SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-13148

Corporación Durango, S.A. de C.V.

Durango Corporation
(Translation of Registrant’s name into English)

United Mexican States
(Jurisdiction of incorporation or organization)

Torre Corporativa Durango
Potasio 150
Ciudad Industrial
Durango, Durango, Mexico 34220
+52 (618) 814-1658
and
+52 (618) 814-2799

(Address and telephone number of principal executive offices)

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 91,832,122 Series A Shares, without par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x     No o

Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o     Item 18 x

INTRODUCTION

     In this annual report, the “company,” “we,” “us” and “our” refer to Corporación Durango, S.A. de C.V. and its consolidated subsidiaries, as the context may require. Unless the context otherwise indicates, the terms “our notes” and “the notes” refer collectively to our 12 5/8% Senior Notes due 2003, or the 2003 notes, the 2006 notes, the 2008 notes and our 13 ¾% Senior Notes due 2009, or the 2009 notes, issued under our indentures, and the notes issued under our Euro Commercial Paper Program. We are a corporation organized under the laws of the United Mexican States, or Mexico.

Presentation of Financial Information

     We report our financial statements in pesos and prepare our financial statements in accordance with generally accepted accounting principles in Mexico, or Mexican GAAP, which differ in significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. Notes 24 and 25 to our audited consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our consolidated net income (loss) and total stockholders’ equity as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003. We have a fiscal year end of December 31.

     Our company is the result of the merger on October 8, 2001 of Corporación Durango, S.A. de C.V., or CODUSA, into Grupo Industrial Durango, S.A. de C.V., or GIDUSA. GIDUSA, being the surviving entity, was subsequently renamed Corporación Durango, S.A. de C.V. Prior to October 8, 2001, GIDUSA was a majority-owned subsidiary of CODUSA.

     The financial statements included herein reflect the following:

     For accounting purposes, the GIDUSA merger was reflected on a historical cost basis in a manner similar to a pooling of interest under which there was no change in the existing assets and liabilities and results of operations of both entities. The minority interest in CODUSA’s consolidated financial statements prior to the GIDUSA merger reflected the shareholding in GIDUSA not owned by CODUSA. This minority interest was eliminated upon the merger.

     Pursuant to Bulletin B-10, “Recognition of the Effects of Inflation in Financial Information,” and Bulletin B-12, “Statement of Changes in Financial Position,” issued by the Mexican Institute of Public Accountants (Instituto Mexicano de Contadores Públicos), or MIPA, our audited consolidated financial statements are reported in period-end pesos to adjust for the effects of inflation. The presentation of financial information in period-end, or constant, currency units is intended to eliminate the distorting effect of inflation on the financial statements and to permit comparisons across comparable periods in comparable monetary units. Consequently, under Mexican GAAP, non-monetary assets, with the exception of inventories and fixed assets of non-Mexican origin and those of our non-Mexican subsidiaries, are restated using the National Consumer Price Index (Indice Nacional de Precios al Consumidor), or the NCPI. Inventories are restated at current replacement costs while fixed assets of non-Mexican origin are restated by the inflation of the country of origin prior to translation to pesos at the period-end exchange rate.

     We use Bulletin B-15, “Foreign Currency Transactions and Translation of Financial Statements of Foreign Operations,” which prescribes the methodology for the translation and recognition of inflation of the financial information of non-Mexican subsidiaries. Therefore, the peso amounts of our revenues and expenses of our U.S. based subsidiaries may be impacted by the foreign exchange rate fluctuations and inflation rates in the United States.

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     Except as otherwise indicated, financial data for all periods throughout this annual report have been restated in constant pesos as of December 31, 2003. The noon buying rate as reported by the Federal Reserve Bank of New York, for the purchase of dollars, expressed in nominal pesos per dollar at December 31, 2003 was Ps 11.24 = US$1.00. Any discrepancies between the amounts listed and their totals in the tables included in this annual report are due to rounding.

Special Note Regarding Forward-Looking Statements

     This annual report contains forward-looking statements that involve substantial risks and uncertainties, including, in particular statements about our plans, strategies and prospects under the captions “Item 5. Operating and Financial Review and Prospects” and “Item 4. Information on Our Company.” You can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and “would” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed below under the caption “Item 3. Key Information—Risk Factors,” as well as any cautionary language in this annual report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

     You should be aware that the occurrence of the events described in these risk factors and elsewhere could have a material adverse effect on our business, financial condition and results of operations. The forward-looking statements are subject to risks, uncertainties, and assumptions about us, including, among other things:

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     We do not intend to update or otherwise revise the forward-looking statements herein to reflect circumstances existing after the date when made or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the forward-looking statements are shown to be in error, except as may be required under applicable securities laws.

PART I

Item 1. Identity of Directors, Senior Management and Advisors.

     Not applicable.

Item 2. Offer Statistics and Expected Timetable.

     Not applicable.

Item 3. Key Information.

Selected Combined and Consolidated Financial Data

     The following table set forth selected combined and consolidated financial information for our company and its consolidated subsidiaries at the dates and for each of the periods presented. The data does not represent all of our financial information. You should read this information together with, and this information is qualified in its entirety by reference to, our audited consolidated financial statements at December 31, 2002 and 2003 and for the years ended December 31, 2001, 2002 and 2003, including the notes thereto. The financial information at December 31, 1999, 2000 and 2001 and for the years ended December 31, 1999 and 2000, have been derived from audited combined and consolidated financial statements that are not included in this annual report.

     The audited consolidated financial statements have been prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. Notes 24 and 25 to our audited consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our consolidated net income (loss) and total stockholders’ equity as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003.

     Mexican GAAP requires that all financial information be presented in constant pesos (having the same purchasing power for each period indicated taking into account inflation) as of the date of the most recent balance sheet. Accordingly, all of the financial information included in this annual report is presented in constant pesos as of December 31, 2003, unless otherwise noted. Although the restatement of nominal peso amounts into constant peso amounts lessens the distorting effect that inflation has on comparisons of financial statements over time, this restatement does not wholly eliminate those distortions, and evaluation of period-to-period trends may be difficult. References in this annual report to amounts in “nominal” pesos are to pesos that have not been adjusted for inflation.

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     Our consolidated financial statements have been prepared assuming that we will continue as a going concern. However, our independent auditors have stated in their most recent report that due to our liquidity condition, among other factors, there is substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty.

     Except as otherwise noted, the following information is presented in constant pesos as of December 31, 2003.

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Dividends

     Please see “Item 8. Financial Information — Dividend Policy.”

Exchange Rate Information

     The following table sets forth, for the periods indicated, the high, low, average and period-end noon buying rate as reported by the Federal Reserve Bank of New York, for the purchase of dollars, expressed in nominal pesos per dollar.

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Source: Federal Reserve Bank of New York.

On July 14, 2004, the noon buying rate was Ps 11.47 per US$1.00.

Risk Factors

     We are subject to various risks resulting from changing economic, political, industry and business and financial conditions that may affect our results of operations or financial condition. These risks are described below.

Risk Factors Relating to the Our Liquidity Crisis and Concurso Mercantil

We have insufficient liquidity to repay our debt obligations. If our company does not complete a successful financial reorganization, we will not be able to pay the principal or interest on our unsecured debt, including our notes, and our operations are likely to be adversely affected.

     In recent years, we have incurred substantial indebtedness to finance our growth and operations. As of December 31, 2003, we had consolidated indebtedness of approximately Ps 9,197.2 million (US$818.5 million). We have not made any principal or interest payments on any of our unsecured debt since November 29, 2002. On May 18, 2004, we filed a voluntary petition for concurso mercantil under the LCR with the First Federal District Court in Durango, Mexico. For a discussion of the LCR and concurso mercantil proceedings, see “Item 4. Information on Our Company—Mexican Law of Commercial Reorganizations.”

     Our failure to pay principal and interest on our unsecured debt has restricted our sources for short-term financing, thereby impeding our ability to finance our operations. Furthermore, the negative publicity surrounding these failures and our filing for concurso mercantil have adversely affected the terms of our trade payables.

     If our current liquidity crisis continues, our ability to undertake important activities will be impaired, including:

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     We believe that we are not likely to find a source of financing to fund the payments due on our unsecured debt and therefore we will not be able to cure the existing events of default under the indentures and other instruments governing our debt obligations if our company does not complete a successful financial reorganization. The events of default give our unsecured creditors the right to accelerate our repayment obligations on our unsecured debt representing 85% of our indebtedness. Since we do not have enough funds to repay these obligations, it is likely that each of these creditors would incur a significant loss if our company does not complete a successful financial reorganization. In our opinion, the recovery that would be received by these creditors in a liquidation scenario would very likely be materially less than they would receive under a financial reorganization.

     Even if we successfully complete a financial reorganization, we will continue to be highly leveraged and will need to increase our cash flow to meet our payment obligations under our existing indebtedness.

The Mexican Law of Commercial Reorganizations may not be as favorable to holders of our notes or ADSs as the U.S. Bankruptcy Code.

     Mexican reorganization law is based on the largely untested LCR enacted in May 2000, which provides for two different phases in the proceedings: conciliation and bankruptcy/liquidation (quiebra). For a description of the LCR, see “Item 4. Information on Our Company—Mexican Law of Commercial Reorganizations.” Once the concurso mercantil is declared and becomes effective, and after the appointment of a conciliator, the conciliation phase begins. The conciliation phase may last up to 185 days, absent protracted litigation. This initial term is subject to extension for two 90-day periods. The objective of the conciliation phase is to reach an agreement between the debtor and its creditors to restructure the indebtedness of the debtor. The bankruptcy/liquidation (quiebra) phase does not have a specific term within which it must be concluded. Holders of our notes are required to file proofs of claims in Spanish against our estate in the First Federal District Court in Durango, Mexico. Upon the court’s recognition of holders of our notes as a creditor of ours, claim of holders of our notes would be unsecured and ranked with equal right to payment with all other unsecured claims filed against our estate.

     We cannot predict the duration of the concurso mercantil proceeding, as the statutory provisions governing such proceedings remain largely untested, or the ability of creditors under our unsecured debt to influence the outcome of such proceedings. The concurso mercantil proceeding in Mexico will likely result in significant changes to our existing obligations, including our unsecured debt, that could include the cancellation of part of those obligations or the rescheduling of all of those obligations. During the pendency of the concurso mercantil proceeding, our ability to operate or manage our business, to retain employees, to maintain existing or create new customer relationships, to continue to collect payments for our products or to obtain any type of funding or financing may be materially adversely affected. We believe that any such adverse effects would be exacerbated if the concurso mercantil proceeding is protracted. Creditors under our unsecured debt and holders of our ADSs may receive little or no meaningful recovery in the concurso mercantil proceeding if a restructuring of our debt is not approved within the conciliation period.

Our unsecured creditors may find it difficult to realize any meaningful recovery on our indebtedness.

     Upon the court’s decision to declare the concurso mercantil, which is still pending as of the date hereof, our obligations under our unsecured debt obligations:

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     There can be no assurance that our unsecured creditors or stockholders will receive any meaningful recovery in the concurso mercantil proceeding if a restructuring of our debt is not approved within the conciliation period.

If a financial reorganization is not consummated, we face a substantial risk of liquidation.

