Edgar Filing: CORPORACION DURANGO SA DE CV

Durango Corporation

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F/A

(Amendment No. 1)

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

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

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.

(Exact name of Registrant as specified in its charter)

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(b) of the Act:


		Name of each exchange on which
Title of each class:		registered:
Series A Common Stock, without par value, or Series A Shares		New York Stock Exchange*
Ordinary Participation Certificates, or CPOs, each representing one Series A Share		New York Stock Exchange*
American Depositary Shares, or ADSs, each representing two CPOs		New York Stock Exchange
13 1/8% Senior Notes due 2006, or the 2006 notes		New York Stock Exchange
13 1/2% Senior Notes due 2008, or the 2008 notes		New York Stock Exchange

Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the United States Securities and Exchange Commission.

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

TABLE OF CONTENTS


PART III
	Item 18. Financial Statements
	Item 19. Exhibits
SIGNATURES
Sec 302 Chief Executive Officer Certification
Sec 302 Chief Financial Officer Certification
Sec 906 Chief Executive Officer Certification
Sec 906 Chief Financial Officer Certification

EXPLANATORY NOTE

This Amendment No. 1 on Form 20-F/A, or Amendment No. 1, is being filed solely to amend the Annual Report on Form 20-F for the fiscal year ended December 31, 2003, or the Original Form 20-F, as filed by Corporación Durango, S.A. de C.V., or our company, with the U.S. Securities and Exchange Commission on July 15, 2004 in the following ways:

•

to include the Reports of Independent Auditors relating to the consolidated financial statements of our company, as of and for the years ended December 31, 2003, 2002 and 2001;

•

to include the Reports of Independent Auditors relating to the financial statements of Compañía Papelera de Atenquique, S.A. de C.V., as of and for the years ended December 31, 2003, 2002 and 2001;

•

to include the Reports of Independent Auditors relating to the financial statements of Industrias Centauro, S.A. de C.V., as of and for the years ended December 31, 2003, 2002 and 2001;

•

to include the certifications applicable to foreign private issuers pursuant to Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002; and

•

to include the certifications applicable to foreign private issuers pursuant to Rules 13a-14(b)/15d-14(b) as required by Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

This Amendment No. 1 amends and restates in their entirety Items 18 and 19 of the Original Form 20-F. Other than as expressly set forth above, this Amendment No. 1 does not, and does not purport to, amend, update or restate the information in the Original Form 20-F or reflect any events that have occurred after the Original Form 20-F was filed.

PART III

Item 18. Financial Statements.

See pages F-1 to F-125, incorporated herein by reference.

Item 19. Exhibits.

Documents filed as exhibits to this annual report:

1.1		Bylaws of our company, as amended (English translation) (incorporated by reference to Exhibit 1.1 to our company’s annual report on Form 20-F filed on July 15, 2004)

2.1		Form of Indenture between CODUSA and Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Bank Minnesota, N.A., and successor in such capacity to JPMorgan Chase Bank, f/k/a The Chase Manhattan Bank), relating to the 2006 notes (incorporated by reference from Registration Statement No. 333-13082 on Form F-1 filed on January 19, 2001)

2.2		First Supplemental Indenture, dated as of October 8, 2001, among CODUSA, GIDUSA and Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Bank Minnesota, N.A., and successor in such capacity to JPMorgan Chase Bank, f/k/a The Chase Manhattan Bank), relating to the assumption by our company of CODUSA’s obligations under the 2006 notes and the indenture for the 2006 notes (incorporated by reference to Exhibit 2.3 to our company’s annual report on Form 20-F filed on June 12, 2002)

2.3		Second Supplemental Indenture, dated as of June 24, 2002 among our company, certain of our company’s subsidiaries and Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Bank Minnesota, N.A., and successor in such capacity to JPMorgan Chase Bank, f/k/a The Chase Manhattan Bank), relating to the guarantee by certain of our subsidiaries of the 2006 notes (incorporated by reference to Exhibit 2.4 to our company’s annual report on Form 20-F filed on June 30, 2003)

2.4		Form of Indenture between CODUSA and Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Bank Minnesota, N.A., and successor in such capacity to JPMorgan Chase Bank, f/k/a The Chase Manhattan Bank), relating to the 2009 notes (incorporated by reference to Exhibit 2.8 to our company’s annual report on Form 20-F filed on June 30, 2003)

2.5		First Supplemental Indenture, dated as of June 24, 2002, among our company, certain of our company’s subsidiaries and Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Bank Minnesota, N.A., and successor in such capacity to JPMorgan Chase Bank, f/k/a The Chase Manhattan Bank), relating to the guarantee by certain of our subsidiaries of the 2009 notes (incorporated by reference to Exhibit 2.9 to our company’s annual report on Form 20-F filed on June 30, 2003)

2.6		The total amount of long-term debt securities of our company and its subsidiaries under any one instrument, other than the 2006 notes and the 2009 notes, does not exceed 10% of the total assets of our company and its subsidiaries on a consolidated basis. We agree to furnish copies of any or all such instruments to the United States Securities and Exchange Commission upon request.

