions withassociates, joint ventures and other related parties principally consisting mainly of advances andreimbursement of expenses, various guarantees, construction contracts and management, marketingand administrative service agreements. Sales and purchases of goods and services to and fromrelated parties are made at current market prices. In addition, Ayala obtains borrowings from banksand other financial institutions, including BPI, an affiliated commercial bank. Ayala’s borrowings are



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50

governed by existing BSP regulations, including in particular in respect of its borrowings from BPI,regulations on loans to Directors, Officers, Stockholders and other Related Interests. Other thanAyala’s borrowings from BPI, Ayala had no other transaction in which any of its Directors or ExecutiveOfficers was involved or had a direct or indirect material interest. There can be no assurance,however, that future arrangements between related parties will not involve conflicts of interest.

MARKET FOR ISSUER’’’’S COMMON EQUITY

AYALA DIVIDEND POLICY

Following are the dividends declared and paid by Ayala from 2005:

Cash Dividends – 2005

Class Payment Date Rate (P) Record Date

On common shares July 19, 2005

January 31, 2006

2.00 / share

2.00 /share

June 24, 2005

January 6, 2006

Cash Dividends – 2006Class Payment Date Rate (P) Record Date

On common shares January 31, 2006July 28, 2006

2.00/share6.00/share

January 6, 2006July 6, 2006



On common shares January 30, 2007

July 31, 2007

November 5, 2007

2.00/share

4.00/share

2.00/share

January 5, 2007

July 6, 2007

October 9, 2007



On common shares January 29, 2008

July 21, 2008

2.00/share2.00/share

January 4, 2008

July 2, 2008

Dividends declared by the Company on its shares of stocks are payable in cash or in additionalshares of stock. The Company does not have a minimum dividend policy: the payment of dividends inthe future will depend upon the earnings, cash flow and financial condition of the Company and otherfactors.

Ayala’s retained earnings include the accumulated equity in undistributed net earnings of consolidatedsubsidiaries, associates and joint ventures accounted for under the equity method amounting toP29,824.0 million, P24,858.9 million, and P18,487.9 million as of December 31, 2007, 2006, and2005, respectively (pre-IFRIC amounts). These amounts are not available for dividend declarationuntil received in the form of dividends from the subsidiaries, associates and joint ventures. Retained

earnings are further restricted for the payment of dividends to the extent of the cost of the commonshares costing P160 million as of December 31, 2007 and 4,379 common shares costing P0.3 millionas of December 31, 2006 and 2005.

STOCK PRICES

Ayala’s common shares are listed at the PSE. The closing prices of Ayala’s common shares for 2008,2007, 2006 and 2005, adjusted for stock dividends, are as follows:



The Company

51

2008(in P)

2007(in P)

2006(in P)

2005(in P)

High Low High Low High Low High Low1

stquarter 454.17 322.92 458.33 361.11 253.47 220.49 302.08* 232.64*

2nd quarter 352.50 257.50 483.33 388.89 328.13 232.64 267.36 218.753

rdquarter 307.50 249.00 487.50 335.42 331.60 256.94 230.90 189.24

4th

quarter n.a. n.a. 537.50 412.50 409.72 314.24 244.79 196.18

* Prices adjusted for reverse stock split that took effect May 30, 2005

RECENT SALE OF UNREGISTERED SECURITIES

There were a total of 662,551 common shares issued in 2006 and 185,618 common shares issued in2007 following the exercise of stock options by the Company’s executives. Such shares formed partof the 8,864,000 Employee Stock Option Plan shares subject of the Commission’s resolution datedJanuary 12, 2006 confirming the issuance of such shares as exempt transactions pursuant to Section10.2 of the Securities Regulation Code. Pursuant to the Company’s Employee Stock Option Plan,

qualified executives are issued common shares following their exercise of options and are notrequired to pay cash for such shares.

DESCRIPTION OF PROPERTY

Ayala owns four floors of the Tower One Buliding located in Ayala Triangle, Ayala Avenue, MakatiCity. These condominium units were purchased in 1995 and are used as Ayala's corporateheadquarters. Other properties of Ayala include various provincial lots relating to its businessoperations totaling about 860 hectares and Metro Manila lots totaling 2.6 hectares. Out of the 860hectares, only a 3-hectare portion has a mortgage lien but with a pending petition for cancellation.The Honda Cars Makati, Honda Cars Pasig, Honda Cars Alabang and Isuzu Alabang dealershipbuildings are located on its Metro Manila lots which are leased to these dealerships. These propertiesdo not have any mortgage, lien or encumbrance. Other than as described above, Ayala, as a holding

company does not hold significant properties apart from its investments in its subsidiaries. Adiscussion on the assets, prospects and challenge of each subsidiary of Ayala is set forthin the"Business" section of the Prospectus.

MATERIAL CONTRACTS

Ayala has not entered into any contract or agreement within the past two (2) years immediatelypreceding this filing, which contract or agreement is of material importance or outside the ordinarycourse of business, aside from the following:

Date Type Particulars

November 21, 2006 Transferable Term LoanFacility Agreement

Ayala acted as guarantor to a US$150 milliontransferable term loan facility between AYC FinanceLimited (“AYC”) as borrower and several lenders whoare also the lead arrangers of the Agreement.

Repayment dates for advances made to AYC are insix month intervals from 2009 until 2011. Ayalaunconditionally guaranteed the due and punctualpayment of advances if for any reason AYC does notmake timely payment. Ayala waived all rights ofsubrogation, contribution, and claims of priorexhaustion of remedies. Ayala’s obligation as



The Company

52

guarantor will remain in full force until no sumremains to be lent by the lenders, and the lendersrecover the advances.

November 24, 2006 Loan Agreement Ayala obtained a P2 billion loan amount fromMetropolitan Bank and Trust Company.

Interest at 3 month interest periods is the 3 month bidyield on Philippine Government Treasury securitiesplus a spread of 0.54%.

Repayment is done in 7 yearly installments (ending2013) with balloon payment (98.50% of principalamount) on last installment.

June 27, 2007 Loan Agreement Ayala obtained a P2 billion loam amount fromMetropolitan Bank and Trust Company.

Interest at 3 month interest periods is the PDST-R1 5-year benchmark rate.

Repayment of the full loan amount will be made onmaturity date, or on June 28, 2012.

April 15, 2008 Transferable Term LoanFacility Agreement

Ayala acted as guarantor to a US$50 milliontransferable term loan facility between AYC FinanceLimited (“AYC”) as borrower and several lenders whoare also the lead arrangers of the Agreement.

Repayment dates for advances made to AYC are insix month intervals from 2011 to 2013. Ayalaunconditionally guaranteed the due and punctualpayment of advances if for any reason AYC does notmake timely payment. Ayala waived all rights ofsubrogation, contribution, and claims of priorexhaustion of remedies. Ayala’s obligation asguarantor will remain in full force until no sum

remains to be lent by the lenders, and the lendersrecover the advances.

November 8, 2007 P5 billion Fixed RateBond Offering

Ayala offered bonds due 2012 with an aggregateprincipal amount of P5 billion, with an option toincrease the Offer size up to P8 billion. The bondshave a term of 5 years and 1 day from November 21,2007 (the issue date), with a fixed interest rateequivalent to 6.825% p.a. interest on the bondspayable quarterly in arrears commencing on February22, 2008. The bonds will be redeemed at par (or100% of face value) on November 22, 2012.

The bonds constitute the direct, unconditional,unsubordinated and unsecured obligations of Ayalaand rank pari passu and rateably without anypreference or priority amongst themselves and atleast pari passu with all other present and futureunsubordinated and unsecured obligations of Ayala,other than obligated preferred by law.

October 5, 2007 Loan Agreement Ayala obtained a P1.5 billion loan from theMetropolitan Bank & Trust Company.

Interest at 3-month interest periods at a rate perannum equivalent to 7-year PDST-R1 plus 20 basispoints.



The Company

53

Repayment is done in 7 yearly installments (starting2008 and ending 2014) with balloon payment (97% ofthe principal amount) on the last installment.

February 8, 2008 Loan Agreement Ayala obtained a P1.5 billion loan from the PhilippineAmerican Life and General Insurance Company, Inc.,Philam Equitable Life Assurance Company, AIGPhilam Savings Bank, Inc. – Trust Division, and thePhilam Bond Fund, Inc.

Interest is at 6.75% per annum.

Repayment is done in 10 yearly installments (starting2009 and ending 2018) with balloon payment (99% ofthe principal amount) on the last installment.

MATERIAL PATENTS, TRADEMARKS, AND INTELLECTUAL PROPERTIES

Ayala has no material patent, trademark or intellectual property right to products which would bematerial to the Offer. Ayala’s operating companies, however, may have these material intellectual

property rights, but the dates and terms of their expiration or renewal is not perceived to have amaterial adverse effect on Ayala or the Offer.

CHANGES IN CONTROL

Ayala is not aware of the existence of any agreement that may result in a change in control of Ayala.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There has not been any material transaction during the last two years, or proposed transaction, towhich Ayala was or is to be a party, in which any of its Directors or Executive Officers, any nomineefor election as a Director or any security holder identified in this Prospectus had or is to have a director indirect material interest.

The Group, in its regular conduct of business, has entered into transactions with associates, jointlycontrolled entities and other related parties principally consisting of advances and reimbursement ofexpenses, purchase and sale of real estate properties, various guarantees, construction contracts,and development, management, underwriting, marketing and administrative service agreements.Sales and purchases of goods and services to and from related parties are made at normal marketprices.

Please refer to note 28 of the 2007 audited financial statements for further details.

COSTS OF ENVIRONMENTAL COMPLIANCE

In general, there have been no materially significant or extraordinary costs incurred by Ayala and its

subsidiaries, taken as a whole, in respect of environmental compliance. Ayala and its subsidiaries’costs of compliance with applicable environmental laws and regulations vary from project to projectdepending on various factors, especially local conditions. However, none of such costs have beenmaterial in respect of their finances as a whole.

DEVELOPMENT COSTS

As a holding company, Ayala has no material development activities.



The Company

54

GENERAL CORPORATE INFORMATION

CORPORATE GOVERNANCE

Ayala has always been committed to best practices of corporate governance. It has endured for morethan 170 years due in large part to the integrity it has earned, the performance it has achieved and thegovernance standards it has upheld these many years. The Company’s corporate governanceprinciples were formalized in its Manual of Corporate Governance (the “Manual”), which the Companyadopted on September 2, 2002 and has since complied with. The Manual establishes corporategovernance practices that are founded on rigorous systems and processes designed to ensure theCompany’s progress and stability, that an effective system of check and balance is in place and that ahigh standard of accountability and transparency to all stakeholders is enforced.

The Manual conforms to the SEC’s requirements for manuals of corporate governance. It definesprimarily the roles and responsibilities of the Board, Management and the Executive Officers. Moreimportantly, it includes a statement of their respective liabilities in the event of non-compliance orviolations of any of the provisions of the Manual. It also establishes, among others, policies on (a)

independent directors, (b) Board committees, (c) conflicts of interest, (d) internal and external auditprocedures and practices, (e) stockholders’ rights and interests and (f) management’s responsibility tocommunicate and inform stakeholders matters related to the Company’s affairs. The principlesembodied in the Manual lay the foundation for the appropriate supervision and good management ofthe Company to safeguard shareholders’ interests and sustain the Company’s long-term growth.

• The evaluation system which was established to measure or determine the level of compliance ofthe Board of Directors and top level management with its Manual of Corporate Governanceconsists of a Board Performance Assessment which is accomplished by the Board of Directorsindicating the compliance ratings. The above is submitted to the Compliance Officer who issuesthe required certificate of compliance with the Company’s Corporate Governance Manual to theSecurities and Exchange Commission.

• To ensure good governance, the Board establishes the vision, strategic objectives, key policies,

and procedures for the management of the company, as well as the mechanism for monitoringand evaluating Management’s performance. The Board also ensures the presence and adequacyof internal control mechanisms for good governance.

• There were no deviations from the Company’s Manual of Corporate Governance. The Companyhas adopted in the Manual of Corporate Governance the leading practices and principles of goodcorporate governance, and full compliance therewith has been made since the adoption of theManual.

• The Company is taking further steps to enhance adherence to principles and practices of goodcorporate governance

The Board regularly meets at least on a quarterly basis. It ensures the presence and adequacy ofinternal control mechanisms for good governance in accordance with the Manual. The minimum

internal control mechanisms for the Board’s oversight responsibility include, but are not limited to:

• Ensuring the presence of organizational and procedural controls, supported by an effectivemanagement information system and risk management reporting system;

• Reviewing conflict-of-interest situations and providing appropriate remedial measures for thesame;

• Appointing a Chief Executive Officer (“CEO”) with the appropriate ability, integrity and experienceto fill the role, as well as defining the CEO’s duties and responsibilities;



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55

• Reviewing proposed senior management appointments;

• Ensuring the selection, appointment and retention of qualified and competent management;reviewing the Company’s personnel and human resources policies, compensation plan and themanagement succession plan;

•

Institutionalizing the internal audit function; and

• Ensuring the presence of, and regularly reviewing, the performance and quality of external audit.

SHAREHOLDER AND INVESTOR RELATIONS

The Company believes that open and transparent communications are requisite for sustained growthand building investor confidence. Our investor communications program seeks to promote greaterunderstanding of the company’s long-term value creation proposition.

The Company, through its Investor Relations Unit reporting directly to the Chief Finance Officer,address the various information requirements of the investing public and communicates with minorityshareholders through timely and full disclosures to the Philippine Stock Exchange, regular quarterlybriefings, Annual General Meetings, one-on-one meetings, conference calls, roadshows and investorconferences, Web site and emails or telephone calls.

The Company holds regular briefings and meetings with buy-side and sell-side analysts and financialanalysts from the banking community. Access to senior management is also provided to analysts andfund managers. In addition to the year-round meetings with the Chief Finance Officer, analysts aregiven an opportunity to meet the Management Committee members, the President, and Chairmanand CEO upon request.

The Company maintains a web site which includes a section on Investor Relations that details thecompany’s organization structure, financial and operating performance, ownership, and governancepractices. This is updated on a regular basis when and as disclosures to regulatory agencies aremade. Presentations made during analysts briefings and investor conferences are likewise madeavailable on the web site for public access.



56

BBUUSSIINNEESSSS

I. Real Estate and Hotels

Ayala conducts its real estate and hotels business through its subsidiaries Ayala Land, Inc. and AyalaHotels. Inc. (“AHI”). As of June 30, 2008, Ayala effectively owned 53.2% of ALI common shares and76.6% of AHI.

AYALA LAND, INC.

ALI, one of the largest and most diversified real estate conglomerates in the Philippines, is principallyengaged in the planning, development and marketing of large-scale communities having a mix ofresidential, commercial and other uses. Its principal businesses include planning and development ofmixed-use properties, particularly, the subdivision and sale of residential and commercial lots inplanned communities and the development and leasing of retail space and land in these communities.ALI also builds and sells residential condominium and office buildings, develops industrial andbusiness parks and develops and sells middle income and affordable housing units. ALI also ownshotels and movie theaters, and provides property management and construction services togovernment infrastructure and other projects. As of June 30, 2008, ALI’s land bank comprised a totalof 4,265 hectares of fully converted properties in various locations nationwide.

ALI was spun-off by Ayala in 1988 to enhance management focus on its existing real estate businessand to highlight the value of the assets, management and capital structure of the real estate business.ALI has a market capitalization of P125 billion as of June 30, 2008 based on its shares’ closing priceas of that date.

In 1991, ALI shares were offered to the public in a P2.5 billion initial public offering (“IPO”) of primaryand secondary shares, and subsequently listed on the Makati and Manila Stock Exchanges (thepredecessors of the PSE). The IPO diluted Ayala’s effective interest in ALI to 88.2%. Since then,

there were further dilutions and sales of shares and so as of June 30, 2008, Ayala’s effective interestin ALI stood at 53.2%.

ALI’s subsidiaries and affiliates as of June 30, 2008 were as follows:

Ownership (%)By Ayala Land By Subsidiary /

Affiliate

CORE BUSINESS

Strategic Landbank Management

Aurora Properties, Inc. 70.0Vesta Property Holdings, Inc. 70.0Ceci Realty, Inc. 60.0

Emerging City Holdings, Inc. 50.0Columbus Holdings, Inc. 70.0

Bonifacio Land Corporation* 4.3 50.4Fort Bonifacio Development Corp.** 55.0

Berkshires Holdings, Inc. 50.0Columbus Holdings, Inc. 30.0

Bonifacio Land Corporation* 4.3 50.4Fort Bonifacio Development Corp.** 55.0

Regent Time International Limited 100.0



Business – Real Estate and Hotels

57

Bonifacio Land Corporation * 4.3 3.9Ownership (%)

By Ayala Land By Subsidiary /Affiliate

Buendia Landholdings, Inc. 100.0Red Creek Properties, Inc. 100.0

Crimson Field Enterprises, Inc. 100.0Crans Montana Property Holdings Corp 100.0Amorsedia Development Corporation 100.0

HLC Development Corporation 100.0

Residential Development Avida Land Corporation 100.0

Buklod Bahayan Realty and Development Corp. 100.0First Communities Realty, Inc. 100.0Avida Sales Corp. 100.0

Community Innovations, Inc. 100.0Serendra, Inc. 28.1 38.9

Roxas Land Corporation 50.0

Amorsedia Development Corporation 100.0OLC Development Corporation 100.0Ayala Greenfield Development Corp. 50.0

Ayala Land Sales, Inc. 100.0Ayala Land International Sales, Inc. 100.0

Shopping Centers

Northbeacon Commercial Corporation 100.0Station Square East Commercial Corporation 69.0ALI-CII Development Corporation 50.0Alabang Commercial Corporation 50.0North Triangle Depot Commercial Corporation 49.0Lagoon Development Corporation 30.0Ayala Theatres Management, Inc. 100.0

South Innovative Theatre Management, Inc. 100.0Five Star Cinema, Inc. 100.0Food Court Company, Inc. 100.0Leisure and Allied Industries Phils., Inc. 50.0

Corporate Business

Laguna Technopark, Inc. 75.0Glensworth Development, Inc. 100.0ALI Property Partners Holdings Corp. 60.0

ALI Property Partners Corp. 60.0One Dela Rosa Property Development Inc. 100.0First Gateway Real Estate Corp. 100.0UP North Property Holdings, Inc 100.0

Visayas Mindanao

Cebu Holdings, Inc. 47.2Cebu Property Ventures & Development Corp. 8.0 76.0Cebu Leisure Company, Inc. 100.0CBP Theatre Management Inc. 100.0Cebu Insular Hotel Company, Inc. 37.1




58

Ownership (%)By Ayala Land By Subsidiary /

AffiliateInternational First Longfield Investments Limited 100.0

Green Horizons Holdings Limited 100.0ARCH Capital Management Co. Ltd. 17.0ARCH Capital Partners L.P. 8.0

SUPPORT BUSINESS

Construction

Makati Development Corporation 100.0MG Construction Ventures Holdings, Inc. 66.0

Property Management

Ayala Property Management Corporation 100.0

HotelsAyala Hotels, Inc. 50.0Enjay Hotels, Inc. 100.0Cebu Insular Hotel Company, Inc. 62.9

OTHERS

KHI-ALI Manila, Inc. 82.0KHI Manila Property, Inc. 20.0Astoria Investment Ventures, Inc.*** 100.0ALInet.com, Inc. 100.0CMPI Holdings, Inc. 60.0

CMPI Land, Inc. 60.0* ALI’s effective ownership in Bonifacio Land Corporation is 37.2% ** ALI’s effective ownership in Fort Bonifacio Development Corporation is 20.5% *** Pertains to common shares

ALI’s strategy is to maintain and enhance its position as the leading property developer in thePhilippines. It intends to continue its traditional activity of developing large-scale, mixed-usedintegrated communities while diversifying its revenue base. ALI hopes to achieve this by: (a)increasing its rental activities, where it has locked-in growth in gross leasable area with new malls andoffice buildings and (b) expanding its real estate business into different markets and geographic areaswith increasing presence in the middle-income and affordable housing segments, where it believesthere are significant growth opportunities or where proposed developments will complement itsexisting real estate business. Furthermore, ALI is expanding its service businesses, with externalcontracts accounting for an increasing share of its services income.

BUSINESS LINES

ALI’s projects are segregated into various business lines, based on their operations. These businesslines, categorized into core businesses and support businesses, are described below.

Core Businesses

1. Residential Developments

Sale of high-end, upper middle-income and affordable residential lots and units, and lots inleisure community developments; lease of residential units; marketing of residentialdevelopments;




59

2. Shopping Centers

Development of commercial centers and lease to third parties of retail space and land therein;operation of movie theaters, food courts, entertainment facilities and carparks in thesecommercial centers; management and operations of malls which are co-owned with partners;

3. Corporate Business

Development and lease or sale of office buildings; sale of industrial lots and lease of factorybuildings;

4. Strategic Landbank Management

Acquisition, development and sale of large, mixed-use, master-planned communities; sale ofoverride units or ALI’s share in properties made available to subsidiaries for development; leaseof hotel and gas station sites and carparks outside Ayala Center.

5. Geographic Businesses:

Visayas-Mindanao

Development, sale and lease of ALI’s and subsidiaries' product offerings in key cities in theVisayas and Mindanao regions;

International Investment in an Asian real estate private equity fund and a fund management company.

Support Businesses

1. Construction

Land development and construction of ALI and third party projects;

2. Hotels

Development of hotels; lease of land to hotel tenants;

3. Property Management

Facilities management of ALI and third-party projects;

4. Waterworks Operations

Operation of water and sewage treatment facilities in some ALI projects.

In addition to the above business lines, ALI also derives other income from its investment activitiesand sale of non-core assets.

COMPETITION RISKS

ALI is subject to significant competition in its businesses. ALI competes with other developers anddevelopments to attract residential buyers, shopping center tenants, office tenants and industrial lotbuyers, construction and property management clients, and hotel customers. However, ALI believesthat, at present, there is no single property company that has a significant presence in all sectors ofthe property market.

Residential developments

With respect to high-end residential developments, upper mid-income and affordable housing sales,ALI competes for purchasers primarily on the basis of reputation, reliability, quality and location of




60

projects, and availability of in-house financing.

Shopping centers

For its shopping centers, ALI competes for tenants primarily based upon the ability of the relevantretail center to attract customers. This, in turn, generally depends on the quality and location of, and

mix of tenants in, the relevant retail center and the reputation of the owner of the retail center- andrental and other charges. Ayala Malls attract customers as they offer rewarding experiences in asense of place that is innovative, fun and compelling. The market for shopping centers has becomeespecially competitive and the number of competing properties is expected to grow. Some competingshopping centers are located within relatively close proximity with some of ALI’s commercial centers.

Corporate business

For its office rental properties, ALI competes for tenants on the basis of quality and superior location,the reputation of the building’s owner, the quality of support services provided by the propertymanager, as well as rental and other charges.

Construction

ALI’s construction business is benefiting from the improved performance of the construction industry,particularly from an increase in development activities mostly from the residential and retail sectors.However, any slowdown in the construction business could potentially cap growth of ALI’sconstruction arm. Makati Development Corporation (“MDC”) competes for clients on the basis ofquality, cost and speed to market delivery.

Hotels

After a slump of several years, the local hotel sector experienced marked growth in both occupancyand rental rates. ALI’s hotels, known for their world-class accommodation and service, as well aspremium locations, performed strongly in each of their respective markets. Any slowdown in tourismcould potentially limit growth of ALI’s hotels.

To mitigate the above-mentioned risks, ALI shall continue to adopt appropriate risk management tools

as well as conservative financial and operational controls and policies to manage the various businessrisks it faces.




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FINANCIAL HIGHLIGHTS

The following table sets forth ALI’s financial highlights:

Ayala Land, Inc. Financial Highlights

(in P millions)

Unaudited June 30

2008

Audited Dec. 31

2007Income Statement

Revenues 15,385 25,707

Net Operating Income (NOI)1

4,285 7,704

Net Income (attributable to equity holders of ALI) 2,909 4,386

Balance Sheet

Cash and Cash Equivalents and short term investments 14,696 13,308

Total Assets 89,862 82,981

Total Debt 10,388 10,139

Equity attributable to equity holders of ALI 48,264 45,705

Consolidated Project and Capital Expenditures

(P billions) 7.9 15.4

Financial Ratios

Current Ratio2

1.59:1 1.65:1

Debt-to-Equity Ratio3

0.22:1 0.22:1

Return on Equity*4

12.4%* 10.2%

Return on Assets*5

6.7%* 5.4%

Notes:

* Return on equity and return on assets computed as annualized 1H08 net income attributable to equity holders of ALI divided by average equity attributable to equity holders of ALI and average total assets, respectively, as of end-Jun08 and

end-07 1 Revenue from real estate and hotel operations less costs related to real estate and hotel operations.2 Current assets divided by current liabilities.3 Total of short-term and long-term debt divided by equity attributable to equity holders of ALI.4 Net income attributable to equity holders of ALI divided by average equity attributable to equity holders of ALI.5 Net income attributable to equity holders of ALI divided by average total assets.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2008

REVENUES

Ayala Land, Inc. (“ALI”) ended the first half of 2008 with a net income attributable to equity holders ofALI P2.91billion, posting a significant 37% growth from the P2.13 billion recorded last year. Thisrobust financial performance was driven by strong growth in operating revenues, improved equityearnings from affiliates, higher interest and other income, and effective cost control.

ALI recorded consolidated revenues of P15.38 billion in the first half of 2008, 32% more than the P11.63 billion recorded in the same period last year. Operating revenues increased by 26% to P13.71billion buoyed largely by growth in the Residential and Construction businesses. Strategic LandbankManagement, Corporate Business and Visayas-Mindanao operations also contributed to consolidatedrevenue growth.

Higher equity earnings from Ayala Land’s corporate investment vehicles in Bonifacio Global City,Cebu Holdings, Inc. (CHI) and Alabang Commercial Corporation (ACC), contributed to net income




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growth. In addition, ALI earned higher interest and other income with increased cash balances andthe sale of shares in three subsidiaries (namely Piedmont Property Ventures, Inc., Stonehaven Land,Inc. and Streamwood Property, Inc.) in March that generated P762 million in pre-tax capital gains.

Consolidated net operating income (NOI), defined as income derived from real estate and hoteloperations after deducting for operating expenses, reached P4.29 billion in 1H08, growing by 16%

from the same period last year. Margin improvements were achieved by the Residential, Corporateand Strategic Landbank businesses. However, overall NOI margin declined by three percentagepoints to 31% as shopping center and property management margins dropped due to the continuedclosure of high-margin Glorietta 2, the start-up operations at Greenbelt 5 and lower carpark volumewith the ongoing Ayala Center redevelopment. Construction margins also dropped significantly due tohighly competitive bids on large external contracts as well as the rising costs of construction materials.Meanwhile, overhead costs were kept at bay as general and administrative expenses increased byonly 11% to P1.31 billion.

Business Segments

Residential Development accounted for the bulk of revenues at 46% of total or P7.0 billion. This wasfollowed by the Support Businesses at 24%, or P3.8 billion, bannered by the strong growth of theConstruction business. The leasing businesses namely Shopping Centers and Corporate Business

contributed 14% or P2.1 billion and 3% or P428 million, respectively. Strategic LandbankManagement accounted for 2% or P337 million, followed by Visayas- Mindanao with P60 million orless than 1%. The balance of 11% or P1.7 billion was from Interest and Other Income.

Residential Development

Residential Development revenues amounted to P7.0 billion in the first half of 2008, 12% higher thanthe P6.3 billion during the same period in 2007. Alveo Land (formerly Community Innovations) andAvida Land notably posted very strong topline growth rates of 40% and 36%, respectively.

Ayala Land Premier (ALP) projects generated P3.3 billion in revenues, down 8%, with the bulk or P2.1billion coming from high-end condominium units. Despite higher percentage of completion at TheResidences at Greenbelt (TRaG1 at 100%, TRaG 2 at 58% and TRaG3 at 22% as of end-June 2008),revenues from high-end condominium units declined 13% due to the full sellout of TRAG, with only

seven units booked in 1H08 against 239 units last year. Worth noting however was the strong salesperformance of One Serendra East Tower, which achieved 45% take up since launch in March.Revenue contribution was still minimal however given the low construction completion as of end-June.High-end lots contributed Php 862 million (+5% y-o-y) with total booked sales of 215 lots, mostly fromnew projects Abrio and Sonera, while leisure project Anvaya Cove generated P381 million (-5% y-o-y)from 65 booked units and shares.

Alveo’s revenues increased by 40% y-o-y to P2.0 billion in 1H08. Booked units during the period grewby 47% to 558 units, with Treveia in NUVALI accounting for 136 lots. Senta, the newest residentialcondominium project in Legaspi Village, Makati, had strong take up of 44% (192 out of 438 units), andwas able to book 83 units since its launch in April. Likewise, the launch of Red Oak (second tower ofTwo Serendra) in June registered a 21% take-up within barely one month of sale.

Avida’s revenues grew by 36% to P1.6 billion in the first six months of 2008 on the back of a similar

increase in bookings of 25% to 1,086 units from 867 units in 1H07. Projects launched over the pasttwelve months, namely Avida Settings NUVALI, Avida Settings Cavite, Avida Towers San Lazaro(new towers) and Avida Towers Makati West, accounted for the bulk of unit bookings.

NOI for Residential Development contributed 47% of total NOI and grew 30% y-o-y in 1H08 to P2.0billion. NOI margin (calculated by dividing net operating income by revenue from real estate and hoteloperations) likewise improved to 29% from 25% owing to higher value of sales and controlled costs.

Overall demand for residential projects remained strong with the number of taken-up units during thefirst six months of the year reaching 3,229, 10% more than the same period last year. The value ofthese units was 8% higher at P11.9 billion versus the P11.0 billion during the same period last year. A




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total of 2,906 units were launched during the first half of the year, representing over half of the full-year target of 5,600 units (excluding residential projects in Visayas-Mindanao).

Shopping Centers

Revenues for the first half of the year of Shopping Centers were steady at P2.1 billion. Base rent for

building leases were escalated within a range of 8-12% but was offset by the loss of Glorietta 2 andPark Square 2 revenues and some concessions offered to merchants directly affected by the ongoingconstruction/redevelopment of Ayala Center.

NOI for Shopping Centers posted a decline of 9% to P1.2 billion, while NOI margin was squeezed to57% from 63%. The drop in margin was primarily due to the continued closure of high-marginGlorietta 2 and the lower than expected occupancy rate at Greenbelt 5 which encountered delays infit-out for some merchants. Average occupancy for consolidated malls was lower despite animprovement in the occupancy rate of Market!Market! as Greenbelt 5 was only 64% occupied as ofend-June (but leased 86%). This business line accounted for 28% of total NOI.

The expansion of the shopping center portfolio is well underway. The 17,000-square meter Greenbelt5-Phase 2 and the 9,500 square meters of Glorietta 5 retail in Ayala Center are due to be completedin the fourth quarter of 2008. Construction of Q Mall in Angeles, Pampanga is ongoing, with a target

opening of May 2009. Meanwhile, planning of the retail-BPO development in Davao City is alsoongoing.

Corporate Business

Revenues from Corporate Business amounted to P428 million in 1H08, 8% higher than last year dueto higher average rental rates, coupled with the sale of three hectares at Laguna Technopark'sexpansion phase in 1Q08. Average rent at headquarter-type office buildings increased by 15% whileits occupancy level remained steady at 98%. For the BPO buildings, average rent of all operationaltenants went up by 8%, while occupancy dropped to 65% from 100% as a result of the additional48,000 square meters of GLA coming onstream from the first four buildings of UP TechnoHub. Todate however, 93% of the first five buildings (58,000 square meters GLA) of UP TechnoHub has beenturned over to clients for fit-out.

NOI likewise grew to P270 million, an increase of 34% compared to the same period last year of P201million, buoyed by Laguna Technopark lot sales this year versus none last year. NOI marginsimproved by 12 percentage points, to 63% from 51% previously, because of higher rental rates andlower direct operating expenses. Corporate Business’ NOI accounted for 6% of total.

Other BPO projects slated for completion for the balance of the year are the following: UP TechnohubBuilding 6, NUVALI Technopod Building 1, the BPO component of Glorietta 5, Dela Rosa E-Services,San Lazaro Building 1. The total GLA contribution of all these projects once operational will be 94,000square meters.

Strategic Landbank Management

Revenues of Strategic Landbank Management reached P337 million during the first six months of2008, an increase of 142% from the same period in 2007. The significant growth was due to overrides

on the strong lot sales at NUVALI across all three residential brands. Meanwhile, higher constructioncompletion on override units at The Columns at Ayala Avenue and Legazpi Village helped offset thedrop in booked override units to 73 in 1H08 versus 294 in 1H07.