     Our consolidated financial statements have been prepared under the assumption that we will continue as a going concern. However, our independent auditors have stated in their most recent report that, due to our liquidity crisis, among other factors, there is substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. If we are not successful in consummating a financial reorganization, in generating sufficient cash from operating activities to meet our financial obligations and to make essential capital expenditures, or in obtaining outside sources of funding, we will be forced to sell assets. If we need to dispose of assets, particularly during the current global downturn in the paper and packaging industry, we will be unable to realize the book value of those assets upon liquidation. If we are unable to successfully restructure our debt, we might be unable to continue our operations and may be required to liquidate our entire operations. If we are required to liquidate our operations, the holders of our notes and ADSs will likely incur a significant loss and the overall recovery on our notes and ADSs will very likely be materially less than what creditors and stockholders would receive if a financial reorganization were consummated.

If our ADSs, the 2006 notes and the 2008 notes are delisted from the New York Stock Exchange, there may be an adverse effect on the liquidity of our ADSs, 2006 notes and 2008 notes and on our ability to raise capital.

     On May 25, 2004, following our filing of concurso mercantil, the New York Stock Exchange announced the trading of our company’s ADSs, 2006 notes and 2008 notes would be suspended immediately. At such time the New York Stock Exchange applied to the United States Securities and Exchange Commission to delist the ADSs, the 2006 notes and the 2008 notes. Delisting from the New York Stock Exchange would have an adverse effect on the liquidity of our ADSs, 2006 notes and 2008 notes and on our ability to raise capital through the issuance of ADSs or securities convertible into ADSs.

Risks Related the Paper and Packaging Industry and Our Business

Our operations are and will continue to be restricted by covenants in our debt agreements.

     We are party to debt agreements which have negative covenants and other restrictions that will limit our ability and the ability of our subsidiaries to:

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We are vulnerable to cyclicality and fluctuations in pricing.

     Our business is affected by trends in international prices and demand for paper and packaging products. Prices for containerboard and, to a lesser extent, converted products such as corrugated containers and multi-wall sacks and bags have historically been subject to cyclical fluctuations. Pricing is affected not only by demand for paper and packaging products, which correlates with real economic growth, but also by current inventory levels of customers. In addition, the paper and packaging industries are highly capital intensive and the impact of new production facilities may result in imbalances between supply and demand. Any decrease in demand or increase in supply could adversely affect the prices of our products and our net sales revenue.

We are vulnerable to competition from international paper producers with substantial resources.

     We face increasing competition in Mexico from Mexican and non-Mexican producers of paper and packaging due in part to significantly enhanced market access for imported products. Many of our competitors are large international paper producers with substantial resources at their disposal. We try to maintain our prices in Mexico at levels below those of imports from the Unites States and in the past, this price differential, combined with protective tariffs, has discouraged imports from the United States. With the gradual elimination of tariffs and generally low prices for paper and packaging products in the United States over the last four years, competition from imports has increased and may increase further. We face substantial competition in the United States from a variety of producers of paper and packaging products. Many of our foreign competitors are substantially larger and have substantially greater financial, manufacturing, technological and marketing resources than our company. We anticipate that we may experience increasingly intense competition from international producers of paper and packaging products, both in Mexico and in the United States where we sell these products. Increased competition from imports may have a material adverse effect on our company by driving down our prices and decreasing our revenues. Actions by our competitors, including any future increases in their capacity, may make it increasingly difficult for us to maintain our domestic market share in paper and packaging products.

Our operations may be adversely affected by increases in the price of raw materials.

     The cost of our supply of recycled fiber is directly affected by trends in international and domestic prices of old corrugated containers, or OCC, and old newsprint, or ONP, which stem from market fluctuations caused by factors beyond our control. Generally, demand and prices for finished paper vary directly with demand and prices for these raw materials. In addition, the cost of OCC in Mexico is affected both by inflation and exchange rates. We might not be able to recoup any future increases in the costs of raw materials through increases in sales prices for our products, which would adversely affect our operating income.

We may be adversely affected by the imposition and enforcement of more stringent environmental and safety requirements.

     We are subject to strict environmental regulations in Mexico and in the United States. Changes in environmental regulations, or changes in the policy of enforcement of existing environmental regulations, could adversely affect us. Our Mexican operations are supervised by the Mexican Ministry of the Environment and Natural Resources (Secretaria del Medio Ambiente y Recursos Naturales) and our U.S. operations are supervised by the U.S. Environmental Protection Agency and other federal, state and local regulatory agencies. These agencies are responsible for the implementation of pollution control laws and regulations and could take action against us by shutting down plants, revoking licenses, imposing fines or obligating us to clean up waste that we produced, if we fail to comply with environmental regulations. It is also possible that the relevant governmental agencies could issue additional regulations, could seek a more stringent interpretation of existing regulations or could exercise stricter enforcement actions that would require us to spend additional funds on environmental matters. In addition,

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the enactment of new environmental laws or regulations in Mexico or the United States may cause us to spend additional funds, which may be material, in order to comply with the new laws or regulations.

If we lose key members of our management team and are unable to attract other qualified personnel, our business could be adversely affected.

     Our success largely depends on the continuing contributions of our management team. Our managers have been with our company for an average of 19 years and have implemented our past strategic acquisitions. In particular, our chief executive officer, chief operations officer, and chief financial officer have been with our company since the founding of GIDUSA. The loss of key personnel or our potential inability to attract and retain other qualified managers could adversely affect us.

Our principal stockholders own 95.1% of our shares and may take actions not in the interest of other holders of our shares or debt securities.

     We are controlled by the Rincón family, which directly and indirectly owns 95.1% of our outstanding voting stock. See “Item 7. Major Stockholders and Related Party Transactions.” As a result, the Rincón family has the power to elect all of our directors and determine the outcome of any action requiring stockholder approval, including transactions with related parties, corporate reorganizations and the timing and payment of any future dividends. The interests of the Rincón family as stockholders may differ from the interests of other holders of our shares or debt securities.

We are currently involved in litigation that, if decided adversely to us, could materially adversely affect our financial condition.

     We are currently involved in a lawsuit relating to our nonpayment of amounts alleged due under promissory notes issued to HG Estate, LLC in connection with the acquisition of our former subsidiary, Durango Paper Company. We have filed a statement of claims in arbitration, among other things, challenging the validity of these promissory notes. We are involved in a lawsuit relating to our failure to pay outstanding obligations under our Euro Commercial Paper Program. In addition, we are involved in a lawsuit by the creditors of our former subsidiary, Durango Georgia Paper Company, relating to certain transfers, guarantees and claims. This action is currently pending in the Durango Georgia Paper Company bankruptcy proceeding. We are also involved in a lawsuit by the Mexican government through its National Water Commission (Comisión Nacional del Agua) against our former subsidiary, Productora Nacional de Papel, S.A. de C.V., or Pronal, relating to water consumption during the calendar year 2000. We intend to vigorously defend against these lawsuits, but the results of these proceedings cannot be predicted. Adverse outcomes for our company in either of these matters could require significant expenditures and could have a material adverse effect on our financial condition. We have only reserved against the HG Estate claims and the Euro Commercial Paper Program litigation. See “Item 8. Financial Information — Legal Proceedings.”

Because our accounting standards are different from those in other countries, investors may find it difficult to accurately assess our business and financial operations.

     We prepare our financial statements in accordance with Mexican GAAP. These principles differ in significant respects from U.S. GAAP as further discussed in notes 24 and 25 to our audited consolidated financial statements. In particular, all Mexican companies must incorporate the effects of inflation directly in their accounting records and published financial statements. The effects of inflation accounting under Mexican GAAP are not eliminated in the reconciliation to U.S. GAAP. For this and other reasons, the presentation of our financial statements and reported earnings may differ from that of companies in other countries.

     A principal objective of the securities laws of Mexico is to promote full and fair disclosure of all material corporate information. The Series A Shares are listed on the Mexican Stock Exchange and, as a listed Mexican company, we are required to report quarterly financial information to the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores), or CNBV. We file English translations of these filings with the United States Securities and Exchange Commission on Form 6-Ks. However, there may be less publicly available information about issuers of securities listed on the Mexican Stock Exchange, including our company, than would be regularly published by or about U.S. companies subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.

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Risks Relating to Mexico

Economic and political developments in Mexico may adversely affect our business.

     We are a Mexican company with a substantial part of our operations and assets in Mexico. In the past, Mexico has experienced both prolonged periods of weak economic conditions and dramatic deteriorations in economic conditions that have had a negative impact on our company. There can be no assurances that such conditions will not return or that such conditions will not have a material adverse effect on our financial condition and results of operations.

     The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Mexican governmental actions concerning the economy and state-owned enterprises could have a significant impact on Mexican private sector entities, in general, and on us, in particular, and on market conditions, prices, and returns on Mexican securities, including our Series A Shares and our debt securities.

     Although the government of Mexico has pursued policies of economic liberalization and deregulation in the Mexican economy in the past decade, a significant change in those policies may hurt business and economic conditions in Mexico in general and our business in particular. If there were instability or a general market failure, the Mexican government could reverse its economic policies of liberalization. Since we are a competitive provider of paper and packaging products in Mexico, we believe that any reversal of the Mexican liberalization policies in the Mexican markets would restrict our ability to expand our market share. We do not have and do not intend to obtain political risk insurance.

Downturns in the Mexican economy adversely affect us.

     The majority of our customers are Mexican companies or individuals and a substantial part of our operations and our assets are located in Mexico. For these reasons, our operations, results and financial condition are dependent upon the level of economic activity in Mexico. Paper and packaging prices in Mexico and our revenues are highly affected by the level of economic activity in Mexico and the general purchasing power of individuals and companies. If the Mexican economy continues to experience a slow rate of growth, our business, financial condition and results of operations may be adversely affected because our customers may reduce their consumption of our products.

Currency devaluations may impair our ability to service our debt and adversely affect our profitability.

     The peso has devalued substantially against the dollar in the past and may devalue significantly in the future. The value of the peso, based on the exchange rate calculated and published by the Mexican Central Bank (Banco de México), declined by 61% against the dollar during 1994, by an additional 54% during 1995 and continued to weaken between 1995 and 1998. Despite stabilization of the peso/dollar exchange rate between 1999 and 2001, the peso devalued a further 13.8% during 2002. In 2003, the peso devalued by 7.6%.

     Changes in the value of the peso relative to the dollar have adversely affected and may continue to adversely affect our financial condition and results of operations. Devaluation of the peso relative to the dollar adversely affects our results of operations by increasing our dollar-based costs, including our cost of borrowing, since the peso cost of interest payments on our dollar-denominated indebtedness increases. For example, our net loss in 2002 as compared to 2001 increased by Ps 4,604.4 million partially due to our exchange loss of Ps 998.2 million in 2002 which we incurred as a result of the 13.8% currency devaluation of the peso against the dollar in 2002. Similarly, the 7.6% currency devaluation of the peso against the dollar that occurred in 2003 generated an exchange loss of Ps 821.4 million which was one of the factors leading to our net loss of Ps 3,354.2 million in 2003. Substantially all of our indebtedness is denominated in dollars, while a majority of our revenues and operating expenses are denominated in pesos. We do not have in place hedging arrangements with respect to devaluation risk because we do not believe them to be cost effective for our company.