2.7		Form of Deposit Agreement among our company, The Bank of New York and owners and beneficial owners of American Depositary Receipts issued thereunder, including the form of American Depositary Receipts (incorporated by reference to Exhibit 4.3 to our company’s registration statement No. 33-80148 on Form F-1 filed on June 10, 1994)

2.8		Trust Agreement, dated November 24, 1989, between NAFIN, as grantor, and NAFIN, Trust Department, as CPO trustee, together with an English translation (incorporated by reference to Exhibit 4.4 to our company’s registration statement No. 33-80148 on Form F-1 filed on June 10, 1994)

2.9		Public Deed with respect to the CPOs, together with an English translation (incorporated by reference to Exhibit 4.5 to our company’s registration statement No. 33-80148 on Form F-1 filed on June 10, 1994)

2.10		Instrument of Resignation, Appointment and Acceptance, dated as of February 5, 2003, among our company, Wells Fargo Bank, National Association (as successor by merger to Wells Fargo Bank Minnesota, N.A.) and JPMorgan Chase Bank (f/k/a Chase Manhattan Bank), relating to the replacement of the trustee for our company’s 2003 notes, 2006 notes, 2008 notes and 2009 notes (incorporated by reference to Exhibit 2.17 to our company’s annual report on Form 20-F filed on June 30, 2003)

4.1		Securities Purchase Agreement, dated as of October 7, 2002, between our company and Operadora Omega Internacional, S.A. de C.V., relating to the sale of 100% of the total issued and outstanding capital stock

-3-

		and certain promissory notes of Durango Paper Company (incorporated by reference to Exhibit 4.1 to our company’s annual report on Form 20-F filed on June 30, 2003)

4.2		Asset Purchase Agreement, dated as of February 3, 2003, among our company, Titán and Empaques Moldeados de América Tecnologías, S.R.L. de C.V., relating to the sale of assets of our company’s molded pulp division (incorporated by reference to Exhibit 4.2 to our company’s annual report on Form 20-F filed on June 30, 2003)

4.3		Amendment No. 1, dated February 28, 2003, to the Asset Purchase Agreement, dated as of February 3, 2003, among our company, Titán and Empaques Moldeados de América Tecnologías, S.R.L. de C.V., relating to the sale of assets of our company’s molded pulp division (incorporated by reference to Exhibit 4.3 to our company’s annual report on Form 20-F filed on June 30, 2003)

8		List of Subsidiaries (incorporated by reference to Exhibit 8 to our company’s annual report on Form 20-F filed on July 15, 2004)

12.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

12.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

13.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

13.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

-4-

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this Amendment No. 1 on its behalf.


CORPORACIÓN DURANGO, S.A. DE C.V.
By:	/s/ Mayela Rincón de Velasco
	Name:	Mayela Rincón de Velasco
	Title:	Chief Financial Officer

Date: July 22, 2004

-5-

INDEX TO FINANCIAL STATEMENTS

CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2002 and 2003 and for the years ended December 31, 2001, 2002 and 2003


	Page
Reports of independent registered public accounting firms		F-1
Consolidated balance sheets as of December 31, 2002 and 2003		F-5
Consolidated statements of operations for the years ended December 31, 2001, 2002 and 2003		F-7
Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2001, 2002 and 2003		F-9
Consolidated statements of changes in financial position for the years ended December 31, 2001, 2002 and 2003		F-10
Notes to combined and consolidated financial statements		F-12

COMPANIA PAPELERA DE ATENQUIQUE, S.A. DE C.V.

INDEX TO FINANCIAL STATEMENTS

as of December 31, 2002 and 2003 and for the years ended December 31, 2001, 2002 and 2003


	Page
Reports of independent registered public accounting firms		F-61
Balance sheets as of December 31, 2002 and 2003		F-65
Statements of operations for the years ended December 31, 2001, 2002 and 2003		F-67
Statements of changes in stockholders’ equity for the years ended December 31, 2001, 2002 and 2003		F-68
Statements of changes in financial position for the years ended December 31, 2001, 2002 and 2003		F-69
Notes to the consolidated financial statements		F-71

INDUSTRIAS CENTAURO, S.A. DE C.V.