NOI likewise increased by 180% to P146 million from P52 million, with NOI margin improving to 38%from 30% last year. SLMG’s NOI during the six-month period contributed 3% to total NOI.

Equity in net earnings from Ayala Land’s 20% effective stake in Fort Bonifacio DevelopmentCorporation (FBDC) grew to Php 361 million, up 47% year-on-year, largely due to the significantincreases in the prices of lots in the area. Eight lots at Bonifacio Global City (BGC), with a total area of




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21,638, were sold in the first half of 2008 at an average price of P173,000 per square meter,compared with 37,000 square meters at an average of P94,000 during the same period last year.

ALI continued to drive the growth in land values of its three strategic landbank areas. In Makati,construction of the Raffles / Fairmont luxury hotel complex, in partnership with Kingdom HotelInvestments has commenced. Glorietta 5, which has both office and retail components, is also set for

completion by the end of 2008.

In Bonifacio Global City, the 29-storey BGC E-Services Building is already under construction and willbe completed by 2010. Planning of the headquarter office building that will house the Philippine StockExchange (PSE) in the West Superblock area is well underway. Forthcoming developments includethe headquarter office building of a major local company, the 6-star Shangri-La Hotel to be builtbeside the PSE building in the West Superblock area, as well as a Mind Museum.

Complementing the residential components launched late last year in NUVALI is NUVALI TechnopodBuilding 1, the first building in a planned BPO campus, with a retail, dining and entertainment areasituated around an 8 hectare lake. Technopod Building 1 and the retail areas are slated for completionin the fourth quarter of 2008 while the lake and Visitors’ Center are in the final stages of construction.

Visayas-Mindanao

Visayas-Mindanao’s revenues went up by 52% to P60 million in the first half from P40 million duringthe same period last year. This was due to the increase in value of booked units to P76 million fromP74 million a year ago. Most of the bookings came from newer phases of Plantazionne VerdanaHomes and Ayala Northpoint (both in Bacolod). NOI contribution, however, was a negative P8 milliondue to high fixed costs in Ayala Heights Phase 2 and the slow take-up of Alegria Hills in Cagayan deOro.

Support Businesses

The Support Businesses, namely Construction, Property Management and Hotels, generatedrevenues (net of inter-company eliminations) of P3.8 billion during the first six months of the year,almost double the revenues of the previous year for the same period. Total NOI for the supportbusinesses in aggregate also grew by 19%, with most of the increase coming from the Construction

business.

Makati Development Corporation (MDC), ALI’s wholly-owned construction arm, reported revenues ofP2.6 billion (net of inter-company eliminations), representing a 227% growth over the first half of 2007revenues on the back of significant progress in construction accomplishment on external projects.These major projects account for 41% of the outstanding contracts with third parties. The constructionbusiness contributed P231 Million or 5% of the company’s NOI.

Ayala Property Management Corporation (APMC), a 100%-owned subsidiary, reported a flat growth inrevenues of Php 506 million (net of inter-company eliminations) in the first six months of 2008 over theprevious year’s level. The increase in CBD carpark revenues were offset by the lower carpark volumein Ayala Center. APMC’s NOI amounted to P195 million or 5% of ALI’s NOI.

The Hotels group, comprised of Hotel InterContinental Manila and Cebu City Marriott Hotel, generated

P684 million in revenues in the first half, likewise showing a flat growth from the same period lastyear. While the Hotel InterContinental Manila was able to raise average room rates by 16% to P5,523,its occupancy went down to 78% from 82% in the same period last year. On the other hand, CebuCity Marriott Hotel suffered setbacks as its occupancy rate went down to 71% from 75% whileaverage room rates dropped by 5% to P3,295 due to increased competition in the area. The twohotels contributed P245 million or 6% to ALI’s NOI.

NOI margins of the Support Businesses however dropped to 18% from 29% largely because of thelower margins on MDC’s external contracts, lower volumes at the high-margin Ayala Center carparks,and the average 4 percentage point drop in Hotel occupancy rates.




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Equity in Net Earnings of Investees, Interest, Fees, Investment and Other Income

Equity in Net Earnings from Investees grew by 49% to P556 million from Php 374 million, largely dueto higher contribution from ALI’s corporate investment vehicles in BGC, as well as higher earnings ofCHI and ACC.

As discussed earlier, the contribution of FBDC reached Php 361 million or 47% higher than the P246million in the same period last year. Meanwhile, Equity Earnings from Cebu Holdings Inc. and CebuProperty Ventures Development Corp. were 65% higher at P142 million from P86 million last year. AtAyala Center Cebu, the average building rent was 6% higher y-o-y, while occupancy rate alsoimproved to 97% from 94%. Three lot sales, one in Cebu Business Park and two in Asiatown IT Park,further augmented equity earnings.

For the shopping center business, Alabang Commercial Corporation (corporate vehicle for AlabangTown Center) contributed P59 million, 12% more than the previous year because of higher rentalrates. TriNoma, which opened in May 2007, reached profitability this year, with a positive equityearnings contribution of P1 million in 1H08 against a negative P13 million in 1H07.

Interest, fees, investment and other income amounted to P1.1 billion from P1.0 billion a year ago. Thebulk was contributed by the P762 million in pre-tax capital gains from the sale of shares in wholly-

owned subsidiaries Piedmont Property Ventures, Inc., Stonehaven Land, Inc. and StreamwoodProperty, Inc. in the first quarter of 2008.

Expenses

For the first six months of 2008, total expenses amounted to P11.3 billion, 26% more than the P8.9billion in 1H07. The bulk was accounted for by real estate cost of sales and hotel operations at P9.4billion, 30% more than last year in line with the growth of the various business segments.

General and Administrative Expenses (GAE) were tightly controlled and rose by only 11% y-o-y toP1.3 billion, a much lower pace than the 26% increase in real estate revenues. Interest and othercharges likewise increased by only 3% to P515 million as of end-June 2008 from P501 million theprevious year.

Project and Capital Expenditures

For the first half of 2008, ALI spent a total of P7.9 billion for project and capital expenditures, 17%more than the P6.9 billion spent in 1H07. This represents 32% of the full year 2008 budget of P24.3billion.

Residential Development projects accounted for the bulk of capex at 54% of total or P4.3 billion.Corporate Business followed and used 23% or P1.8 billion, mainly for UP TechnoHub and Dela RosaE-Services Building. Shopping Centers spent 14% or P1.1 billion, while the balance was accountedfor by Strategic Landbank Management and Visayas-Mindanao. ALI expects to substantially catch-upwith its capital expenditure program in the second half of the year.

The budgeted amount for project and capital expenditures in 2008 is being funded from existing cashand cash from operations, pre-selling, additional borrowings and proceeds from the sale of non-core

assets and installment receivables.

Financial Condition

ALI’s balance sheet continues to remain healthy and strong with a Net Cash position (short-term debtand long-term debt less cash and cash equivalents less short-term investments) of P4.3 billion and aCurrent Ratio of 1.59:1 at end-June 2008. Cash and cash equivalents and short-term investmentsstood at P14.7 billion, P1.4 billion more than the end-2007 level mainly due to proceeds from theaforementioned sale of the three subsidiaries. Meanwhile, Total debt rose only slightly to P10.4 billionfrom the December 2007 level, translating to a Debt-to-Equity Ratio of 0.22:1.




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DIVIDEND POLICY

Dividends declared by ALI on its shares of stock are payable in cash or in additional shares of stock.The payment of dividends in the future will depend upon the earnings, cash flow and financialcondition of ALI and other factors.

Special cash dividends are declared depending on the availability of cash, taking into account ALI’sproject and capital expenditures and the progress of its ongoing asset rationalization program.

Cash dividends are subject to approval by ALI’s Board of Directors but no stockholder approval isrequired. Property dividends which may come in the form of additional shares of stock are subject toapproval by both ALI’s Board of Directors and ALI’s stockholders. In addition, the payment of stockdividends is likewise subject to the approval of the SEC and PSE.

Other than the restrictions imposed by the Corporation Code of the Philippines, there is no otherrestriction that limits ALI’s ability to pay dividends on common equity.

DESCRIPTION OF PROPERTY

The following table provides summary information on ALI’s landbank as of June 30, 2008. Properties

are wholly owned and free of liens unless noted.

Location Hectares % to Total ALIlandbank

Makati CBD (MCBD) 53 1%

Bonifacio Global City (BGC) 33 1%

Other Metro Manila (ex-MCBD and

BGC)

256 6%

Canlubang 1,663 39%

Other Laguna (ex-Canlubang) 853 20%

Cavite 128 3%

Batangas, Rizal, Quezon 128 3%

Other Luzon areas 426 10%

Bacolod/Iloilo 256 6%

Cebu 171 4%

Davao 85 2%

Cagayan De Oro 213 5%

TOTAL 4,265 100%




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PROPERTY ACQUISITIONS

With 4,265 hectares in its landbank as of June 30, 2008, ALI believes that it has sufficient propertiesfor development at least for the next 25 years.

ALI also sees opportunities in further expanding its market share in the sectors that are experiencing

growth – residential, office (primarily BPOs) and shopping centers – as well as moving or positioninginto new growth sectors (e.g. tourism estates) related to its core businesses. More particularly, ALIsees additional opportunities for strategic acquisitions and investments in the next two to three years,mainly in the form of strategic land parcels within and outside the Greater Manila Area.

ENVIRONMENTAL COMPLIANCE

ALI incurs no material costs in relation to compliance with environmental laws and regulations. Eachof ALI and its subsidiaries, as a matter of corporate policy, either has secured or seeks to secure allrelevant and applicable Government approvals such as environmental compliance certificates orcertificates of non-coverage, development permits, and licenses to sell, as part of the normal courseof their business.



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II. Financial Services

BANK OF THE PHILIPPINE ISLANDS

DESCRIPTION OF BUSINESS

Ayala is engaged in banking through its affiliate BPI. Ayala, directly and indirectly, held approximately33.3% of BPI as of June 30, 2008. Other major shareholders of BPI as of said date are DevelopmentBank of Singapore (“DBS”) (20.3%) and the Roman Catholic Archdiocese of Manila Group (8.5%).

As of the date of this Prospectus, BPI is the third largest commercial bank in the Philippines in termsof total assets, and second overall in deposits, loans and capital. It has the second biggest marketshare in trust banking. It is the largest consumer lender and the top commercial bank in OFWremittances. The bank also enjoys a significant presence in corporate finance, securities distributionand insurance business.

BPI provides a wide range of corporate and commercial banking products and services such as credit,trade-related services, cash management services and financial advice to large- and medium-sizedcorporations and institutions in the Philippines. It provides traditional short- and long-term financing as

well as products and services such as trade acceptances and bills of exchange for such customers.

BPI is among the leading banks in the consumer banking business in the Philippines. Its servicesinclude mortgage lending, automobile financing, deposit taking, electronic banking, remittance andforeign exchange, credit card operations and private banking. BPI has a network of 831 branches,including 177 kiosks that are typically located in shopping malls, supermarkets and transport stations.BPI is a recognized leader in electronic banking, having introduced most of the firsts in the industry,such as automated teller machines (“ATMs”), a point-of-sale debit system, kiosk banking, phonebanking, Internet banking and mobile banking. BPI has 1,484 ATMs and accounts for the biggestshare in the BPI ExpressNet consortium of 3,503 ATMs.

BPI manages corporate, institutional and individual trust and investment accounts and common trustfunds. Total funds managed inclusive of deposits as of June 30, 2008 amounted to P786 billion.

PRINCIPAL SUBSIDIARIES

The bank’s principal subsidiaries are listed below.

1. BPI Family Savings Bank, Inc. serves as BPI’s primary vehicle for retail deposits, housing loansand auto finance. It has been in business since 1985. It acquired Shenton Realty Corporation inDecember 2004.

2. BPI Capital Corporation is an investment house concentrating in corporate finance and thesecurities distribution business. It began operations as an investment house in December 1994. Itwholly owns BPI Securities Corporation, a stock brokerage company with a seat in the PSE.

3. BPI Leasing Corporation is a quasi-bank concentrating in lease finance. It was originally

established as Makati Leasing and Finance Corporation in 1970. Its quasi-banking license wasinherited from the merger with Citytrust Investment Phils., Inc. in May 1998.

4. BPI Direct Savings Bank is a savings bank focused on providing internet and mobile bankingservices to its customers. It started operating as such on February 17, 2000 upon approval of theBSP.

5. BPI International Finance Limited, Hong Kong is a deposit taking company in Hong Kong. Itwas originally established in August 1974.



Business – Financial Services

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6. Bank of the Philippine Islands (Europe) Plc is a wholly owned subsidiary of BPI, which wasgranted a UK banking license by the Financial Services Authority on April 26, 2007. It was officiallyopened to the public on October 01, 2007.

7. BPI Express Remittance Corp. (U.S.A.) is a remittance center for overseas Filipino workers

incorporated on September 24, 1990.

8. Ayala Life Assurance Inc. is a life insurance company acquired by BPI through its merger withAyala Insurance Holdings Corp. (“AIHC”) in April 2000. It was originally established in 1933 asFilipinas Life Assurance Co. and has a 100% owned pre-need subsidiary called Ayala Plans.

9. BPI/MS Insurance Corporation is a non-life insurance company formed through a de facto mergerof FGU Insurance Corporation and FEB Mitsui Marine Insurance Company on January 7, 2002.

BPI merged with Far East Bank and Trust Co., Inc. and AIHC in 2000.

In September 2005, BPI acquired 92% of the share capital of Prudential Bank, Inc. (“PrudentialBank”). BPI merged with Prudential Bank on December 29, 2005, wherein approximately ten millionBPI shares were issued to the 8% Prudential Bank minority shareholders.

In October 2005, the stockholders of Universal Malayan Reinsurance (“UMRe”), the reinsurancecompany formed thru the merger of Universal Reinsurance Corporation (“UNIRE”), a BPI subsidiarywith Malayan Reinsurance Corporation, a subsidiary of the Yuchengco Group of Companies, andNational Reinsurance Corporation of the Philippines (“NRCP”) approved the plan of merger of UMReand NRCP, with NRCP as the surviving entity.

Listed in the PSE, BPI had a market capitalization of P116.3 billion as of June 30, 2008.

FINANCIAL CONDITION AS OF JUNE 30, 2008

BPI’s consolidated statements of condition for end-June 2008 and end-2007 are shown below:

In P Millions June 2008 December 2007

Total resources 626,063 637,285

Deposit liabilities 509,698 513,444

Loans and advances (Net) 296,163 273,756

Capital funds attributable to the equity holders 63,074 70,011

Total resources as of end of June 2008 stood at P626.1 billion, P11.2 billion or 1.8% lower than 2007year-end level of P637.3 billion. The decrease was attributed to the drops in both capital funds anddeposits by P7.0 billion and P3.7 billion, respectively.

Deposit liabilities contraction was mostly due to the P22.5 billion or 7.6% drop in time deposits asmaturities were shifted to high yielding trust products. This was partially compensated for by the P18.7billion or 8.6% combined expansion in demand and savings deposits, with savings depositscontributing a major portion with a P15.6 bil lion or 12.0% increase.

Total capital funds attributable to the equity holders declined by P7.0 billion or 9.9% due to lowersurplus and reserves. The surplus account diminished by P6.7 billion or 17.8% from the combinedeffect of the following: 1) the payment on February 20, 2008 of the regular and special cash dividenddeclared for the second semester of 2007 totaling P1.90 per share or P5.1 billion; 2) the declaration ofa 20% stock dividend amounting to P5.4 billion; and 3) the P3.8 billion income attributable to equityholders for the first semester. Capital stock thus correspondingly grew by P5.4 billion or 20.0% onaccount of the stock dividends. Reserves were lower by P5.9 billion on sell down of available for salesecurities and marked to market losses of the remaining inventory.




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Due to Bangko Sentral ng Pilipinas and other banks decreased by P935 million or 71.8% mainlyon lower tax collections and accrual for BSP supervision & examination fees. Accrued taxes, interestand other expenses likewise declined by P706 million or 15.1% on payments of accrued interests onmatured/redeemed time deposits, accrued expenses and income taxes.

On the asset side, net loans and advances grew by P22.4 billion or 8.2% on strong demand of both

corporate and retail borrowers. Interbank loans receivable and securities purchased underagreements to resell and due from other banks were up by P17.6 billion and P3.9 billion,respectively, as the bank shifted its available for sale securities portfolio to these outlets to shortenduration by 23%. Trading securities were likewise higher by P3.9 billion in order to take advantageof market movements. On the other hand, available for sale securities dropped by P39.2 billion dueto inventory sell downs to minimize marked to market losses. Due from Bangko Sentral ngPilipinas and held to maturity securities also declined by P11.7 billion or 16% and P5.8 billion or11.1%, respectively, due to matured investments and placements in the first semester. Derivativefinancial assets were lower by P660 million or 21.1% on account of the lower level of forwardscontracts bought.

RESULTS OF OPERATIONS FOR FIRST SEMESTER 2008

In P Millions Jan-June2008 2007

Net Interest Income 9,114 9,775

Other Income 5,567 7,130

Impairment Losses 875 959

Other Expenses 8,542 8,894

Net Income attributable to equity holders 3,833 5,715

First semester 2008 net income attributable to equity holders was P3.8 billion, P1.9 billion or 32.9%lower than last year’s P5.7 billion. Revenues declined by P2.2 billion or 13.2% as both net interestincome and other income contracted by P661 million and P1.6 billion, respectively. The impact ofthe revenue decline was partly tempered by lower other expenses and impairment losses which weredown by P352 million and P85 million, respectively.

Net interest income dropped by 6.8% despite an increment of P21.5 billion in average asset base.Net interest spread narrowed by 41 basis points following the decline in overall asset yield. Thistranslated to a P346 million drop in interest income while interest expense rose by P315 million or5.0%.

Other income fell significantly by P1.6 billion or 21.9%. Income attributable to insuranceoperations was down by a P1.2 billion due to last year’s non-recurring investment income. Incomefrom foreign exchange and securities trading also decreased by P774 million or 43.3%. Thecontinued rise in interest rates provided limited opportunity to generate trading gains. Instead thebank opted to shorten duration of its securities inventory to minimize marked to market losses and yetstay within prudential value at risk (VAR) limits. Service charges and commissions contributed anincrease of P169 million or 13.0% on higher volume of transactions. GRT was down by P161 millionor 30.3% corresponding to the lower level of other income.

Impairment losses at P875 million were P85 million lower as last year’s included provisions for otheraccounts.

Other expenses stood at P8.5 billion, P352 million lower than last year’s P8.9 billion. Otheroperating expenses posted a P461 million or 17.5% drop due to lower prior year’s tax settlementsand non-credit write-offs. Occupancy and equipment-related expenses were up by P149 milliondue to higher equipment depreciation costs.

Provision for income tax ended higher by P174 million or 14.6%. Current income tax dropped byP226 million or 18.4% largely from lower final taxes on securities. On the other hand, deferred




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income tax showed a reversal from its normal credit balance and increased by a hefty P400 millionfollowing the utilization of NOLCO on account of the bank’s positive tax position.

Key Performance Indicators

The following ratios, applied on a consolidated basis, are used to assess the performance of the bank

and its majority owned subsidiaries:

June 30, 2008 June 30, 2007

Return on Equity (%) 11.8 17.5

Return on Assets (%) 1.3 2.0

Net Interest Margin (%)* 3.6 4.0

Operating EfficiencyRatio (%)*

58.2 52.6

Capital Adequacy Ratio (%)** 13.7 13.8* Adjusted to incorporate documentary stamps as part of deposit costs ** BSP BIS Ratio (Basel II)

Return on equity (ROE), net income divided by average equity, dropped by 5.7 percentage points on

account of the lower first semester earnings this year. Return on assets (ROA), net income dividedby average assets, also declined from 2.0% to 1.3%. ROE and ROA measures the bank’s efficiency inutilizing its capital and resources, respectively, in generating profits.

Net interest margin (NIM), net interest income divided by average interest bearing assets, was downby 42 basis points due to narrower spreads on interest bearing assets arising from lower assetsyields.

Operating efficiency ratio (cost to income), operating expenses divided by total revenues,deteriorated by 5.6 percentage points as revenues registered a bigger decline than operatingexpenses this year.

Capital adequacy ratio (CAR), total qualifying capital divided by total risk-weighted assets, measuresthe ability of the bank’s capital funds to cover its various risks. CAR as of June 2008 was flat against

last year. The bank’s CAR is more than BSP’s minimum requirement of 10% notwithstanding that thebank carries only Tier 1 capital. The bank’s strong capital position is a product of the bank’s ability togenerate profits.

CASH DIVIDENDS

Cash dividends declared and paid by BPI during the six months ended June 30, 2008 and June 30,2007 are as follows:

Cash Dividends Declared

Date Amount Declared Amount Paid

January to June 2008 P0.90 per share P5.14 billion*

January to June 2007 P0.90 per share P5.14 billion**

* Represents P1.90/share cash dividends declared on November 21, 2007 ** Represents P1.00/share cash dividend declared on October 18, 2006 and P0.90/share declared on November 15,2006

COMPETITION

The Philippine banking industry has seen a significant increase in the number of commercial banks,especially since the liberalization of operations by foreign banks. The number of commercial banksincreased from approximately 30 prior to liberalization to more than 50. However, as of June 30, 2008,the number of universal and commercial banks had declined to 36 as a result of mergers andclosures. Competition has remained intense despite the industry consolidation.




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Loan requirements, especially from the top tier corporate sector, while still predominantly for workingcapital, have slightly recovered on stronger credit demand from power, real estate, business processoutsourcing, as well as tourism related sectors. The top corporates though have been the focus offoreign banks, resulting in narrower margins for this market segment. It is in the buoyant SME andmiddle market where lending opportunities are better, and where most of the domestic banks’

emphasis has been directed. A number of foreign banks though as well as most domestic banks,have entered the growing consumer market where BPI is a major player. BPI believes that itscompetitive advantages include, aside from the extensive delivery infrastructure, its experience inefficient management of operations such as loan origination, credit approval, collection and assetrecovery activities.



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III. Telecommunications

GLOBE TELECOM, INC.

Ayala conducts its telecommunications business through its business affiliate, Globe. Globe is aleading provider of wireless communications services in the Philippines. It continues to grow andengage its customers through its clear commitment to enriching lives through ease and relevance.With approximately 22.4 million wireless subscribers as of June 30, 2008, Globe accounts forapproximately 36% of the total wireless subscribers in the country. Globe’s shares are listed on thePSE and included in the Philippine composite index. As of June 30, 2008, Globe had a marketcapitalization of P156.2 billion.

As of June 30, 2008, Ayala owned 30.5% of Globe’s outstanding common shares while SingaporeTelecom International (“STI”), a wholly owned subsidiary of Singapore Telecom, owned 47.3%.Asiacom Philippines, Inc., a holding company that currently owns all of Globe’s outstanding preferredshares, is 60% owned by Ayala and 40% by STI.

Wireless Business: Products and Services

Globe Telecom offers its wireless services including local, national long distance, international longdistance, international roaming and other value-added services through three brands: Globe Postpaid ,Globe Prepaid and TM . The TM consumer wireless prepaid service was previously operated byInnove. However, starting last May 19, 2008 following the approval of the NationalTelecommunications Commission (NTC), the TM contracts were transferred to Globe which nowoperates all wireless prepaid services in the integrated cellular networks of Globe and Innove.

Globe Postpaid includes all postpaid plans such as G-Plans and consumable G-Flex Plans , andPlatinum (for the high-end market).

Globe Prepaid and TM are the prepaid brands of Globe. Each brand is positioned at different marketsegments. Globe Prepaid is focused on the mainstream, broad market while TM is focused on thevalue-conscious segment of the market. In addition to these brand offerings, Globe has customizedservices and solutions to address specific market segments, each with its own unique positioning andservice offers.

Globe also provides its subscribers with mobile payment and remittance services under the GCash brand. Now on its fourth year, this service enables our subscribers to perform international anddomestic remittance transactions, pay fees, utility bills, income taxes, avail of micro-financetransactions, donate to charitable institutions, and buy Globe prepaid reloads.

To cater to a wide variety of our prepaid subscribers, we provide various top up facilities at eachsubscriber’s convenience. Our Globe Prepaid and TM subscribers can reload airtime value or creditsusing various reloading channels.

Subscribers can purchase Globe Prepaid Call and Text cards in P100, P300 and P500 denominationswhile TM Call and Text cards are available in P50, P100, and P300 denominations. They can alsoutilize Globe AutoloadMAX , our over-the-air (OTA) reload channel, which offers the most affordableand flexible load credits in P1 increments from P10 to P150 for our TM subscribers, and P15 to P150for our Globe Prepaid subscribers. In addition, subscribers can also top up using various bankchannels like ATMs, credit cards, and internet banking facilities. Globe subscribers can also obtainload credits through the Bank of the Philippine Islands’ 24 Hour Call Center and Express Phone facility, as well as through E-POS (electronic point-of-sale) terminals located at various retail outletsand at our business centers.

A consumer to consumer top up facility, Share A Load, is also available whereby our Globe Prepaid and TM subscribers can share prepaid load credits among themselves in denominations of P1 to



Business - Telecommunications

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P150 (in P1 increment). In addition, our Globe Postpaid subscribers can Share A Load to our prepaidsubscribers in P1 to P150, P300 and P500 denominations. Another reloading channel available isGCash2Load , where Globe Postpaid, Globe Prepaid and TM subscribers can top up their own orsomebody else’s mobile phone by converting their GCash to prepaid load credits in P1 incrementsfrom P10 to P150. Denominations of P300, P500 and P1,000 are also available.

Wireline Business: Products and Services

Innove, provides wireline voice communications (local, national and international long distance), anddata services to individuals, small and medium enterprises (SMEs), corporations and enterprises inthe Philippines.

Consumers

Our postpaid voice service provides basic landline services including toll-free NDD calls to otherGlobe landline subscribers for a fixed monthly fee. The service can be customized with the followingoptional value-added services - IDD, phone lock, call waiting and forwarding, multi-calling, call waitingID, caller ID, special numbers and voice mail. Our PIN-based prepaid card service, Globe1, can beused for local, national and international long distance calls using a Globe landline (postpaid andprepaid), payphone or mobile service. The card is offered in P100 and P300 denominations.

On the wired broadband front, our consumers can choose between broadband packages bundled witha Globe postpaid landline, or a broadband data-only service for only P995 at download speeds of 384kbps and 512 kbps, respectively. Recently, we introduced an entry-level wired internet service thatprovides a minimum browsing period while allowing per minute or per hour charging beyond the fixedlimit for only P595 a month. Meanwhile, for consumers who require higher speeds, our high-end planswith a monthly service fee (MSF) of P5,995 provide connection of up to 3 mbps.

For fixed wireless broadband connection using our 3G with HSDPA network, we offer broadbandpackages bundled with voice, or broadband data-only service with a 512 kbps connection for onlyP1,295 and P995, respectively. For subscribers who require full mobility, our Visibility serviceprovides both unlimited and capped postpaid mobile internet plans that allow internet access atspeeds of up to 1.8 mbps via HSDPA, 3G, EDGE, GPRS, and Wi-Fi at over 600 hotspots nationwide.Dial-up access is also available. Visibility SIMs can also be used for voice, text, VAS and roaming.

Enterprise, Corporate/SME clients

To better serve the various needs of our customers, we have created customer facing units withinGlobe to focus on the wireless and wireline needs and solutions of specific market segments andcustomers. Globe Business is dedicated to address the needs of the business sector and isorganized along two main segments – Corporate and SME (CSME) and Enterprise. These groups areequipped with their own technical and customer relationship teams to cater to the needs of micro,medium and large scale corporate clients.

For our corporate and enterprise clients’ wireline voice communication needs, we offer postpaidservice bundles which come with a business landline and unlimited dial-up internet access. We alsoprovide a full suite of telephony services from basic direct lines to ISDN services, 1-800 numbers, IDDand NDD access, as well as managed voice solutions such as VOIP and managed IP

communications. Value-priced, high-speed data services over our nationwide broadband network arealso available and include domestic and international data services, wholesale and corporate internetaccess, data center services, and segment-specific solutions customized to the needs of verticalindustries. We also provide various mobile-based services matched with relevant value-addedservices. Some of the products and services we offer are as follows:

(i) Globe Private Networks offer a variety of dedicated communications services that allowcustomers to run various data applications, access LANs or corporate intranets andextranets with integrated voice services on high speed, efficient and reliable connections;




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(ii) Globe Data Center Services include provision of managed space and carrier-class facilityfor co-location requirements, dedicated hardware from leading partner vendors for off-sitedeployment and 24x7 monitoring and management, maintenance for application hosting,high speed performance and secure LAN-based internet connectivity to co-located andhosted servers and applications. Solutions also include a suite of Business Continuity andRecovery services such as offsite media storage and disaster recovery to ensure

immediate recovery and availability of information technology resources to continuemission-critical operations, certified and skilled technical operations team to supporthosting services such as email, storage, and managed security services;

(iii) Globe Data Centers services include carrier-class facilities for co-location requirements,global hardware platforms for off-site deployment, 24x7 monitoring and maintenance fordedicated server hosting applications, fast and reliable LAN-based internet connectionsfor superior hosting services and a robust infrastructure with skilled technical support foroutsourced email, storage and messaging services;

(iv) Globe Broadband Access is a network access solution that provides our customers withultra-high speed fiber optic network connectivity over a fully redundant and diverseDWDM-based fiber backbone.

.

Broadband Internet customers can subscribe to DSL access packages, Internet Direct services forguaranteed service levels over leased line facilities, Broadband Internet Zones (BIZ) for broadband toroom internet access for hotels and transient travelers, wholesale internet access through Internet Exchange (GiX), or bandwidth-on-demand based on average usage payment scheme through ourinnovative GiX Burstable, and Freeway IP for wholesale internet access through our managedinternational private leased line circuit to the United States.

Dial-up customers can avail of dedicated dial-up services ideal for small office environments whichenables multiple users on a small LAN to access the internet. It also includes an internationalroaming option which provides internet connection in over 150 countries using a local dial-up numberand account. SMEs can also take advantage of E-business in a box which is a set of bundledservices designed to set up and maintain a web presence for start-up companies. This includesregistration of domain names for a personalized dotcom internet address and free web pages to makeour clients’ business accessible.

Globe also has a rich stream of product and service innovations customized for specific businesssegments, such as the following:

(i) Autoload Max Corporate Edition is the enterprise version of our leading electronic prepaidcredit loading system that allows a company to manage, schedule and automaticallyreload prepaid credits to their employees’ mobile phones.

(ii) Business Loop is a special billing feature that helps companies cut costs by providingspecial calling rates for enrolled subscribers and simplified billing for easier monitoring ofbusiness communications.

(iii) I-cafe Kit or Internet Café Kit is a business-in-a-box solution to help entrepreneurs starttheir own internet surfing or gaming businesses which includes hardware, software,

connectivity options, marketing support, consultancy and after-sales support inpartnership with other service providers.

(iv) Inventory Ordering System is a business solution specifically designed to cater to retailrequirements of SMEs by providing an easy-to-use platform and system application thatcan be customized for any multi-site company with franchises, commissaries,warehouses and backend ordering operations.

(v) Mobility Bundle is a special Visibility subscription packaged with a full-featured laptop orother devices like PDAs and PC cards which allows entrepreneurs and executives toaccess the internet and data via GPRS, EDGE, Wi-Fi and dial-up transport channels.




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(vi) Mobile Office enables mobile professionals to securely access corporate email, browseand download files from a remote hard drive, and access several PCs (home and office)on one subscription.

(vii) Mobile Mail allows mobile professionals to securely access enterprise applications,

corporate email, calendar and desktop files via a mobile device or from any internet-enabled PC.

(viii) Store Express allows clients to conveniently link their retail branches via IP-VPN using acombination of leased line, DSL or dial-up connection to the head office. This providesreliable and fast access to information on retail chain sales and inventory systems atreasonable rates, as well as internet access, web and email hosting, business continuityand recovery services, managed customer premises equipment, remote video monitoring,POS software and hardware bundles in partnership with leading equipment providers asvalue-added services.

(ix) Tracker Corporate Edition is the enterprise web-based application that enables acompany to monitor and track company personnel and resources such as vehicles andmobile assets.

(x) TxtConnect allows subscribers to send high-volume text broadcasts to pre-registeredgroups and include value added services such as generation of reports on sent andreceived messages, sending messages on a set schedule and transmitting system-generated SMS messages.

(xi) Webeye is a remote web-based video solution that complements any existing CCTV set-up and allows subscribers to monitor physical resources in multiple outlets and locationsvia a broadband internet connection.

KEY PERFORMANCE INDICATORS

Globe acknowledges the importance of its shareholders and is dedicated to optimize profitability andefficiently manage the use of capital resources with a view to increasing shareholder value.