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An increase in inflation may increase our operating costs but not our revenues.

     During most of the 1980s, 1991, and 1995 through 1998, Mexico experienced periods of very high levels of inflation. Inflation has led to high interest rates, devaluations of the peso and, during the 1980s, substantial government controls over exchange rates and prices. Inflation in Mexico, as measured by changes in the NCPI, as provided by Banco de México, was 4.4% in 2001, 5.7% in 2002, and 4.0% in 2003.

     In 2003, the Mexican inflation rate hit its lowest levels in over 30 years. We cannot give any assurance that the Mexican inflation rate will continue to decrease or maintain its current level for any significant period of time. Our profitability may be adversely affected by increases in inflation. High levels of inflation would cause our operating costs to increase because approximately 80% of our cost of goods sold and selling, general and administrative expenses are payable in pesos and generally are based on short-term contracts, which may be subject to inflationary pressures. However, the prices that we charge for our products are generally denominated in dollars or are dollar-linked and may not increase at the same rate as our costs because the prices that we charge our customers for products are either fixed by long-term contract or effectively limited by the competitive nature of the markets in which we operate. If, as in the past four years, we are unable to pass on the increased costs of our inputs to our customers, the real prices of our products will not keep pace with inflation. As a result, our operating income may decline unless we have a comparable increase in our sales volume to offset the decline in real prices of our products.

Exchange controls may impair our ability to obtain dollars to make dollar-denominated payments.

     The Mexican government does not currently restrict the ability of Mexican or foreign persons or entities to convert pesos into dollars or other currencies, and vice versa. However, in the past, the Mexican economy has experienced balance of payment deficits and shortages in foreign exchange reserves, and the Mexican government has responded by restricting the ability of Mexican or foreign persons or entities to convert pesos to foreign currencies generally, and dollars in particular. The Mexican government may institute a restrictive currency exchange control policy in the future. Any restrictive currency exchange control policy could prevent or restrict our access to dollars to meet our dollar-denominated obligations, including our debt obligations and could also have a material adverse effect on our business, financial condition and results of operations. We cannot predict the impact of any such measures on the Mexican economy.

The price of our Series A Shares, ADSs, notes and other debt securities may be affected by economic developments in other emerging market countries.

     The market value of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. Investors’ reactions to developments in any of these other countries may have an adverse effect on the market value of securities of Mexican issuers. In the past, economic crises in Asia, Russia, Brazil and other emerging markets adversely affected the Mexican economy, and thus, future economic developments in Mexico and other emerging markets, as well as low growth in the United States, could adversely affect the Mexican economy in future periods.

     In 1998, prices of both Mexican debt securities and Mexican equity securities dropped substantially as a result of a sharp drop in Asian securities markets and the economic crises in Russia and Brazil. In 2001, Argentina defaulted on its public debt, and prices of Argentine debt securities and the level of the Merval Stock Exchange Index declined significantly. As a result of these economic crises, there were political demonstrations and civil unrest in Argentina. In 2002, the devaluation of the Argentine peso created pressures on the price system that prompted inflation to rebound, after several years of price stability and price deflation, giving rise to hyperinflationary episodes over the course of the year.

     Although the events in Argentina have not had a material effect on the Mexican economy, to the extent that the Argentine government is unsuccessful in preventing future economic decline, this crisis may adversely affect the price of our securities. The market value of our Series A Shares, ADSs, notes and other debt securities could be adversely affected by events elsewhere, especially in emerging market countries.

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Item 4. Information on Our Company.

History and Development of Our Company

     We were incorporated on January 22, 1982. However, some of our underlying operating companies have been in existence since 1975. We were formed in 1975 from the combination of a forest products transportation company and a regional wholesaler of building products. Between 1987 and 2000 we pursued a strategy of vertical integration, implemented by both acquisitions and internal expansion, to attain our present position as Mexico’s largest producer, in terms of capacity, of containerboard and corrugated containers, based on information published by the Mexican National Chamber for the Pulp and Paper Industry (Cámara Nacional de la Industria de la Celulosa y el Papel), or the Mexican National Chamber for the Pulp and Paper Industry.

     On October 8, 2001, our company, which was then named Grupo Industrial Durango, S.A. de C.V., merged with Corporación Durango, S.A. de C.V., or CODUSA. Our company, the surviving entity, was subsequently renamed Corporación Durango, S.A. de C.V. Prior to the merger, CODUSA owned 59% of our capital stock and all of the outstanding capital stock of Grupo Pipsamex, S.A. de C.V., or Grupo Pipsamex, and Durango Paper Company. In connection with the merger, shares of our company were issued to members of the Rincón family in exchange for their shares of CODUSA.

     We are a corporation (sociedad anónima de capital variable) operating under the laws of Mexico. Our corporate domicile and principal executive offices are located at Torre Corporativa Durango, Potasio 150, Ciudad Industrial, Durango, Durango, United Mexican States 34220, and our telephone numbers are +52 (618) 814-1658 and +52 (618) 829-1000.

     Our agent for service of process in the United States is Durango McKinley Paper Company, 700 Sam Houston Rd., Mesquite, Texas 75149, Attention: Prudencio Calderón.

Significant Developments During 2003 and Recent Developments

Defaults, Negotiations with Creditors and Concurso Mercantil

     In November 2002, we defaulted on payments of principal and interest under our unsecured indebtedness. In December 2002, we retained financial advisors to advise us in evaluating debt-restructuring alternatives to implement a long-term solution to our capital structure and debt service requirements. We also began discussions with our bank creditors and certain holders of our debt securities.

     In light of our failure to make payments on our existing notes, on January 21, 2003, Moody’s took action to lower the ratings on our existing notes to their second lowest rating of “Ca.” On February 4, 2003, Standard & Poor’s lowered our foreign and local currency corporate ratings to their lowest rating of “D.” Moody’s and Standard & Poors have ceased rating our company and its debt securities.

     On April 7, 2003, we entered into a forbearance agreement with the Steering Group of an Ad Hoc Bondholders Committee. In connection with this forbearance agreement, we paid a forbearance fee of US$12 million. Holders of approximately US$493 million of our notes agreed to join the forbearance agreement. The forbearance agreement expired on June 30, 2003.

     On April 30, 2004, we entered into a plan support agreement with certain bank creditors and holders of our notes holding an aggregate of 55% of the outstanding principal amount of our unsecured debt. Under the terms of the plan support agreement, the parties were obligated to pursue and implement a financial restructuring along the lines contained in the agreement in principle with these creditors, including by means of a cash tender offer and certain exchange offers and, under certain circumstances, a prepackaged plan of reorganization under U.S. bankruptcy law. The participating creditors agreed that they would tender their unsecured debt in the offers and vote their unsecured debt in favor of the prepackaged plan of reorganization under U.S. bankruptcy law. The plan support agreement contained certain obligations of our company and the participating creditors. These obligations were not met by the agreed dates and certain participating creditors terminated the plan support agreement on May 17, 2004.

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     On May 18, 2004, we filed a voluntary petition for concurso mercantil under the LCR with the First Federal District Court in Durango, Mexico. On May 20, 2004, our foreign representative, Gabriel Villegas Salazar, commenced the 304 Proceeding on our behalf. The concurso mercantil proceeding in Mexico is administered under the voluntary petition (Solicitud de Concurso Mercantil Presentada por el Propio Comerciante), Case No. 3/2004. The 304 Proceeding is administered under case caption “In re: Petition of Gabriel Villegas Salazar, as Foreign Representative of Corporación Durango, S.A. de C.V., Debtor in Foreign Proceeding,” Case No.: 04-13487(RDD). None of our subsidiaries have filed for concurso mercantil or other bankruptcy protection.

     On May 25, 2004, following our filing for concurso mercantil, the New York Stock Exchange announced the trading of our company’s ADSs, 2006 notes and 2008 notes would be suspended immediately. At such time the New York Stock Exchange applied to the United States Securities and Exchange Commission to delist the ADSs, the 2006 notes and the 2008 notes. Delisting from the New York Stock Exchange would have an adverse effect on the liquidity of our ADSs, 2006 notes and 2008 notes and on our ability to raise capital through the issuance of ADSs or securities convertible into ADSs.

Operations and Asset Dispositions

     In February 2003, we commenced operation of a new converter in Dallas with a capacity of 100 thousand short tons. This converter enables Durango McKinley Paper Company to manufacture specialty packaging products. Following the commencement of operations of this converter, Durango McKinley Paper Company closed its Houston facility.

     On February 27, 2003, our subsidiary, Empaques de Cartón Titán, S.A. de CV., or Titán, sold the assets of its molded pulp division, representing approximately 7.0% of Titán’s total assets, for approximately US$53.7 million. As a result of this sale, our company no longer produces molded pulp products.

     On November 14, 2003, Grupo Pipsamex sold its subsidiary, Pronal, for approximately US$28.0 million. Pronal’s principal asset was a paper mill located in San Luis Potosí, Mexico.

     On November 25, 2003, Grupo Pipsamex sold its warehouse in Mexico City for US$11.5 million. As part of the sale, Grupo Pipsamex reserved the right to use a potion of the warehouse representing approximately 1/3 of the entire property for a period of five years at no cost.

     On June 3, 2004, our subsidiary, Ponderosa, entered into an asset sale agreement with a Mexican company, under which Ponderosa agreed to sell its particleboard plant in Chihuahua for US$22.5 million (Ps 252.8 million). This sale is subject to customary closing conditions, including the approval of the Mexican antitrust authority. Upon the closing of this sale, the capacity of our other segment will be reduced by 272 thousand short tons to 72 thousand short tons.

Business Overview

     We are a vertically integrated producer of paper and packaging products with a distribution network that links our strategically located facilities with our customers. We believe that these factors, as well as our investment in modern manufacturing technology and our access to raw materials as Mexico’s only producer of unbleached virgin kraft pulp and one of Mexico’s largest users of recycled paper, based on information published by the Mexican National Chamber for the Pulp and Paper Industry, allow us to be one of the industry’s lowest cost producers. In 2003, our total sales volume was 1.2 million short tons.

     We are a strategically-focused paper company, supplying companies in the maquiladora sector, as well as the traditional Mexican export sector. We produce and supply paper to our converting facilities which in turn manufacture packaging products. Our products include:

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     In Mexico, we are the largest domestic producer of newsprint with an estimated 35.8% market share in 2003, based on information published by the Mexican National Chamber for the Pulp and Paper Industry.

     We sell our products to a broad range of Mexican and United States manufacturers of consumable and durable goods, including the maquiladora sector and Mexico’s major exporters. Our customers in the United States and Mexico include many of the largest industrial, construction, consumer, agricultural, and media companies such as Nestlé, Pepsico, Sara Lee, Kimberly-Clark, Smurfit Stone, Vitro and El Universal. In Mexico, we produce containerboard, corrugated containers, multi-wall sacks and bags, newsprint, uncoated free sheet, particleboard and plywood. In the United States, we produce containerboard and corrugated containers.

     Our revenues were Ps 6,831.0 million in 2003. In 2003, approximately 27.3% of our sales were made in dollars, with the balance primarily dollar-linked. In 2003, 81.3% of our total sales were made in Mexico and 18.7% were made in and into the United States.

Paper and Packaging Industry Overview

     There are four major groups of paper products produced by the paper industry:

     We produce packaging paper and printing and writing paper.

North American Paper and Packaging Industry

     Since mid-1995, the North American paper and packaging industry has experienced a prolonged down-cycle characterized by continued price pressures, excess capacity and the inability of many industry participants to earn satisfactory returns on capital. To maintain reasonable capacity utilization, U.S. paper producers have generally maintained high export levels over the past three years, including in the exports to Mexico. These exports have increased supply in the Mexican market and kept pressure on Mexican paper prices during 2003.

     To counteract these effects, significant industry consolidation has occurred over recent years, including Weyerhaeuser’s acquisition of Willamette, Temple-Inland’s acquisition of Gaylord Container, and the merger of Westvaco and Mead. This follows the earlier large combinations of International Paper with Champion International, Georgia-Pacific with Fort James, and Jefferson Smurfit Corp. with Stone Container.

Mexican Paper Industry

Apparent Demand for Paper

     Based on installed capacity, Mexico’s paper industry is the second largest in Latin America, according to the 2003 annual report of the Mexican National Chamber for the Pulp and Paper Industry. The total size of Mexico’s paper industry in 2003, based on “apparent demand,” was 6,391 million short tons including temporary imports, according to the 2003 annual report of the Mexican National Chamber for the Pulp and Paper Industry. Mexican production is distributed among 64 plants. Apparent demand consists of domestic production, as reported by manufacturers, plus imports, minus exports.

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     Apparent demand is a concept similar to consumption, but does not reflect increases and reductions in inventories by customers. Apparent demand may not match consumption in any given year; however, over a period of years, the two measures should tend to approximate one another.

     Over the past decade, levels of apparent demand for paper have fluctuated according to changes in gross domestic product. Thus, as gross domestic product increases, apparent demand also increases. Changes in Mexican paper demand have historically amounted to 1-2 times the change in gross domestic product for a given year.

Mexican Apparent Demand
for the Paper Industry
(all figures in thousands of short tons, except percentages)

     The dominant portion of the total market for paper products is the market for packaging paper. The table below shows Mexican apparent demand from 1999 to 2003 for packaging paper in short tons. In 2003, packaging paper accounted for 59% of Mexico’s total paper production and 56% of apparent demand for paper.

Mexican Apparent Demand for Packaging Paper
(all figures in thousands of short tons, except percentages)

     The table below show Mexican apparent demand in short tons from 1999 to 2003 for newsprint in short tons. In 2003, newsprint accounted for 5% of Mexico’s total paper production and 7% of apparent demand for paper.

Mexican Apparent Demand for Newsprint
(all figures in thousands of short tons, except percentages)

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     The table below show Mexican apparent demand in short tons from 1999 to 2003 for printing and writing paper. In 2003, printing and writing paper accounted for 17% of Mexico’s total paper production and 19% of apparent demand for paper.

Mexican Apparent Demand for Printing and Writing Paper
(all figures in thousands of short tons, except percentages)

Pricing

     In the past three years, prices for Mexican paper and packaging products have been influenced by a combination of factors, including:

     Containerboard and newsprint are commodities priced in relation to international prices for paper, recycled fiber and pulp. Because the paper industry is highly capital intensive, prices may also be affected by industry capacity utilization rates, by additions of new capacity and by plant closures.

     The prices of corrugated containers and multi-wall sacks and bags in Mexico are affected by prevailing prices of containerboard, as well as the following factors:

     Prevailing international prices for paper and packaging, as well as U.S. price levels, declined sharply during late 1995 and remained weak until the first half of 1999. In the second half of 1999, newsprint prices recovered somewhat; however, in the second half of 2001, newsprint prices began a decline and during 2002, prices for newsprint declined by 19.7%. In 2003, prices for newsprint recovered by 8.4%.

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     Prices for corrugated containers in Mexico have historically tended to be approximately 15% below corrugated container prices in the United States and prices for Mexican containerboard have tended to be 10% to 15% lower than in the United States. In the past, this price differential, combined with protective tariffs, has discouraged imports from the United States. With the complete elimination of tariffs and generally low prices for packaging products in the United States over the last three years, competition in Mexico from imports has increased. Our prices for containerboard and packaging products over the last three years have declined in the face of competition from imports.

     Under NAFTA, most of Mexico’s tariffs were eliminated in 2003. Since January 1, 1999, the tariff on newsprint has been 0%. Mexico maintained a protective tariff on corrugated containers of 5% through the end of 2000, which was eliminated in 2001. Multi-wall sacks and bags were protected by a 3% tariff in 2000, but this tariff declined to 0% in 2003. As a result, the elimination of tariffs has had the effect of shortening the lag time between price changes in the U.S. and Mexican packaging and paper industries.

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Subsidiaries and Operating Divisions

Organizational Structure

     We are comprised of various operating divisions which are distinguished by product type as follows:

     Our operating divisions interact with each other to comprise a vertically integrated unit. This integration enables us to limit purchases from external suppliers and reduce costs. Our operating divisions are:

     Our operating divisions interact with each other through inter-company sales as follows. Grupo Durango sells containerboard to Titán for the production of corrugated containers and multi-wall sacks. Titán sells its waste to Grupo Durango for the production of recycled fiber. Grupo Pipsamex purchases some corrugated containers from Titán. Grupo Pipsamex sells OCC and ONP to Grupo Durango for the production of recycled paper.

Our Products

General

     Our main product groups are:

     The total capacity of our continuing operations by product and number of mills and plants as of December 31, 2003, and our actual production for the periods indicated, is as follows:

     The total sales volume of our continuing operations to third-parties and net sales by product for the periods indicated is as follows:

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Paper Products

     Below is a description of our paper products and their usage.

     We are able to produce a wide variety of paper products, in terms of weight and resistance, and we can use virgin and recycled fiber as raw material in different proportions to achieve the characteristics required by our customers. We sell our linerboard in rolls of varying widths depending on the capacity of the converting machinery on which it will be used.

Packaging Products

     Below is a brief description of our packaging products and their usage.

     We produce a wide range of corrugated containers depending on the product to be shipped, its size and weight and the distance the product is to be shipped. Our multi-wall sacks and bags are high-resistance containers that are designed to be used reliably in adverse conditions of filling, handling, transportation, warehousing and distribution. The bags we manufacture are made from paper produced from virgin pulp which gives our bags their superior strength.

Other Products

     Below is a description of our other products and their usage.

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     Demand in the Mexican forest products industry is driven primarily by the Mexican construction and furniture industries. Demand for our other products declined sharply in 2001 and has subsequently remained depressed.

Customers

     We primarily sell our products in Mexico and the United States. In 2003, 81.3% of our total sales were made in Mexico and 18.7% were made in and into the United States.

     Our major customers in Mexico and the United States include:

Sales and Marketing

     In 2003, sales to our 10 largest customers accounted for approximately 13% of our net sales. None of our customers accounted for a material amount of our revenues. We do not believe that the loss of any single customer would have a material adverse effect on our business.

     Our sales and marketing staff are responsible for identifying and developing markets as well as notifying our research and development staff of customer product requirements. We sell our products through our direct sales force at our Mexican offices located in Mexico City, Guadalajara and Monterrey, Mexico, and our U.S. offices located in Albuquerque, New Mexico and Dallas, Texas. As of December 31, 2003, we had approximately 52 employees involved in direct sales. We make substantially all of our sales directly to our clients. We use brokers only in limited circumstances.

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     Our sales strategy involves targeting niche markets, such as the maquiladora sector, growing manufacturing regions in central and southern Mexico, Mexican export markets and lightweight markets. A core element of our sales strategy is to establish long-term customer relationships by ensuring that we satisfy our customers’ specific requirements. The customized service we provide and the strategic relationships we have developed ensure we retain our existing customers while attracting new ones. Over the past three years, changes in Mexican tax law have reduced the number of manufacturers in the maquiladora sector of Mexico, reducing the aggregate productive capacity of the region. However, many of these manufacturers have relocated their operations to more centralized locations in Mexico and are now permanently established in the market. To enable us to maintain the advantages of strategically located facilities, we continue to update our distribution network to accommodate the trends of our important manufacturing customers.

     To support our direct sales efforts and to actively promote our products, we engage in a variety of marketing activities. These activities include regular meetings with our entire sales force and educational seminars and social outings with customers.

     Customer service is an important factor in maintaining and gaining market share and customers. We deliver products to our customers in a manner that addresses individual technical specifications, delivery methods, timing constraints and other customer specific requirements. Our sales force has established customer complaint procedures and undergoes customer retention reviews to ensure that the level of our service is maintained and constantly improved. Our advertising and promotional campaigns are carried out in specialized industry publications and industry trade shows.

     With respect to corrugated containers, by engaging in sales on both sides of the Mexican-U.S. border, we continuously evaluate the pricing levels for our products in both the U.S. and Mexican markets. While pricing is generally negotiated on a yearly basis, our contracts normally include price adjustment provisions to compensate for market movements as published in reputable trade publications.

Raw Materials

     We believe we have a flexible raw material mix. The principal raw materials used in our production processes are recycled fiber and virgin pulp. Recycled fiber is obtained by processing OCC material, ONP material, magazines and office waste paper material. We also use virgin pulp, which is made by processing wood chips, which we mix with recycled fiber to produce a variety of semi-recycled grades of other packaging and paper products. In the case of newsprint and printing grades, we produce a high quality product with a high content of recycled fiber.

Recycled Fiber

     Our business is affected by trends in international and domestic prices of OCC and ONP material. In Mexico, the price differential between domestic and imported OCC and ONP material fluctuates in peso terms, due to demand and currency fluctuations, and at any given time we may supply ourselves from either market, depending on the then current price differential. In 2003, approximately 92% of the fiber we used in our Mexican operations was recycled and approximately 37% of this recycled fiber was imported from third party producers.

     In the United States, our McKinley mill uses only recycled fiber. In 2003, our recycling centers in Albuquerque, Phoenix and El Paso provided approximately 43% of our fiber requirements in the United States and we obtained the balance of our recycled fiber requirements in the open market.

Pulp

     We are Mexico’s sole producer of unbleached kraft pulp and we are currently able to produce 110,000 short tons of unbleached kraft pulp per year, which is more than sufficient to supply our internal requirements for virgin kraft pulp. We are also able to produce 79,000 short tons per year of chemical thermo-mechanical pulp, 79,000 short tons per year of thermo-mechanical pulp, 79,000 short tons per year of sugar cane bagasse pulp, and 165,000 short tons per year of deinked pulp.

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     In Mexico, we buy our wood, the raw material from which we produce virgin kraft pulp, from small property owners and ejidos, which are small plots of land granted by the Mexican government to small groups of land workers. The wood is purchased from sellers located in the states of Durango, Jalisco, Oaxaca and Michoacán. In total we have access to approximately 600,000 hectares of forestry land. In 2002, the Mexican government made significant changes to the ejido system in order to increase productivity. The changes have restructured the ejido system to allow large private investors to co-invest with small owners or to lease properties on a long-term basis. We have traditionally managed our supply of resources through direct negotiations with landowners. In general, we believe that our existing wood supply arrangements are sufficient to provide for our currently anticipated rates of consumption for the foreseeable future. We also have a strong presence in the Mexican forestry sector that allows us to effectively source our wood supply.