It constantly reviews and monitors its activities and key performance indicators to measure success inimplementing operating and financial strategies, plans and programs. Some of Globe’s keyperformance indicators are set out below. Except for Net Income, these key performance indicatorsare not measurements in accordance with Philippine Financial Reporting Standards (“PFRS”) andshould not be considered as an alternative to net income or any other measure of performance whichare in accordance with PFRS.

Gross Average Revenue Per Unit (Gross ARPU)

Gross ARPU measures the average monthly gross revenue generated for each subscriber. This iscomputed by dividing recurring gross service revenues for a business segment for the period by theaverage number of the segment’s subscribers and then dividing the quotient by the number of monthsin the period.

Net Average Revenue Per Unit (Net ARPU)

Net ARPU measures the average monthly net revenue generated for each subscriber. This iscomputed by dividing recurring net service revenues of the segment for the period (net of discountsand interconnection charges to external carriers and content provider revenue share) by the averagenumber of the segment’s subscribers and then dividing the quotient by the number of months in theperiod.




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Subscriber Acquisition Cost (SAC)

SAC is computed by totaling marketing costs (including commissions and handset/SIM subsidies orthe difference between non-service revenues and cost of sales) related to the acquisition programs forthe segment for the period divided by the gross incremental subscribers.

Average Monthly Churn Rate

The average monthly churn rate is computed by dividing total disconnections (net of reconnections)for the segment by the average number of the segment’s subscribers, and then divided by the numberof months in the period. This is a measure of the average number of customers wholeave/switch/change to another type of service or to another service provider and is usually stated asa percentage.

EBITDA

EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is calculated as net servicerevenues less subsidy

1, operating expenses and other income and expenses excluding any property

and equipment-related gains and losses and financing costs. This measure provides usefulinformation regarding a company’s ability to generate cash flows, incur and service debt, financecapital expenditures and working capital changes. As Globe’s method of calculating EBITDA maydiffer from other companies, it may not be comparable to similarly titled measures presented by othercompanies.

EBITDA Margin

EBITDA margin is calculated as EBITDA divided by total net service revenues. Total net servicerevenue is equal to total net operating revenue less non-service revenue. This is useful in measuringthe extent to which subsidies, operating expenses (excluding property and equipment-related gainsand losses and financing costs) and other income and expenses, use up revenue.

EBIT

EBIT is defined as earnings before interest, property and equipment-related gains and losses andincome taxes. This measure is calculated by deducting depreciation and amortization from EBITDA.Globe Group’s method of calculating EBIT may differ from other companies, hence, may not becomparable to similar measures presented by other companies.

Net Income

As presented in the unaudited condensed consolidated financial statements for the periods ended 30June 2008 and 2007, net income provides an indication of how well the company performed after allcosts of the business have been factored in.

FINANCIAL HIGHLIGHTS FOR JANUARY TO JUNE 2008

KEY DRIVERSin P millions

Six Months Ended June 30(Unaudited)

2008 2007 YoY % Change

Profit & Loss Data

Net Operating Revenues 31,947 33,009 -3%

Service Revenues 31,114 31,621 -2%

Costs and Expenses 12,668 12,067 5%

Cost of Sales 1,249 1,995 -37%

Operating Expenses 11,419 10,072 13%




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EBITDA 19,279 20,942 -8%

EBITDA Margin 62% 66%

Depreciation and Amortization 8,138 8,385 -3%

EBIT 11,141 12,557 -11%

Financing (1,809) (3,267) -45%

Interest Income 238 370 -36%

Others - net 51 119 -57%Provision for Income Tax (3,407) (3,354) 2%

Net Income After Tax 6,214 6,425 -3%

Core Net Income1 6,676 7,378 -10%

1Core net income is NIAT before Forex/MTM gain (loss) and charges related to the early redemption of the Group’s 2012

Senior Notes recognized in the first quarter of 2007. • Consolidated service revenues of P31.1 billion decreased by 2% from last year’s level. If

adjusted for the one-time impact of last year’s national elections, normalized service revenues areflat year on year. Wireless revenues, which accounts for 89% of total service revenues, declinedby 2% year on year, while wireline revenues improved 5% driven by improvements in thebroadband and wireline data business.

• Total operat ing expenses and subsidy (excluding depreciation) rose 11% year-on-year to P=11.8billion from P10.7 billion in 2007. Operating expenses grew by 13% driven mainly by highermanpower costs, rental charges, services and provisions, partially offset by a 31% year on yeardecline in subsidies. With lower revenues and increased operating expenses, consolidatedEBITDA decreased by 8% year on year to close at P=19.3 billion. EBITDA margins stood at 62% ofservice revenues from last year’s 66%. Following the decline in EBITDA, EBIT fell 11% year onyear, with this period’s EBIT margin at 36% from last year’s 40%.

• Consolidated net income after tax posted a 3% year-on-year decrease to P6.2 billion driven bylower operating earnings, higher income tax provisions, partially offset by lower financing costsduring the current period. Financing costs were higher in 2007 as a result of the one-time chargesof P1.3 billion related to Globe’s early redemption of its US$294 Million Senior Notes due in 2012.Excluding forex, mark-to-market gains and losses, as well as charges related to the redemption ofthe Senior Notes recognized in the first half of 2007, core net income for the first half of 2008reached P6.7 billion, down 10% from last year’s P7.4 billion.

• Total capital expenditures for the first half amounted to P=9.5 billion, 62% higher than previousyear’s P=5.8 billion due to increased expenditures related to the aggressive broadband rollout,continued deepening of our 2G coverage and investments in domestic and internationaltransmission including the purchase of capacities in the TGN-Intra Asia submarine cable system.Cumulative 2G cellsites increased by 4% from 6,046 to 6,279 bringing geographic and populationcoverage to 96% and 99%, respectively.

• Total cash balance (including short term, available for sale and held-to-maturity investments)registered at P=8.7 billion, lower than last year’s P13.2 billion due to higher capex spending andreduced operating inflows. Total debt has been reduced to P32.0 billion at the end of the first halffrom P33.2 billion after Globe fully redeemed its US$ Senior Notes in April 2007.




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OPERATING REVENUES FOR THE SIX MONTHS ENDED JUNE 30

Operating Revenues By Businesses (Php Mn)2008 2007 YoY

Change

(%)

Wireless 28,414 29,693 -4%Service Revenues 27,625 28,313 -2%Non-Service Revenues 789 1,380 -43%

Wireline 3,533 3,316 7%Service Revenues 3,489 3,308 5%Non-Service Revenues 44 8 450%

Total Net Operating Revenues 31,947 33,009 -3%

Globe’s total net operating revenues declined by 3% to P31,947 million from last year’s P33,009million mainly due to lower wireless service revenues, which accounts for 89% of total servicerevenues, coupled with a 40% decline in non-service revenues.

Year on year, wireless service revenues declined by 2% to P27,625 million. If the P356 millionestimated election-related revenues in 2007 are excluded, wireless service revenues would havebeen flat year-on-year. Despite the strong results on subscriber net additions this period, revenuegrowth was held back by the weaker consumer environment impacted by higher inflation. This hasresulted in lower subscriber activity levels, increasing multi-SIM usage, reductions in revenues fromvalue-added services, and shifts towards lower-ARPU products such as SMS in lieu of voice.

The continued strength of the peso relative to last year’s levels also affected revenue growth. With28% of net operating revenues linked to the dollar, the impact on revenues of the 14% year on yearpeso appreciation amounted to approximately P1.4 billion. Therefore, our service revenues wouldhave grown by 3% year on year instead of declining 2% had exchange rates been steady.

Wireless non-service revenues decreased by 43% to P789 million due to lower priced SIMs andphonekits sold to new subscribers during the current period. An aggressive acquisition campaign

during the second quarter resulted in 5.4 million gross additions, compared to 4.2 million in the firstquarter, which contributed to a 58% increase in non-service revenues on a quarter-on-quarter basis.

Meanwhile, wireline service revenues registered a 5% increase to P3,489 million due to growth in ourbroadband and wireline data businesses. Cumulative broadband subscribers increased by 54% yearon year and propelled broadband revenues to P777 million while improved take up of corporateleased line and value-added services boosted wireline data revenues to P1,153 million by the end ofthe first half of 2008.

Wireless Voice

The wireless voice segment accounted for 52% of total wireless service revenues for the first half ofthe year from 54% in 2007. Wireless voice revenues were lower by 5% at P14.44 billion from theP15.2 billion registered the previous year primarily due to decreased year-on-year local voice

revenues resulting from lower traffic usage and lower international revenues on account of the peso’sappreciation. These were partially offset by improvements in VoIP and international roamingrevenues.

To stimulate local outbound traffic usage, Globe and TM extended its bulk voice promotions – the P10for a 3-minute call for Globe subscribers and TM with its P15 for a 15-minute call and P10 for a 5-minute call (single or multiple calls totaling 5 minutes). At the same time, Globe and TM sustainedtheir P0.10 per second voice offerings and added another promotion that allowed intra-network voicecalls to be made by subscribers every Sunday for only P0.05 per second.




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Following the transfer of TM subscribers to Globe, Globe calls to TM subscribers and vice-versa arenow considered intra-network calls, hence, are not subject to interconnection charges. Consequently,we also extended our per second voice promotions for calls between Globe and TM subscribers.

To further promote international services, we continue to provide international outbound callingpromotions such as the P7.50 per minute rate to Bridge Mobile Alliance operators, P7.50 off-peak rate

to the US and Canada and the P0.15 per second to the top 15 IDD calling destinations. Meanwhile,TM sustained its P8 per minute calling rate to popular OFW destinations such as the US, Canada,Hawaii, Saudi Arabia and Japan. International roaming postpaid subscribers can also use the G- Webcall service to make VoIP calls at P7.50 per minute to another Globe or TM subscriber or makefree VoIP calls to another G-Webcall user.

Wireless Data

Globe’s wireless data business contributed 48% to total wireless net service revenues. For the firsthalf of the year, data revenues of P13.2 billion were flat year on year but grew 1% quarter on quarter.Regular, bucket and unlimited SMS promotions continued to account for the bulk of wireless datarevenues.

To further stimulate usage and following the transfer of TM subscribers to Globe, we have extended

our Unlimited Texting, SuliTxt , TodoText and EverybodyTxt bucket SMS promotions to provide valueand expanded texting options for our subscribers. To address subscribers’ need for value consideringthe difficult macroeconomic environment, we recently introduced a promotional text offering of P20 for40 inter-network SMS.

TM also offered its Share a Todo Text service which allows a TM subscriber to register another TM subscriber for them to enjoy unlimited daytime texting for only P10 a day. Globe further expanded itsbucket promotion to international SMS with the iTXT or International Text service where Globe Prepaid subscribers can send international SMS to SingTel subscribers for as low as P0.50 per SMS.The ITXT packages can be purchased over the air and are available in two packages, P25 for 25international SMS or P50 for 100 international SMS. Globe also offered TIPID iTXT which allowsOFWs and their families based in the United States and Japan to purchase over-the-air, internationalSMS packages at bulk rates for credit to the prepaid subscribers based in the Philippines. Thesepackages are available in US$1.99 and Y300 denominations for 20 and 35 international text

messages, respectively.

To encourage increased usage of its value added services, Globe continued to market its Mobile Internet Flexible Browsing Rate promotion which gives postpaid and prepaid subscribers the choice ofa volume or time-based internet browsing rate of P0.15/kb or P5 for 15 minutes. To allow subscribersto experience mobile browsing with 3G connectivity, Globe offered a lightweight, ultra-portable Asus EeePC laptop bundled with a 3G mobile phone to postpaid subscribers starting with the entry-levelpostpaid plans of GText/GFlex 500 onwards. Roaming subscribers who require mobile internetaccess can also avail of the Bridge DataRoam service with its flat-rate data roaming when logging onto Bridge Alliance member operator networks.




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The key drivers for the wireless business are as follows:

Year on Year

30 Jun 30 Jun YoY

2008 2007 Change(%)

Cumulative Subscribers (or SIMs) – 22,737,560 18,126,493 25%

Net (End of period)

Globe Postpaid 727,397 683,348 6%

Prepaid 22,010,163 17,443,145 26%

Globe Prepaid 13,165,467 11,227,472 17%

TM 8,844,696 6,215,673 42%

Average Revenue Per Subscriber(ARPU)

Gross ARPU

Globe Postpaid . 2,067 2,178 -5%

Prepaid

Globe Prepaid 283 349 -19%

TM 148 216 -31%

Net ARPU

Globe Postpaid . 1,486 1,625 -9%

Prepaid

Globe Prepaid 209 258 -19%

TM 111 161 -31%

Subscriber Acquisition Cost (SAC)

Globe Postpaid . 5,768 5,281 9%

Prepaid

Globe Prepaid 30 55 -45%TM 36 67 -46%

Average Monthly Churn Rate (%)

Globe Postpaid . 1.67% 1.60%

Prepaid

Globe Prepaid 5.24% 4.14%

TM 6.39% 5.21%

Globe’s cumulative wireless SIM base expanded 25% year on year, ending the first half with 22.7million SIMs. Gross additions grew by 39% to 9.6 million this period from 6.9 million in 2007. Netadditions this quarter of 1.5 million SIMs is a record high for Globe and is a 53% improvement fromlast quarter which was affected by the fiber cuts and network disruptions, particularly in the provincialareas. On a cumulative basis, this semester’s net additions are lower versus last year’s given thelower first quarter 2008 performance.

The succeeding sections cover the key segments and brands of the wireless business – Globe Postpaid, Globe Prepaid and TM .

GLOBE POSTPAID

Globe’s postpaid segment comprises about 3% of its total subscriber base. Total postpaid gross andnet additions on a year on year basis registered at 89,320 and 17,580, respectively compared to the




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103,264 and 39,447 registered for the same period last year. Cumulative subscribers as of the end ofthe period stood at 727,397, rising 6% from 683,348 the previous year due to attractive andcompetitive offers for this segment and continued churn management campaigns that have resulted inchurn rates below the 1.7% level.

During the year, G lobe Postpaid introduced its Load Allowance Plan and Phone Fanatics promotion to

address the needs of subscribers who require group plans and in response to competitive offers. TheLoad Allowance Plan works like an extension plan attached to a postpaid subscription with fixedmonthly reloads at set dates within the month. Unused and unexpired credits can be carried over tothe next month. The plans come with free handsets and are available in P250, P500 or P1000 planvariants. With Phone Fanatics, new subscribers can get a group plan for P1,000 that includes threenew handsets by subscribing to a G-Text (P500) plan and two P250 extension plans.

Globe’s postpaid segment registered gross and net ARPUs of P2,067 and P1,486, lower than lastyear’s P2,178 and P1,625 on account of lower average voice usage offset by higher take up of dataservices particularly regular SMS. IDD voice revenues continue to be affected by the impact of thestronger peso and the increasing availability of lower-priced IDD alternatives such as VoIP and instantmessaging.

Postpaid SAC increased slightly by 9% to P5,768 from P5,281 year-on-year due to increased handset

subsidies for new postpaid offers including high-value handsets, as well as due to higher advertisingand promotion charges to counter aggressive acquisition offers by our competitors.

PREPAID

Globe’s prepaid segment, which includes the Globe Prepaid and TM brands, comprised the remaining97% of its total subscriber base.

With affordable and superior product offers and strengthened regional sales programs, ourconsolidated prepaid subscribers increased year on year by 26% from 17.4 million to 22.0 million.

A prepaid subscriber is recognized upon the activation and use of a new SIM card. The subscriber isprovided with 60 days (first expiry) to utilize the preloaded SMS value. If the subscriber does notreload prepaid credits within the first expiry period, the subscriber retains the use of the wireless

number but is only entitled to receive incoming voice calls and text messages for another 120 days(second expiry). However, if the subscriber does not reload prepaid credits within the second expiryperiod, the account is permanently disconnected and considered part of churn. The first expiry periodsof reloads vary depending on the denominations, ranging from 1 day for P10 to 60 days for P300 toP500 reloads. The second expiry is 120 days from the date of the first expiry. The first expiry is resetbased on the longest expiry period among current and previous reloads. Under this policy,subscribers are included in the subscriber count until churned.

The succeeding sections discuss the performance of the Globe Prepaid and TM brands in moredetail.

Globe Prepaid

Globe Prepaid maintained strong subscriber growth, posting a 17% year-on-year improvement in its

SIM base to reach 13.2 million subscribers. Year-on-year, gross additions were 34% higher at 5.02million compared to the 3.8 million in 2007. Higher churn resulting from intense market competitionlowered net additions by 6% to 1.0 million against the 1.1 million generated in 2007. Globe Prepaid subscribers currently account for 58% of total wireless subscribers.

Year-on-year, gross and net ARPUs for Globe Prepaid declined by 19% as revenues continue to beimpacted by multi-SIM usage, lower activity levels, a shift towards lower-ARPU services such as SMSin lieu of voice, as well as the impact of stronger peso on dollar-linked ILD revenues. Consumptionand usage were also partly affected by the weakened consumer environment of 2008 compared tolast year, with rising food and fuel prices.




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SAC declined by 45% year-on-year from P55 to P30 due to more focused spending on advertisingand promotions. During the first half of 2008, subsidies comprised 4% of total SAC, while advertisingand promotions contributed most of the balance. For 2007, subsidies accounted for 13% whileadvertising and promotions and commissions comprised 84% and 3%, respectively.

TM

TM continues to be the front runner in subscriber growth, expanding its SIM base by 42% to close thefirst half of 2008 with 8.8 million subscribers. TM’s gross additions for the current period of 4.5 million,which represents 47% of total wireless acquisitions, were higher than last year’s level of 3.1 million asa result of intensified regional acquisition campaigns. Net additions were also higher by 3% at 1.4million from the 1.3 million posted in 2007 and comprised 56% of this period’s total net additions.

TM ’s churn rate for the period was higher at 6.39% compared to 5.21% in 2007 due to intensifiedcompetition particularly in the mass market segment. Relative to the second quarter, this quarter’schurn rate also includes subscribers who were affected by the service disruptions in the Visayas andMindanao areas during the early part of 2008.

TM’s net ARPU decreased by 31% year on year to P111 due to lower average usage partly resultingfrom the network disruption experienced in the first two months of the year which largely affected TM

subscribers in Visayas and Mindanao, as well as increased multi-SIM usage.Year-on-year, TM’s SAC decreased by 46% from P67 to P36 due to significant reductions in SIMcosts during the current period. For 2008, advertising and promotions made up the bulk of SAC at58% followed by handset and SIM subsidies at 39% with the balance of 3% going to commissions. In2007, advertising and promotions accounted for 40%, subsidies made up 57% and the balance of 3%were brought about by commissions.

GCASH

GCash continues to establish its presence in the mobile commerce industry. GCash ’s initial thrusttowards money-transfers, purchase of goods and services from retail outlets, and sending andreceiving domestic and international remittances has spurred alliances in the field of mobilecommerce. On 30 July 2008 GCash announced that it has partnered with Western Union (WU) to

offer the Globe/WU Mobile Money Transfer program that allows OFWs in Hawaii to send moneydirectly to Globe and TM subscribers in the Philippines at lower transfer fees compared to pure cashtransactions.

Today, GCash allows Globe and TM subscribers to pay or transact for the following using their mobilephone:

• domestic and international remittances• utility bills• interest and amortization of loans• insurance premiums• donations to various institutions and organizations• sales commissions and payroll disbursements• school tuition fees

• micro tax payments and business registration• electronic loads and pins• online purchases• ferry and airline tickets• train tickets using the G-PASS chip

In addition to the above transactions, GCash is also used as a wholesale payment facility. As of 30June 2008, GCash handled an average monthly transaction value of around P6.1 billion with netregistered GCash user base of 1.8 million.




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WIRELINE BUSINESS

Year on Year

30 Jun 30 Jun YoYWireline Net Service Revenues(Php Mn) 2008 2007 Change

(%)

Service

Voice 1 1,559 1,823 -14%

Broadband2

777 499 56%

Data3

1,153 986 17%

Wireline Net Service Revenues 3,489 3,308 5%1Wireline voice net service revenues consist of the following:

a) Monthly service fees including CERA of voice-only subscriptions; b) Revenues from local, international and national long distance calls made by postpaid, prepaid

wireline subscribers and payphone customers, as well as broadband customers who have subscribed to data packages bundled with a voice service. Revenues are net of prepaid and payphone call card discounts;

c) Revenues from inbound local, international and national long distance calls from other carriers terminating on our network; d) Revenues from additional landline features such as caller ID, call waiting, call forwarding, multi- calling, voice mail, duplex and hotline numbers and other value-added features; and e) Installation charges and other one-time fees associated with the establishment of the service.

Revenues from (b) and (c) are net of any interconnection or settlement payments to domestic and international carriers.

2 Broadband net service revenues consist of the following:

a) Monthly service fees of broadband data only and bundled voice and data subscriptions; b) Value-added services such as games; and c) Installation charges and other one-time fees associated with the service.

3 Wireline data net service revenues consist of the following:

a) Monthly service fees from international and domestic leased lines;

b) Other wholesale transport services; c) Revenues from value-added services; and d) One-time connection charges associated with the establishment of service.

Revenues from (a) to (c) are net of any interconnection or settlement payments to other carriers.

Globe’s wireline business posted a 5% year-on-year growth in service revenues, driven by the 56%growth of its broadband business as well as improved corporate leased line revenues which delivereda 17% year on year gain for the wireline data business.

WIRELINE VOICE

Year on Year

30 Jun 30 Jun YoY

2008 2007 Change(%)

Cumulative Voice Subscribers -

Net (End of period) 403,692 403,345Average Revenue Per Subscriber(ARPU) 1

Gross ARPU 755 879 -14%

Net ARPU 632 756 -16%

Average Monthly Churn Rate 2.42% 1.58%1Starting from the first quarter of 2008, broadband revenues and subscribers wi ll be shown

separately from wireline voice revenues and subscribers. Wireline voice gross and net




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ARPUs for prior periods have been adjusted to exclude broadband-related MSF and revenues to ensure comparability. For more details, please see notes related to wireline voice net service revenues indicated in the wireline net service revenue table.

Wireline voice revenues dropped by 14% year on year from P1,823 million to P1,559 million on theback of declining ARPUs which in turn is driven by continued shift of traffic from fixed to mobile, theimpact of the strong peso and price pressures driven by intense competition.

To drive acquisition and expand its wireline voice packages, Globe offered Globe Wireless Landline service in selected areas in Metro Manila for only P599 a month which entitles subscribers to freeGlobelines to Globelines local calls, as well as other various call features and SMS capabilities.

BROADBAND

Year on Year

30 Jun 30 Jun YoY

2008 2007 Change(%)

Cumulative Broadband Subscribers1

(end of period) 137,077 89,299 54%Fixed Wireless 16,808 13,839 21%

Wired 120,269 75,460 59%Average Revenue Per Subscriber(ARPU) 1,008 1,183 -15%

1The broadband subscribers cited above represent our wired and wireless customers who

have subscribed to either our data-only or bundled voice and data packages.

The broadband business posted a significant year on year growth with revenues increasing 68% fromP499 million to P777 million as a result of a 54% growth in its subscriber base. Cumulative broadbandsubscribers registered at 137,077 at the end of the period as a result of aggressive acquisitioncampaigns during the past quarters supported by targeted and value-priced broadband offerings inselected areas nationwide. These do not include the 8,997 subscribers who have signed up for ourfully mobile broadband service sold under the Visibility brand. Visibility subscribers contributed P77.6million in revenues for the first half of 2008. Visibility subscribers and revenues are included in our

wireless business.

Net broadband ARPUs declined 15% year on year due mainly to the entry of lower-priced broadbandbundled plans during the current period as well as customer rebates provided to subscribers in thefirst quarter with the service disruptions.

Globe continues to expand its broadband offerings with differentiated and value-priced products usingwired and wireless delivery options. Recently, Globe introduced an entry level broadbandsubscription plan providing flexible usage and charging alternatives. This offer, called the Globe Broadband Plan 256 kbps Wired Internet service, allows 30 hours of internet access at speeds of upto 256 kbps for only P595 a month. Excess hours beyond the fixed limit can be charged at P0.16 per-minute or P10 per-hour. The service can also be used with a WorldPass account, through a WiZ hotspot or through dial-up.

Additionally, Globe continues to offer affordable broadband bundles designed for our target segments – the SME PC Bundle for new businesses that need to get online quickly and the Sulit Computer Bundle for first time home broadband users. The SME PC Bundle includes a Globe Broadband connection, a landline, multiple PC options at speeds starting from 384 kbps up to 3 mbps on fivedifferent subscription plans that start at P1,995. New, dial-up or transient internet users can also applyfor the Sulit Computer Bundle that includes a 384 kbps broadband connection, landline and a laptopfor only P1,495 a month.




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WIRELINE DATA

Year on Year

30 Jun 30 Jun YoY

Net Service Revenues (Php Mn) 2008 2007 Change(%)

Wireline Data

International 324 320 1%

Domestic 518 435 19%

Others 1 311 231 35%

Total Wireline Data Service Revenues 1,153 986 17%1

Includes revenues from value-added services such as internet, data centers and bundled services.

Globe’s wireline data business increased revenues by 17% to P1,153 million in 2008 from P986million in 2007 due to improved domestic leased line revenues from an expanded circuit base andhigher corporate internet revenues. These gains have been achieved despite the appreciation of the

peso during the current year which brought on lower peso revenues from US$-linked subscriberbillings.

OTHER GLOBE GROUP REVENUES

International Long Distance (ILD) Services

Year on Year

30 Jun 30 Jun YoY

2008 2007 Change(%)

Total ILD Revenues (Php Mn)1

7,049 7,370 -4%

Average collection rates for the period (Php to US$1) 41.553 48.318 -14%

Total ILD Revenues as a % of net service revenues 23% 23%

Total ILD Minutes (in million minutes) 2 1,186 1,098 8%

Inbound 1,043 960 9%

Outbound 143 138 4%

ILD Inbound / Outbound Ratio (x) 7.29 6.961Prior period ILD revenues have been restated for comparability.

2ILD minutes originating from and terminating to Globe and Innove networks. Prior period minutes have been restated

for comparability.

Both Globe and Innove offer ILD services which cover international calls, SMS and other value-addedservices between the Philippines to more than 200 destinations with over 400 roaming partners. Ourservice generates revenues from both inbound and outbound international call traffic with pricingbased on agreed international termination rates for inbound traffic revenues and NTC-approved ILDrates for outbound traffic revenues.

On a consolidated basis, ILD revenues from the wireless and wireline businesses decreased by 4% toP=7,049 million compared to last year’s P=7,370 million, despite the 8% increase in total ILD minutes,primarily due to the 14% year on year appreciation of the peso.

To further promote IDD usage, Globe continues to offer various IDD promotions to different countriesat very competitive rates. Under our pioneering and unique per second IDD offering, Globe and TM subscribers can call 15 popular destinations including the U.S., Saudi Arabia, Singapore, Australia,Canada, Japan, Hong Kong and China for only P0.15 per second. A rate of P0.34 per second appliesto calls to other countries. On a per minute charging basis, Globe offers P7.50 per minute off-peakcalls to the United States and Canada and to Bridge Alliance operators such as Taiwan Mobile, HK




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CSL, Singtel and Maxis Malaysia. Recently, TM offered an P8 per minute rate to US, Canada, Hawaii,Saudi Arabia and Japan available anytime to its subscribers.

To enable international inbound traffic, Globe and TM introduced IDD usage promotions, lowered theprices of its OFW SIM packs and partnered with international roaming operators to expand coverage.During the quarter, selected Globe and TM subscribers were entitled to receive rewards upon

reaching set international inbound traffic criteria based on their historical IDD usage and patterns. Theprices of Globe’s OFW Family SIM packs have been further reduced to P90 (for 3 SIMs) from P80 (for2 SIMs). The OFW Family SIM packs include an OFW SIM that has been preactivated withinternational roaming capability and carries a zero daily maintaining balance feature. The zero dailymaintaining balance has been made a permanent feature. The minimum maintaining balance for non-OFW SIMs has also been reduced to a promotional rate of P50 from P100 for subscribers to enjoycontinuous roaming service. Recently, a single SIM OFW SIM pack has been made available inselected outlets in targeted OFW destinations worldwide to allow non-residents access to Globe’sservices even while abroad. To ensure that international roamers always stay connected, Globe haspartnered with commercial airline operators, maritime and satellite operators and providers to offerroaming services and coverage to subscribers who are onboard aircraft, ships or in areas covered bysatellites.

On the wireline front, Globe continues to offer its Lowest IDD rates promotion via its Globe1 card

whereby callers using Globe’s fixed line and payphone service can enjoy low IDD rates. Recently,Globe lowered its IDD rate to P2.50 per minute, from P3 per minute, to five IDD destinations, namelyUS, Canada, Australia, Hong Kong and Singapore. The Globe1 card also allows P4.50 per minute forcalls to China, Malaysia, Taiwan, South Korea and Thailand, and US$0.40 per minute for calls toother destinations.

Interconnection

Domestically, the Globe Group pays interconnection access charges to other carriers for callsoriginating from its network terminating to other carriers’ networks, and hauling charges for calls thatpass through Globe’s network terminating in another network.

Internationally, the Globe Group also incurs payouts for outbound international calls which are basedon a negotiated price per minute and collects termination fees from foreign carriers for calls

terminating in our network. The Globe Group also collects interconnection access charges from localcarriers whose calls and SMS terminate in Globe Group’s network.

Interconnection expenses for outbound traffic as a percentage of gross service revenues remained atthe 15% level for 2008 and 2007.

DIVIDEND POLICY

Dividends declared by Globe on its shares of stocks are payable in cash or in additional shares ofstock. The payment of dividends in the future will depend upon Globe’s earnings, cash flow andfinancial condition, as well as other factors. Cash dividends are subject to approval by Globe's Boardof Directors but no stockholder approval is required. Property dividends which may come in the formof additional shares of stock and are subject to approval by both Globe's Board of Directors andstockholders. The following are the cash dividends declared and paid by Globe over the past two

years.

Cash Dividends Declared – 2005 to 2008

Amount (P) Record Date Payment Date

20.00 February 18, 2005 March 15, 2005

20.00 August 19, 2005 September 14, 2005

20.00 February 21, 2006 March 15, 2006





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33.00 February 19, 2007 March 15, 2007


50.00 November 20, 2007 December 17, 2007

37.50 February 18, 2008 March 31, 2008



RISK MANAGEMENT

As of 30 June 2008, the Philippine Peso stood at P44.896 to the US dollar a 3% appreciation versuslast year’s rate of P46.246.

The foreign exchange differentials arising from revaluation of foreign currency-denominated accountsare charged against/credited to current operations. For the period ended, the Globe Group charged atotal of P637 million in net foreign exchange losses to current operations compared to the net foreignexchange gains of P602 million in 2007.

To mitigate foreign exchange risk, the Globe group enters into short-term foreign currency forwards

and long-term foreign currency and interest rate swap contracts to manage its foreign exchangeexposure related to foreign currency-denominated monetary assets and liabilities and foreignexchange and interest rate exposures of long term foreign-currency denominated loans.

As of 30 June 2008, Globe had US$2.5 million in notional amount of outstanding foreign currencyswap agreements and US$167 million in short-term forward contracts, some of which have optionfeatures.

Interest rate swaps are used to manage our interest rate risk in a cost-efficient manner. As of 30 June2008, Globe had US$40 million in notional amount of US$ swaps under which it effectively swappedsome of its floating US$ denominated loans into fixed rate, with semi-annual payment intervals up toJanuary 2011. We also have US$5 million in notional amount of US$ swaps under which Globereceives a fixed rate of 9.75% and pays a floating rate based on LIBOR, subject to a cap. Theperformance of the swap is linked to the 10-year and 30-year US$ Constant Maturity Swap Rates. In

addition, Globe has a fixed to floating interest rate swap contract with a notional amount of P1 billion,in which it effectively swapped a fixed rate Philippine peso denominated bond into floating rate withquarterly payment intervals up to February 2009 and float to fixed interest rate swap contracts with anotional amount of P1 billion which converts the floating rate back to fixed rate.

The group also has embedded forwards and options in certain financial and non-financial contractswith total notional amount of US$47 million.

Gains (losses) on derivative instruments represent the net mark-to-market (MTM) gains (losses) onderivative instruments. As of 30 June 2008, the MTM value of outstanding derivatives of the Globegroup amounted to US$4.3 million while losses on derivative instruments arising from changes inMTM reflected in the consolidated income statements amounted to P74 million.

On the other hand, the Globe group also has foreign currency-linked revenues1 and expenses which

serve as natural hedges against our foreign exchange exposure. Consolidated foreign currency-linkedrevenues were at 28% and 25% of total net revenues for the periods ended 30 June 2008 and 2007,respectively. Foreign currency-linked revenues comprised 27% of net wireless revenues and 32% ofnet wireline revenues. In contrast, our foreign-currency linked expenses were at 14% and 13% (as apercentage of total operating expenses) for the periods ended 30 June 2008 and 2007, respectively.