Water

     Other than at our Atenquique and Mexpape pulp and paper mills, which use treated river water, we obtain our water requirements for both our Mexican and U.S. operations from wells located at our production facilities. We believe that our water supply is sufficient for all existing and contemplated activities.

     Our McKinley mill is one of only three “zero-effluent” paper mills in the world. Water is initially obtained from wells, and after using it in the papermaking process, it is then treated and recycled through the plant. Accordingly, the ongoing water supply requirements at our McKinley mill are significantly less than for conventional paper mills.

Electric Power

     Atenquique generates its own electric power from an on-site power plant, while the other Grupo Durango mills purchase all of their electric power from the Comisión Federal de Electricidad, the Mexican state-owned electric company. Some of our mills generate a portion of the power needed in our pulp mills: the Mexpape mill generates 50% of its electric power, the Centauro paper mill generates approximately 20% of its electric power, while the balance is purchased from the Mexican state-owned electric company. Our other Mexican plants purchase all their electric power from the Mexican state-owned electric company. The contracts for electric power supply signed with the Mexican state-owned electric company are the standard contracts used for all Mexican companies and there is no specific termination date for the contracts.

     In the United States, a rural electric cooperative supplies 100% of the electric power used by our McKinley mill at formula prices under a long-term contract. Our U.S. converting facilities purchase electric power from local utilities.

Distribution and Supply of our Products

     Our distribution network is an extensive and efficient delivery system within the Mexican paper and packaging industry. Our production facilities are strategically located in close proximity to our suppliers and customers. In creating our vertically integrated manufacturing process, we have generally located our raw material supply, processing and production assets near major industrial centers around Mexico to reduce transportation costs and delivery time for our products. We distribute and deliver our products from our plants as well as from several warehouses strategically located throughout Mexico. In the United States, we deliver our products from our plants located in Prewitt, New Mexico and Dallas and Houston, Texas. We are able to deliver our products to our customers within one to five days from the date of the purchase order. We are able to adjust deliveries of our products through the use of a just-in-time system, offering same day deliveries, at the request of our customers.

     We currently own approximately 76 trailer trucks and have access to approximately 1,500 additional trailer trucks owned by independent operators who provide services principally to us. We use our trucks to transport wood from forests to our production facilities, and we also use our trucks, and trucks operated by independent operators, to ship finished products to our customers in Mexico and in the United States. The independent operators benefit from their relationship with us because they can frequently haul our finished goods to industrial centers and raw material in the form of recycled fiber to our plants on a single round trip. This also reduces our shipping costs.

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     Among our products, containerboard, newsprint and printing grades, which are transported in large rolls, can be economically shipped over long distances. Corrugated containers and bags have a much smaller economic shipping radius because their low density results in a relatively high transport cost per ton compared to paper. Consequently, our broad network of container and bag plants, located near major industrial centers around Mexico, is an important factor in the timely and economic delivery of our packaging products to both local and national customers.

     We rely heavily on our distribution and supply system to obtain raw materials for our strategically located network of production facilities and to deliver our products to customers. We believe that the reach and efficiency of our distribution and supply system are important to our customers, and we believe customer loyalty depends as much on service and quality as on price.

     We also use railroads for the transportation of raw materials to our production facilities and finished products to our customers.

Our Competition

     In Mexico, we compete with a number of Mexican paper producers and packaging producers and with major non-Mexican integrated paper and packaging producers, who are primarily importers from the United States. In addition, as an integrated paper and packaging producer, we compete not only with other integrated paper and packaging producers, but also with companies that produce only paper, converted products, or packaging. Many of our non-Mexican competitors have greater financial resources than we do. We compete primarily on customer service, product quality differentiation and price.

     In the United States, we compete with a number of paper producers and packaging producers, including Boise Cascade Corp., Smurfit Corp., Stone Container Corp., International Paper, Abitibi Consolidated, Inc., Packaging Corporation of America, Bowater Incorporated, and Weyerhaeuser Company, many of whom have greater financial resources than we do.

     Constant review and benchmarking of competitive factors is necessary to remain competitive in our industry. We monitor the paper industry through market publications, and through our participation in many industry-related events. While pricing is normally negotiated on an annual basis for the majority of our products, our contracts normally include price adjustment provisions to compensate for market movements as published in reputable trade publications.

     We produce, distribute and sell different paper grades and paper products, which we believe gives us, unlike our Mexican competitors, the flexibility to avoid the impact of cyclically occurring in the market. We can increase paper production for export opportunities, as conditions warrant, such as changes in raw material prices, without interrupting a steady supply of paper to our internal converting operations and our existing customers. While the phased reduction in Mexican tariffs under NAFTA may increase our competition from U.S. producers of containerboard, we are not aware of any plans by domestic or foreign producers to construct additional production capacity in Mexico.

     In 2003, approximately 66% of our net sales of paper to third parties were to customers in Mexico and approximately 34% of our net sales of paper to third parties were to customers in the United States. In 2003, approximately 87% of our net sales of packaging products to third parties were to customers in Mexico; and approximately 13% of our net sales of packaging products to third parties were to customers in the United States. In 2003, approximately 7% of our net sales of packaging products were to companies in Mexico that primarily export their products, including exporters located in the border region, maquiladoras located outside of the border region and other Mexican exporters.

Environmental Matters

     Our Mexican operations are subject to the Mexican General Law of Ecological Stabilization and Environment Protection (Ley General del Equilibrio Ecológico y de Protección al Ambiente) and the rules and regulations

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published under this law. Under this law, companies engaged in industrial activities are subject to the regulatory jurisdiction of the Mexican Ministry of the Environment and Natural Resources.

     In 1988, we agreed with Mexican environmental regulatory authorities on a compliance plan which we proceeded to implement. Today, our paper mills are in compliance with general standards established by law and with specific standards promulgated by the Mexican regulatory authorities. In 1995, we purchased approximately 26% of Planta Ecológica Industrial, S.A. de C.V., a joint venture of industrial water users in Monterrey, Nuevo León. The venture processes and recycles water used by plants in the industrial park where our Monterrey paper mill is located. Our paper mills in Mexico are subject to periodic environmental audits by the Mexican Ministry of the Environment and Natural Resources. We have frequently been recognized for our environmental record and our role in implementing modern forest management techniques. However, there can be no assurance that relevant Mexican authorities will continue to find our environmental procedures adequate, or that more stringent environmental laws will not be enacted by Mexico in the future. Were enforcement of existing laws to increase, or new environmental laws to be enacted, we could incur material compliance costs.

     Our U.S. operations are subject to federal, state, and local provisions regulating the discharge of materials into the environment and otherwise related to the protection of the environment. Compliance with these provisions, primarily the Federal Clean Air Act, Clean Water Act, Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, or CERCLA, and Resource Conservation and Recovery Act, or RCRA, has required us to invest substantial funds to modify facilities to assure compliance with applicable environmental regulations.

     We are committed to protecting the health and welfare of our employees, the public, and the environment and we strive to maintain compliance with all state and federal environmental regulations in a manner that is also cost effective. In any construction of new facilities and the modernization of existing facilities, we intend to use modern technology for our air and water emissions. These forward-looking programs will minimize the impact that changing regulations have on capital expenditures for environmental compliance.

Mexican Law of Commercial Reorganizations

     On May 12, 2000, the LCR replaced the Mexican Law of Bankruptcy and Suspension of Payments (Ley de Quiebras y Suspensión de Pagos), which had been in effect since 1943, as Mexico’s reorganization regime. To date, the LCR has been largely untested, thus the manner in which it will be interpreted by Mexican courts and the impact it will have on the rights of debtors and creditors is uncertain.

     Under the LCR, a debtor that fails to satisfy generally its debt payment obligations may be found insolvent and potentially subject to a reorganization proceeding under the LCR. An insolvency declaration may be requested by the debtor if either of the following situations are present, or by two or more of its creditors, or the public prosecutor, if both of the following conditions are met. An entity filing a voluntary petition will be deemed to be insolvent if at least one of the following conditions is met:

     The determination of a debtor’s solvency or insolvency is made by a judge based largely upon an insolvency report made by an examiner (visitador) appointed by the Mexican Federal Institute of Commercial Reorganization Specialists (Institute Federal de Especialistas de Concursos Mercantiles), which we refer to as the Institute, after the petition for concurso mercantil is filed.

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     When the judge declares the effectiveness of the concurso mercantil, unless the debtor requests a bankruptcy declaration, a conciliator is appointed and the conciliation phase begins. In the conciliation phase the judge:

     The conciliator arranges for the debtor and its recognized creditors to engage in negotiations to restructure and rehabilitate the insolvent company in accordance with the LCR. If a restructuring agreement is reached, it is presented before the judge for approval and the proceeding is terminated with the rehabilitation of the debtor. Any agreement among the creditors in the conciliation phase requires the support of the creditors of the debtor holding more than 50% of the aggregate of the recognized amount of debt of all the recognized unsecured creditors.

     During the conciliation phase, the debtor continues to manage its affairs under the supervision and oversight of the conciliator, subject to certain restrictions. Removal of the debtor’s management at the request of the conciliator is provided for in certain circumstances, in which case the conciliator assumes management. The conciliator may request that the debtor’s operations be terminated, in whole or in part, temporarily or permanently. At the request of third parties, assets owned by such third parties in the possession of the debtor may be segregated from the proceedings. Monetary obligations of the debtor denominated in Mexican currency are accelerated and are converted into investment units (Unidades de Inversion), an accounting unit linked to the peso and the inflation rate in Mexico. Monetary obligations also stop bearing interest, except in the case of ordinary interest bearing debts secured with real estate collateral (in which case interest accrues up to the value of the collateral). Monetary obligations denominated in a currency other than pesos, are converted into pesos and then converted into investment units, except in the case of secured debt.

     The conciliation phase has an initial duration of up to 185 days and may be renewed for two 90-day periods, subject to certain requirements. If the conciliation phase is not successful, a bankruptcy declaration is entered. A bankruptcy declaration may also be entered at any time during the conciliation phase at the request of the debtor or the conciliator. Should the conciliator request a bankruptcy declaration, we would have the opportunity to oppose such a request.

     During the bankruptcy phase, the debtor’s business and its assets are liquidated and the proceeds used to pay recognized creditors. The First Federal District Court in Durango, Mexico will appoint a receiver for this purpose, who also replaces the debtor’s management. The receiver will administer the assets of the debtor and take the necessary measures for their preservation, pending realization. The receiver sells the debtor’s assets, mainly through public auction. Bankruptcy payment to creditors with the liquidation proceeds is made in accordance with the LCR rules regarding ranking and priority. The proceeds are paid in accordance with the receiver’s proposal, subject to the judge’s approval. A bankruptcy judgment:

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     As of July 15, 2004, the voluntary petition filed by our company to request the concurso mercantil had not yet been declared effective by the First Federal District Court in Durango, Mexico.

     If we enter into a conciliation phase, we may not reach an agreement with our creditors. Creditors holding more than 50% in amount of the total recognized unsecured debt must agree to the terms of the conciliation. Pursuant to the LCR, any such restructuring agreement is required to treat all unsecured creditors not signing the agreement at least equal to the most favored unsecured creditors that represent at least 30% of such class.

     Since the LCR has been recently enacted and its provisions affecting debtors’ and creditors’ fights have not been fully tested in court, we cannot predict whether the actual implementation of the above structural and procedural descriptions of the LCR by the Mexican courts will be consistent with our interpretation of the statute.

Insurance

     We carry “all risk” insurance policies for each of our facilities. These policies cover our property, plant, equipment, raw materials, finished products and inventory at levels customary with market practice.

Property, Plant and Equipment

     The table below sets forth information regarding the identity, location, products and capacity of our production facilities as of December 31, 2003:

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     In 2003:

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     In addition to our facilities described above, our headquarters are located in Durango, Mexico, approximately 900 kilometers (560 miles) north of Mexico City. We maintain sales offices in Mexico City, Guadalajara, Jalisco and Monterrey, Nuevo León and representative offices in Dallas, Texas. Our various production facilities in Mexico are located in the states of Durango, Nuevo León, Jalisco, Baja California, Sonora, Estado de México, Hidalgo, Querétaro, Sinaloa, Chihuahua and Chiapas, as well as in Mexico City. In the United States, we operate facilities in the states of New Mexico, Texas and Arizona. We own our headquarters and all of our operating facilities, except as noted in the table above.

Item 5. Operating and Financial Review and Prospects.

General

     The discussion and analysis of our financial condition and results of operations has been organized to present the following:

Overview

     We are a vertically integrated producer of paper and packaging products with an extensive distribution network that links our strategically located facilities with our customers. We believe that these factors, as well as our investment in modern manufacturing technology and our access to raw materials as Mexico’s only producer of unbleached virgin kraft pulp and one of Mexico’s largest users of recycled paper, based on information published by the Mexican National Chamber for the Pulp and Paper Industry, allow us to be one of the industry’s lowest cost producers.

     Our results of operations have been influenced and will continue to be influenced by a variety of factors, including:

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     Our financial condition and liquidity is and will be influenced by a variety of factors, including:

Financial Presentation and Accounting Policies

Consolidated Financial Statements

     We have prepared our consolidated financial statements at December 31, 2003 and 2002 and for the three years ended December 31, 2003 in accordance with Mexican GAAP, which differs in significant respects from U.S. GAAP. Notes 24 and 25 to our audited consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our consolidated net income (loss) and total stockholders’ equity as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003.

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     Our company is the result of the merger on October 8, 2001 of Corporación Durango, S.A. de C.V., or CODUSA, into Grupo Industrial Durango, S.A. de C.V., or GIDUSA. GIDUSA, the surviving entity, was subsequently renamed Corporación Durango, S.A. de C.V. Prior to October 8, 2001, GIDUSA was a majority owned subsidiary of CODUSA.

     For accounting purposes, the GIDUSA merger took effect as of October 8, 2001 and was reflected on a historical cost basis in a manner similar to a pooling of interests under which there was no change in the existing assets and liabilities and results of operations of both entities. The minority interest in Colusa’s consolidated financial statements prior to the GIDUSA merger reflected the shareholding in GIDUSA not owned by CODUSA. This minority interest was eliminated upon the merger. With the prior approval of the Foreign Relations Ministry of Mexico, our name change became effective on February 12, 2002 when GIDUSA’s bylaws (estatutos sociales) were amended and registered with the Public Registry of Commerce.

     Our financial statements reflect the consolidated assets and liabilities and results of operations of CODUSA, which includes GIDUSA, as of December 31, 2002 and 2003 and for each of the three years ended December 31, 2003.

Business Segments

     We manage our business and report our results on a product basis in three segments. Our reportable segments are:

     In 2003, paper products accounted for 41.1% of our total sales; packaging products accounted for 57.7% of our total sales and other products accounted for the remaining 1.2% of our total sales.

Discontinued Operations

     In connection with our financial and operating restructuring, during 2003 we authorized the discontinuation and/or sale of some subsidiaries or significant assets. The related assets, liabilities and operating results are presented in our financial statements as discontinued operations. Discontinued operations are (1) the molded pulp division of Titán, which we sold on February 27, 2003, (2) Pronal, which we sold on November 14, 2003, and (3) the Chihuahua particleboard plants of Ponderosa.

Critical Accounting Estimates

     We have identified the most critical accounting estimates that involve a higher degree of judgment and complexity and that management believes are important to a more complete understanding of our financial position and results of operations. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In order to provide an understanding about how

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we form our judgments and estimates about certain future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to the following critical accounting estimates under Mexican GAAP.

Allowance for doubtful accounts

     We have attempted to reserve for expected credit losses based on our past experience with similar accounts receivable and believe our reserves to be adequate. It is possible, however, that the accuracy of our estimation process could be materially impacted as the composition of this pool of accounts receivable changes over time. We continually review and refine the estimation process to make it as reactive to these changes as possible; however, we cannot guarantee that we will be able to accurately estimate credit losses on these accounts receivable.

Deferred taxes

     As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves our estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as allowance for doubtful accounts, deferred assets, inventories, property, machinery and equipment, accrued expenses and tax loss carryforwards, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

     Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

Property, plant and equipment

     Fixed assets and intangible assets are assigned useful lives, which impacts the annual depreciation and amortization expense. The assignment of useful lives involves significant judgments and the use of estimates. Changes in technology or changes in intended use of these assets may cause the estimated useful life to change.

     We also evaluate the carrying value property, plant and equipment to be held and used and any assets to be disposed of when events or circumstances suggest that the carrying value may not be recoverable, such as plant temporary shut downs or permanent closures. Such reviews have been necessary in recent years. Impairment losses for equipment held and used are recorded when the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. The estimates of undiscounted cash flows take into consideration expectations of future macroeconomic conditions as well as our company’s internal strategic plans. Therefore, inherent in the estimated future cash flows is a certain level of risk that we have considered in our valuation, nevertheless, actual future results may differ. Should an impairment exist, the amount of the loss is then quantified by comparing the carrying amount of the assets to the weighted discounted cash flows. For assets to be disposed of, our company assesses whether machinery or equipment can be used at other facilities and if not, estimates the proceeds to be realized upon sale of the assets. Our company has recorded impairment losses related to certain unused assets and such losses may potentially occur in the future.

Pension plans, seniority premiums and indemnities

     The determination of our obligation amid expense for pension plans, seniority premiums and indemnities are dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in note 12 to the consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and healthcare costs. In accordance with generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant

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differences in our actual experience or significant changes in our assumptions may materially affect our pension and other postretirement obligations and our future expense.

Negative goodwill

     Negative goodwill is amortized under the straight-line method over a period not to exceed two years, which in our opinion, approximates the period in which the acquired subsidiaries are integrated into our company. The period that it takes an acquired subsidiary to be integrated into our company involves significant judgments and the use of estimates.

Principal Factors Affecting Our Results of Operations

Our Liquidity Crisis

     At December 31, 2003, our total outstanding indebtedness on a consolidated basis was Ps 9,197.2 million. As a result of our substantial indebtedness, our company incurred interest expenses of Ps 1,186.2 million in 2003, Ps 1,130.6 million in 2002 and Ps 1,118.5 million in 2001. In addition, because substantially all of this indebtedness is denominated in dollars and the peso has depreciated significantly against the dollar during 2003 and 2002, our company incurred foreign exchange losses of Ps 821.4 million in 2003 and Ps 998.2 million in 2002. These interest expenses and foreign exchange losses were substantial factors in our net losses for 2003 and 2002.

     In addition, as a result of our declining operating results during the past two years, we were not able to generate sufficient resources to pay the principal and interest that has come due under our unsecured indebtedness since November 29, 2002. As a result of our negative credit ratings and downgrades, our access to sources for short-term financing has been severely restricted, thus impeding our ability to finance our operations. Furthermore, the negative publicity surrounding the downgrades and our liquidity crisis has adversely affected the terms of our trade payables and ability to obtain new customers. For a further discussion of our liquidity crisis, see “Liquidity and Capital Resources — Our Liquidity Crisis.”

Disposition of Certain of Our Operations

     Our results of operations have been affected during the last three years by our disposition of some of our operations. As a result of these dispositions, our net sales, gross profit and operating income have decreased significantly and we have recorded significant other expenses, net losses of discontinued operations and an extraordinary loss.

Disposition of Eastman and Sky Divisions of Durango Paper Company

     As part of our strategy to reduce the indebtedness we incurred in connection with the acquisition of Durango Paper Company, we sold substantially all of the converting assets of Durango Paper Company consisting of the Eastman and Sky divisions for Ps 330.4 million (US$29.4 million), which resulted in a loss of Ps 138.2 million (US$12.3 million). This loss was recorded as an extraordinary loss in our statement of operations for 2001. As a result of these dispositions, the capacity of our packaging segment was reduced by 180 thousand short tons.

Disposition of Durango Paper Company

     In August 2002, our subsidiary Durango Paper Company suffered a boiler explosion at one of its plants located in St. Marys Georgia, which resulted in the suspension of operations and the generation of significant losses. Additionally, at the date of the accident, we did not have sufficient insurance coverage for such an event and were exposed to the entire loss relating to the incident. In October 2002, we sold Durango Paper Company and certain promissory notes to Operadora Omega Internacional, S.A. de C.V., a related party. The sale was made for an aggregate amount of US$100,000, allocated US$50,000 for the purchase of the capital stock and US$50,000 for the purchase of certain promissory notes due to our company with an aggregate principal amount of US$128.8 million. As a result of this sale, the capacity of our paper segment was reduced by 420 thousand short tons and we ceased producing kraft paper and coated bleached board.

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     This sale gave rise to an aggregate loss of Ps 1,509.1 million, which is included in other expenses in our statement of operations for 2002. Prior to this sale, we had guaranteed certain obligations of Durango Paper Company’s subsidiaries, specifically a loan agreement with the Bank of America, N.A. and certain letters of credit, in an aggregate principal amount of US$25.2 million (Ps 283.2 million). In 2003, the creditors of these obligations called these guarantees. As a result, we recorded a charge to the statement of operations of Ps 262.2 million (US$23.6 million), which is included in other expenses in 2003 and corresponds to the principal amount of these obligations at the date these obligations were transferred to our company.

Disposition of Molded Pulp Division

     On February 27, 2003, our subsidiary, Titán, sold the assets of its molded pulp division for approximately US$53.7 million (Ps 603.4 million), resulting in a gain of Ps 335.0 million, which is included in the net loss of discontinued operations in the statement of operations for 2003. Pursuant to the asset purchase agreement, Titán transferred to the buyer some accounts receivable and trade accounts payable, in order to enable the buyer to continue with the production and selling of molded products. As a result of this sale, the capacity of our packaging segment was reduced by 40 thousand short tons and we ceased producing molded pulp products.

Disposition of Pronal

     On November 14, 2003, our subsidiary, Grupo Pipsamex, sold its subsidiary, Pronal, for US$28.0 million (Ps 314.6 million), resulting in a loss of Ps 447.5 million, which is included in the net loss of discontinued operations in the statement of operations for 2003. As a result of this sale, the capacity of our paper segment was reduced by 160 thousand short tons and we ceased being the sole Mexican producer of newsprint.