RECENT DEVELOPMENTS

On May 22, 2006, Innove received a copy of the Complaint of Subic Telecom Company (“Subictel”),Inc., a subsidiary of PLDT, seeking an injunction to stop the Subic Bay Metropolitan Authority andInnove from taking any actions to implement the Certificate of Public Convenience and Necessity




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granted by SBMA to Innove. Subictel claimed that the grant of a CPCN allowing Innove to offer certaintelecommunications services within the Subic Bay Freeport Zone would violate the Joint VentureAgreement (“JVA”) between PLDT and SBMA. Innove has since filed its Opposition to the Prayer forInjunction with Motion to Dismiss, citing that SBMA is not entitled to an injunction on the basis of thegrounds it has cited in the complaint, that an injunction in this case would be contrary to public policy,and that the complaint is forum-shopping since Subictel had already previously objected to the grant

of the CPCN in the proceedings before the regulatory body. SBMA also filed its Opposition pointingout, among others, that Subictel is not a proper party in this case since Subictel is not a party to theJVA. The court granted Innove’s Motion to Dismiss and Subictel has filed a Motion forReconsideration. The Motion for Reconsideration was subsequently denied and Subictel hasappealed to the Court of Appeals. The appeal is pending.

On May 19, 2008, Globe Telecom, Inc. announced that the National TelecommunicationsCommission (NTC) has approved the assignment by its wholly-owned subsidiary InnoveCommunications (Innove) of its Touch Mobile (TM ) consumer prepaid subscriber contracts in favor ofGlobe Telecom. Globe Telecom would be managing all migrated consumer mobile subscribers of TM ,in addition to existing Globe subscribers in its integrated cellular network.

On June 30, 2008, Globe Telecom announced that it has acquired 100% ownership of theEntertainment Gateway Group (“EGG”) and its affiliated companies for an all-cash transaction valued

at P351.5 million. The acquisition involves a) Globe acquiring 50% of the shares of EntertainmentGateway Group (Phils.) from its individual shareholders; b) Globe acquiring Karton Limited, a HongKong company which owns 50% of EGG and c) the acquisition of EGGstreme (Hong Kong) Limitedfrom its respective shareholders. EGG is one of the leading mobile content providers in thePhilippines, offering a wide array of value-added services covering music, news and information,games, chat, and web-to-mobile messaging. Globe has also made inroads into various internationalmarkets with large Filipino communities, including Japan, US, Hong Kong, and the Middle East.



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IV. AC Capital

Ayala holds a portfolio of other investments - which include operations in water distribution,electronics and information technology, automotive dealership and international businesses - underan internal development division called AC Capital.

Water Distribution

MANILA WATER COMPANY, INC.

Background

Manila Water Company, Inc. is a Philippine company which provides water delivery and sewerageand sanitation services under the terms of a 25-year Concession Agreement to approximately 5.6million people in the East Zone, comprising a broad range of residential, commercial and industrialcustomers.

Under the Concession Agreement entered into on February 21, 1997 with MWSS, a government-

owned and controlled corporation, MWC was granted exclusive rights to service the East Zone ofMetro Manila as an agent and contractor of MWSS. Under this Concession Agreement, MWSSgranted MWC the use of MWSS’s land and operational fixed assets and the exclusive right, as agentof MWSS, to produce and treat raw water, distribute and market water, and collect, transport, treatand dispose wastewater for the East Zone.

The Concession Agreement provides MWC, as an agent and contractor of MWSS, with a service areathat encompasses 23 cities and municipalities, including parts of Manila, San Juan, Taguig, Pateros,Antipolo, Taytay, Jala-Jala, Baras, San Mateo, Rodriguez, Marikina, Pasig, Mandaluyong, Makati,most of Quezon City and Rizal, and spans approximately 1,400 square kilometers. As of June 30,2008, MWC supplied an average of 1,350 mld of water and distributed water to an estimatedcustomer population of 5.6 million people in the East Zone with approximately 1,010 million householdconnections. MWC also manages and operates the sewerage system that covers a portion of itsservice area, as well as provides sanitation services (including desludging of septic tanks) to its

customers in the East Zone.

MWC’s principal shareholders include Ayala, United Utilities, Mitsubishi Corporation, PhilwaterHoldings Company, Inc. and the International Finance Corporation (“IFC”).

Operations and Performance

Under the Concession Agreement, Manila Water is required to extend the existing water supply andsewerage systems in order to meet coverage targets, which are set out as percentages of thepopulation in the service area receiving water supply and the percentage of the connected populationreceiving sewerage services. Manila Water is also required to provide sewerage and sanitationservices.

From August 1, 1997 to June 30, 2008, MWC has spent around P25 billion on capital expenditures

and Concession Fees. These capital expenditures were used to replace old pipelines, rehabilitate oldfacilities inherited from MWSS, develop interim new water sources and build new wastewaterfacilities.

As a result of the Manila Water’s aggressive capital expenditure program, MWC’s non-revenue water(“NRW”) levels have been significantly reduced from 63.0% on August 1, 1997 when the companystarted operations to 20.2% at end-June 2008.

The water recovered in turn enabled the company to increase the number of customers served from



Business - AC Capital

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around 2.6 million people, most of whom belong to lower income communities in the East Zone, to5.6 million people as of June 2008. While only 26.0% of customers served in 1997 enjoyed watersupply 24 hours a day, service levels were improved so that 99% of customers served now enjoy 24hours water supply coverage.

The increase in customer base and consumption levels helped MWC increase its billed water from

440.0 mld at the start of operations to 1,077 mld for the month of June 2008. In the meantime, sewercoverage as of June 2008 increased to 12% from just 3% coverage in 1997.

To assure its customers of continued and maintained service level, MWC also implemented anaggressive Business Continuity Program. Contingency drills in all critical sites were conducted.Awareness of the program was likewise communicated across the organization involving all ManilaWater Employees.

MWC continues to exceed the Department of Health (“DOH”) bacteriological compliance standard of95%. For a number of years now, compliance has been maintained at 100%. MWC continues toconduct weekly residual chlorine tests, monthly bacteriological examinations and frequent regularinspection of water and sanitation facilities to ensure that these East Zone residents have continuousaccess to clean water. Representatives from the DOH and MWSS Regulatory Office are involved onthese activities.

Sewer coverage by the end of 2007 increased to 10% from just 3% coverage in 1997, totaling morethan 68,000 households benefited from this service. As of June 2008, MWC operates 31 STPs with atotal capacity of 85 MLD, compared to 40 MLD in 1997.

Customers who are not connected to the sewer network are provided septic tank emptying servicesthrough the ‘Sanitasyon Para Sa Barangay’ (“SPSB”) program. Through cooperation with thebarangays the program aims to desludge all septic tanks in a barangay without charge over aspecified, set schedule. MWC’s accelerated desludging program has already served a total of103,900 households or 30,706 septic tanks for the first half of this year. A total of 47,723 septic tanksare targeted to be served by MWC’s free scheduled desludging program for the year.

Tariff Structure and Rate Regulation

MWC is entitled to recover over the 25-year Concession period its operating, capital maintenanceand investment expenditures, business taxes and Concession Fee payments, and to earn a rate ofreturn on these expenditures for the remaining term of the concession. The rate of return is thenadjusted during the Rate Rebasing exercise, which is conducted every five (5) years. This return ismarket-based and may change after each Rate Rebasing exercise.

During the exercise, MWC submits a list of all its investments and expenditures in the concessionarea as well as its new business plan to the MWSS Regulatory Office for evaluation and approval.Taking into consideration other assumptions including the results of public consultations, the regulatorthen determines the appropriate return and the tariffs required for MWC to recover all its investmentsplus the guaranteed return over the remaining life of the concession.

In December 2007, the second Rate Rebasing exercise was completed. MWC’s current real rate ofreturn, which will be applicable for all investments made by MWC for the East Zone within the periodstarting January 1, 2008 up to December 31, 2012, was pegged at 9.3%.

Different water tariff schedules apply to different categories of customers. In addition, higherconsumption levels result in a higher water rate on a per cubic meter basis. Adjustments to the watertariff, mostly in the form of the Basic Water Charge, are implemented on January 1 of the yearfollowing each Rate Rebasing exercise. These rates are further broken down to cover the differentcustomer types and consumption brackets. After the recently completed Rate Rebasing exercise,Manila Water was granted a one time tariff rate which will be implemented on a staggered basis overa period of 5 years. The rate adjustment will cover for MWC’s P187-billion capital investment andoperational expenditure program to be implemented in the next 15 years.




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Aside from the determination of the Basic Water Charge, water tariffs are also adjusted annually toaccount for inflation (as measured by the Philippine Consumer Price Index [“CPI”]). In addition,certain events beyond the control of Manila Water are considered and an extraordinary priceadjustment is implemented to cover factors such as El Nino occurrence and other unforeseencalamities.

The Concession Agreement also allows MWC to recover through tariff adjustments all past foreignexchange losses and at the same time adopt a foreign currency differential adjustment (“FCDA”) forestimated foreign exchange gains or losses for the year. These gains and losses are in relation toimpact of foreign currency fluctuations on the foreign denominated loans and Concession Feepayments to MWSS. The FCDA is evaluated quarterly, the latest of which was implemented on April2008.

With the approval of the new set of tariff increases in the next 5 years under the 2008 rate rebasing, anew set of KPIs and BEMs were also set by the MWSS Regulatory which MWC has to comply with.Historically, MWC has outperformed the targets set during the 2003 rate rebasing exercise. Toensure the level of customer service in terms of water quality, water network and service complaintsresolution, the regulatory office conducts an annual Public Assessment in Water Services (“PAWS”).The latest survey results indicate a Very Good rating in all barangays or communities surveyed.

Financial Highlights for the First Half of 2008 (Post IFRIC 12)

During the year ended December 31, 2007, MWC had P7,494 million of revenues and P2,616 millionof net income, total assets of P27,983 million and total shareholders’ equity of P12,402 million. Totalassets further grew to P27,760 million as of the end of June 2008, while total shareholders’ equityincreased to P13,250 million as of the same cut-off date.

The adoption of the new Accounting reporting requirement (“IFRIC 12”) resulted in the increase inassets and liabilities. As of June 30, 2008, total assets increased by P3.4 billion and total liabilitiesincreased by P4.5 billion, which reduced stockholder’s equity by P1.1 billion.

Manila Water’s current ratio (calculated by dividing current assets by current liabilities) and debt-toequity ratio (calculated by dividing total liabilities less service concession obligation by total equity)were at 0.94:1 and 0.76:1 respectively. These were at 0.94:1 and 0.92:1 in December 2007.

Manila Water’s strong balance sheet allows sufficient capacity to secure additional financing.Philratings has also conferred the highest local rating of PRS Aaa to Manila Water for twoconsecutive years now. This rating allows MWC to source lower cost funding from a multitude ofpossible financial sources, thus allowing MWC to further enhance returns. In addition to alreadyexisting available facilities from institutions like the World Bank, IFC, and the European InvestmentBank, MWC’s strong operational cash flows will ensure MWC’s liquidity and capacity to undertake itsincreased investment commitments over the next few years.

Buoyed by a 99% collection efficiency for the first 6 months of 2008, net cash from operating activitiesgrew by 27% to P2.42 billion from P1.91 billion in the same period last year.

As of the six (6) months ended June 30, 2008 MWC reported P4.45 billion in revenues. This reflected

a 25% increase from last year’s P=3.57 bil lion. This revenue growth was driven by a combination ofbilled volume growth and upward tariff adjustments.

Costs and expenses were 16% higher than last year’s comparable level brought about by higherprovisions for depreciation. Interest on loans was also charged to operations as projects werecompleted. The increase, however, was offset by lower provision for bad debts (from 2% to 1% ofsales). Other costs such as power and chemicals were also efficiently managed and showed minimalincrease from last year’s level. In fact, the sustained focus and discipline to carefully managespending resulted in operational expenses increasing by just 8.6% year on year, significantly lowerthan inflation. As a result, net income increased to P1.26 billion, 17% higher than the same period




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last year. Consequently, net income margin (calculated by dividing net income by total revenues)improved to 28%.

Despite the tough economic situation, Manila Water’s share price was stable at P18.25 per share asof end-June, outperforming the Phisix by 30.7%. MWC’s share performance has resulted in anannualized diluted EPS of P1.10 resulting in a P/E ratio of 15.3 times.

Dividend Policy

Under Manila Water’s cash dividend policy, common shares shall be entitled to annual cash dividendsequivalent to 35% of the prior year’s net income, payable semi-annually in March and September.MWC’s Board of Directors may change the cash dividend policy at any time. MWC’s Board ofDirectors is authorized to declare cash dividends. A cash dividend declaration does not require anyfurther approval from the stockholders. A stock dividend declaration requires the further approval ofstockholders representing not less than two-thirds of Manila Water’s outstanding capital stock.

Corporate Governance

Manila Water continues to take steps to strengthen its corporate governance practices. To illustratethe high priority put on corporate governance, the Audit and Governance Committee of MWC’s Board

of Directors plays a key role in ensuring the adoption of policies on transparency and disclosures. Atthe same time, Manila Water has continually sought ways to improve internal controls and hasinstituted the integration of risk planning and management in its planning and budgeting process.

Through the past few years, Corporate Governance Asia and Asiamoney has recognized MWC withawards on corporate governance.

Sustainable Development

MWC’s successful operations for the past 11 years were fully supported by the perfect alignment of itsbusiness objectives with its social and environmental advocacies. True to its commitment, ManilaWater will continue to implement its various sustainable development programs which include the“Tubig Para Sa Barangay” or Water for the Community Project and protection of the environmentthrough the expansion of its wastewater services and watershed projects. The “Tubig Para Sa

Barangay” Project has so far benefited more than 1 million people from the poor communities. Inaddition, Manila Water has also provided employment to thousands of workers and sources oflivelihood for more than 700 families through MWC’s vendor development and livelihood programs(Kabuhayan Para sa Barangay or “KPSB”).

Manila Water’s accomplishments in the field of sustainable development have been affirmed severaltimes. In 2007, IFC conferred to MWC its annual Client Leadership Award in recognition of MWC’scomprehensive approach in promoting sustainable development in the East Zone of Metro Manila andin the water and wastewater industry. In 2008, Manila Water was recognized as one of the top tenGreenest Companies in Asia by Finance Asia.

Expansion and Investment Programs

From 2008 to 2012, MWC expects to spend P36.6 billion on capital expenditures and Concession Fee

payments. MWC’s investment program plans to continue to develop new water sources, rehabilitateand expand its water distribution network, improve existing facilities and ensure its reliability, expandsanitation services and adopt a low-cost decentralized sewerage strategy.

In addition, Manila Water is now seeking new growth opportunities outside of the East Zoneconcession area. To this end MWC is forming two subsidiaries to propel its foray into the internationaland local water and environmental sectors.




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Water Network Expansion Over the next five years, Manila Water will be connecting an additional 1 million people to its customerbase through the expansion of its water network to reach more areas and improve service levels inRizal Province such as San Mateo, Angono and Taytay. The network expansion will involve thelaying of new primary and distribution mains, pumping stations and reservoirs.

New Water Sources Complementing the expansion programs would be the development of new water sources to ensurethe continuity and reliability of water supply in MWC’s concession area.

Network Reliability Manila Water will also be carrying out measures to further improve the reliability of the water networkagainst natural calamities like earthquakes through the laying of additional pipelines, retrofitting ofcritical mains, and construction of reservoirs at strategic locations.

Wastewater Expansion A major part of the expansion program of Manila Water is on wastewater. MWC will increase thecurrent coverage of 12% level to 30% in 2010. Included in the approved rate rebasing plan is theconstruction of more sewerage and septage treatment plants and expand sewer network possiblythrough a combine sewer-drainage system. It will also improve existing facilities, ad implement more

stringent safety elements. The new tariff adjustment already considered the proposed capitalinvestments n wastewater.

The Marikina River Project will be one of the major wastewater initiatives of MWC. This will entailclean-up of the river through the development of several treatment plants along the riverbanks, to beable to treat collected wastewater before being discharged to the river.

New Business Development To support its growth strategy, MWC is also pursuing local and regional new business opportunities.Just recently, Manila Water was awarded a US$ 15 million contract in Ho Chi Minh City, Vietnam.MWC bested 4 other foreign companies in this 5 year Performance-Based Leakage Reduction andManagement Services to Saigon Water Corporation (SAWACO). MWC currently has an ongoingoperations and management contract in Tiripur, India, and is providing consultancy services for thewater and wastewater operations in Boracay Island.




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Electronics and Information Technology

Ayala is involved in electronics and information technology through IMI, and Azalea Technology. As ofJune 30, 2008, IMI’s major shareholders were Ayala through its wholly owned subsidiary AYC

Holdings Ltd.(67.9%), and Resins Inc. (16.92%). Azalea, which is wholly owned by Ayala, wasestablished in January 2000 to be a holding company for Ayala’s technology related investments.

INTEGRATED MICROELECTRONICS, INC.

IMI is an electronics manufacturing services (“EMS”) provider to some of the world’s largest OriginalEquipment Manufacturers (“OEMs”). IMI serves customers mainly in the industrial, storage,automotive, telecom and consumer electronics end-markets with potential for medical. IMI’s serviceofferings include design services, product development, prototyping, component assembly, hard andoptical disk drive sub-assembly, printed circuit board assembly (PCBA), plastic injection, metalstamping, box-build, supply chain management, and after-sales service. For the six months endedJune 30, 2008, 43% of its production was exported to Japan while the U.S.A. and Europe accountedfor 22% and 20%, respectively. IMI's main strategy going forward is to develop more value-added

capabilities to enable it to provide a complete EMS solution to its clients.

On January 29, 2005, IMI entered into an Asset Purchase Agreement with Saturn Electronics andEngineering, Inc. (“Tustin”) and Saturn Electronics Philippines, Inc. (“Saturn”) for the purchase ofcertain assets and contracts, and the assumption of certain liabilities of Tustin and Saturn. Included inthe assets purchased are the design team, patents and leased facility in Tustin, California;manufacturing team and facility in Cebu; and, client support and procurement team in Singapore.

On December 12, 2005, IMI acquired Speedy-Tech Electronics Ltd (“Speedy-Tech”), a Singapore-based EMS and power electronics company with facilities in Singapore, China and the Philippines.Speedy-Tech is owned by IMI Singapore, which is a wholly-owned subsidiary of IMI. Speedy-Techshares were delisted from the Singapore Stock Exchange.

IMI also acquired Michael Hansson Consulting Inc., a Philippine-based engineering-oriented systems

integrator, in the third quarter of 2006. This allows IMI to provide high-end test, measurement andcontrol solutions to local electronics and semiconductor companies.

IMI posted US$228.1 million in sales revenues and US$16.4 million in net loss attributable to equityholders of IMI for the first half of 2008. The US$16.4 million loss was mainly driven by the US$33.36million costs of unwinding from currency hedging contracts. IMI executed a program to hedge itspeso expenses starting in 2007 when the peso was appreciating. However, the change in macro-economic environment and peso volatility this year negatively affected IMI’s hedging position. Ashort-term program was placed to correct such position by end of June.

The company’s Board of Directors has also approved a program to call additional equity in the form ofpreferred shares from its shareholders. The proceeds from the equity call will be used to support IMI’sexpansion plan.

PRODUCTS AND MANUFACTURING

IMI's principal products are PCBAs and electronic sub-assemblies for a variety of storage,communications, consumer, automotive and industrial electronic applications, contracted either on adedicated (consignment) or merchant (full-turnkey) basis. Its main customers include Panasonic,IIDA, Epson, Philips, Hitachi, Isahaya and Toshiba, among others.

IMI's consignment contracts, which comprise approximately 34% of IMI’s total revenues (for the sixmonths ended June 30, 2008), are manufactured on captive assembly line arrangement. These linesare dedicated to a specific customer with facilities designed and operated in close co-ordination with




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the customer. Raw materials, equipment and the required technology are supplied by the customerwhile IMI provides the facilities, manpower and production management expertise corresponding tothe requirements of each customer. The balance of IMI’s turnover was produced on a turnkey basis.In providing total turnkey solutions for its customers, IMI works closely with them in the design stage,leverages its own material sourcing and logistics capabilities and then manufactures and packagesthe products using IMI's own equipment and technology.

Speedy-Tech has a well-diversified base of customers spread over a wide spectrum of industries suchas the IT, industrial equipment, medical devices, telecommunications and consumer electronicssectors covering the U.S.A., Europe and the Asia-Pacific region. Speedy-Tech counts amongst itscustomers established global electronics players such as Canon, Dentsply, EBM-Papst, EmersonNetwork Power, Fiberxon, Guest, Hewlett Packard, Huawei Technologies, LG Electronics, NEC,Nippon Antenna, Printronix, Shimadzu and Videojet Technologies.

The IMI group has maintained a commitment to providing quality products and services. IMIcontinued to maintain its 9001:2000 Quality Management Systems certification. IMI also achievedanother quality milestone when it received the ISO/TS 16949 certification, an international qualitysystem standard for automotive industries and ISO 13485:2003, quality management system formedical industry Moreover, IMI has embraced the Six Sigma management philosophy, a management

tool that encompasses a broad array of best practices and knowledge on how to improve processes inorder to achieve operational excellent results and financial gains. IMI continues its transformationprograms that include the Six Sigma business process innovation program. In addition, IMI’s qualitycircles continue to win top honors in the Quality and Productivity Improvement Circle (QPIC) Regionaland National Competitions.

Similarly, Speedy-Tech has a strong commitment to quality. Its quality assurance system is regularlyaudited by its customers and certification authorities for ISO, QS and BABT.

IMI companies including Speedy-Tech have received numerous awards from its customers inrecognition of its relentless pursuit for performance excellence.

FACILITIES

IMI has nearly 112,000 square meters of manufacturing space located in Laguna Technopark, in theLaguna International Industrial Park, and in Mactan Export Processing Zone, Cebu. Within thesespaces, IMI runs surface-mount technology (“SMT”) lines for the assembly of PCBAs as well as avariety of back-end testing equipment. IMI maintains dedicated design facilities in Alabang. Due to itsacquisition of Saturn, another design facility is located in Tustin, California. Speedy-Tech has sixproduction facilities: one in Singapore, one in the Philippines and five in China. The totalmanufacturing space of the six is 76,000 square meters.

COMPETITION RISK

IMI operates in a highly competitive global environment dominated by several very large participants(with sales in excess of U.S.$1.0 billion). Foreign EMS providers that offer lower manufacturing costpose as risk to IMI’s competitive position since its customers could shift to them. In response to thisrisk, IMI leverages its global manufacturing as well as designs footprints. Also, IMI maintains the high

quality of its products in order to give the best price-value proposition to its customer. The groupbelieves that by continuously improving its value-added services, asset efficiency, and the quality ofits manufacturing processes, and combining this with a productive labor force, IMI can successfullycompete on its chosen target segments.

RESEARCH AND DEVELOPMENT ACTIVITIES

IMI designs and develops complete products and subsystems to assist original equipmentmanufacturers in product realization. IMI’s design and development capabilities encompass short-range wireless technologies, embedded systems, and power electronics. It engineers work in close




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coordination with customers during the early stages of product development to ensure a seamlesstransition from design conceptualization to volume manufacturing. In addition, IMI USA (acquiredfrom Tustin) is home to IMI’s advanced manufacturing technology R&D activities, with focus on areasincluding flip chip, substrate and interconnect technologies.

ENVIRONMENTAL COMPLIANCE

IMI complies with ISO 14001, international standard for Environment Management Systems ascertified by SGS since year 2000. Moreover, IMI has converted some of its SMT lines to RoHS(Restriction on Hazardous Substances) compliant lines. This environmental compliance enables IMIto qualify as a contract manufacturer for various OEMs.

AZALEA TECHNOLOGY INVESTMENTS, INC. AND AZALEA INTERNATIONALVENTURE PARTNERS, LTD.

Ayala’s wholly owned subsidiary, Azalea Technology Investments, Inc. (“Azalea”), was established inJanuary 2000 to be a holding company for Ayala’s technology-related investments.

Azalea is an investor in technology-related companies in the Philippines. Azalea’s focus is to identify

good opportunities in technology-driven businesses and to invest and nurture those businesses.

As of June 2008, Azalea generated a consolidated loss of P134.2 million, P123.3 million of which wasAzalea’s dilution loss in Azalea International.

Ayala Systems Technology, Inc. (“ASTI”) is a systems integrator and IT services provider to thedomestic and international markets. As a systems integrator, it combines its skills in supportingdifferent products and platforms with its experience in managing large projects. As an IT servicesprovider, ASTI offers a wide range of products and services such as hardware, network andcommunications infrastructure, software tools, business software applications, applications softwaredesign, development and quality assurance, project management and business process outsourcing.

For the period ended June 30, 2008, ASTI’s revenues were P131 million with net loss of P17 million.

Azalea Technology has a Game Development Division which focuses on developing mobile servicesavailable on mobile telephone companies both in the Philippines and overseas. The division wasspun off in early 2006 as GlyphStudios Inc. and was incorporated under Azalea International.

Azalea International was previously a wholly owned subsidiary of Azalea Technology. In May 2008,Ayala converted its deposits on future subscriptions in Azalea International into equity, increasingAyala’s ownership from 68.71% to 96.95%. Consequently, Azalea Technology’s ownership in AzaleaInternational was diluted from 31.29% to 2.44%.

Azalea International has made several key investments in companies based inside and outside thePhilippines. Effective May 2008, Azalea International became 96.98% owned by Ayala. Apart fromits investments in SiRF (a global positioning system chip design company), Azalea International,starting May 2008, holds almost 99.99% of LiveIt Investments, Ltd., the company that carries Ayala’s

businesses in the BPO sector. It also wholly owns HRMall, another BPO company, effectiveDecember 2007.

Azalea International continues to invest in technology companies through venture capital funds, NarraVenture Capital LP (“Narra I”) and Narra Venture Capital II LP (“Narra II”) and Tech Ventures III, L. P.(“TV-III”). Narra I is a joint undertaking by Azalea and Tallwood Partners LLC, a leading investor inemerging technologies based in Silicon Valley. Narra I and Narra II have made several investmentsin companies developing semiconductors and semiconductor-related products, convergedcommunication systems, computing platforms, and software and related services. AzaleaInternational recently invested in Pacific Synergies IV LP. TV-III and Pacific Synergies are bothmanaged by the ICCP Group.




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Azalea International also has invested in The Rohatyn Group Special Opportunity Fund and GeneralOpportunity Fund. In January 2007, Azalea International bought a minority stake in Milestone, asoftware company based in Australia.

Ayala was also a founding member of Bayantrade Dotcom, Inc. (“Bayantrade”), the Philippines' first e-

procurement portal. Incorporated in August 2000, Bayantrade aims to help Philippine businessesbecome globally competitive as it offers its member companies access to competitive pricing from abroad range of suppliers. For suppliers, it offers access to buying organizations from the country'slargest companies. Value pass through to-date has exceeded US$900 million. Aside from e-procurement services, Bayantrade also offers professional services in implementing SAP systems forsupply chain management and in procurement execution BPO. Effective February 2008, Bayantradewas officially under Azalea International.

For the period ended June 30, 2008, Bayantrade had net sales of P182 million and generated a netloss of P3 million.




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Business Process Outsourcing

LiveIt Solutions, Inc. (“LSI”) was incorporated in the Philippines in June 2006 as Ayala’s wholly-owned

Philippine holding company for its investments in the BPO sector while LiveIt Investments Limited(“LIL”) was incorporated in the British Virgin Islands in June 2006 as LSI’s wholly-owned subsidiary.LSI and LIL taken together are referred to as “LiveIt”. Another BPO company, HRMall Inc. (“HRMall”),was also incorporated on June 30, 2006.

On May 1, 2008, Azalea International converted its US$124 million deposits on future subscription inLIL giving it 99.99% ownership interest in the company. LSI, which previously held 100% of LIL, nowholds 0.01% stake in LIL. LIL carries the Group’s investments in Integreon Managed Solutions Inc.(“Integreon”), Affinity Express Inc. (“Affinity”) and Newbridge International Investments (“Newbridge”)which owns common shares and American Depositary Shares of eTelecare Global Solutions, Inc.(“eTel”).

LIVEIT SOLUTIONS, INC. AND LIVEIT INVESTMENTS LIMITED

LiveIt's objective is to create a portfolio of high-growth and differentiated BPO companies, throughacquisition or investment in existing US, Philippine or India BPO companies. Target companies arethose that provide complex services, have well-established customer relationships in global markets,and have the potential for add-on acquisitions.

As of June 2008, LiveIt has made cumulative investments (including capitalized fees) of over P6.26billion, or approximately US$130.99. million in three companies: eTel, Integreon, and Affinity. eTel focuses on providing complex voice-based services such as technical support, financial advisory,warranty support, customer retention and marketing surveys and research for the US market. As ofJune 30, 2008, LiveIt holds 21.96% stake in eTel. On September 22, 2008, Ayala Corporation,announced that, together with Providence Equity Partners, the leading private equity firm specializingin the telecom and media sectors, it has entered into a definitive agreement with eTel<http://www.etelecare.com/> for affiliates of Ayala and Providence to commence a tender offer in the

Philippines and the United States to acquire up to all of the outstanding shares of eTel commonshares, and up to all of the outstanding eTel American Depositary Shares, for US$9.00 per share incash. The total transaction value is approximately US$290 million.

Integreon is a Los Angeles-headquartered company that is a leading provider of high-value andcomplex BPO solutions in the areas of knowledge, document content and graphics, businessadministration and discovery support services with centers in India, UK, US and the Philippines.LiveIt invested an additional US$11 million in Integreon last February and March 2007 to fund theacquisition of CBF Group, a North Dakota-based company that exclusively provides enterpriseservices to law firms. It also funded Integreon's acquisition of Datum Legal, Inc. last June 2008.Datum is a leading litigation support and electronic data discovery company in New York. After theDatum acquisition, LiveIt's share in Integreon went up from 81.98% to 86.23%. Affinity is a leading provider of outsourced graphics and design services with clients in the newspaper,advertising, commercial printing, retail/quick printing and promotional products industries. Affinity hasdelivery centers in the US, India and the Philippines. As of June 2008, LiveIt holds 99.49% interest inAffinity.

The Philippine subsidiaries of Affinity and Integreon were incorporated in March and April 2007,respectively. Integreon Philippines' PEZA accreditation application has been approved in July 2007while Affinity's was approved in August 2007.




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HR MALL, INC.

HRMall is a human resource BPO service provider. It started operations in July 2006 initially servicingthe payroll and timekeeping requirements of Globe Telecom and its subsidiaries at all levels of theorganization. This was the company’s first step in being the shared services center for humanresources processes across the companies within the Ayala group. Aside from delivering its services

to Globe and Ayala Land in 2007, HRMall captured new revenue sources this year from other Ayalagroup subsidiaries such as Ayala Property Management Corporation and Makati DevelopmentCorporation.




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International

Ayala's international operations are conducted primarily through AG Holdings Ltd.

AG HOLDINGS

Ayala, through Bestful Holdings, has formed AG Holdings Ltd., which folded in Ayala International asa 100% subsidiary and which will henceforth serve as the new international holding company for itsoverseas property investments.

AG Holdings’ initiatives are to expand existing partnerships and to seek new ones in order to developa deal pipeline that will yield new investment opportunities in different property sectors in both Asiaand, selectively, in the United States. We believe this is a creative way to test out markets overseaswhere we can export our expertise in real estate development.

Net income attributable to equity holder of AG Holdings for first half 2008 was US$3.1 million, 56%lower than the same period of the previous year which included the gain on the sale of its interest inForum, a retail-cum-office building along Orchard Road in Singapore. AG’s overall internationalproperty business is presently in investment mode and will not generate profits in the near term.

In 2006, AG Holdings launched its co-sponsorship of a private equity property fund in Asia. Itlaunched ARCH Capital Asian Partners LP Fund (ARCH Fund), a fund that focuses on Asia and hadits final closing in December 2007 where a total capital commitment of US$330 million was raised. AGHoldings committed to sponsor and invest US$50 million or approximately 15% of the total committedcapital of ARCH Fund. To-date, ARCH Fund has five projects on-going, one located in Macau, threein Thailand, and one in India. Recently, ARCH Fund formed a joint venture with the Mahindra &Mahindra Group of India. This joint venture is for the development of a 53-acre high-end residentialtownship project within the Special Economic Zone Mahindra World City in Chennai, India. This is thegroup’s first foray in India. AG Holdings also invested in ARCH Capital Management in 2006, the fundmanagement company that manages the ARCH Fund.

The continuing credit crisis has resulted in a significant slowdown in sales of the residential projects ofAG Holdings’ US business while marginally improving the market for apartment rentals. AG Holdings continued its diversification into rental properties with the acquisition, together with partners, ofapartments and properties for retail neighbourhood center developments. The US business currentlyhas apartment leasing inventory of over 1,200 units. AIPL’s total investment in these apartmentprojects amounted to US$4 million.

The market value of AG Holdings’ current portfolio as of June 30, 2008 is approximately US$137.9million with assets focused mainly in China (18%), the US (46%), Thailand (6%), and the rest of Asia(including India). Out of the current portfolio, 78% are in direct investments, while the remainder isthrough fund investments.

Through Fidelis Holdings Ltd., a joint venture with Ayala Land, AG Holdings is actively looking forlonger-term NAV-creating opportunities in the region especially as asset prices revalue given therecent volatility in the markets. It will continue to focus on India, Thailand and Vietnam. In conjunction

with ARCH Capital Management’s activities, it intends to continue to expand and diversify fromresidential development into other property segments, specifically shopping centers, apartments, andmixed-use properties.



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EEMMPPLLOOYYEEEESS AANNDD LLAABBOORR RREELLAATTIIOONNSS

As of June 30, 2008, Ayala had 117 employees. All regular non-managerial employees are coveredby a new Collective Bargaining Agreement which took effect on January 1, 2007 with a term that lasts

until December 31, 2009. Ayala has not experienced any strikes by its employees and there is noknown threat of a strike.

For the near term, Ayala intends to maintain its current headcount. Of Ayala’s 117 employees, 72 aremanagers, and 45 make up the support staff. Ayala does not have supplemental benefits or incentivearrangements with its employees.



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LLEEGGAALL PPRROOCCEEEEDDIINNGGSS

MATERIAL LEGAL PROCEEDINGS

Except as disclosed herein, there are no material pending legal proceedings to which Ayala, its

subsidiaries or affiliates is a party or of which any of its material properties are subject.

AYALA CORPORATION

Manalo Case

The heirs of a certain Silvino Manalo filed a complaint dated March 18, 2008 with the Regional TrialCourt (“RTC”) of Muntinlupa City against, among others, Ayala for cancellation of transfer certificate oftitles in the name of Ayala covering the Ayala covering a portion of the Alabang Village andreconveyance of the property covered by said titles. The plaintiffs allege that Ayala’s title is aderivative title of a fake and spurious tit le manufactured by a land-grabbing syndicate.

Ayala filed a Motion to Dismiss dated May 30, 2008. It argued that the predecessors-in-interest of theplaintiffs were deemed to have notice of the allegedly spurious title back in 1918 when the original title

covering the subject property was cancelled and the allegedly spurious title was registered in itsstead. Since almost ninety years have elapsed from that time, any action for reconveyance of thesubject property had prescribed.

The plaintiffs filed a Consolidated Opposition to the Motion to Dismiss filed by Ayala. Plaintiffscontended that the Motion to Dismiss should be denied because the complaint does not on its faceshow that the action for reconveyance had already prescribed.

In a Reply dated July 8, 2008, Ayala countered that the complaint filed by the plaintiffs indeed showedon its face that the action had prescribed. Ayala pointed out that the annexes which form an integralpart of the complaint readily disclose that the cancellation and transfer of titles which plaintiffs allegedas fraudulent took place and were registered in 1918.

The case is still pending with the RTC of Muntinlupa City. Said court is currently awaiting responsive

pleadings from the other defendants.

AYALA LAND, INC.

Ayala Southvale

ALI is not involved in any litigation it considers material. However, certain individuals and entitieshave claimed an interest in ALI’s properties located in Las Piñas, Metro Manila, which are adjacent toits development in Ayala Southvale.

Prior to purchasing the aforesaid properties, ALI conducted an investigation of titles to the propertiesand had no notice of any title or claim that was superior to the titles purchased by ALI. ALI traced itstitles to their original certificates of title and ALI believes that it has established its superior ownershipposition over said parcels of land. ALI has assessed these adverse claims and believes that its titlesare in general superior to the purported titles or other evidence of alleged ownership of theseclaimants. On this basis, beginning in October 1993, ALI filed petitions in the RTC of Makati and LasPiñas for quieting of title to nullify the purported titles or claims of these adverse claimants. A numberof these cases are at various stages of trial and appeal. Some of these cases have been finallydecided by the Supreme Court (“SC”) in ALI’s favor. These include decisions affirming the title of ALIto some of these properties, which have been developed and offered for sale to the public as Sonera,Ayala Southvale. The controversy involves the remaining area of approximately 129 hectares.

ALI does not intent to develop and sell the rest of the Las Piñas properties until the litigation isresolved.



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ALI has made no provision in respect of such actual or threatened litigations.

Avida Tex System

In December 1999, plaintiffs Edgardo Vasquez and Vazquez Building Systems Corporation filed a

patent infringement case against Avida, a wholly-owned subsidiary of ALI. Avida has raised a numberof defenses, including the following: (i) Avida is utilizing the Tex system, a British technology patentedin the Philippines of which Avida is a licensee, and not the Vasquez modular housing patent; (ii)patent claim is overbroad; and (iii) the H-shaped column and the wall panel installation system beingclaimed as the infringed component cannot be covered by the Vasquez patent because these are notpatentable as they do not qualify as a “novelty”. In a decision dated December 18, 2007, the RTC ofQuezon City ruled in favor of plaintiffs, requiring Avida to compensate the plaintiffs in the amount ofP90 million as temperate damages or reasonable royalty with interest at the rate of 6% p.a. from thedate of filing of the complaint as well as moral and exemplary damages and reasonable attorney’sfees and cost of suit. Avida filed a notice of appeal to contest this decision with the Court of Appeals.

Since then, Avida has entered into a compromise agreement with Edgardo Vasquez and VazquezBuilding Systems Corporation to resolve the patent infringement case filed by the latter against Avida.The compromise became effective upon the approval of the Court of Appeals last March 17, 2008.

The agreement paves the way for the final settlement of the case.

Glorietta Explosion

As a result of the explosion which occurred on October 19, 2007 at the basement of the MakatiSupermarket Building, the Philippine National Police (“PNP”) and the Department of Interior and LocalGovernment (“DILG”) filed two complaints with the Department of Justice (“DOJ”) for the prosecutionof certain officers/employees of Makati Supermarket Corporation, the owner of the building, as well assome officers/employees of ALI’s subsidiary, Ayala Property Management Corporation (“APMC”),among other individuals (the “Respondents”), for criminal negligence. On April 23, 2008, the DOJ-constituted panel of prosecutors issued a resolution dropping the complaints against the otherRespondents (the “Resolution”). The PNP questioned this Resolution and filed a Petition for Reviewwith the Office of the Secretary of the DOJ, which to date remains pending. No civil case has beenfiled by any of the victims. In the event that the Secretary of the DOJ decides to include the

officers/employees of APMC as among the Respondents and file a criminal case against certainofficers/employees of APMC as recommended by the PNP and DILG, the accused, if convicted afterfinal judgment, can be held not only criminally but also civilly liable. In the event the accused will notbe able to pay for the civil award, APMC will be held subsidiarily liable for such sums (the amount ofwhich cannot be estimated). ALI and APMC believe, however, that the facts surrounding the incidentdo not show any negligence.

GLOBE TELECOM, INC.

Globe and Innove are contingently liable for various claims arising in the ordinary conduct of businessand certain tax assessments which are either pending decision by the courts or are being contested,the outcome of which are not presently determinable. In the opinion of management and legalcounsel, the eventual liability under these claims, if any, will not have a material or adverse effect onthe Globe Group’s financial position and results of operations.

NTC MC No. 13-6-2000

Globe is an intervenor in and Innove is a party to a civil case by virtue of which Globe and Innove,together with other cellular operators, sought and obtained a preliminary injunction against theimplementation of National Telecommunications Commission (“NTC”) Memorandum Circular (“MC”)No. 13-6-2000 from the RTC of Quezon City. NTC MC No. 13-6-2000 prescribed new billingrequirements for cellular service providers. The NTC appealed the issuance of the injunction to theCourt of Appeals (“CA”). On October 25, 2001, the CA ordered the dismissal of the case before theRTC for lack of jurisdiction , but without prejudice to the wireless companies’ seeking relief before theNTC, which the CA claims had jurisdiction over the matter. On February 22, 2002, a Petition for



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Review was filed with the SC to annul and reverse the decision of the CA. The SC, on September 2,2003, overturned the CA’s earlier dismissal of the petitions filed by Smart Telecommunications, Inc.(“Smart”) and Globe. In its 13-page decision, the SC said that the Quezon City trial court could hearand decide the case, contrary to NTC’s argument. The SC has also since denied the NTC’s motionfor reconsideration. Globe is currently awaiting resumption of the proceedings before the RTC ofQuezon City.

Subictel

On May 22, 2006, Innove received a copy of the Complaint of Subic Telecom Company (“Subictel”),Inc., a subsidiary of PLDT, seeking an injunction to stop the Subic Bay Metropolitan Authority(“SBMA”) and Innove from taking any actions to implement the Certificate of Public Convenience andNecessity (“CPCN”) granted by SBMA to Innove. Subictel claimed that the grant of a CPCN allowingInnove to offer certain telecommunications services within the Subic Bay Freeport Zone would violatethe Joint Venture Agreement (“JVA”) between PLDT and SBMA. Innove has since filed its Oppositionto the Prayer for Injunction with Motion to Dismiss, citing that SBMA is not entitled to an injunction onthe basis of the grounds it as cited in the complaint, that an injunction in this case would be contrary topublic policy, and that the complaint is forum-shopping since Subictel had already previously objectedto the grant of the CPCN in the proceedings before the regulatory body. SBMA also filed itsOpposition pointing out, among others, that Subictel is not a proper party in this case since Subictel is

not a party to the JVA. The court granted Innove’s Motion to Dismiss and Subictel has filed a Motionfor Reconsideration. The Motion for Reconsideration was subsequently denied and Subictel hasappealed to the CA. The appeal is pending.

On July 4, 2006, Smart filed a letter-complaint with the NTC against the 500 free text promotionoffered by Innove on its Speak and Surf product. The promotion allows Speak and Surf subscribersto send 500 free text messages to Globe and Touch Mobile Subscribers. Smart complained that thispromotion was predatory and discriminatory. On July 17, 2006, the NTC issued a Show-Cause orderrequiring Globe to explain its position on this matter. On July 25, 2006, Globe filed its answer. In itsanswer, Globe explained that the cost of the “free” texts are sufficiently covered by the monthlyservice charge of P995 paid by Speak n’ Surf subscribers. In this light, the offer is neitherdiscriminatory nor predatory. In it answer, Globe also extended an invitation to Smart and othernetworks to join the promotional offer. Globe is currently awaiting the disposition of the NTC on thismatter.

MANILA WATER COMPANY, INC.

Water Rate Increases

A criminal complaint was filed with the Office of the Ombudsman against members of the MWSSBoard of Trustees, MWSS Board Chairman (Hon. Oscar Garcia), members of the MWSS RegulatoryOffice (including Chief Regulator Eduardo Santos and Messrs. Angel Efren Agustin, Randolf Sakay,Cristeto Donopol and Emmanuel Afable) and the presidents of MWC (Mr. Antonino Aquino) andMaynilad Water Services, Inc. (Mr. Fiorello Estuar), for a violation of Republic Act No. 3019 and for“conduct prejudicial to the best interest of the service”. The complaint arose from the water rateincreases which became effective on January 1, 2005. MWC believes that the Ombudsman willdismiss the complaint.

Freedom from Debt Coalition

In June 2006, the Freedom from Debt Coalition petitioned the Supreme Court to annul the ruling ofthe MWSS Board of Trustees that MWC and Maynilad are not public utilities but agents andcontractors of MWSS. While MWC is not impleaded as a respondent, certain contingent, adverse,financial and regulatory consequences might result from a ruling granting the petition. MWC believesthat it is not a public utility but an agent and contractor of the MWSS, which remains as the publicutility, a position supported by Section 2.1 of the Concession Agreement, MWSS Board Resolutiondated July 30, 2004, National Water Resources Board Resolution dated June 17, 2005, and aMemorandum from the Office of the Government Corporate Counsel dated June 1, 2005. OnDecember 10, 2007, the Supreme Court dismissed the petition on the following grounds: (a)



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petitioners should have appealed the MWSS resolutions to the NWRB instead of filing a certioraripetition with the Supreme Court; (b) the petition did not name as respondents Maynilad and MWCI,the two MWSS concessionaires who are indispensable parties; (c) petitioners disregarded thehierarchy of courts principle by filing the petition directly with the Supreme Court instead of a lowercourt; and (d) the case involves factual issues, which the Supreme Court cannot resolve. Recently,MWC received information that the Freedom from Debt Coalition has filed a motion for

reconsideration with the Supreme Court.

Real Property Taxes

MWC is also involved (along with Maynilad) as an appellant in a real property tax assessment casenow in the Central Board of Assessment Appeals (“CBAA”). The assessment was made by theMunicipality of Nozragaray (with its assessor, the Hon. Gloria P. Sta. Maria and its mayor, the Hon.Matilda A. Legaspi) and the Province of Bulacan (with its assessor, the Hon. Aimee T. Borbe) ((the“LGUs”) amounting to P648,777,944.60 jointly against MWC and Maynilad, with respect to the IpoDam and related facilities owned by MWSS. The LGUs claim that MWC and Maynilad are subject toreal property taxes (“RPT”) on said dam and facilities for being the beneficial owners thereof. MWCand Maynilad argue that, as agents of MWSS, a government-owned and controlled corporation andinstrumentality of the government not subject to real property taxes, they are likewise not subject toRPT. Currently, the CBAA is still inquiring on the possibility of settlement among the parties to the

case.

BPI, AAHC and IMI are not involved in any material pending legal proceedings.



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OOWWNNEERRSSHHIIPP

SHAREHOLDERS

Members of the Zobel de Ayala family, individually and through their control of Mermac, Inc., a privateholding company incorporated in the Philippines, are the majority shareholders of and effectivelycontrol Ayala. Mermac, Inc. held 51.0% of Ayala as of June 30, 2008. Members of the Zobel de Ayalafamily have been involved in Ayala’s business since its establishment in 1834. As of June 30, 2008,Ayala’s other principal shareholders were Mitsubishi Corporation (10.6%) and Shoemart, Inc. (3.3%).

Ayala’s 20 largest common shareholders as of June 30, 2008 were as follows:

Name of Shareholder No of shares % Nationality

1 Mermac, Inc.* 253,074,330 51.01% Filipino

2 PCD Nominee Corporation (Non-Filipino) 128,091,030 25.82% Foreign

3 Mitsubishi Corporation* 52,564,617 10.59% Japanese

4 PCD Nominee Corporation (Filipino) 30,907,907 6.23% Filipino5 Shoemart, Inc. 16,282,542 3.28% Filipino

6 Henry Sy, Sr. 1,296,636 0.26% Filipino

7 AC ESOP/ESOWN Account – 2007 743,875 0.15% Filipino


9 Philippine Remnants Co., Inc. 685,872 0.14% American


11 Consuelo Zobel Alger Foundation 379,657 0.08% Filipino

12 Cygnet Development Corporation 368,115 0.07% Filipino

13 Sysmart Corporation 305,590 0.06% Filipino

14 Mitsubishi Logistics 300,427 0.06% Japanese

15 Antonio O. Olbes 235,191 0.05% Filipino

16 Ariston Estrada, Jr. 209,472 0.04% Filipino

17 Eduardo O. Olbes 195,993 0.04% Filipino

18 AC ESOP/ESOWN Account 136,810 0.03% Filipino

19 Telengtan Brothers & Sons, Inc. 114,048 0.02% Filipino

20 Lucio Yan 106,664 0.02% Filipino

*Mermac, Inc. and Mitsubishi Corporation are not members of a group as defined in the Securities Regulation Code’s implementing rules and regulations.



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MMAANNAAGGEEMMEENNTT’’SS DDIISSCCUUSSSSIIOONN AANNDD AANNAALLYYSSIISS OOFF RREESSUULLTTSS OOFF OOPPEERRAATTIIOONNSS AANNDD FFIINNAANNCCIIAALL CCOONNDDIITTIIOONN

The following table summarizes the financial highlights of Ayala’s consolidated financial performance:

Consolidated Income

Statement Data

In P millions

(Unaudited)For the Period ended

June 30



(Unaudited)*Post IFRIC 12


2008 2007 2007 2006 2007 2006

Revenues 39,284 40,382 78,708 70,166 78,767 70,162

Net income 7,588 12,792 19,003 14,468 19,062 14,464

Net income attributable to:

Equity holders of the parent

Minority interest

6,2931,295

11,491

1,301

16,198

2,805

12,177

2,291

16,257

2,80512,173

2,291

Consolidated Balance Sheet

Data

(Unaudited)*Post IFRIC 12

As of December 31In P millions

(Unaudited)As of June 30)


As of December 31

2008 2007 2006 2007 2006

Assets

Total current assets 74,988 69,759 57,800 69,759 57,800

Noncurrent accounts and notesreceivables

2,962 4,010 2,520 4,010 2,520

Land and improvements – net 16,932 16,201 16,587 16,201 16,587

Investments in associates and jointlycontrolled entities – net

69,150 71,560 68,569 71,272 68,221

Investments in bonds and othersecurities 2,440 2,493 3,462 2,493 3,462

Investment properties – net 17,523 17,416 16,795 17,416 16,795

Property, plant and equipment - net 9,453 8,493 9,057 8,493 9,057

Other noncurrent assets 7,631 6,487 7,542 6,487 7,542

Total assets 201,079 196,419 182,332 196,131 181,984

Liabilities

Total current liabilities 38,432 36,245 32,407 36,245 32,407

Long-term debt - net of currentportion

35,244 37,885 38,518 37,885 38,518

Cumulative redeemable preferredshares

– – 2,500 –

Other noncurrent liabilities 8,510 7,505 7,073 7,505 7,073Minority interest 28,503 27,609 24,699 27,609 24,699

Equity attributable to equity holdersof the parent

90,390 87,176 77,135 86,887 76,787

Total liabilities and equity 201,079 196,419 182,332 196,131 181,984

*These figures are audited except for the effect of the restatements resulting from adoption of IFRIC 12



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KEY PERFORMANCE INDICATORS OF AYALA AND PRINCIPAL SUBSIDIARIES (in P millions)

Ayala Corporation (Consolidated)

(Unaudited)June 30, 2008

(Unaudited)June 30, 2007

(Audited)December 31, 2007

(Audited)December 31, 2006

Post IFRIC 12 Pre-IFRIC 12

Revenues 39,284 40,382 78,708 70,166

Net Income attributableto equity holders ofparent 6,293 11,491 16,198 12,177

Total Assets 201,079 189,869 196,419 182,332

Total Debt 45,454 47,083 50,032 52,881

Equity attributable toequity holders of theparent 90,390 85,668 87,176 77,136

Current Ratio1

1.95x 1.88 x 1.92x 1.7x

Debt-to-Equity Ratio3 0.50x 0.55 x 0.57x 0.69 x

Ayala Land, Inc. (Consolidated)

P millions (Unaudited)

June 30, 2008

(Unaudited)

June 30,2007

(Audited)

December 31, 2007

(Audited)

December 31, 2006

Revenues 15,385 11,631 25,707 25,559

Net Income attributableto equity holders of ALI

2,909 2,126

4,386

3,866

Total Assets 89,862 76,916 82,981 78,250

Total Debt 10,388 9,959 10,139 12,837

Equity attributable to

equity holders of ALI 48,264 42,353 45,705 40,651Current Ratio

11.59x 1.71x 1.65x 1.71x

Debt-to-Equity Ratio3

0.22x 0.24x 0.22x 0.32x

Integrated Microelectronics, Inc. (Consolidated)*

USD thousands (Unaudited)

June 30, 2008

(Unaudited)

June 30,2007

(Audited)

December 31, 2007

(Audited)

December 31, 2006

Revenues 228,107 199,679 423,219 392,771

Net Income/(loss)attributable to equity holdersof IMI

(16,382) 13,302 35,804 34,740

Total Assets 319,901 293,062 300,999 283,585Total Debt 91,771 82,698 70,285 89,516

Equity attributable to equityholders of IMI

131,468 137,969 157,275 131,005

Current Ratio2 1.31x 1.82x 1.71 1.68x

Debt-to-Equity Ratio3 0.70x 0.60x 0.45 0.68x

*IMI’s functional currency is US dollars



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Ayala Automotive Holdings Corp. (Consolidated)

P millions (Unaudited)

June 30, 2008

(Unaudited)

June 30,2007

(Audited)

December 31, 2007

(Audited)

December 31, 2006

Revenues 5,659 5,501 12,238 9,179

Net Income attributable toequity holders of AAHC

80 84201

105

Total Assets 2,456 2,265 2,848 1,855

Total Debt 253 167 566 79

Equity attributable to equityholders of AAHC

1,396 1,254

1,316

1,164

Current Ratio2 1.64 1.57 1.40x 1.74x

Debt-to-Equity Ratio3 0.18 0.13 0.43x 0.07x

1 Current assets divided by current liabilities (where current assets and current liabilities exclude noncurrent assets/liabilities held for sale). 2 Current assets divided by current liabilities. 3 Total of short-term debt and long-term debt divided by the equity attributable to the parent.

In general, the above key performance indicators were within targeted levels.

For the balance sheet items (current ratio and debt to equity ratios), the Company aims to maintainfor its current ratio not to be lower than 0.5:1 and for its debt to equity ratio not to exceed 3:1. TheCompany and its subsidiaries’ ratios are considered better than these levels as a result of prudentdebt management policies.

There were no events that will trigger direct or contingent financial obligation that is material to theCompany, including any default or acceleration of an obligation.

Likewise, there were no material off-balance sheet transactions, arrangements, obligations (includingcontingent obligations), and other relationships of the Company with unconsolidated entities or otherpersons created during the reporting period.

FOR SIX MONTHS ENDED JUNE 30, 2008 (Post IFRIC 12)

Ayala Corporation’s net income attributable to equity holders of the parent in the second quarter of2008 reached P3.6 billion, 38% higher than the previous quarter’s recorded figure of P2.6 billion, but38% lower than second quarter of 2007. Net income attributable to equity holders of the parent for thefirst half reached P6.3 billion, 45% lower than the P11.5 billion in the same period last year. Lowerearnings during the period were attributed mainly to significantly lower capital gains and lower equityearnings from its key operating units.

Ayala booked P2.7 billion in capital gains from the sale of 3.8 million of its common shares in Globe.The gains realized were substantially lower than the P7 billion gain booked in the first half of last year.Equity earnings from operating units declined by 23% as net income of certain operating unitssoftened amidst a more challenging economic environment.

Ayala Land reported a 37% growth in its net income attributable to equity holders of ALI withconsolidated revenues up 25% year-on-year buoyed by the sustained growth of its residential andconstruction businesses. Its strategic landbank management, corporate business, and operations inVisayas and Mindanao also contributed to revenue improvement. ALI’s Residential Developmentrevenues grew by 12% with unit take-up during the period up by 13% versus the same period lastyear. Its Shopping Center revenues remained stable while Corporate Business revenues registeredan 8% growth. Ayala Land spent about P7.9 billion in capital expenditure in the first half, 14% higher



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than in the first half of 2007. The company expects to substantially catch up with its capitalexpenditure program in the second half of the year.

Its banking unit, Bank of the Philippine Islands (BPI), recently reported a net income attributable toequity holders of BPI in the second quarter of P2.3 billion, exceeding the first quarter’s recordedfigure of P1.5 billion. However, BPI’s net income in the first half of the year of P3.8 billion was 33%lower than the P5.7 billion figure recorded in the first semester of 2007. Margins and securities tradingincome were tighter amidst a rising interest rate environment which resulted in a 7% drop in netinterest income and a 22% decline in non-interest income. Lower operating expenses, however,partly cushioned the revenue shortfall. Loan growth was resilient, expanding by 16% driven byconsumer lending, particularly, retail mortgage, credit cards, and auto loans, which rose by 28%, 22%and 17%, respectively. Demand for credit was equally strong from large corporates and SMEs. BPIcontinued to lead in the remittance business and was awarded for the third straight year by theBangko Sentral ng Pilipinas as the Top Commercial Bank for OFW Remittances for 2007.

Telecom unit Globe reported a 3% decline in net income in the first half. Consolidated servicerevenues slipped by 2% due mainly to lower wireless service revenues mitigated by a 5% increase inwireline revenues. The changing pattern in consumer spending tempered revenue growth particularlyfor voice and value-added services, indicating the shift in consumers’ preference for lower-costalternatives such as SMS. Overall demand, however, for wireless communications was strong as

Globe’s subscriber base expanded by 25% year-on-year, with the highest net adds of 1.5 millionachieved in the second quarter. Despite an 11% increase in operating expenses, consolidatedEBITDA margins remained high during the period at 62%. Improvements in revenue growth areexpected in the second half as key initiatives are in place to focus on priority segments, support amore aggressive broadband roll out, and develop new growth areas. Globe also announced a specialcash dividend of P50 per share to its shareholders putting total dividends this year to P125 per share,on top of the regular cash dividend of P37.50.

Equity earnings from companies under AC Capital were lower this year mainly due to a decline inearnings of Ayala Auto, international arm AG Holdings, and one-time loss provisions at IntegratedMicroelectronics, Inc. (IMI). Double-digit earnings growth of Manila Water, however, partly cushionedthe earnings shortfall.

Manila Water reported a 17% increase in net income in the first half of the year to P1.3 billion fromP1.1 billion the prior year. Its continued focus on its capital investment plan has allowed it toconsistently improve operating efficiencies. Non-revenue water declined to 20% with billed volume up6%. MWC added 25,000 new service connections during the period in expansion areas within theEast Zone. The company continues to explore opportunities beyond its concession zone. It recentlysigned a contract for technical consulting services with the Boracay Water and Sewerage System andwas also awarded a 5-year management contract for a non-revenue water reduction project with theSaigon Water Company in Vietnam.

IMI registered a net loss of US$16 million due mainly to currency hedging-related transactions whichwere all fully unwound as of the end of June. Revenue growth, however, remained strong and was up14% year-on-year due to higher volumes from its key customers. Excluding losses from the currencyhedging contracts, IMI’s net income would have been up 28% year-on-year. IMI’s business prospects

remain strong and the company is continuing to explore opportunities to expand its geographicfootprint and enhance its capabilities through value-adding acquisitions.

Ayala’s BPO investee companies continued to generate positive performance despite toughereconomic conditions. Listed customer care company eTelecare reported record revenue of $75.4million for the three months ended June 30, 2008, a 23% increase over second quarter 2007 revenueof $61.4 million. For the six months ended June 30, 2008, eTelecare reported net income of $2.5million on revenue of $148.6 million compared to net income of $11.2 million on revenue of $123.5million in the first six months of 2007.



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Its unlisted BPO unit Integreon, completed its acquisition of a New York-based eDiscovery company,Datum, Inc., pushing revenues up 30.81%, post-acquisition, and 25.58% on a stand-alone basis.Margins improved significantly both at the gross profit and EBITDA levels on the back of favorableforeign exchange rates and Datum’s strong performance. In the meantime, graphics and creativedesign outsourcer Affinity Express made major customer acquisition wins last quarter, which areramping up to full volumes.

FOR TWELVE MONTHS ENDED DECEMBER 31, 2007 (Pre-IFRIC 12)

Ayala Corporation posted record consolidated revenues and net income in 2007. Despite theuncertainties looming in global financial markets in the latter part of the year, the domestic operatingenvironment remained generally positive with economic fundamentals largely remaining intact. Themain drivers of domestic consumption, particularly the robust overseas workers’ remittances, lowdomestic interest rate, revival of sectors like power and infrastructure as well as greater activityacross several industries continued to underpin the growth of the Ayala group’s major businesses,particularly in property, telecom, banking, water, and automotive. However, the peso’s continuedstrength has also impacted the export-oriented businesses in the portfolio, particularly in theelectronics and business process outsourcing services. But overall, the company’s growth momentumremained solid this year as the company also realized values from its portfolio and as operating unitsachieved generally higher earnings.

Consolidated revenues reached P78.7 billion, up 12% versus the prior year driven by a healthygrowth in consolidated sales and services, higher equity in net earnings, interest income, and gainsfrom the sale of shares particularly at the parent level.

Consolidated sales and services increased by 6% to P56.6 billion due mainly to higher unit sales ofAyala Automotive, higher contribution from the newly acquired companies of the electronics businessas well as the new investments in business process outsourcing (BPO) under LiveIt.

Growth, however, was partly weighed by the marginal revenue growth of the real estate group. Whileunderlying demand across all of the company’s real estate products remained strong as reflected instrong residential unit sales and high occupancy rates of its commercial centers and business officeportfolio, Ayala Land, Inc. (ALI) recorded only a slight revenue expansion. Sales and services

accounted for 72% of total consolidated revenues in 2007.

Equity in net earnings of associates and joint ventures reflected an 18% increase to P9.7 billion fromP8.3 billion in 2006. The strong earnings growth of the parent company’s key affiliates, particularlyGlobe Telecom, which posted a 13% growth in net income, banking unit, Bank of the PhilippineIslands (BPI), which posted an 11% increase in net income, as well as the higher earnings of theassociates of Ayala Land altogether resulted in higher equity earnings for the group. Equity earningsaccounted for 12% of the company’s total revenues in 2007.

Consolidated revenues were further boosted by capital gains which pushed the Other Incomeaccount up by 53% to P10.7 billion. A substantial part of this was generated through value realizationinitiatives at the parent level as it recognized P7.3 billion in gains from the sale of shares in AyalaLand, BPI, and Globe as market values during the year reached attractive levels for value realization.

On the cost side, consolidated cost and expenses increased by 8% to P58.4 billion. A substantial partof this was due to a 6% increase of consolidated cost of sales and services to P43.2 billion, whichwas very much in line with the growth of consolidated sales and services.

General and administrative expenses (GAE), on the other hand, rose by 23% to P9.5 billion stemmingfrom expenses related to capacity expansion initiatives and amortization expense of the new BPObusinesses, higher manpower and technology integration-related expenses of the electronics group.



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Other charges increased by 306% to P1.6 billion mainly due to an impairment loss on goodwill of theelectronics, information technology and business process outsourcing services group, andextraordinary charges of the real estate group.

Consolidated interest expense and other financing charges declined by 18% to P4.1 billion from P5billion the prior year. This was due to a substantial reduction in average funding costs. At the holdingcompany level in particular, the continued decline in domestic interest rates has helped reducefinancing expense significantly. Financing expense at the holding company level reached P3 billion in2007, 26% lower than the prior year. In 2007 the parent company pre-paid a total of P14 billion worthof debt that had an average cost of 11.8%. Refinancing with lower cost debt has brought down theaverage cost of parent company’s outstanding debt in 2007 to 7.4% from 9.5% the prior year. Netdebt (short term and long term debt less cash and cash equivalents and short-term investments) atthe parent level has also been substantially reduced and is now down to P13.3 billion, putting parentlevel net debt-to-equity ratio (net debt divided by equity attributable to parent) even lower at 0.15 to 1from 0.29 to 1 at the beginning of the year. Even on a consolidated basis, consolidated debt by year-end 2007 was lower at P50 billion. With cash, cash equivalents and short-term investments of P40.5billion, consolidated net debt declined to P9.5 billion from P29.6 billion and consolidated net debt toequity ratio at 0.11 to 1 from 0.38 to 1. Equity attributable to equity holders of Ayala by year-endreached P87.2 billion, up 13% from the prior year.

Altogether, these put consolidated net income attributable to equity holders of the parent in 2007 atP16.2 billion, which was a 33% increase from the P12.2 billion net income recorded in 2006 and thehighest ever recorded by the company.

The healthy earnings growth and strong cash position of the parent company enabled it to furtherincrease its dividend payout in 2007 with a total of P7.3 billion paid out to shareholders, more thandouble the amount the prior year. This is equivalent to 60% of prior year’s net income, inclusive of the20% stock dividend, and a dividend yield of 1.4% based on an average price of P558.50 per share.This combined with the 15.5% gain in the company’ stock price during the year put total return toshareholders at 17% in 2007.

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2006 (Pre-IFRIC 12)

It was another record year for Ayala Corporation as its net income attributable to equity holders of theparent reached an all-time high of P12.2 billion, 49% higher than 2005’s recorded figure of P8.2billion. This was a result of the strong earnings of the operating units, lower interest expense, andgains from share sales. At the holding Company level, equity earnings excluding dilution gainsbooked in 2005 grew by 12% to P12.3 billion as all key businesses posted significant earningsgrowth. Earnings were further enhanced by capital gains of P4.7 billion from the sale of shares inAyala Land, BPI, and Globe. This monetization initiative is in line with the Company’s strategy torealize values from existing investments and reallocate resources into new high growth businesses aswell as further reduce debt. Net debt at the holding Company level by year-end was significantlylower at US$462 million.