     A portion of the proceeds of this sale is pledged to Banco Nacional de Comercio Exterior S.N.C., or Bancomext, under the terms of our loan agreements with Bancomext. We must use these proceeds to repay a portion of the principal amount outstanding under this loan agreement or reinvest these proceeds in capital assets of Grupo Pipsamex. As a result, a portion of the proceeds of this sale is included in our balance sheet as restricted cash.

Disposition of Mexico City Warehouse

     On November 25, 2003, our subsidiary, Grupo Pipsamex, sold a warehouse located in Mexico City for US$11.5 million (Ps 129.2 million). As part of the sale, Grupo Pipsamex reserved the right to use a portion of the warehouse representing approximately one third of the entire property for a period of five years at no cost. This sale generated a loss of Ps 193.9 million, which is recorded in other expenses in our statement of operations for 2003.

     A portion of the proceeds of this sale is pledged to Bancomext under the terms of our loan agreements with Bancomext. We must use these proceeds to repay a portion of the principal amount outstanding under this loan agreement or reinvest these proceeds in capital assets of Grupo Pipsamex. As a result, a portion of the proceeds of this sale is included in our balance sheet as restricted cash.

Disposition of Chihuahua Particleboard Operations

     During 2003, our management authorized a plan to sell a plant located in Chihuahua, which is primarily engaged in the manufacturing of particleboard. Based on the negotiations with the potential buyer, we reduced the book value of the net assets to be sold by Ps 351.3 million, which reduction is included in the net loss of discontinued operations in the statement of operations for 2003.

     On June 3, 2004, our subsidiary, Ponderosa, entered into an asset sale agreement with a Mexican company, under which Ponderosa agreed to sell its particleboard plant in Chihuahua for US$22.5 million (Ps 252.8 million). This sale is subject to customary closing conditions, including the approval of the Mexican antitrust authority. Upon the closing of this sale, the capacity of our other segment will be reduced by 272 thousand short tons to 72 thousand short tons.

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Pricing of Our Products

     The pricing of our products is influenced by a number of factors, including:

     Containerboard. Prices for containerboard primarily reflect international paper prices. From 1998 through June 1999, international prices for containerboard were low compared to the prior four years. From June 1999 through December 2000, international prices for containerboard recovered. In 2001, prices remained flat and in 2002 prices declined drastically and the industry was unable to implement expected price increases, primarily because of the slowing of the economies in Mexico and the United States. In 2003 prices continued to be depressed due to the slow economic recovery in the United States and Mexico.

     Prices for Mexican containerboard have historically tended to be approximately 10% to 15% lower than in the United States. In the past, this price differential, combined with protective tariffs, has discouraged imports from the United States. With the complete elimination of tariffs and generally low prices for containerboard in the United States over the last three years, competition in Mexico from imports has increased.

     Over the last three years, our prices for Mexican containerboard have tended to be approximately 20% lower than U.S. prices. Prices for containerboard in Mexico are lower than prices in the United States as a result of strong international competition in the form of imports of containerboard and packaging products. We compete with U.S. and Mexican producers in both the United States and Mexico.

     Newsprint. The overall global newsprint pricing environment during 1999 was depressed by oversupply resulting in low capacity utilization and operating margins worldwide. This environment, coupled with the elimination of tariffs effective January 1, 1999, has significantly reduced newsprint prices in Mexico. Although global prices for newsprint began to rise at the end of 1999, our prices for newsprint remained flat in 2000 and 2001 and have decreased in 2002. In 2003 our prices for newsprint increased. We were the only producer of newsprint in Mexico from the end of 1998, when we acquired Grupo Pipsamex, until November 2003, when we sold Pronal.

     Packaging products. In general, the prices of our packaging products fluctuate in accordance with international prices. Prices for corrugated containers in Mexico have historically tended to be approximately 15% below corrugated container prices in the United States. In the past, this price differential, combined with protective tariffs, has discouraged imports from the United States. With the complete elimination of tariffs and generally low prices for packaging products in the United States over the last three years, competition in Mexico from imports has increased. Our prices for packaging products over the last three years have declined in the face of competition from imports.

Cyclicality Affecting the Paper and Packaging Industry, Capacity Utilization and Pricing

     Global consumption of containerboard and newsprint has increased significantly over the past 30 years. Due to this growth in consumption, producers have experienced periods of insufficient capacity for these products. Periods of insufficient capacity, including some due to raw material shortages, have usually resulted in increased capacity utilization rates and international market prices for our paper products, leading to increased operating margins. These periods have often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates and international selling prices, leading to declining operating margins.

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     We expect that these cyclical trends in international selling prices and operating margins relating to global capacity shortfalls and additions will likely persist in the future, principally due to the continuing impact of four general factors:

     Since mid-1995, the North American paper and packaging industry has experienced a prolonged down cycle characterized by continued price pressures, excess capacity and the inability of many industry participants to earn satisfactory returns on capital. To maintain reasonable capacity utilization, U.S. paper producers have generally maintained high export levels over the past three years, including in the exports to Mexico.

     Capacity expansion plans in the North American paper and packaging industry have been reduced to their lowest levels in over 20 years. In addition, large amounts of capacity have been permanently closed since the beginning of 2001.

Capacity Utilization

     Our operations have high fixed costs. Accordingly, to obtain low unit production costs and maintain adequate operating margins, we seek to maintain a high capacity utilization rate at all of our production facilities.

     The table below sets forth capacity utilization rates with respect to the production facilities for some of our principal products for the years ended December 31, 2003, 2002 and 2001.

     We recorded impairment losses for our long-lived assets of Ps 604.8 million during 2003 and Ps 1,569.5 million during 2002 in other expenses in our statement of operations and reserved these amounts against the value of our property, plant and equipment on our balance sheet. The deferred income tax effect for this reserve resulted in a benefit of Ps 193.5 during 2003 and Ps 502.3 during 2002, which was recorded in income tax expenses (benefit) in our statement of operations.

     In addition, we reviewed the fair value less disposal cost of the long-lived assets for which management has committed to a plan of disposal, principally Ponderosa’s particleboard plant in 2002 and 2003 and Pronal’s assets in 2002, and recorded impairment losses for these assets of Ps 101.0 million during 2003 and Ps 351.3 million during 2002 in loss on discontinued operations in our statement of operations. The deferred income tax effect for this reserve resulted in a benefit of Ps 32.3 during 2003 and Ps 112.4 during 2002, which was recorded in loss on discontinued operations in our statement of operations.

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     Until December 31, 2003, Mexican GAAP required the calculation of impairment of long-lived assets by comparing the unamortized carrying amount of the asset to the undiscounted future expected cash flows to be generated by the assets, without interest charges. Under these rules, if the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss was recognized for the difference between the fair value and carrying value of the assets.

     In March 2003, the MIPA issued Bulletin C-15, “Impairment of the Value of Long-Lived Assets and Their Disposal,” or Bulletin C-15, whose adoption is mandatory for fiscal years beginning on or after January 1, 2004. Bulletin C-15 establishes new rules for the calculation and recognition of impairment losses for long-lived assets and their reversal. These new rules require the calculation of impairment of long-lived assets by comparing the unamortized carrying amount of the asset to the greater of the net selling price of a cash-generating unit and the net present value of future expected net cash flows. Because the net present value of estimated future net cash flows from the use of certain of our assets is less than their book value as of December 31, 2003, we estimate that the adoption of Bulletin C-15 as of January 1, 2004 will result in impairment of these assets, reducing their value by approximately Ps 914.1 million and reducing our deferred income tax liability by Ps 292.5 million, with a net charge to our statement of operations of Ps 621.6 million.

Effects of Fluctuations in Raw Materials Prices

     Fluctuations in the market price of OCC and ONP, which are the primary raw materials used in our paper making activities have significant effects on our costs of goods sold and the prices that we are able to charge our customers for our paper and packaging products. In addition, our cost of goods sold is significantly affected by energy costs.

Recycled Fiber Costs

     OCC and ONP are the primary raw materials used in the production of our paper products. In 2003, OCC and ONP represented approximately 45% of the total cost of goods sold of our paper segment and approximately 31% of our consolidated cost of goods sold. The cost of OCC and ONP varies in accordance with international market prices, which fluctuate depending upon the supply of OCC and ONP and the demand for finished paper. Mexican OCC or ONP prices tend to follow price movements in the United States, but are generally lower because Mexican OCC or ONP is lower in quality.

     We believe that we are one of Mexico’s largest users of recycled paper and operate recycling centers in the United States in Albuquerque and Phoenix. In 2003, approximately 43% of the OCC and ONP used in our United States paper production were collected by our recycling centers. We purchase the remainder of our OCC and ONP requirements in the open market.

     Because the primary raw material of our packaging segment is containerboard produced by our paper segment or other paper producers with cost structures similar to ours, fluctuations in the international market price of OCC and ONP result in similar fluctuations in the cost of the primary raw materials of the packaging segment.

     We attempt to revise the prices for our products, which are generally denominated in dollars or are dollar-linked, to reflect changes in the international market prices of these products, which in turn reflect fluctuations in the international market prices of OCC and ONP. However, as a result of the current imbalance between supply of and demand for paper and packaging products, during 2002 and 2003 we were not able to successfully pass through the increased prices of OCC and ONP to our customers.

     The international market price of OCC and ONP has fluctuated significantly in the past, and we expect that it will continue to do so in the future. The international market price of OCC and ONP has been subject to significant upward pressures during the past several years as a result of significantly increased demand for OCC and ONP in Asia, particularly China. Significant increases in the price of OCC and ONP and, consequently, the cost of producing our products, reduces our gross margins and negatively affects our results of operations to the extent that we are unable to pass all of these increased costs on to our customers and could result in reduced sales volumes of our products. Conversely, significant decreases in the price of OCC and ONP and, consequently, the cost of

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producing our products, would likely increase our gross margins and our results of operations and could result in increased sales volumes if this lower cost leads us to lower our prices. We do not currently hedge our exposure to changes in the prices of OCC and ONP.

Energy Costs

     Our energy cost represents approximately 18% of our cost of production. In particular, our paper mills consume significant amounts of electric power. We purchase approximately 60% of the electric power needs of our Mexican operations from the Federal Electricity Commission (Comisión Federal de Electricidad), the Mexican state-owned electric company, under long-term contracts and we produce the remainder at our own power plants. These long-term contracts guarantee the supply of electric power at prices that have historically increased by the Mexican inflation rate. In the United States, our McKinley mill is supplied 100% by a rural electric cooperative at formula prices under a long-term contract. Our U.S. converting facilities purchase electric power from local utilities.

Mexican and United States Demand for Our Products

     We produce paper and packaging products in Mexico and the United States. In 2003, paper products accounted for 41.1% of our total sales and packaging products accounted for 57.7% of our total sales.

     The following is our geographic segment sales information for the periods indicated.

     In 2003:

     In 2003, approximately 7% of our net sales of packaging products was to companies in Mexico that primarily export their products, including exporters located in the border region, maquiladoras located outside of the border region and other Mexican exporters.

     As a Mexican company with most of our operations in Mexico, we are significantly affected by economic conditions in Mexico. Our results of operations and financial condition have been, and will continue to be, affected by the growth rate of Mexico’s GDP because our products are used in the packaging of a wide range of consumer, agricultural, manufacturing and industrial products.