On a consolidated basis, sales and services rose by 54% to P53.4 billion. The substantial increase isattributed to Ayala Land’s increased sales of land and condominium units during the year as demand

remained brisk for residential projects across all market segments. Its revenues from its commercialcenter operations likewise contributed to the strong revenue growth as the year saw higher basic rent,the full operation of Phase 1B of Market! Market!, and higher occupancy rates. The electronicsbusiness also contributed to pushing consolidated revenues higher as IMI’s revenues more thandoubled during the year, reflecting the impact of the acquisition of Speedy Tech as well as organicgrowth. The auto dealerships likewise contributed to revenue growth with Ayala Auto’s sales up 24%year-on-year.

Equity in net earnings of associates and joint ventures was relatively flat in 2006 at P8.3 billion as2005 included dilution gains from the initial public offering of MWC in March 2005. This primarily



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reflects Ayala’s share in the net earnings of BPI, Globe, and MWC. All three businesses postedrecord net income in 2006, with BPI’s up 8% to P9.0 billion, Globe up 14% to P11.8 billion, andMWC’s by 19% to P2.4 billion.

Interest fees, rental, investment and other income grew by 11% to P8.5 billion largely due to gainsfrom the sale of shares of Ayala Land, BPI, and Globe. Ayala monetized some of these shares inview of new investments it is currently making in the business process outsourcing sector as well asan investment in a private equity real estate fund which has development projects lined up overseas.The sale of these shares allowed us to realize values from these long-time investments and also gaveus the flexibility to pay out, for the first time in a decade, special cash dividends to shareholders.

Consolidated cost of sales and services increased by 56% to P40.9 billion and moved much in linewith revenue growth. General and administrative expenses increased by 28% to P7.7 billion as aresult of higher payroll costs due to additional hiring to support the expansion initiatives at IMI andAyala Land.

Consolidated interest and other charges declined by 28% to P5.4 billion. This was a result of acombination of lower debt at the parent level as well as Ayala Land’s asset write-offs in 2005.Consolidated cash and cash equivalents decreased to P20.3 billion as of year-end 2006 from P24.0billion at the beginning of the year. Total cash dividends received by Ayala from subsidiaries and

affiliates reached P5 billion.

By year-end 2006, net debt at the parent Company level declined to US$462 million from US$563million at the beginning of the year. A portion of our debt was paid in 2006 through the issuance ofP5.8 billion in Series B preferred shares which now forms part of our stockholders’ equity. While thepreferred B shares do not have a fixed redemption period, Ayala has the option to redeem theseshares after five years. This has caused the Company's debt mix to move substantially in favor of thepeso with 69% of the debt in local currency and 31% in US dollars. The current level of net debt putsthe net debt-to-equity ratio down to 0.29 to 1 from 0.41 to 1 at the beginning of the year.

At the consolidated level, total debt also declined by 12% to P52.9 billion from P58.1 billion withconsolidated net debt to equity at 0.38 to 1. Total equity attributable to equity holders of the parent atyear-end reached P77.1 billion up 26% from the previous year.

In the Philippine Stock Exchange, the Company’s stock price closed at a year-high of P590.00 pershare, buoyed by the Company’s positive fundamentals and the market’s generally robustperformance. The strong peso, steady inflation, interest rates at all-time lows, sustained economicgrowth and well contained budget deficit have all contributed to sustaining the market’s bullishmomentum. The generally upbeat mood throughout the year pushed the Philippine Composite Index(Phisix) to close 42% higher year-on-year at 2,982.54.

Ayala’s listed operating units performed well. Ayala Land closed the year with a 54% increase in itsshare price to P15.25. BPI rose 40% to P63.50 at year-end. Globe advanced 68% to P1,235.00 andMWC gained 52% to close at P9.40.

Ayala Corporation’s market capitalization at the end of the year reached P203.45 billion, the third

highest among locally listed issues. Collectively, the market cap of the five listed Ayala companiesaccounted for 29% of the Phisix’s total market capitalization. The 87% increase in Ayala’s share pricefrom its yearend 2005 level and the higher full-year dividend yield of around 2% resulted in anestimated total return to shareholders of 89% from end-2005.

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2005 (PRE-IFRIC 12)

2005 was a banner year for Ayala as consolidated net income attributable to equity holders of parentreached a record of P8.2 billion, 11.5% higher from 2004 recorded figure of P7.4 billion. This waslargely the result of the collective strong performance of Ayala’s key operating subsidiaries as well as



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gains from share sales. In 2005, a total of P1.1 billion in capital gains were realized at the holdingcompany level from the sale of shares in MWC and ALI. Dilution gains were likewise realizedprimarily from the MWC IPO, the merger of Ayala’s electronics subsidiary with Speedy Tech, andBPI’s acquisition of Prudential Bank. Excluding gains, 2005 net income would be 21% higher thanrecurring net income in 2004.

On a consolidated basis, sales and services grew 16% to P34.6 billion. This primarily captures therobust revenues of the Company’s property subsidiary combined with higher sales from IMI. Thesuccessful launch of new residential development projects, higher leasing revenues from shoppingcenters, office buildings and hotels as well as higher construction revenues boosted topline growth.This was further pushed by higher sales volumes of IMI as volume orders from existing businessesand incremental contribution from the operations of newly acquired companies pushed IMI’s revenuesby 63% year-on-year.

Ayala’s equity in net earnings of associates and joint ventures increased by 8% to P8.2 billion,reflecting its higher share in net earnings from operating subsidiaries. BPI posted a record net incomefor the year of P8.4 billion, pushing Ayala’s equity earnings from the banking subsidiary higher by24%. MWC also posted a historic high income of P2.0 billion, increasing Ayala’s equity earnings fromthis subsidiary by 70%. The latter includes dilution gains from MWC’s IPO in March 2005. Growth in

equity earnings however was partly capped by lower equity earnings from Ayala’s telecom subsidiaryGlobe. Globe registered lower earnings during the year as a result of higher network and marketingrelated expenses exacerbated by a higher provision for taxes following the expiration of its income taxholiday. Ayala remains confident of Globe’s profitability and growth potential moving forward as itcontinues to strengthen its competitive position with an expanded network coverage, a range ofinnovative value add services, better cost management and as it uses new technology to tap into newrevenue streams. Globe has achieved a positive momentum and ended 2005 on a strong note as itposted a historic high income in the fourth quarter.

Consolidated interest, rental and other investment income increased by 26% to P7.7 billion duemainly to ALI’s gains from the sale of its stake in the MRT-3 project in the first quarter of the year.

Consolidated cost of sales and services increased by 18% to P26.2 billion along with the increase in

sales volume and also due to the shift of some IMI customers from consignment to turnkeyarrangement which includes material costs. General and administrative expenses increased by 19%to P6.0 billion mainly due to higher payroll costs given the expansion moves of some of theCompany’s subsidiaries. Consolidated interest and other charges likewise increased by 15% to P7.6billion largely as a result of asset write-offs by the real estate group. Interest expense, however, waslower as consolidated debt declined.

The Group’s overall financial position continued to improve. In 2005, consolidated gross debtdecreased by 19% to P60.4 billion while debt at the parent level was reduced further to P44.9 billionfrom P60.6 billion at the beginning of the year. This resulted in a drop in parent level financing cost by17% as debt mix also continued to move in favor of peso-denominated loans. At year-end, debt mixat the holding company level was at 61% Peso and 39% U.S. Dollars as Ayala took advantage ofopportunities to shift its dollar-denominated borrowings to peso when appropriate. Following itslandmark offer of P7.0 billion peso bonds in 2004, Ayala issued in 2005 two Peso fixed rate notes - afive-year P3.0 billion peso note and another seven-year P4.2-billion peso note - in line with thisstrategy.

Ayala’s consolidated cash and cash equivalents decreased by 31.27% as of year-end to P24.0 billionas loans of about P20.7 billion were paid down mainly at the parent level. Cash at the parent levelalso decreased to P15.0 billion or roughly U.S.$283 million. This, however, was partly offset by highercash dividends received from subsidiaries. Cash dividends received by Ayala from subsidiaries andaffiliates reached its highest in 2005 to P6.7 billion.



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Consolidated net debt-to-equity improved further to 0.6 to 1 from 0.74 to 1 while net debt-to-equity atthe parent level likewise improved to 0.49 to 1 from 0.68 to 1. Total stockholders’ equity at year endreached P61.2 billion, up 15% from the previous year.

MATERIAL CHANGES IN THE JUNE 2008 FINANCIAL STATEMENTS (POST IFRIC 12)(INCREASE /DECREASE OF 5% OR MORE IN THE FINANCIAL STATEMENTS)

Balance Sheet items(June 30, 2008 Vs December 31, 2007)

Cash and cash equivalents – 7% decrease from P36,836 million to P34,184 million Lower cash and cash equivalents due to payment of loans (net of new loans availed) partly offset bycash dividends received by the parent company, and proceeds from sale of shares and increasedcollections by the real estate group. Cash and cash equivalents decreased from 19% to 17% of thetotal assets as of December 31, 2007 and June 30, 2008, respectively.

Short-term investments – 35% decrease from P3,688 million to P2,387million Lower money market placements with maturity of more than 3 months by the parent company. As a

percentage to total assets, short-term investments decreased from 2% to 1% of the total assets as ofDecember 31, 2007 and June 30, 2008, respectively.

Accounts and notes receivable – 40% increase from P17,296million to P24,143 million Largely due to receivable arising from sale of shares by the parent company, receivables fromvarious construction projects by the real estate group, advances to project companies by theinternational group and increase in expenses billable to customers by the electronics, informationtechnology and business process outsourcing services group. Accounts and notes receivableincreased from 9% of the total assets as of December 31, 2007 to 12% as of June 30, 2008.

Inventories – 16% increase from P8,843 million to P10,237 million Largely due to set-up of additional costs and disbursements for actual development of variousprojects by the real estate group, increased inventories by electronics, information technology and

business process outsourcing services group due to increasing turnkey businesses partly offset bythe reduction in the automotive group inventories. As a percentage to total assets, inventories are at4.5% and 5.1% as of December 31, 2007 and June 30, 2008, respectively.

Other current assets – 30% increase from P3,098 million to P4,037 million Increase is mainly due to deferred charges representing costs on new and future projects, and higherprepaid expenses by the real estate group. As a percentage to total assets, other current assetsremained at 2% as of December 31, 2007 and June 30, 2008.

Noncurrent accounts and notes receivable – 26% decrease from P4,010 million to P2,962 million Primarily due to changes in classification of its trade receivables by Avida Land of the real estategroup. Noncurrent accounts and notes receivable slightly decreased from 2.0% of the total assets asof December 31, 2007 to 1.5% as of June 30, 2008.

Investments in associates and joint ventures – 3% decrease from P71,272,million to P69,150 million Investments in associates, joint ventures and others includes the Company’s and its subsidiaries’investments in various affiliates which are being accounted for under the equity method. Theseassociates are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation, amongothers.

The decrease is largely due to sale of shares, dividend income received from associates and share inthe decrease in unrealized gain on available for sale securities and investment fluctuation reservepartly offset by the 2008 share in equity earnings and additional infusion in some associates. This



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account slightly decreased from 36.3% of the total assets as of December 31, 2007 to 34.4% as ofJune 30, 2008.

Property, plant and equipment – 11% increase from P8,493 million to P9,454 million Disbursements for the construction of Glorietta 5, Greenbelt 5 Phase 2 and San Lazaro BPO by thereal estate group, capex for office equipment and construction-in-progress of a foreign facility byelectronics, information technology and business process outsourcing services group. As of June 30,

2008 and December 31, 2007, the group’s property, plant and equipment is at 4.7% and 4.33% ofthe total assets, respectively.

Deferred tax assets – 31% increase from P984 million to P1,284 million Due to higher recognized real estate sales by the real estate group. As of June 30, 2008 andDecember 31, 2007, the group’s deferred tax asset is at 0.6% and 0.5% of the total assets,respectively.

Intangible assets – 13% increase from P3,276 million to P3,698 million Provisional goodwill arising from the acquisition of a BPO company, higher forex rate partly offset bythe 2008 amortization of intangible assets by the electronics, information technology and businessprocess outsourcing services group. As a percentage to total assets, this account remained at 2% asof December 31, 2007 and June 30, 2008.

Other noncurrent assets – 20% increase from P2,087 million to P2,503 million Due to disbursements for future projects by the real estate group. As a percentage to total assets, thisaccount is at 1.06% as of December 31, 2007 and 1.24% as of June 30, 2008.

Accounts payable and accrued expenses – 16% increase from P22,261 million to P25,863 million Due to higher trade payables relative to the ongoing construction of various projects, increase inaccrual of salaries, equipment rental and cost of materials by the real estate group and increasedtrade payables by the electronics, information technology and business process outsourcing servicesgroup partly offset by the payment of interest payable by the parent company. As a percentage tototal liabilities, this account increased from 28% to 31% as December 31, 2007 and June 30, 2008,respectively.

Short-term debt – 48% increase from P2,634 million to P 3,902 million Additional loans availed by the electronics, information technology and business process outsourcingservices and real estate groups partly offset by reduced loan balance of the automotive group. As ofDecember 31, 2007 and June 30, 2008, this account increased from 3% to 5% of the total liabilities,respectively.

Current portion of long-term debt – 34% decrease from P9,513 million to P 6,308 million Decrease is due to the partial payment of loans by the parent company and the electronics,information technology, business process outsourcing services group partly offset by the increase inthe real estate group due to the reclassification of current maturing loans from long-term debt. As ofDecember 31, 2007 and June 30, 2008, this account is at 12% and 8% of the total liabilities,respectively.

Other current liabilities – 36% increase from P1,551million to P2,111 million

Mainly derivative liability, increase in payables of China operations and inclusion of balances of newlyacquired BPO by the electronics, information technology and business process outsourcing servicesgroup. As a percentage to total liabilities, this account is at 2% as of December 31, 2007 and 3% asof June 30, 2008.

Income tax payable – 13% decrease from P286 million to P248 million Higher creditable withholding tax recognized by the real estate group. As a percentage to totalliabilities, this account is at 0.4% and 0.3% as of December 31, 2007 and June 30, 2008,respectively.



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Long-term debt – 7% decrease from P37,885 million to P35,244 million Reclassification of current maturing loans into current portion of long-term debt by the parentcompany and real estate group. As a percentage to total liabilities, this account is at 46% as ofDecember 31, 2007 and 43% as of June 30, 2008.

Deferred tax liabilities – 109% increase from P156 million to P325 million Primarily due to timing differences in tax recognition by the real estate group. As a percentage to totalliabilities, this account is at 0.19% as of December 31, 2007 and 0.40% June 30, 2008.

Other noncurrent liabilities – 12% increase from P6,818 million to P7,659 million Largely due to increase in buyers’ deposits for new residential projects and tenants’ deposits for officeand shopping center spaces and increase in deferred credits from higher real estate sales by the realestate group. This account is at 8% and 9% of the total liabilities as of December 31, 2007 and June30, 2008, respectively.

Cumulative translation adjustment – 53% increase from (P2,374 million) to (P1,121 million)Mainly due to forex rate changes.

Net unrealized gain on available-for-sale financial assets – 142% decrease from P1,789 million to

(P746 million)Due to lower revaluation of available for sale securities.

Treasury shares – 234% increase from P160 million to P533 million Due to buy-back of shares.

Income Statement items(YTD June 30, 2008 Vs YTD June 30, 2007)

Sales and services – 11% increase from P27,075 million to P29,941 million Higher revenues from residential developments and construction services, as well as corporatebusiness, strategic landbank management and Visayas-Mindanao operations by the real estategroup, higher unit sales by the automotive group and higher dollar revenue of the electronics,

information technology and business process outsourcing services group. The increase in dollarrevenue was however offset by the lower exchange rate of the US$ to peso in 2008.

Sales and services contributed 76% of the total revenue in 2008 and 67% in 2007.

Equity in net earnings of associates and joint ventures – 9% decrease from P4,871 million to P4,425 million Due to lower equity in earnings from associates of the parent company partly offset by higher shareincome from the real estate group’s corporate vehicles for its investment in Bonifacio Global City.

This account is 11% and 12% of the total revenue in 2008 and in 2007, respectively.

Interest income – 28% increase from P646 million to P824 million

Due to higher investible funds and interest rates in 2008.

This account is 2% of the total revenue in 2008 and in 2007.

Other income – 47% decrease from P7,791 million to P4,095 million Lower capital gains in 2008 by the parent company partly offset by the gain on sale of shares of 3subsidiaries by the real estate group.

This account is 19% and 10% of the total revenue in 2007 and in 2008, respectively.



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Cost of sales and services – 11% increase from P20,711 million to P23,077 million Relative to higher sales.Cost of sales and services is 73% of the total costs and expenses in 2007 and 2008

Interest expense and other financing charges – 42% increase from P2,270 million to P3,225 million Loss on unwinding of hedge contracts by the electronics, information technology and businessprocess outsourcing services group partly offset by lower interest rates and loan levels by the parentcompany and the automotive group. This account is 10% and 8% of the total costs and expenses forthe periods June 30, 2008 and 2007, respectively.

Provision for income tax – 11% increase from P1,038 million to P1,156 million Higher taxable income by the real estate group. Provision for income tax is 4% of the total costs andexpenses for the periods June 30, 2007 and 2008.

MATERIAL CHANGES IN THE 2007 FINANCIAL STATEMENTS (PRE-IFRIC 12)(INCREASE /DECREASE OF 5% OR MORE IN THE FINANCIAL STATEMENTS)

Balance Sheet Items(2007 Vs 2006)

Cash and cash equivalents – 81% increase from P20,391 million to P36,836 million Attributable to proceeds from sale of shares of stocks, increased collections and proceeds from theissuance of preferred shares by the real estate group. As a percentage to total assets, cash and cashequivalents increased from 11% to 19% as of December 31, 2006 and December 31, 2007,respectively.

Short-term investments – 26% increase from P2,928 million to P3,688 million Mainly due to money market placements of the parent company and the real estate group’sinvestment management account in 2007 partly offset by the lower money market placements of thereal estate group. As a percentage to total assets, short-term investments remained at 2% of the totalassets as of December 31, 2006 and December 31, 2007.

Inventories – 6% decrease from P9,392 million to P8,843 million Largely due to sale of units at residential building and subdivision projects by the real estate grouppartly offset by higher vehicles inventory by the automotive group. As a percentage to total assets,inventories remained at 5% as of December 31, 2006 and December 31, 2007, respectively.

Other current assets – 22% decrease from P3,961 million to P3,098 million Sale of marketable securities partly offset by higher prepaid expenses of the real estate group. As apercentage to total assets, other current assets remained at 2% as of December 31, 2006 andDecember 31, 2007, respectively.

Noncurrent assets held for sale – 100% decrease from P3, 658 million to P-0- Due to sale of Oakwood by the real estate group and sale of investment in Hermill by the internationalgroup in 2007. This account is 2% of the total assets as of December 31, 2006.

Noncurrent accounts and notes receivable – 59% increase from P2,520 million to P4,010 million Due to availment of longer payment terms and additional sales at new and existing projects by thereal estate group. Noncurrent accounts and notes receivable slightly increased from 1% of the totalassets as of December 31, 2006 to 2% as of December 31, 2007.

Investments in associates and joint ventures – 4% increase from P68,569, million to P71,560 million Investments in associates, joint ventures and others includes the Company’s and its subsidiaries’investments in various affiliates which are being accounted for under the equity method. These



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associates are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation, amongothers.

The increase is largely due to the investment in a BPO company partly booked in 2006 underInvestment in bonds and other securities account by the electronics, information technology andbusiness process outsourcing services group and 2007 equity share in earnings of associates partlyoffset by the sale of shares by the parent company, lower forex rate and return of investment by theinternational group. This account slightly decreased from 38% of the total assets as of December 31,2006 to 36% as of December 31, 2007.

Investment in bonds and other securities – 28% decrease from P3,462 million to P2,493 million Sale of marketable securities and reclassification of investments in a BPO company to Investments inAssociates & Joint Ventures account partially offset by new investments and marked to marketinvestments of the electronics, information technology, business process outsourcing services group.This account is 2% of the total assets as of December 31, 2006 and 1% as of December 31, 2007.

Property, plant and equipment – 6% decrease from P9,057 million to P8,493 million

Decrease due to lower forex rate, depreciation expense and business development costs charged toexpense by electronics, information technology, business process outsourcing services group partly

offset by the ongoing projects of the real estate group. As of December 31, 2006 and December 31,2007, the group’s property, plant and equipment account is at 5% and 4% of the total assets,respectively.

Deferred tax assets – 12% decrease from P1,124 million to P984 million Due mainly to realization of unrealized financial gross profit of the real estate group. As of December31, 2006 and December 31, 2007, the group’s deferred tax asset is at 0.6% and 0.5% of the totalassets, respectively.

Pension assets – 31% decrease from P203 million to P141 million Decrease in pension assets of the electronics, information technology, business process outsourcingservices group. This account remained at 0.1% of the total assets as of December 31, 2006 andDecember 31, 2007.

Intangible assets – 26% decrease from P4,430 million to P3,276 million Due to lower peso exchange rate, amortization in 2007 and impairment of goodwill. As a percentageto total assets, this account remained at 2% as of December 31, 2006 and December 31, 2007.

Other noncurrent assets –17% increase from P1,785 million to P2,087 million Cost of various facilities advanced by the electronics, information technology, business processoutsourcing services group which will be billed to its customers. As a percentage to total assets, thisaccount remained at 1% as of December 31, 2006 and December 31, 2007.

Accounts payable and accrued expenses – 21% increase from P18,326 million to P22,261 million Higher trade payables by the real estate group and higher inventory pull-outs by the automotivegroup. As of December 31, 2006 and December 31, 2007, this account is at 23% and 28% of the total

liabilities, respectively.

Short-term debt –5% increase from P2,504 million to P2,634 million New loan availed by the automotive group partly offset by the payment of debt by the internationaland electronics, information technology and business process outsourcing services groups. As ofDecember 31, 2006 and December 31, 2007, this account remained at 3% of the total liabilities.

Other current liabilities – 7% increase from P1,453 million to P1,550 million Increase in customers’ deposits by the real estate group. As a percentage to total liabilities, thisaccount is at 2% as of December 31, 2006 and December 31, 2007.



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Liabilities directly associated with noncurrent assets held for sale – 100% decrease from P469 million to P-0- Due to sale of assets previously booked as held for sale. As a percentage to total liabilities, thisaccount is at 0.6% as of December 31, 2006.

Cumulative redeemable preferred shares – 100% decrease from P2,500 million to P-0- million Redemption of preferred shares by the parent company. Cumulative redeemable preferred shares is3% of the total liabilities as of December 31, 2006.

Deferred tax liabilities – 65% decrease from P444 million to P156 million Primarily due to reduction in deferred tax liabilities of the real estate group. As a percentage to totalliabilities, deferred tax liabilities is at 0.6% and 0.2% as of December 31, 2006 and December 31,2007, respectively.

Pension liabilities – 9% increase from P488 million to P532 million Increase in pension liabilities of the real estate group. This account remained at 1% of the totalliabilities as of December 31, 2006 and December 31, 2007.

Other noncurrent liabilities – 11% increase from P6,141 million to P6,818 million

Mainly due to increase in buyers’ and tenants’ deposits of the real estate group. This accountremained constant at 8% of the total liabilities as of December 31, 2006 and December 31, 2007.

Paid-up capital – 16% increase from P23,138 million to P26,855 million Largely due to the 20% stock dividend.

Share-based payments – 8% increase from P558 million to P604 million Increase in stock options granted.

Cumulative translation adjustment – 670% decrease from (P298 million) to (P2,297 million)Mainly due to forex rate changes.

Retained earnings – 17% increase from P51,659 million to P60,461 million

Attributable to 2007 net income net of cash and stock dividends declared.

Net unrealized gain on available-for-sale financial assets – 18% decrease from P2,079 million to P1,712 million Due to lower revaluation of investments in securities.

Treasury shares – 51,414% increase from P0.310 million to P160 million Due to buy-back of shares.

Minority interest – 12% increase from P24,699 million to P27,609 million Largely due to share of minority holders in 2007 net income and increased share due to reducedshareholdings by the equity holders of the parent.

Income Statement Items(YTD December 2007 vs. YTD December 2006)

Sales and services – 6% increase from P53,394 million to P56,578 million Higher unit sales by the automotive group, higher sales volume of existing businesses andcontributions from the operations of newly acquired companies by the electronics, informationtechnology and business process outsourcing services group partly offset by lower revenue from thereal estate group.

Sales and services contributed 72% of the total revenue in 2007 and 76% in 2006.



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Equity in net earnings of associates and joint ventures – 18% increase from P8,253 million to P9,708 million Largely due to higher equity earnings generated from the associates of the real estate andinternational groups and the parent company.


Interest income – 11% increase from P1,521 million to P1,693 million Due to higher investible funds in 2007.


Other income – 53% increase from P6,998 million to P10,728 million Largely due to capital gains from sale of shares and higher forex gains. This account is 14% and 10%of the total revenue in 2007 and in 2006, respectively.

Cost of sales and services – 6% increase from P40,857 million to P43,169 million Relative to higher sales. Cost of sales and services is 72% and 73% of the total costs and expenses for the period ending

December 31, 2007 and 2006, respectively.

General and administrative expenses – 23% increase from P7,708 million to P9,498 million Largely due to the GAE of the new subsidiary, higher manpower costs, depreciation and amortizationexpenses of the electronics, information technology and business process outsourcing servicesgroup.

This account is 16% and 14% of the total costs and expenses for the period ending December31, 2007 and 2006, respectively.

Interest expense and other financing charges – 18% decrease from P5,024 million to P4,120 million Due to reduced average funding costs. As of December 31, 2007 this account is 7% of the total costsand expenses vs 9% in December 31, 2006.

Other charges – 306% increase from P387 million to P1,570 million Due to impairment loss on goodwill of the electronics, information technology and business processoutsourcing services group and extraordinary charges of the real estate group. As of December 31,2007 this account is 3% of the total costs and expenses vs 1% in December 2006.

Provision for income tax – 5% increase from P1,877 million to P1,972 million Due mainly to higher taxes paid by the parent company and the electronics, information technologyand business process outsourcing services group.

MATERIAL CHANGES IN THE 2006 FINANCIAL STATEMENTS (PRE-IFRIC 12) (INCREASE /DECREASE OF 5% OR MORE IN THE FINANCIAL STATEMENTS)

Balance Sheet Items(2006 Vs 2005)

Accounts and notes receivable – 54% increase from P11,308 million to P17,470 million

Largely due to receivables from the sale of shares, increased sales at new and existing projects andhigher corporate withholding tax by the real estate group, advances by the international group tofinance new investments and increased sales by the electronics, information technology and businessprocess outsourcing services and automotive groups. As a %age to total assets, accounts and notesreceivable increased from 7% as of December 31, 2005 to 10% as of December 31, 2006.



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Other current assets – 81% increase from P2,190 million to P3,961 million

Due to advances on land, increase in marketable securities and higher input VAT by the real estategroup, inclusion of accounts of a new subsidiary under the electronics, information technology andbusiness process outsourcing services group and additional investments in marketable securities bythe international group. Other current assets increased to 2% of the total assets as of December 31,2006 from 1% as of December 31, 2005.

Noncurrent assets held for sale – 100% increase to P3,658 million

Represents total assets of Makati Property Ventures Inc., a member of the real estate group andinvestment in Hermill Investment Pte. Ltd. of the international group classified as noncurrent assetsheld for sale.

Noncurrent account and notes receivable – 55% decrease from P5,631 million to P2,520 million

Mainly due to sale of receivables by one of the companies of the real estate group. As a %age to totalassets, noncurrent account and notes receivable slightly decreased from 3% as of December 31,2005 to 1% as of December 31, 2006.

Investments in associates and joint ventures – 7% increase from P63,808 million to P68,569 million

Investments in associates joint ventures and others includes the Company’s and its subsidiaries’investments in various affiliates which are being accounted for under the equity method. Theseaffiliates are Bank of the Philippine Islands, Globe Telecom and MWC Corporation, among others.The increase is largely due to the 2006 equity in earnings from affiliates and additional equity infusionby subsidiaries in an Asian private equity real estate fund and fund management Company. Thisaccount is 38% of the total assets as of December 31, 2005 and December 31, 2006.

Investment in bonds and other securities – 67% increase from P2,073 million to P3,462 million

Primarily due to new investments made in 2006 by the electronics, information technology and

business process outsourcing services group and revaluation of investments partly offset by the saleof securities at the Parent Company level. As a %age to total assets, this account is 2% and 1% as ofDecember 31, 2006 and December 31, 2005, respectively.

Property, plant and equipment – 9% decrease from P9,918 million to P9,057 million

Reclassification by the real estate group to Noncurrent assets held for sale partly offset by theinclusion of assets of the newly acquired subsidiaries under the electronics, information technologyand business process outsourcing services group. This account is 6% and 5% of the total assets asof December 31, 2005 and December 31, 2006, respectively.

Pension assets – 14% decrease from P236 million to P203 million

Lower pension assets of the electronics, information technology and business process outsourcingservices group. This account remained at 0.1% of the total assets as of December 31, 2006 andDecember 31, 2005.

Intangible Assets– 48% increase from P2,996 million to P4,430 million

Largely due to the acquisition of a new subsidiary partly offset by the amortization of intangible assetsby the electronics, information technology and business process outsourcing services group. As a%age to total assets, this account is 2% as of December 31, 2006 and 2% as of December 31, 2005.



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Other noncurrent assets – 8% decrease from P1,947 million to P1,785 million

Due to liquidation of advances made by the real estate group to a landowner and lower deferredcharges by the Parent Company. As a %age to total assets, this account remained at 1% as ofDecember 31, 2005 and December 31, 2006.

Accounts payable and accrued expenses –6% increase from P17,311 million to P18,326 million

Primarily due to higher payables to contractors and suppliers and higher VAT and expandedwithholding tax payable by the real estate group, inclusion of payables of the newly acquiredcompanies of the electronics, information technology and business process outsourcing servicesgroup and the Parent Company’s higher dividends payable partly offset by lower interest payable dueto lower loan balance.

As of December 31, 2006 and December 31, 2005, this account is at 23% and 20% of the totalliabilities, respectively.

Short-term debt – 59% decrease from P6,154 million to P2,504 million

Largely due to payment of short-term debt by the electronics, information technology and business

process outsourcing services group used to finance acquisition of new companies in 2005. As ofDecember 31, 2006 and December 31, 2005, this account is at 3% and 7% of the total liabilities,respectively.

Income-tax payable – 8% increase from P273 million to P296 million

Due to higher income subject to income tax.

Current portion of long-term debt – 214% increase from P2,985 million to P9,360 million

Reclassification of the real estate group’s P3 billion bonds which will mature in April 2007, as well asreclassification of the Parent Company’s and the electronics, information technology and businessprocess outsourcing services group’s current maturing loans. As a %age to total liabilities, current

portion of long-term debt is 12% and 4% as of December 31, 2006 and December 31, 2005,respectively.

Cumulative redeemable preferred shares (current portion) – 100% decrease from P2,230 million

Redemption of the P2,230 million redeemable preferred shares in 2006 by the Parent Company. As a%age to total liabilities, the cumulative redeemable preferred shares is 3% as of December 31, 2005.

Other current liabilities – 47% increase from P986 million to P1,453 million

Largely due to higher buyer deposits from various residential projects by the real estate group andrevaluation of advances by the Parent Company. This is 2% and 1% of the total liabilities as ofDecember 31, 2006 and December 31, 2005, respectively.

Liabilities Directly Associated with Noncurrent Assets Held for Sale– 100% increase to P469 million

Represents total liabilities of Makati Property Ventures Inc., a member of the real estate groupclassified as noncurrent assets held for sale.

Long-term debt – 17% decrease from P46,507 million to P38,518 million

Mainly due to payment of loans and reclassification to current portion. As a %age to total liabilities,long-term debt is at 48% and 55% as of December 31, 2006 and December 31, 2005, respectively.



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Deferred tax liabilities – 42% increase from P312 million to P444 million

Higher tax liability from prior years’ installment sales of the real estate group due to shift in revenuerecognition from %age of collection to %age of completion. As a %age to total liabilities this accountis 0.6% as of December 31, 2006 and 0.4% as of December 31, 2005.

Pension and other benefits – 12% increase from P434 million to P488 million

Mainly due to the Parent Company’s increase in retirement fund contribution. As a %age to totalliabilities, pension and other benefits slightly increased from 0.5% as of December 31, 2005 to 0.6%as of December 31, 2006.

Other noncurrent liabilities – 14% increase from P5,370 million to P6,141 million

Higher retention payable and deferred interest income by the real estate group. As a %age to totalliabilities, this account is at 8% as of December 31, 2006 and 6% as of December 31, 2005.

Paid-up-Capital – 36% increase from P16,960 million to P23,138 million

Due mainly to the issuance of P5.8 billion preferred shares in 2006.

Share-based payments – 15% decrease from P656 million to P558 million

Mainly due to additional stock options exercised.

Cumulative translation adjustment – 151% decrease from P587 million to (P298 million)

Mainly due to forex rate changes.

Net unrealized gain on available-for-sale investments 335% increase from P478 million to P2,079 million

Largely to increase in value of various investments of an affiliate bank and the electronics, information

technology and business process outsourcing services group.

Minority interest – 14% increase from P21,590 million to P24,699 million

Largely due to share of minority holders in the 2006 net income and increased share due to sale ofshares by the equity holders of Ayala Corporation.

Income Statement items(YTD December 2006 Vs YTD December 2005)

Sales and services – 54% increase from P34,638 million to P53,394 million

Higher revenues from residential developments, shopping centers, office rentals and support

businesses of the real estate group, contributions from the operations of newly acquired companiesby the electronics, information technology and business process outsourcing services group andhigher sales volume by the automotive group.

Sales and services contributed 76% and 69% of the total revenue in 2006 and in 2005, respectively.

Equity in net earnings of associates and joint ventures – 0.6% increase from P8,202 million to P8,253 million



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Largely due to higher share in net earnings from various affiliates such as Bank of the PhilippineIslands, Globe Telecom and Ayala Land Inc.’s affiliates such as Alabang Commercial Corporationand Cebu Holdings, Inc., partly offset by the absence of dilution gain arising from MWC Corporation’sinitial public offering in 2005.

In 2006, this account is 12% of the total revenue lower than the 16% in 2005.

Interest fees, rental investment and other income – 11% increase from P7,702 million to P8,519 million

Largely due to capital gains from sale of shares in 2006. This account is 12% of the total income in2006, lower than the 15% in 2005.

Cost of sales and services – 56% increase from P26,170 million to P40,857 million

Relative to higher sales. This account is 73% of total costs and expenses in 2006 compared to 64%in 2005.

General and administrative expenses –28% increase from P6,011 million to P7,708 million

Due to higher payroll and benefits costs and expansion of some subsidiaries. This amount is 14% oftotal costs and expenses in 2006, lower than the 15% in 2005.

Interest and other charges – 28% decrease from P7,563 million to P5,411 million

Due to provisions for decline in value of assets intended to be sold and write-off of deferred chargesof the real estate group in 2005 and lower interest payables due to lower debt levels in 2006 at theparent Company level. This account is 10% of total costs and expenses in 2006 and significantlylower than the 19% in 2005.

Provision for income tax – 124% increase from P839 million to P1,877 million

Lower final tax rate in 2005 on capital gains in AIVI transaction coupled with higher corporate income

tax rate in 2006.



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MMAANNAAGGEEMMEENNTT

BOARD OF DIRECTORS

Ayala’s Board has seven members, all of whom are elected by Ayala’s common stockholders at thestockholders’ annual meeting. The Directors hold office for one year and until their successors areelected and qualified in accordance with Ayala’s By-Laws.

The Board regularly meets at least on a quarterly basis. It ensures the presence and adequacy ofinternal control mechanisms for good governance in accordance with the Company’s Manual ofCorporate Governance. The minimum internal control mechanisms for the Board’s oversightresponsibility include, but are not limited to:

(a) Ensuring the presence of organizational and procedural controls, supported by an effectivemanagement information system and risk management reporting system;

(b) Reviewing conflict-of-interest situations and providing appropriate remedial measures for thesame;

(c) Appointing a CEO with the appropriate ability, integrity and experience to fill the role, as well asdefining the CEO’s duties and responsibilities;

(d) Reviewing proposed senior management appointments;

(e) Ensuring the selection, appointment and retention of qualified and competent management;reviewing the Company’s personnel and human resources policies, compensation plan and themanagement succession plan;

(f) Institutionalizing the internal audit function; and

(g) Ensuring the presence of, and regularly reviewing, the performance and quality of external audit.

As of June 30, 2008 the composition of the Board was as follows:

Jaime Augusto Zobel de Ayala Chairman and Chief Executive OfficerFernando Zobel de Ayala President and Chief Operating OfficerMeneleo J. Carlos, Jr. Independent DirectorToshifumi Inami DirectorDelfin L. Lazaro DirectorXavier P. Loinaz DirectorMercedita S. Nolledo Director

The write-ups below include positions currently held by the directors as well as positions held duringthe past five years.

Jaime Augusto Zobel de Ayala , Filipino, 48, has served as Director of Ayala Corporation since1987. He also holds the following positions: Chairman and CEO and Chairman of the NominationCommittee of Ayala Corporation; Chairman of the Board of Directors of Globe Telecom, Inc., Bank ofthe Philippine Islands and Integrated Micro-electronics, Inc.; and Director of Ayala Land, Inc. He is amember of various international and local business and socio-civic organizations including the JPMorgan International Council, Mitsubishi Corporation International Advisory Committee, ToshibaInternational Advisory Group, Harvard University Asia Center Advisory Committee, Board of Trusteesof the Asian Institute of Management and a national council member of the World Wildlife Fund (US).



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He was a TOYM (Ten Outstanding Young Men) Awardee in 1999 and was named Management Manof the Year in 2006 by the Management Association of the Philippines for his important role in thetransformation of Ayala Corporation into a highly diversified forward-looking conglomorate. He wasalso awarded the prestigious Harvard Business School Alumni Achievement Award in 2007. Hegraduated with B.A. in Economics (Cum Laude) at Harvard College in 1981 and took his MBA at theHarvard Graduate School of Business Administration in 1987.

Fernando Zobel de Ayala , Filipino, 47, has served as Director of Ayala Corporation since 1994. Healso holds the following positions: President and Chief Operating Officer of Ayala Corporation;Chairman of Ayala Land, Inc., Manila Water Company, Inc., AC International Finance Ltd., AyalaInternational Pte. Ltd., Ayala Automotive Holdings Corp., Ayala Hotels, Inc., Alabang CommercialCorp., and Anvaya Cove Beach and Nature Club, Inc.; Co-Vice Chairman and Trustee of AyalaFoundation, Inc.; Director of the Bank of the Philippine Islands, Globe Telecom, Inc., IntegratedMicro-electronics Inc., AI North America and Habitat for Humanity International; and Member of theEast Asia Council of INSEAD. He graduated with B.A. Liberal Arts at Harvard College in 1982.

Meneleo J. Carlos, Jr., Filipino, 78, serves as the Independent Director of Ayala Corporation sinceSeptember 2002. He is the Chairman of Ayala Corporation’s Audit and Compensation Committeesand a member of the Nomination Committee. He is the Chairman and President of RI Chemical

Corporation; President of Resins, Inc., Riverbanks Development Corporation; Chairman of theFederation of Philippine Industries, Maja Development Corporation, AVC Chemical Corporation,Philippine Iron Construction & Marine Works, Inc. (PICMW) and Vacphil Rubber Corporation; andDirector of Philippine Aerosol Container Corp. (PACC) and Cagayan Electric Power & Light Company(CEPALCO). He graduated with a B.S. Chemical Engineering degree and a Certificate of AdvancedStudies at Cornell University in 1952.

Toshifumi Inami , Japanese, 56, has served as Director of Ayala Corporation since June 2006. He iscurrently the General Manager of Mitsubishi Corporation-Manila Branch and Senior Vice President ofMitsubishi Corporation-Tokyo, Japan. He is the Chairman of International Elevator & Equipment, Inc.;Chairman and President of MCPL (Philippines), Inc.; Director in the following companies: TheJapanese Association Manila, Inc., Isuzu Philippines Corp., MD Distripark Manila, Inc., MD LagunaCorporation, Imasen Philippines Manufacturing Corp., Kansai Paint Philippines, Trans World Agro-

Products Corporation, Kepco Ilijan Corporation, TeaM Energy and UniCharm Philippines Inc.; andPresident of Japanese Chamber of Commerce & Industry of the Philippines (JCCIPI). Prior to hisassignment at Mitsubishi Corporation-Manila Branch, he was the General Manager at the ShipDepartment of Mitsubishi Corporation-Tokyo, Japan. Mr. Inami had a degree in BS MechanicalEngineering from Keio University in Japan.

Delfin L. Lazaro , Filipino, 61, was elected to the Board of Ayala on 01 January 2007. He has servedas a member of the Management Committee of Ayala Corporation (Ayala Group) since 1996. Healso holds the following positions: Director and Chairman of the Executive Committee of GlobeTelecom, Inc.; Chairman of Ayala Systems Technology, Inc., HRMall, Inc. and Atlas Fertilizer &Chemicals; Director of Ayala Land, Inc., Integrated Micro-electronics, Inc., Manila Water Co., Inc., AINorth America, Inc., Ayala International Holdings, Ltd.. and Ayala Automotive Holdings Corp. Formerly, Mr. Lazaro was the President and CEO of Benguet Corporation and Secretary of the

Department of Energy of the Philippine government. He was named Management Man of the Year1999 by the Management Association of the Philippines for his contribution to the conceptualizationand implementation of the Philippine Energy Development Plan and to the passage of the lawcreating the Department of Energy. He was also cited for stabilizing the power situation that helpedthe country achieve successively high growth levels up to the Asian crisis in 1997. He graduated withBS Metallurgical Engineering at the University of the Philippines in 1967 and took his MBA (withDistinction) at Harvard Graduate School of Business in 1971.

Xavier P. Loinaz , Filipino, 64, has served as director of Ayala Corporation since April 2006. He wasa member of the Management Committee of Ayala Corporation (Ayala Group) from 1989 to 2004. He



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was formerly the President of Bank of the Philippine Islands (BPI) from 1982 to 2004. Other positionsheld are: Director of BPI, BPI Capital Corporation, BPI Direct Savings Bank, Inc., BPI/MS InsuranceCorporation, BPI Family Savings Bank, Inc. and Chairman of the Board of Directors of Ayala LifeAssurance, Inc.; and Member of the Board of Trustees of BPI Foundation, Inc. He graduated with anAB Economics degree at Ateneo de Manila University in 1963 and took his MBA-Finance at WhartonSchool, University of Pennsylvania in 1965.

Mercedita S. Nolledo , Filipino, 66, has served as Director of Ayala Corporation since 2004 and isalso a Senior Managing Director and Corporate Secretary of Ayala Corporation, and Senior Counselof the Ayala Group of Companies. Her other significant positions include: Director and CorporateSecretary of Ayala Land, Inc.; Director of Honda Cars Cebu, Inc., Honda Cars Makati, Inc., IsuzuAutomotive Dealership, Inc., Isuzu Cebu, Inc., Ayala Automotive Holdings Corp., Bank of thePhilippine Islands, BPI Family Bank, BPI Capital Corp. and Anvaya Cove Beach and Nature Club,Inc.; Corporate Secretary and Member of the Board of Trustees of Ayala Foundation, Inc.; Directorand Treasurer of Phil. Tuberculosis Society, Inc. She had her education at the University of thePhilippines and graduated Magna Cum Laude and Class Valedictorian in Bachelor of Science inBusiness Administration and Cum Laude and Class Valedictorian in Bachelor of Laws.

EXECUTIVE OFFICERS

Ayala's various business interests are managed by the following members of senior management:

Management Committee Members/Key Officers

* Jaime Augusto Zobel de Ayala Chairman & Chief Executive Officer

* Fernando Zobel de Ayala President & Chief Operating Officer

* Delfin L. Lazaro Senior Managing Director

* Mercedita S. Nolledo Senior Managing Director & Corporate Secretary

** Rufino Luis T. Manotok

Alfredo I. Ayala

Senior Managing Director, Corporate Information Officer &Chief Finance Officer

Managing Director

Victoria P. GarchitorenaSolomon M. Hermosura

Ricardo Nicanor N. Jacinto

Managing DirectorManaging Director

Managing Director

** Renato O. Marzan

Rufino F. Melo III

Managing Director, Assistant Corporate Secretary &Compliance Officer

Managing Director

Ramon G. Opulencia Managing Director & Treasurer

** John Philip S. Orbeta

Luis Juan B. Oreta

Managing Director

Managing Director*Member of the Board of Directors **Management Committee Member-Ayala Holding Co.

The write-ups below include positions currently held by the executive officers as well as positions heldduring the past five years.

Rufino Luis T. Manotok , Filipino, 57, has served as a member of the Management Committee ofAyala Corporation (Ayala Group) since 1999. He also holds the following positions: Senior ManagingDirector, Corporate Information Officer and Chief Finance Officer of Ayala Corporation; President andChairman of the Board of Directors of Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc.,Isuzu Iloilo Corp. and Honda Cars Cebu, Inc.; Chairman of Isuzu Cebu, Inc.; President and Director ofAyala Automotive Holdings Corp., Philwater Holdings Company and Ayala Aviation Corp.; andDirector of AC International Finance Ltd., AI North America, Inc., Asiacom Philippines, Inc., AYC



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Holdings Ltd., Ayala Systems Technology, Inc., BPI Family Savings Bank, Inc., and MichiganHoldings, Inc. He graduated with Bachelor of Arts in Economics at the Ateneo de Manila University in1971 and had his Masters Degree in Business Management at the Asian Institute of Management in1973. He also took the Advance Management Program at Harvard Business School in 1994.

Alfredo I. Ayala , Filipino, 47, has served as Managing Director of Ayala Corporation since 2006. Healso holds the following positions: Director and Chief Executive Officer of LiveIt Solutions, Inc. andDirector of HRMall, Inc. and eTelecare Global Solutions, Inc. He holds a B.A. in development studiesand economics from Brown University and a M.B.A. from the Harvard Business School.

Victoria P. Garchitorena , Filipino, 63, has served as a member of the Management Committee ofAyala Corporation (Ayala Group) since 2006. She is currently the Managing Director of AyalaCorporation (since 1996), President and Board member of Ayala Foundation, Inc. and AyalaFoundation USA. Her other significant positions include: Trustee of the International Center onInnovation, Transformation and Excellence in Governance and Pinoy Me Foundation; Governor ofManagement Association of the Philippines; member of the Asia Pacific Advisory Council AgainstCorruption-World Bank and Makati Business Club; and member of the National Committee ofBishops-Businessmen’s Council for Human Development. Previously, she was a Senior Consultanton Poverty Alleviation and Good Governance and the Head of the Presidential Management Staff andSecretary to the Cabinet under the Office of the President of the Republic of the Philippines; a

Director of Philippine Charity Sweepstakes Office; Executive Assistant to the Chairman and Presidentof the Meralco Foundation, Inc.; a Trustee of the Ramon Magsaysay Awards Foundation; and Co-Chairperson of EDSA People Power Commission. She graduated with a B.S. Physics degree(Summa Cum Laude) at the College of the Holy Spirit in 1964 and was an SGV scholar at the AsianInstitute of Management.

Solomon M. Hermosura , Filipino, 46, has served as Managing Director of Ayala Corporation since1996. He also holds the following positions: Director of Pameka Holdings, Inc., Water Capital Works,Inc. and West Zone Water Service, Inc.; Director and Corporate Secretary of Philwater HoldingsCompany, Inc. and Northern Waterworks and Rivers of Cebu, Inc.; Corporate Secretary of ManilaWater Company, Inc.; and Assistant Corporate Secretary of Ayala DBS Holdings, Inc. He earned hisBachelor of Laws degree from San Beda College in 1986 and the placed third in the 1986 BarExamination.

Ricardo Nicanor N. Jacinto , Filipino, 47, has served as Managing Director of Ayala Corporationsince 2000. He also holds the following positions: Director of Ayala Automotive Holdings Corporation,Ayala Hotels, Inc., Globalstride Holdings, Ltd., Technopark Land, Inc., Ayala Aviation Corp., MichiganHoldings, Inc., Integreon Holdings, Integreon Philippines, Integreon India, and LiveIt Philippines;Director and President of Globalstride Marketing Corporation; and President of Nicanor P. Jacinto, Jr.Foundation. He earned his Masteral in Business Administration at Harvard University in 1986.

Renato O. Marzan , Filipino, 59, has served as a member of the Management Committee of AyalaCorporation (Holding Company) since May 2007. He also holds the following positions: GeneralCounsel, Managing Director, Compliance Officer and Assistant Corporate Secretary of AyalaCorporation; Director and Corporate Secretary of Integrated Micro-electronics, Inc., Honda CarsMakati, Inc., and Isuzu Automotive Dealership, Inc.; Corporate Secretary of Globe Telecom, Inc., AC

International Finance Ltd., Cebu Holdings, Inc., Cebu Property Ventures and Development Corp.,Avida Land, Corp., Ayala Hotels, Inc., Alabang Commercial Corp., Community Innovations, Inc., andAyala Automotive Holdings Corporation; and Assistant Corporate Secretary of Ayala Land, Inc. andAyala Foundation, Inc. He had his education at the San Beda College with a degree in Bachelor ofArts in Philosophy (Magna Cum Laude) in 1969 and Bachelor of Laws (Cum Laude) in 1973.

Rufino F. Melo III , Filipino, 54, has served as Managing Director of Ayala Corporation since 2006. Heis also a Director of Darong Agricultural Corp. and Pameka Holdings, Inc. Previously, he served asAssociate Director of Ayala Corporation from 1998 to 2005. Prior to joining Ayala Corporation, he



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was the Group Financial Comptroller of Jardine Davies, Inc. He graduated with a BSBA in Accountingat the University of the East in 1975.

Ramon G. Opulencia , Filipino, 51, has served as Treasurer of Ayala Corporation since September2005 and has previously served as the Senior Assistant Treasurer from November 1992 toSeptember 2005. He is also a Managing Director of Ayala Corporation. He is currently a member of

the Board of Directors and the Audit Committee of BPI Family Savings Bank, Inc. Prior to joiningAyala Corporation, he was a Senior Manager of the Bank of the Philippine Islands’ Treasury Group.He graduated with a BS in Mechanical Engineering degree at the De La Salle University in 1978 andtook his Masteral in Business Management at the Asian Institute of Management graduating withDistinction in 1983. He completed the Advanced Management Program at the Harvard BusinessSchool in May 2005.

John Philip S. Orbeta , Filipino, 46, has served as a member of the Management Committee of AyalaCorporation (Holding Company) since 2005. He is currently the Managing Director and Group Headfor Corporate Resources, which includes Strategic Human Resources, Corporate Communicationsand Information & Communications Technology at Ayala Corporation. He is concurrently theChairman of the Ayala Group Human Resources Council which brings together the HumanResources professionals from all the Ayala Group of Companies. He joined the Ayala Corporation inMay of 2005 as Managing Director and Head of Strategic Human Resources and Organization

Development and was concurrently the Senior Vice President and Head of the Human ResourcesGroup of Ayala Land, Inc. Prior to joining Ayala Corporation, he spent 19 years at Watson WyattWorldwide (NYSE:WW), the global management consulting firm where he was the Vice Presidentand Global Practice Director for the firm's Human Capital Consulting Group, overseeing the firm'spractices in executive compensation, strategic rewards, data services and organization effectivenessaround the world. He was also a member of Watson Wyatt's Board of Directors. He received hisundergraduate degree in Economics from the Ateneo de Manila University where he also attendedgraduate studies in Industrial Psychology. He completed a Leadership Development Program at theHarvard Business School.

Luis Juan B. Oreta , Filipino, 51, has served as Managing Director of Ayala Corporation since 2002.He is also a Director of Technopark Land, Inc. and Michigan Holdings, Inc. He graduated with a BSin Business Economics at the University of the Philippines in 1977 and took his Master in Business

Administration at Rutgers University in 1982.

SIGNIFICANT EMPLOYEES

No single person or employee is expected to make a significant contribution to the business sinceAyala considers the collective efforts of all its employees as instrumental to the success of Ayala’sperformance.

FAMILY RELATIONSHIP

Ayala’s Chairman Emeritus, Jaime Zobel de Ayala, is the father of Jaime Augusto Zobel De Ayala(Chairman of the Board and CEO) and Fernando Zobel de Ayala (President and COO).

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

To the best of Ayala's knowledge, there has been no occurrence of any of the following events sinceits incorporation which are material to an evaluation of the ability or integrity of any director, personnominated to become a director, executive officer, or control person of Ayala:



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(a) Any insolvency or bankruptcy petition filed by or against any business of which such person wasa general partner or executive officer either at the time of the insolvency or within two years priorto that time;

(b) Any conviction by final judgment in a criminal proceeding, domestic or foreign, or any pendingcriminal proceeding, domestic or foreign, excluding traffic violations and other minor offenses;

(c) Any final and executory order, judgment, or decree of any court of competent jurisdiction,domestic or foreign, permanently or temporarily enjoining, barring, suspending, or otherwiselimiting involvement in any type of business, securities, commodities, or banking activities; and

(d) Any final and executory judgment by a domestic or foreign court of competent jurisdiction (in acivil action), the SEC, or comparable foreign body, or a domestic or foreign exchange orelectronic marketplace or self-regulatory organization, for violation of a securities or commoditieslaw.

COMPENSATION OF DIRECTORS AND OFFICERS

Directors

Article IV, Section 21 of Ayala’s By-Laws provides:

“Section 21 - The members of the Board of Directors of the Corporation who are neither officers norconsultants of the Corporation shall be entitled to a director’s fee in an amount to be fixed by thestockholders at a regular or special meeting duly called for the purpose.”

During the Annual Stockholders’ Meeting held on April 4, 2003, the stockholders ratified theresolution fixing the remuneration of non-executive directors at P1,000,000.00 per year, consisting ofthe following components:

Retainer Fee: P500,000.00Per diem per Board meeting attended: P100,000.00

In addition, a non-executive Director is entitled to a per diem of P20,000.00 per Board committeemeeting actually attended.



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Name and Principal Position Year Salary Other Income*

Jaime Augusto Zobel de Ayala

Chairman and CEOFernando Zobel de AyalaPresident and COODelfin L. LazaroSenior Managing DirectorRufino Luis T. ManotokSenior Managing Director,Corporate Information Officer& Chief Finance OfficerMercedita S. NolledoSenior Managing Director,Senior Counsel & CorporateSecretary

Renato O. MarzanManaging Director, GeneralCounsel, Assistant CorporateSecretary & ComplianceOfficerRamon G. OpulenciaManaging Director & TreasurerAlfredo I. AyalaManaging DirectorVictoria P. GarchitorenaManaging DirectorSolomon M. HermosuraManaging DirectorRicardo Nicanor N. JacintoManaging DirectorRufino F. Melo IIIManaging DirectorJohn Philip S. OrbetaManaging DirectorLuis Juan B. OretaManaging Director

Actual 2006 P148.09 M P205.76 MActual 2007 P165.50 M P110.71 M

CEO & 13 Most HighlyCompensated ExecutiveOfficers Actual Jan to

June 2008P89.94 M P46.94 M

Projected Julyto Dec 2008

P86.96 M P14.57 M

Actual 2006 P190.75 M P249.72 MActual 2007 P218.20 M P127.46 M

All other officers** as a groupunnamed

Actual Jan toJune 2008

P121.50 M P62.32 M

Projected Julyto Dec 2008

P116.66 M P22.07 M

* Guaranteed bonus, performance bonus and Stock Options exercised ** Managers and up (including all above-named Officers)



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The total annual compensation includes basic pay and other taxable income or bonuses.

Ayala has no other arrangement with regard to the remuneration of its existing Directors and officersaside from the compensation received as herein stated.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS

Pursuant to Ayala’s By-Laws, each Director has a term of office of one year from date of election oruntil his successor shall have been named, qualified, and elected. Each Executive Officer has anemployment contract with Ayala for an indefinite period, the terms and conditions of which are inaccordance with existing laws.

The executive officers are entitled to receive retirement benefits in accordance with the terms andconditions of Ayala’s Bureau of Internal Revenue (“BIR”)-registered employees’ retirement plan.There is no plan or arrangement by which the Executive Officers will receive from Ayala any form ofcompensation in case of a change-in-control of Ayala or a change in the officers’ responsibilitiesfollowing such change-in-control.

WARRANTS AND OPTIONS OUTSTANDING

The Company offered the Executive Stock Option Plan (ESOP) and the Executive Stock OwnershipPlan (ESOWN) to the Company’s officers since 1995 and 2005, respectively. Of the above namedofficers, there were 57,548 common shares exercised for the year 2007 and up to the first half of2008 by the following officers, to wit:

Name No. ofShares

Date of Grant Exercise Price Market Price at Date of Grant

Solomon M. Hermosura Various Various Various

Ricardo N. Jacinto Various Various Various

Rufino Luis T. Manotok Various Various Various

Rufino F. Melo III Various Various Various

All above-named Officersas a group

57,548 168.21 242.08*

* Average price at date of grant.

As of 30 June 2008, 2.6 million subscriptions are outstanding under the ESOWN which was approvedby the Securities and Exchange Commission in December 2005. The number of officers of theCompany who are eligible to participate in the ESOWN is approximately 47.

The Company has adjusted the exercise price and market price of the options awarded to the abovenamed officers due to the stock dividend declared by the Company in May 2004 and June 2007 andto the reverse stock split in May 2005.



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MANAGEMENT AND CERTAIN SECURITY HOLDERS

Security Ownership of Certain Record and Beneficial Owners and Management

Security Ownership of Certain Record and Beneficial Owners (of more than 5%) as of June 30, 2008

Type ofClass

Name, address ofRecord Owner and

Relationship with Issuer

Name of BeneficialOwner and

Relationship withRecord Owner

Citizenship No. of SharesHeld

% of theOutstanding

CommonShares

Common Mermac, Inc.1

35/F Tower One, AyalaTriangle, Ayala Ave.,Makati City

Mermac, Inc.2

Filipino 253,074,330 51.01%

Common PCD Nominee Corporation(Non-Filipino)

3

G/F MSE Bldg. AyalaAve., Makati City

HSBC and StandardChartered Bank (SCB)

4

Various 128,091,030 25.82%

Common Mitsubishi Corporation5

52/F PBCOM Tower6794 Ayala Ave. cor.Rufino St., Makati City

Mitsubishi Corporation6

Japanese 52,564,617 10.59%

Common PCD Nominee Corporation(Filipino)

3

G/F MSE Bldg. AyalaAve., Makati City

HSBC and StandardChartered Bank (SCB)

4

Filipino 30,907,907 6.23%

Security Ownership of Directors and Management as of June 30, 2008

Title ofClass

Name of BeneficialOwner

Amount and Nature of BeneficialOwnership

Citizenship % of AllClasses

Directors

Common Jaime Augusto Zobel deAyala

467,549 (direct & indirect) Filipino 0.08%

Common Fernando Zobel de Ayala 481,420 (direct & indirect) Filipino 0.09%

Common Meneleo J. Carlos, Jr. 1 (direct) Filipino 0.00%

Common Toshifumi Inami 1 (direct) Japanese 0.00%

1The Co-Vice Chairmen of Mermac, Inc., Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala, are the

Chairman/CEO and President/COO of the Company, respectively.2

The Board of Directors of Mermac, Inc. has the power to decide how Mermac shares in AC are to be voted.3

The PCD is not related to the Company.4

HSBC and SCB are participants of PCD. The 70,768,073 and 34,705,758 shares beneficially owned by HSBC and SCB,respectively, form part of the 158,998,937 shares registered in the name of PCD Non-Filipino and Filipino. The clients of HSBC and SCB have the power to decide how their shares are to be voted.5

Mitsubishi Corporation is not related to the Company.6

The Board of Directors of Mitsubishi Corporation has the power to decide how Mitsubishi shares in AC are to be voted.



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Common Delfin L. Lazaro 258,110 (direct & indirect) Filipino 0.05%

Common Xavier P. Loinaz 105,513 (direct) Filipino 0.02%

Common Mercedita S. Nolledo 136,907 (direct & indirect) Filipino 0.02%

CEO and Most Highly Compensated Executive Officers

Common Jaime Augusto Zobel deAyala

467,549 (direct & indirect) Filipino 0.08%

Common Fernando Zobel de Ayala 481,420 (direct & indirect) Filipino 0.09%

Common Delfin L. Lazaro 258,110 (direct & indirect) Filipino 0.05%

Common Mercedita S. Nolledo 136,907 (direct & indirect) Filipino 0.02%

Common 162,401 (direct & indirect) Filipino 0.03%

Preferred “B”

Rufino Luis T. Manotok

25,000 (direct) Filipino 0.00% Common 143,676 (direct & indirect) Filipino 0.02%

Preferred “B”

Ramon G. Opulencia

15,000 (direct) Filipino 0.00%

Common

Common

Renato O. Marzan

Alfredo I. Ayala

124,688

91,300

(direct & indirect)

(direct & indirect)

Filipino

Filipino

0.02%

0.02%

Common

Common

Common

Preferred “B”

Common

Victoria P. Garchitorena

Solomon M. Hermosura

Ricardo Nicanor N.Jacinto

Rufino F. Melo III

90,290

100,590

28,62959,050

54,009

(direct & indirect)

(direct & indirect)

(direct)

(direct & indirect)

Filipino

Filipino

Filipino

Filipino

0.02%

0.02%

0.01%0.01%

0.01%

Common

Common

John Philip S. Orbeta

Luis Juan B. Oreta

146,809

68,130

(direct & indirect)

(direct & indirect)

Filipino

Filipino

0.03%

0.01%

All Directors and Officers as a group 2,523,073 0.46%

None of the members of Ayala’s directors and management owns 2% or more of Ayala’s outstandingcapital stock.

VOTING TRUST HOLDERS OF 5% OR MORE

Ayala knows of no person holding more than 5% of common shares under a voting trust or similaragreement.



137

MMAATTTTEERRSS AAFFFFEECCTTIINNGG LLIIQQUUIIDDIITTYY AANNDD CCAAPPIITTAALL EEXXPPEENNDDIITTUURREE

As regards internal and external sources of liquidity, funding will be sourced from internally generatedcash flows, and also from borrowings or available credit facilities from other local and international

commercial banks, including an affiliated bank.

There is no material commitment for capital expenditures other than those performed in the ordinarycourse of trade or business.

There is no significant element of income not arising from continuing operations.

There have not been any seasonal aspects that had a material effect on the financial condition orresults of Ayala’s operations.

CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

The accounting policies adopted in the preparation of the 2008 interim unaudited condensedconsolidated financial statements are consistent with those followed in the preparation of the Group'sannual financial statements for the year ended December 31, 2007 except for the adoption of thefollowing new standards and Interpretations which became effective in 2008.

Philippine Interpretation IFRIC 11, PFRS 2, Group and Treasury Share Transactions (effective for annual periods beginning on or after March 1, 2007)

This Interpretation requires arrangements whereby an employee is granted rights to an entity’s equityinstruments to be accounted for as an equity-settled scheme by the entity even if the entity choosesor is required to buy those equity instruments (e.g., treasury shares) from another party, or theshareholder(s) of the entity provide the equity instruments needed. It also provides guidance on howsubsidiaries, in their separate financial statements, account for such schemes when their employees

receive rights to the equity instruments of the parent. Adoption of the Interpretation did not have anysignificant impact on the condensed consolidated financial statements.

Philippine Interpretation IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after January 1, 2008).

This Interpretation establishes the accounting to be applied for certain infrastructures that isconstructed, acquired or provided by the grantor for the purposes of meeting the concession.

Philippine Interpretation IFRIC 12, Service Concession Arrangement, covers contractualarrangements arising from public-to-private service concession arrangements if control of the assetsremains in public hands but the private sector operator is responsible for construction activities aswell as for operating and maintaining the public sector infrastructure. The Interpretation prescribes

the accounting for the rights which the Operator receives from the Grantor using either:

The financial asset model wherein the Operator shall recognize a financial asset to the extentthat it has an unconditional contractual right to receive cash from the Grantor. The Operatorhas an unconditional right to receive cash if the Grantor contractually guarantees to pay theOperator;



Matters Affecting Liquidity and Capital Expenditure

138

The intangible asset model wherein the Operator shall recognize an intangible asset to theextent that it receives a right to charge the users (not an unconditional right to receive cashbecause the amounts are contingent on the extent that the public uses the service);

The mixed model if the Operator is paid by the users, but the Grantor guarantees a certainminimum amount to be paid to the Operator, the Financial Asset Model is used to the extent

of such amount.

Based on Manila Water Company Inc.’s (MWCI) assessment, its service concessionagreement with MWSS would qualify under the Intangible asset model. The effect of theadoption of the Interpretation required MWCI to recognize the fair value of its right to chargeits customers, which resulted in the following consequential effects:

a. Increase in total assets with a corresponding increase in total liabilities. Therehabilitation works performed by MWCI (previously recognized as property, plantand equipment) and the present value of the total estimated concession feepayments was recognized as an intangible asset in accordance with PAS 38,Intangible Assets. The intangible asset is amortized using the straight-line methodover the life of the concession agreement. Previously, the asset recognized under

the concession agreement was amortized based on the ratio of the nominal value oftotal estimated concession fee payments to the remaining projected billable watervolume over the remaining concession period.

b. As the related service concession obligation is now recognized, this resulted inadditional finance cost to MWCI due to the accretion of the obligation. The increasein intangible assets, together with the change in amortization method describedabove, also resulted in an increase in amortization expense.

c. In connection with the rehabilitation works performed, MWCI also recognizedrevenue and costs in accordance with PAS 11, Construction Contracts. It measuresthe revenue from rehabilitation works at the fair value of the consideration received orreceivable. Given that MWCI has subcontracted the rehabilitation works to outsidecontractors, the recognized revenue from rehabilitation works is equal to the relatedcost.

d. As the service concession obligations are denominated in foreign currencies thesewere restated to their peso equivalent using the exchange rate at balance sheet date.The related foreign currency differential adjustment under the concession agreementprovided only for a reimbursement of an amount in excess of the base rate agreedduring the rate rebasing exercise with MWSS. As the two amounts are not equal, thedifference (between the foreign currency differentials arising from the restatement ofthe obligation and the reimbursable amount) affected the profit and loss. The relatedrevenue to recover the unreimbursed portion will be recognized only upon delivery ofservice to customers.