     In addition, because a significant portion of our operations are in the United States and a large portion of our packaging products are used in Mexico to packaged consumer, agricultural, manufacturing and industrial products

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destined for the United States, our results of operations and financial condition have been, and will continue to be, affected by the growth rate of the United States’ GDP.

     Mexican GDP growth has fluctuated significantly, and we anticipate that it will likely continue to do so. Our management believes that economic growth in Mexico would positively affect our future net sales and results of operations. However, a continued recession in Mexico would likely reduce our future net sales and have negative impacts on our results of operations.

Effects of Fluctuations in Exchange Rates between the Peso and the Dollar

     Our results of operations and financial condition have been, and will continue to be, affected by the rate of depreciation or appreciation of the peso against the dollar because:

     Approximately 27% of our sales were made in dollars during 2003 with the balance primarily dollar-linked. Historically, costs of production in Mexico have been incurred in pesos, although substantially all of the costs and expenses of Durango McKinley Paper Company are incurred in dollars. During 2003, 20% of our consolidated cost of goods sold was incurred in dollars or was dollar-linked. The primary dollar costs of our Mexican operations are incurred for imports of OCC and ONP. Fluctuations in the peso affect the cost of imported OCC and ONP and other dollar-linked or imported raw materials. The peso appreciated by 4.6% against the dollar in 2001, depreciated by 13.8% against the dollar in 2002 and depreciated by 7.6% against the dollar in 2003.

     Depreciation of the peso against the dollar generally results in our receiving more pesos for our dollar sales but our dollar-based costs increase. The net effect on our operating is generally positive because the percentage of our net sales denominated in dollars or dollar-linked is significantly higher than the percentage of our costs and expenses that are denominated in dollars or dollar-linked. In addition, depreciation of the pesos against the dollar generally benefits Mexican traditional exporters and maquiladora exporters that consume our packaging products.

     Conversely, appreciation of the peso against the dollar generally results in our receiving fewer pesos for our dollar sales but our dollar-based costs decrease. The net effect on our operating income is generally negative because the percentage of our net sales denominated in dollars or dollar-linked is significantly higher than the percentage of our costs and expenses that are denominated in dollars or dollar-linked. In addition, appreciation of the pesos against the dollar generally reduces the sales of Mexican traditional exporters and maquiladora exporters that consume our packaging products.

     At December 31, 2003, substantially all of our indebtedness was denominated in dollars. As a result, when the peso depreciates against the dollar:

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For example, the 13.8% devaluation of the peso in 2002 and the 7.6% devaluation of the peso in 2003 substantially increased our financial expenses and were substantial factors in our net losses for those years.

     Conversely, when the peso appreciates against the dollar:

     We do not have in place hedging arrangements with respect to devaluation risk because we do not believe them to be cost effective for our company.

Effects of Inflation

     Our results of operations and financial condition have been, and will continue to be, affected by the rate of inflation in Mexico because:

     A component of our net comprehensive financing cost includes our gain or loss from monetary position, which refers to the gains or losses, due to the effects of inflation, from holding net monetary liabilities or assets. A gain from monetary position results from holding net monetary liabilities during periods of inflation as the purchasing power represented by nominal peso liabilities declines over time. Accordingly, since our monetary liabilities, including debt and other payables, exceeded our monetary assets, including cash, temporary investments and accounts receivable, in 2001, 2002 and 2003 we recorded a gain from monetary position for those periods.

     The table below shows Mexican inflation according to the NCPI and our gain from monetary position for the periods indicated:

Effect of Taxes on Our Income

     In accordance with Mexican tax law, we are subject to federal income tax, tax on assets and employee statutory profit sharing.

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Income Taxes and Employee Statutory Profit Sharing

     The income tax rate was 35% in 2002 and 2001 and 34% in 2003, and will be reduced by one percentage point each year until reaching 32% in 2005. Mexican income taxes take into consideration the taxable and deductible effects of inflation. Like other Mexican companies, we are required by law to pay our employees, in addition to their agreed compensation and benefits, profit sharing in an aggregate amount equal to 10% of our taxable income (calculated without reference to inflation adjustments). Prior to 2002, the payment of employee statutory profit sharing was deductible in certain instances. This deduction was completely eliminated in 2002. Deferred income tax assets and liabilities are recognized for temporary differences resulting from comparing the book and tax values of assets and liabilities plus any future benefits from tax loss carryforwards. Deferred income tax assets are reduced by any benefits about which there is uncertainty as to their realizability.

Asset Taxes

     Taxes on assets are calculated by applying a rate of 1.8% on the net average of the majority of our restated assets less certain liabilities and is payable only to the extent that it exceeds income tax payable for the applicable period. If in any year the asset tax exceeds the income tax payable, the asset tax payment for such excess may be reduced by the amount by which income taxes exceeded asset taxes in the three preceding years and any required payment of asset taxes is creditable against the excess of income taxes over asset taxes of the following ten years. The asset taxes paid that are expected to be recoverable are recorded as an advance payment of income taxes and decrease the deferred income tax liability on our balance sheet.

Tax Loss Carryforwards and Recoverable Asset Taxes

     Tax loss carryforwards and recoverable asset taxes for which the deferred income tax asset and prepaid income tax, respectively, have been partially recognized may be recovered subject to certain conditions. Due to a deterioration in the circumstances used to assess the realization of the benefit of tax loss carryforwards and recovery of tax on assets paid, the valuation allowance for benefit of tax loss carryforwards and recoverable tax on assets was increased by Ps 546.9 million in 2003 and Ps 965.8 million in 2002 and charged to results of operations.

     Restated amounts as of December 31, 2003 and expiration dates are:

Tax Disputes

     We have initiated a proceeding requesting an injunction against the Mexican tax authorities regarding the methodology used to determine our employee statutory profit sharing liability.

     We have initiated a proceeding requesting an injunction against the Mexican tax authorities with respect to the assessment against our company of Ps 17.6 million with respect to the Substitutive Tax of the Wage Credit. We have asserted in this action that the assessment of the Substitutive Tax of the Wage Credit is unconstitutional. Management believes that the outcome of this proceeding will be favorable to our company, which represents a contingent asset of Ps 12,196.

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     Additional taxes payable could arise in transactions with nonresident related parties if the tax authority, during a review, believes that the prices and amounts used by our company are not similar to those used with or between independent parties in comparable transactions. Price studies prepared by independent third parties are used to compare market prices.

Recent Developments

First Quarter Results

     Our results for the first quarter of 2004 are presented, and our results for the first quarter of 2003 have been restated, in constant pesos as of March 31, 2004. The noon buying rate as reported by the Federal Reserve Bank of New York, for the purchase of dollars, expressed in nominal pesos per dollar at March 31, 2004 was Ps 11.18 = US$1.00 and inflation for the first quarter of 2004 as measured by the NCPI was 1.56%.

     Net sales increased by 3.9% during the first quarter of 2004 to Ps 1,718.9 million compared to Ps 1,655.1 million during the first quarter of 2003. Sales volume of our products increased by 9% during the first quarter of 2004 compared to the first quarter of 2003; however, average prices for our products declined by 4% during the first quarter of 2004 compared to the first quarter of 2003. Our gross margin decreased to 10.1% during the first quarter of 2004 compared to 12.7% during the first quarter of 2003 and our operating margin decreased to 3.4% during the first quarter of 2004 compared to 4.7% during the first quarter of 2003.

     Net comprehensive financing costs decreased by 78.9% during the first quarter of 2004 compared to the first quarter of 2003, principally as a result of our Ps 63.9 million foreign exchange gain during the first quarter of 2004 compared to our Ps 327.1 million foreign exchange loss during the first quarter of 2003.

     We recorded a Ps 918.0 million impairment loss during the first quarter of 2004, which was partially offset by the tax effects of this impairment, which were included in our Ps 265.7 million deferred income tax benefit recorded in the first quarter of 2004.

     Principally as a result of these factors, we recorded a net loss of Ps 708.5 million during the first quarter of 2004 compared to a net loss of Ps 194.3 million during the first quarter of 2003.

Plan Support Agreement

     On April 30, 2004, we entered into a plan support agreement with certain bank creditors and holders of our existing notes holding an aggregate of 55% of the outstanding principal amount of our unsecured debt. Under the terms of the plan support agreement, the parties were obligated to pursue and implement a financial restructuring along the lines contained in the agreement in principle with these creditors, including by means of a cash tender offer and certain exchange offers and, under certain circumstances, a prepackaged plan of reorganization under U.S. bankruptcy law. The participating creditors agreed that they would tender their unsecured debt in the offers and vote their unsecured debt in favor of the prepackaged plan of reorganization under U.S. bankruptcy law. The plan support agreement contained certain obligations of our company and the participating creditors. These obligations were not met by the agreed dates and certain participating creditors terminated the plan support agreement on May 17, 2004.

Concurso Mercantil and 304 Proceeding

     On May 18, 2004, we filed a voluntary petition for concurso mercantil under the LCR with the First Federal District Court in Durango, Mexico. As of the date hereof, the court has not yet been declared the concurso mercantil effective. For a discussion of the LCR and concurso mercantil proceedings, see “Item 4. Information on Our Company—Mexican Law of Commercial Reorganizations.”

     On May 20, 2004, our foreign representative, Gabriel Villegas Salazar, filed the 304 Proceeding with the United States Bankruptcy Court for the Southern District of New York, commencing a case in the United States ancillary to the concurso mercantil proceeding currently underway in Durango, Mexico. The 304 Proceeding is being

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administered under the case caption “In re: Petition of Gabriel Villegas Salazar, as foreign representative of Corporación Durango, S.A. de C.V., Debtor in Foreign Proceeding.”

     Pursuant to sections 105(a) and 304(b) of the United States Bankruptcy Code and in furtherance of the concurso mercantil proceeding, on June 4, 2004, the United States Bankruptcy Court for the Southern District of New York entered a preliminary injunction preliminarily enjoining the commencement or continuation of any action against our company, its officers and directors, and four of our operating subsidiaries, Titán, Centauro, Atenquique, and Ponderosa. At a hearing on June 30, 2004, the United States Bankruptcy Court for the Southern District of New York extended the preliminary injunction through and including August 16, 2004.

Disposition of Chihuahua Particleboard Operations

     On June 3, 2004, our subsidiary, Ponderosa, entered into an asset sale agreement with a Mexican company, under which Ponderosa agreed to sell its particleboard plant in Chihuahua for US$22.5 million (Ps 252.8 million). This sale is subject to customary closing conditions, including the approval of the Mexican antitrust authority. Upon the closing of this sale, the capacity of our other segment will be reduced by 272 thousand short tons to 72 thousand short tons.

Results of Operations

     The following discussion of our results of operations is based on our consolidated financial statements prepared in accordance with Mexican GAAP. The discussion of the results of our business segments is based upon financial information reported for each of the three segments of our business, as detailed in note 22 to our consolidated financial statements.

     In the following discussion, references to increases or decreases in any year are made by comparison with the corresponding prior year, except as the context otherwise indicates.

     The following table sets forth consolidated financial information for each of the three years ended December 31, 2003.