The adoption of the Interpretation resulted in a decrease in MWCI’s retained earnings byP=962.2 million and P=1,159.0 million as of January 1, 2008 and 2007, respectively. Theimpact on the Company is a decrease in the retained earnings balance as of January 1, 2008and 2007 by P=288.6 million and P=347.7 million, respectively.



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139

Philippine Interpretation IFRIC 14, PAS 19 - Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after January 1,2008).

This Interpretation provides guidance on how to assess the limit on the amount of surplus in a definedbenefit scheme that can be recognized as an asset under PAS 19, Employee Benefits . It alsoexplains how the pension asset or liability may be affected by a statutory or contractual minimumfunding requirement. Adoption of the Interpretation did not have any significant impact on thecondensed consolidated financial statements.

There were no disagreements with any accountant on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedure, nor was there anyresignation or dismissal of any accountant who was previously engaged as the principal accountantto audit Ayala’s financial statements, or an independent accountant who was previously engaged toaudit a significant subsidiary and on whom the principal accountant expressed reliance in its report.



140

NNAAMMEEDD EEXXPPEERRTTSS AANNDD CCOOUUNNSSEELL

The Company’s external auditors is SyCip Gorres Velayo & Co. (“SGV & Co.”), independent publicaccountants and a member of Ernst & Young. SGV & Co. audited the Company’s consolidated

financial statements in accordance with Philippine Standards on Auditing for the financial periodsended December 31, 2007 and 2006, included in this Prospectus.

In 2007, Ayala Corporation paid SGV & Co. audit and audit-related fees of approximately P3.00million and other fees amounting to approximately P0.39 million. In 2006, Ayala Corporation paid SGV& Co. audit and audit-related fees of approximately P2.75 million and other fees amounting toapproximately P4.61 million.

In 2007, SGV & Co. rendered PFRS Training/Seminar to the Company for an aggregate fee of P0.39million. In 2006, Ayala was billed for services rendered by SGV & Co. for an aggregate fee of P4.61Mfor the agreed-upon procedures for the primary offer of Preferred B shares, business process reviewand business continuity plan development. Ayala has not secured consulting services from SGV &Co. for tax fees.

The Company’s Audit and Risk Committee recommended the appointment of SGV & Co. as theCompany’s external auditor and its engagement for the other services described above to the AyalaBoard. The Board approved the recommendation. Ayala’s stockholders subsequently ratified theBoard’s approval.

SGV & Co. has no shareholdings in the Company nor any right, whether legally enforceable or not, tonominate persons or to subscribe for the securities in the Company. SGV & Co. will not receive anydirect or indirect interest in the Company or in any securities thereof (including options, warrants orrights thereto) pursuant to or in connection with the Offer. The foregoing is in accordance with theCode of Ethics for the Professional Accountants in the Philippines (which is based on the InternationalCode of Ethics for Professional Accountants developed by the International Federation ofAccountants) set by the Board of Accountancy and approved by the Professional RegulationCommission.

Castillo Laman Tan Pantaleon & San Jose reviewed certain legal and tax matters in respect of theOffer for the Company.

SyCip Salazar Hernandez & Gatmaitan passed upon certain legal matters in respect of the Offer forthe Joint Lead Underwriters.

None of SGV & Co., Castillo Laman Tan Pantaleon & San Jose or SyCip Salazar Hernandez &Gatmaitan has any direct or indirect interest in the Company arising from the Offer.



141

TTHHEE PPHHIILLIIPPPPIINNEE SSTTOOCCKK MMAARRKKEETT

BRIEF HISTORY

The Philippines initially had two stock exchanges, the Manila Stock Exchange, which was organized

in 1927, and the Makati Stock Exchange, which began operations in 1963. Each exchange was self-regulating, governed by its respective Board of Governors elected annually by its members.

Several steps initiated by the Government have resulted in the unification of the two bourses into thePSE. The PSE was incorporated in 1992 by officers of both the Makati and the Manila StockExchanges. In March 1994, the licenses of the two exchanges were revoked. While the PSEmaintains two trading floors, one in Makati City and the other in Pasig City, these floors are linked byan automated trading system which integrates all bid and ask quotations from the bourses.

In June 1998, the Philippine SEC granted the PSE “Self-Regulatory Organization” status, allowing it toimpose rules as well as implement penalties on erring trading participants and listed companies. OnAugust 8, 2001, PSE completed its demutualization, converting from a non-stock member-governedinstitution into a stock corporation in compliance with the requirements of the SRC. The PSE has anauthorized capital stock of P36.8 million, of which P15.3 million is subscribed and fully paid-up. Each

of the 184 member-brokers was granted 50,000 common shares of the new PSE at a par value ofP1.00 per share. In addition, a trading right evidenced by a “Trading Participant Certificate” wasimmediately conferred on each member broker allowing the use of the PSE’s trading facilities. As aresult of the demutualization, the composition of the PSE Board of Governors was changed, requiringthe inclusion of seven brokers and eight non-brokers, one of whom is the President.

On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part of aseries of reforms aimed at strengthening the Philippine securities industry.

Classified into financial, industrial, holding firms, property, services, and mining and oil sectors,companies are listed either on the PSE’s First Board, Second Board or the Small and MediumEnterprises Board. Each index represents the numerical average of the prices of component stocks.The PSE has an index, referred to as the PHISIX, which as at the date thereof reflects the pricemovements of selected stocks listed on the PSE, based on traded prices of stocks from the various

sectors. The PSE shifted from full market capitalization to free float market capitalization effectiveApril 3, 2006 simultaneous with the migration to the free float index and the renaming of the PHISIX toPSEi. The PSEi includes 30 selected stocks listed on the PSE.

With the increasing calls for good corporate governance, PSE has adopted an online daily disclosuresystem to improve the transparency of listed companies and to protect the investing public.

The table below sets out movements in the composite index from 1995 up to the end of 2006, andshows the number of listed companies, market capitalization, and value of shares traded for the sameperiod:



The Philippine Stock Market

142

Composite Indexat Closing

Number ofListed

Companies

AggregateMarket

Capitalization

CombinedValue ofTurnover

Year (in P billions) (in P billions)1995 2,594.2 205 1,545.7 379.01996 3,170.6 216 2,121.1 668.9

1997 1,869.2 221 1,261.3 588.01998 1,968.8 221 1,373.7 408.71999 2,142.9 226 1,938.6 713.92000 1,494.5 230 2,577.6 357.62001 1,168.1 232 2,142.6 159.52002 1,018.4 234 2,083.2 159.72003 1,442.2 236 2,973.8 145.42004 1,822.8 236 4,766.2 206.62005 2,096.0 237 5,948.37 383.52006 2,982.5 240 7,172.8 572.62007 3,621.6 244 7,980.0 1,340.0

Source: Philippine Stock Exchange, Inc.

TRADING

The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. Totrade, bids or ask prices are posted on the PSE’s electronic trading system. A buy (or sell) order thatmatches the lowest asked (or highest bid) price is automatically executed. Buy and sell ordersreceived by one broker at the same price are crossed at the PSE at the indicated price. Payment ofpurchases of listed securities must be made by the buyer on or before the third trading day (thesettlement date) after the trade.

Trading on the PSE starts at 9:30 am and ends at 12:00 pm with a 10-minute extension during whichtransactions may be conducted, provided that they are executed at the last traded price and are onlyfor the purpose of completing unfinished orders. Trading days are Monday to Friday, except legalholidays and days when the BSP clearing house is closed.

Minimum trading lots range from 10 to 5,000,000 shares depending on the price range and nature of

he security traded. Odd-sized lots are traded by brokers on a board specifically designed for odd-lottrading.

To maintain stability in the stock market, daily price swings are monitored and regulated. Undercurrent PSE regulations, when the price of a listed security moves up by 50% or down by 40% in oneday (based on the previous closing price or last posted bid price, whichever is higher), the price of thatsecurity is automatically frozen by the PSE, unless there is an official statement from the company ora government agency justifying such price fluctuation, in which case the affected security can still betraded but only at the frozen price. If a company fails to submit such explanation, a trading halt isimposed by the PSE on the listed security the following day. Resumption of trading shall be allowedonly when the disclosure of the company is disseminated, subject again to the trading ban.

SETTLEMENT

The Securities Clearing Corporation of the Philippines (“SCCP”) is a wholly-owned subsidiary of thePSE and was organized primarily as a clearance and settlement agency for SCCP-eligible tradesexecuted through the facilities of the PSE. It is responsible for (a) synchronizing the settlement offunds and the transfer of securities through delivery versus payment clearing and settlement oftransactions of clearing members, who are also Trading Participants of the PSE; (b) guaranteeing thesettlement of trades in the event of a Trading Participant’s default through the implementation of itsFail Management System and administration of the Clearing and Trade Guarantee Fund, and; (c)performance of risk management and monitoring to ensure final and irrevocable settlement.




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SCCP settles PSE-trades on a 3-day rolling settlement basis, which means that settlement of tradestakes place three days after the transaction date (T+3). The deadline for settlement of trades is 12:00noon of T+3. Securities sold should be in scripless form and lodged under PDTC’s book of entrysystem. Each Trading Participant maintains a cash settlement account with one of the two existingsettlement banks of the SCCP. Payment for securities bought should be in cleared funds and shouldbe final and irrevocable.

SCRIPLESS TRADING

In 1995, PDTC (formerly the Philippine Central Depository, Inc.) was organized to establish a centraldepository in the Philippines and introduce scripless or book-entry trading in the Philippines. OnDecember 16, 1996, the PDTC was granted a provisional license by the SEC to act as a centralsecurities depository. All listed securities at the PSE have been converted into book-entry settlementin the PDTC. The depository service of the PDTC provides the infrastructure for lodgment andupliftment of securities, pledge of securities, securities lending and borrowing and corporate actionsincluding shareholders’ meetings, dividend declarations and rights offerings. The PDTC also providesdepository and settlement services for non-PSE trades of listed equity securities. For transactions onthe PSE, the security element of the trade will be settled through the book-entry system, while thecash element will be settled through the current settlement banks, Rizal Commercial BankingCorporation and Banco de Oro -Unibank, Inc.

In order to benefit from the book-entry system, securities must be immobilized into the PDTC systemthrough a process called lodgment. Lodgment is the process by which shareholders transfer legal title(but not beneficial title) over their shares of stock in favor of the PCD Nominee, a corporation whollyowned by the PDTC whose sole purpose is to act as nominee and legal title holder of all shares ofstock lodged into the PDTC. “Immobilization” is the process by which the warrant or share certificatesof lodging holders are cancelled by the transfer agent and a Jumbo Certificate is issued in the nameof the PCD Nominee. This trust arrangement between the participants and PDTC through the PCDNominee is established by and explained in the PDTC Rules and Operating Procedures approved bythe Philippine SEC. No consideration is paid for the transfer of legal title to PCD Nominee. Oncelodged, transfers of beneficial title of the securities are accomplished via book-entry settlement.

Under the current PDTC system, only participants (e.g., brokers and custodians) will be recognized bythe PDTC as the beneficial owners of the lodged equity securities. All lodgments, trades and uplifts on

these shares will have to be coursed through a participant. Ownership and transfers of beneficialinterests in the shares will be reflected, with respect to the participant’s aggregate holdings, in thePDTC system, and with respect to each beneficial owner’s holdings, in the records of the participants.Beneficial owners are thus advised that in order to exercise their rights as beneficial owners of thelodged shares, they must rely on their participant-brokers and/or participant-custodians.

Any beneficial owner of shares who wishes to trade his interests in the shares must course the tradethrough a participant. The participant can execute PSE trades and non-PSE trades of lodged equitysecurities through the PDTC system. All matched transactions in the PSE trading system will be fedthrough the SCCP and into the PDTC system. Once it is determined on the settlement date (tradingdate plus three trading days) that there are adequate securities in the securities settlement account ofthe participant-seller and adequate cash or an appropriate bank limit in the system cash account ofthe participant-buyer, the PSE trades are automatically settled in the PDTC system, in accordancewith the PDTC Rules and Operating Procedures. Once settled, the beneficial ownership of the

securities is transferred from the participant-seller to the participant-buyer without the physical transferof stock certificates covering the traded securities.

If a shareholder wishes to withdraw his stockholdings from the PDTC system, the PDTC has aprocedure of upliftment under which PCD Nominee will transfer back to the shareholder the legal titleto the shares lodged by surrendering the jumbo certificate of PCD Nominee to a transfer agent whichthen issues a new stock certificate in the name of the shareholder and a new jumbo certificate of PCDNominee for the balance of the lodged shares. The expenses for upliftment are on the account of theuplifting shareholder.




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The SCCP launched its Central Clearing and Settlement System (“CCSS”) in May 2006. Under thissystem, the current securities infrastructure in the Philippines is composed of a depositary and aregistry system wherein listed shares are traded and settled as book-entry shares. The differencebetween the depositary and the registry would be on the recording of ownership of the shares in theissuing corporations’ books.

In the depository set-up, shares are simply immobilized, wherein customers’ certificates are cancelledand a new jumbo certificate is issued in the name of PCD Nominee. Transfers among/between brokerand/or custodian accounts, as the case may be, will only be made within the book-entry system ofPDTC. However, as far as the issuing corporation is concerned, the underlying certificates are in thenominee’s name. In the registry set-up, settlement and recording of ownership of traded securities willalready be directly made in the corresponding issuing company’s transfer agents’ books or system.Likewise, recording will already be at the beneficiary level (whether it be a client or a registeredcustodian holding securities for its clients), thereby removing from the broker its current “de facto”custodianship role.

The option of whether a listed security should be “housed” in the depositary or registry is at theissuer’s discretion. The migration from the depositary to the registry model aims to eliminate the legaland operational risks brought about by a depositary infrastructure. Likewise, the migration is expectedto strengthen measures to protect public investors/shareholders and decrease transaction costs

resulting from additional layers in the settlement process. The move will also prepare an infrastructurefor a complete name-on registry system.

The PSE and the SCCP expect a natural migration to the registry model, with system and costefficiency as the catalyst, and the market itself initiating the move. Once the CCSS is in place,custodians holding Philippine listed equity securities will have the following options:

Stay with the depositary for all its securities, whereby PDTC acts as their implied “Custodian.” Forshares under the PDTC, custodians are direct PDTC account holders, however; with the sharesstill recorded in the PCD Nominee name as far as the corporation/transfer agent is concerned; forshares under the registry, the custodian appears to be a “client” under “PCD,” such that sharesare recognized or recorded with PCD as the master/controlling account.

Be a system participant of the SCCP wherein the CCSS would offer to the custodians the interface toboth the depositary and registry systems. In this option, for shares under the PDTC, custodianswill still have the option to maintain their own accounts in the PDTC or have an omnibus accounttogether with the broker accounts in the PDTC as shares are accounted for or segregated peraccount holder in the CCSS. This simplifies the custodian’s interface into only one connectivity forboth the depositary and the registry systems; for shares under the registry system, the custodianwill have its own master account, having the control over its own account. In the registry scenario,custodians are already recognized as the beneficiary holder of the securities on behalf of itsclients. The custodian effectively is given a direct relationship with the issuing company wherein itreceives the annual reports, dividends, and other communications and information directly.Prospectively, when the custodian is accredited as an indirect clearing member of the SCCP,straight-through processing of trades or settlement can already be done directly with thecustodian or with its client.

ISSUANCE OF CERTIFICATED SHARES

On or after the listing of the shares on the PSE, any beneficial owner of the shares may apply toPDTC through his broker or custodian-participant for a withdrawal from the book-entry system andreturn to the conventional paper-based settlement. If a shareholder wishes to withdraw hisstockholdings from the PDTC System, the PDTC has a procedure of upliftment under which PCDNominee will transfer back to the shareholder the legal title to the shares lodged by surrendering theJumbo Certificate of the PCD Nominee to a transfer agent which then issues a new stock certificate inthe name of the uplifting shareholder and a new Jumbo Certificate to the PCD Nominee for the




145

balance of the lodged shares. The expenses for upliftment are on the account of the upliftingshareholder.

Upon the issuance of certificated shares in the name of the person applying for upliftment, suchshares shall be deemed to be withdrawn from the PDTC book-entry settlement system, and trading onsuch shares will follow the normal process for settlement of certificated securities. The expenses for

upliftment of beneficial ownership in the shares to certificated securities will be charged to the personapplying for upliftment. Pending completion of the upliftment process, the beneficial interest in theshares covered by the application for upliftment is frozen and no trading and book-entry settlementwill be permitted until certificated shares shall have been issued by the relevant company’s transferagent



146

TTAAXXAATTIIOONN

The statements herein regarding taxation are based on the laws in force as of the date of this document. The following summary does not purport to be a comprehensive description of all of the tax

considerations that may be relevant to a decision to purchase, own or dispose of the Preferred Shares and does not purport to deal with the tax consequences applicable to all categories of investors, some of which (such as dealers in securities or commodities) may be subject to special rules. Prospective

purchasers of Preferred Shares are advised to consult their own tax advisers concerning the overall tax consequences of their ownership of Preferred Shares.

DIVIDENDS ON THE PREFERRED SHARES

Individual Philippine citizens and individual aliens who are residents of the Philippines are subject to afinal tax on dividends derived from the Preferred Shares at the rate of 10%, which tax shall bewithheld by the Company.

The dividends derived by domestic corporations ( i.e ., corporations created or organized in thePhilippines or under its laws) and resident foreign corporations ( i.e., foreign corporations engaged intrade or business within the Philippines) from the Preferred Shares shall not be subject to tax.

Non-resident alien individuals engaged in a trade or business in the Philippines are subject to a finalwithholding tax on dividends derived from the Preferred Shares at the rate of 20% subject toapplicable preferential tax rates under tax treaties in force between the Philippines and the country ofdomicile of such non-resident alien individual. A non-resident alien individual who comes to thePhilippines and stays for an aggregate period of more than 180 days during any calendar year isconsidered engaged in a trade or business in the Philippines. Non-resident alien individuals notengaged in trade or business in the Philippines are subject to a final withholding tax on dividendsderived from the Preferred Shares at the rate of 25% subject to applicable preferential tax rates undertax treaties in force between the Philippines and the country of domicile of such non-resident alienindividual.

The term “non-resident holder” means a holder of the Preferred Shares (a) who is an individual who isneither a citizen nor a resident of the Philippines or an entity which is a foreign corporation notengaged in trade or business in the Philippines and (b) should a tax treaty be applicable, whoseownership of the Shares is not effectively connected with a fixed base or a permanent establishmentin the Philippines.

Dividends received from a domestic corporation by a non-resident foreign corporation are generallysubject to final withholding tax at the rate of 35% (until December 31, 2008) or 30% (beginningJanuary 1, 2009) subject to applicable preferential tax rates under tax treaties in force between thePhilippines and the country of domicile of such non-resident foreign corporation. The 35% or 30% ratefor dividends paid to non-resident foreign corporations may be reduced to a special 15% rate if (a) thecountry in which the non-resident foreign corporation is domiciled imposes no taxes on foreignsourced dividends or (b) the country in which the non-resident foreign corporation is domiciled allowsa credit against the tax due from the non-resident corporation taxes deemed to have been paid in thePhilippines equivalent to 20% (until December 31, 2008) or 15% (beginning January 1, 2009).

Philippine tax authorities have prescribed, through an administrative issuance, procedures foravailment of tax treaty relief. Subject to the approval by Philippine tax authorities of a corporation’sapplication for tax treaty relief, the corporation will withhold at a reduced rate on dividends paid to anon-resident holder of Preferred Shares or interest paid to a non-resident holder if such non-residentholder provides the corporation with proof of residence and, if applicable, individual or corporatestatus. Proof of residence for an individual consists of a certification from his embassy, consulate orother proper authority as to his citizenship and residence. Proof of residence and corporate status for



Taxation

147

a corporation consists of authenticated copies of its articles of association, or other equivalentcertifications issued by the proper government authority, or any other official document provingresidence.

2If the regular rate of tax is withheld by the corporation instead of the reduced rates

applicable under a treaty, the non-resident holder of Preferred Shares may file a claim for a refundfrom the Philippine taxing authorities. However, because the refund process in the Philippinesrequires the filing of an administrative claim and the submission of supporting information, and mayalso involve the filing of a judicial appeal, it may be impractical to pursue such a refund.

P AYMENTS ON THE P REFERRED S HARES

All payments in respect of the Preferred Shares are to be made free and clear of any deductions orwithholding for or on account of any present or future taxes or duties imposed by or on behalf of thePhilippines, including but not limited to, stamp, issue, registration, documentary, value added or anysimilar tax or other taxes and duties, including interest and penalties. If such taxes or duties areimposed, the Issuer will pay additional amounts so that holders of Preferred Shares will receive thefull amount of the relevant payment which otherwise would have been due and payable. However, theIssuer shall not be liable for: (a) the final withholding tax applicable on dividends earned on thePreferred Shares (b) expanded value added tax which may be payable by any Preferred Share holderon any amount to be received from the Issuer under the Offer, and (c) any withholding tax on anyamount payable to any Preferred Share holder or any entity which is a non-resident foreign corporation.In addition, all sums payable by the Issuer to tax exempt entities shall be paid in full without

deductions for taxes, duties, assessments or governmental charges.

SALE OR OTHER DISPOSITION OF THE SHARES

Sales, exchanges or other dispositions of Preferred Shares which are effected through the PSE bypersons other than a dealer in securities are subject to a stock transaction tax at the rate of 0.5%based on the gross selling price of the shares. This tax is required to be collected by and paid to theGovernment by the selling stockbroker on behalf of his client. The stock transaction tax is classified asa %age tax in lieu of a capital gains tax. Notwithstanding its classification as a %age tax, exemptionsfrom capital gains tax may also apply to the stock transaction tax under the terms of some tax treaties.

Subject to applicable tax treaty rates, a capital gains tax of 5% on the net capital gains realized duringthe taxable year, not in excess of P100,000.00, and 10% on the net capital gains realized during the

taxable year, in excess of P100,000.00, is imposed on sales, exchanges or other dispositions ofshares of stock not traded through a local stock exchange. As a practical matter, in order for anexemption under a tax treaty to be recognized, an application for tax treaty relief must be filed andapproved by Philippine tax authorities. A non-resident holder must submit proof of residence asdescribed above.

2A certificate from the tax authority of the recipient’s country is a generally accepted proof of residence, for both individualsand corporations. Aside from proof of residence, the BIR also requires the following documents: (a) special power ofattorney duly executed by the recipient in favor of its Philippine agent/withholding agent to file a claim for tax treaty relief;(b) certification from the SEC that the recipient company is not registered to engage in business in the Philippines; (c)letter providing information on the transaction covered by treaty provisions and requested tax treatment for suchtransaction and legal justification; (d) duly notarized certificate of the Corporate Secretary of the Philippine corporation inrespect of the resolution of its board of directors declaring the dividends; and (e) duly notarized certification by theCorporate Secretary of the Philippine corporation showing the number and value of the shares of the applicant and thepercentage of the latter’s ownership in the Philippine corporation as of the date of the transaction.



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T AX T REATIES

The following table lists some of the countries with which the Philippines has tax treaties and the taxrates currently applicable to non-resident holders who are residents of those countries:

Dividends(11)

Stock transaction tax onsale or disposition

effected through the

PSE

Capital gains tax due ondisposition of Shares

outside the PSE

(%) (%) (%)

Canada 25 (1)

* (8)

exempt (8)

France 15 (2)

* (8)

exempt (8)

Germany 15 (3)

0.5 5/10 (9)

Japan 25 (4)

* (8) exempt (8)

Singapore 25 (5)

* (8) exempt (8)

United Kingdom 25 (6) * (10)

exempt (10)

U.S.A 25 (7) * (8) exempt (8)

Notes:

(1) 15% if recipient company controls at least 10% of the voting power of the company paying the dividends.

(a) 10% if the recipient company (if not a partnership) holds directly at least 10% of the voting shares of the company paying

the dividends.

(b) 10% if the recipient company (if not a partnership) owns directly at least 25% of the capital of the company paying the

dividends.

(c) 10% if the recipient company holds directly at least 25% of either the voting shares of the company paying the dividends

or of the total shares issued by that company during the period of six months immediately preceding the date of payment

of the dividends.

(d) 15% if the recipient is a company (including a partnership) and during the part of the paying company’s taxable year

which precedes the date of payment of dividends and during the whole of its prior taxable year at least 15% of the

outstanding shares of the voting stock of the paying company was owned by the recipient company.

(e) 15% if the recipient company is a company which controls directly or indirectly at least 10% of the voting power of the

company paying the dividends.

(f) 20% if during the part of the paying corporation’s taxable year which precedes the date of payment of dividends and

during the whole of its prior taxable year at least 10% of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation.

(g) Capital gains are taxable only in the country where the seller is a resident, provided the shares are not those of a

corporation, the assets of which consist principally of real property situated in the Philippines, in which case the sale is

subject to Philippine taxes.

(h) Under the RP-Germany Tax Treaty, capital gains from the alienation of shares of a Philippine corporation may be taxed in

the Philippines irrespective of the nature of the assets of the Philippine corporation. Tax rates are 5% on the net capital

gains realized during the taxable year not in excess of P100,000.00 and 10% on the net capital gains realized during the

taxable year in excess of P100,000.00.

(i) Under the RP-U.K. Tax Treaty, capital gains from the alienation of the shares of stocks in Philippine corporations owned

by a resident of the United Kingdom shall not be taxable in the Phil ippines.

(j) The recipient may have the option to invoke the tax sparing provision discussed above (15% rate if the recipient’s home

country allows a tax credit of 20%).

* The Philippine tax authorities, in a recent ruling, have taken the position that the stock transaction tax is not identical or substantially similar to the income tax/capital gains tax on a sale of shares in a domestic corporation, and, hence, not

covered by the treaty exemption.



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149

* The Philippine tax authorities, in a recent ruling, have taken the position that the stock transaction tax is not identical or

substantially similar to the income tax/capital gains tax on a sale of shares in a domestic corporation, and, hence, not

covered by the treaty exemption.

DOCUMENTARY STAMP TAXES

The Philippines imposes a documentary stamp tax on the issuance of the Preferred Shares at the rateof P1.00 on each P200.00, or fraction thereof, of the par value of the shares.

The Philippines also imposes a documentary stamp tax upon transfers of the Preferred Shares at arate of P0.75 on each P200.00, or fractional part thereof, of the par value of the shares. Thedocumentary stamp tax is imposed on the person making, signing, issuing, accepting or transferringthe document and is thus payable either by the vendor and the purchaser of the Preferred Shares.However, the sale, barter or exchange of Preferred Shares should they be listed and traded throughthe PSE are exempt from documentary stamp tax for a period of five years from March 20, 2004.

ESTATE AND GIFT TAXES

The transfer of the Preferred Shares upon the death of a registered holder to his heirs by way ofsuccession, whether such an individual was a citizen of the Philippines or an alien, regardless ofresidence, will be subject to Philippine estate tax at progressive rates ranging from 5% to 20% if thenet estate is over P200,000.00.

Individual registered holders, whether or not citizens or residents of the Philippines, who transfershares by way of gift or donation will be liable for Philippine donor’s tax on such transfers atprogressive rates ranging from 2% to 15% if the total net gifts made during the calendar year exceedP100,000.00 provided that the rate of tax with respect to net gifts made to a stranger (one who is nota brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity within the fourthdegree of relationship) is a flat rate of 30%. Corporate registered holders are also liable for Philippinedonor’s tax on such transfers, but the rate of tax with respect to net gifts made by corporate registeredholders is always at a flat rate of 30%.

Estate and gift taxes will not be collected in respect of intangible personal property (a) if the deceasedat the time of death, or the donor at the time of donation, was a citizen and resident of a foreigncountry which at the time of his death or donation did not impose a transfer tax of any character inrespect of intangible personal property of citizens of the Philippines not residing in that foreigncountry, or (b) if the laws of the foreign country of which the deceased or the donor was a citizen andresident at the time of his death or donation allow a similar exemption from transfer or death taxes ofevery character or description in respect of intangible personal property owned by citizens of thePhilippines not residing in that foreign country.



150

PPHHIILLIIPPPPIINNEE FFOORREEIIGGNN IINNVVEESSTTMMEENNTT,, FFOORREEIIGGNN OOWWNNEERRSSHHIIPP AANNDD EEXXCCHHAANNGGEE CCOONNTTRROOLLSS

REGISTRATION OF FOREIGN INVESTMENTS AND EXCHANGE CONTROLS

BSP regulations require registration of investments in Philippine securities if the foreign exchangeneeded to service the repatriation of capital and the remittance of dividends, profits and earnings thataccrue on the investments will be sourced from the banking system. Registration of Philippinesecurities listed on the PSE may be done with the BSP or through an investor’s custodian bank whichshall issue a registration document on behalf of the BSP. A custodian bank may be any commercialbank or offshore banking unit in the Philippines appointed by the investor to register the investment,hold shares for the investor, and represent the investor in all necessary actions in connection with theinvestment in the Philippines. Applications for registration must be accompanied by the following: (a)purchase invoice or subscription agreement and/or proof of listing on the PSE; (b) credit advice orbank certificate showing the amount of foreign currency inwardly remitted and converted to pesos

through a commercial bank; and (c) in certain instances, transfer instructions from the stockholder ordealer, as the case may be.

Proceeds of divestments, or dividends, of registered investments may be repatriatred or remittedimmediately and in full through the Philippine banking system, net of applicable taxes, without theneed of BSP approval. Remittance is allowed upon presentation of the BSP registration document, atthe exchange rate applicable on the date of the actual remittance. Pending repatriation orreinvestment, divestment proceeds, as well as dividends of registered investments, may be lodgedtemporarily in interest-bearing deposit accounts. Interest thereon, net of taxes, may also be remittedin full. Divestment proceeds or dividends of registered investments may be reinvested in thePhilippines.

The Monetary Board of the BSP may, with the approval of the President of the Philippines, temporarily

suspend or restrict the availability of foreign exchange in the imminence of or during a foreignexchange crisis, or in times of national emergency.

RESTRICTION ON FOREIGN OWNERSHIP

Certain economic activities in the Philippines are reserved to Philippine citizens and to entities whosecapital stock is owned by Philippine nationals. Under Philippine law, no more than 40% of the capitalof corporations holding land may be owned by non-Philippine nationals. Ayala currently owns certainparcels of land. Accordingly, the Preferred Shares may be owned or subscribed by or transferred toany person, partnership, association or corporation regardless of nationality, provided that at anytimeat least 60% of the Company’s outstanding capital stock shall be owned by citizens of the Philippinesor by partnerships, associations or corporations 60% of the voting stock or voting power of which is

owned and controlled by citizens of the Philippines.



151

ANNEXES

I. Ayala Corporation And Subsidiaries – Unaudited Interim Consolidated FinancialStatements for the Period Ended June 30, 2008

II. Ayala Corporation And Subsidiaries - Consolidated Financial Statements (as of December31, 2007 and 2006) and Report of Independent Auditors



PPAARRTTIIEESS TTOO TTHHEE OOFFFFEERR

The Company Ayala Corporation33

rdFloor Tower One

Ayala Avenue corner Paseo de Roxas

Makati City 1200PhilippinesTel. No.: (632) 848-5643

Issue Manager BPI Capital Corporation8

thFloor BPI Building

Ayala Avenue corner Paseo de RoxasMakati City 1200Tel. No. (632) 816-9580

Joint Lead Underwriters BDO Capital and Investment Corporation20

thfloor, BDO South Tower,

Makati Avenue cor. H.V. dela Costa St.,1227 Makati City

BPI Capital Corporation 8

thFloor BPI Building

Ayala Avenue corner Paseo de RoxasMakati City 1200

First Metro Investment Corporation45th Floor G.T. Tower InternationalAyala Ave. cor. H.V. dela Costa St.Makati City

The Hongkong and Shanghai Banking Corporation, LimitedThe Enterprise Center, Tower I,6766 Ayala Avenue cor. Paseo de RoxasMakati City 1200

Participating Underwriters Insular Investment and Trust Corporation10th Floor Insular Life Building

ac prospectus final

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