INDEX TO FINANCIAL STATEMENTS

as of December 31, 2002 and 2003 and for the years ended December 31, 2001, 2002 and 2003


	Page
Reports of independent registered public accounting firms		F-95
Balance sheets as of December 31, 2002 and 2003		F-99
Statements of operations for the years ended December 31, 2001, 2002 and 2003		F-100
Statements of changes in stockholders’ equity for the years ended December 31, 2001, 2002 and 2003		F-101
Statements of changes in financial position for the years ended December 31, 2001, 2002 and 2003		F-102
Notes to the financial statements		F-103

Report of Independent Registered Public
Accounting Firm to the Board of Directors
and Stockholders of
Corporación Durango, S. A. de C. V.

We have audited the accompanying consolidated balance sheet of Corporación Durango, S. A. de C. V. and subsidiaries (the “Company”) as of December 31, 2003, and the related consolidated statements of operations, changes in stockholders’ equity and changes in financial position for the year then ended, all expressed in thousands of Mexican pesos of purchasing power of December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in Mexico and with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2003 consolidated financial statements present fairly, in all material respects, the financial position of Corporación Durango, S. A. de C. V. and subsidiaries as of December 31, 2003, and the results of their operations, changes in their stockholders’ equity and changes in their financial position for the year then ended in conformity with accounting principles generally accepted in Mexico.

Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of stockholders’ equity and net loss as of and for the year ended December 31, 2003 to the extent summarized in Note 25.

The accompanying consolidated financial statements as of December 31, 2003 and for the year then ended have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, since November 2002 the Company has failed to pay principal and interest of certain obligations, and therefore the Company reclassified most of its debt as short-term. In addition, during 2003 and 2002 the Company has incurred significant consolidated net losses, and since 2001 its operating margin has declined substantially. As of December 31, 2003 and 2002, the Company had negative working capital and is experiencing severe liquidity problems. Furthermore, as discussed in Note 23, the Company estimates that upon the adoption of Bulletin C-15, “Impairment of the Value of Long-Lived Assets and Their Disposal”, whose application is mandatory for fiscal years beginning on or after January 1, 2004, a charge to results of operations for the year 2004 of Ps.621,619, net of deferred income tax, will be required, which will additionally reduce its stockholders’ equity. These factors, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters, as well as its plan of restructuring, are described in Note 1; however, this plan has not been completed. The Company’s ability to continue as a going concern is dependent upon its ability to generate profits and to restructure its debt. The accompanying financial statements do not include any additional adjustments related to the valuation and presentation of assets or the presentation and amount of liabilities that might result if the Company is unable to continue as a going concern.

F-1

The accompanying financial statements have been translated into English for the convenience of readers in the United States of America.

Galaz, Yamazaki, Ruiz Urquiza, S. C.
A member firm of Deloitte Touche Tohmatsu

C.P.C. Claudia Leticia Rizo Navarro

April 30, 2004
(June 28, 2004 as to Notes 1.e, 24, 25, 26 and 27)

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Mexico, D. F., April 25, 2003, except with respect to the restatement to constant pesos as
December 31, 2003 and Note 18 as to which the date is July 13, 2004.

To the Board of Directors and Shareholders of
Corporación Durango, S.A. de C.V.:

We have audited the accompanying consolidated balance sheet of Corporación Durango, S.A. de C.V. and subsidiaries (formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries), as of December 31, 2002 and the related consolidated statements of income, of changes in shareholders’ equity and of changes in financial position for each of the two years in the period ended December 31, 2002, which, as described in Note 2, have been prepared on the basis of accounting principles generally accepted in Mexico. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America) as well as generally accepted auditing standards in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corporación Durango, S. A. de C. V. and subsidiaries (formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries), as of December 31, 2002 and the consolidated results of their operations, the changes in their shareholders’ equity and the changes in their financial position for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in Mexico.

Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of accounting principles generally accepted in the United Sates of America would have affected the determination of consolidated net income (loss) for each of the two years in the period ended December 31, 2002 and the determination of consolidated shareholders’ equity as of December 31, 2002, to the extent summarized in Note 25 to the consolidated financial statements.

F-3

The accompanying financial statements have been prepared considering the Company will continue as a going concern, which assumes that assets will be realized and liabilities will be settled in the normal course of business operations. As mentioned in Note 10, the Company has significant bank loans and bondholder debt, which requires, aside from compliance with a number of financial ratios, compliance with prompt payment upon maturity of capital and interest. As a result of both internal and external market and economic factors, in the last quarter of the 2002, the Company experienced a significant reduction in cash flow, which resulted in the inability to pay capital and interest related to certain obligations which matured in November and December 2002. As a result of these factors, the Company reclassified several bank loans as short-term debt as the Company was in default with its bank creditors and bondholders. The Company’s current financial situation raises substantial doubt about its ability to continue as a going concern.

As a consequence, the Company shows negative working capital at December 31, 2002, amounting to $6,181,158 thousand, and a net loss of $3,738,924 thousand in the period ended December 31, 2002. Due to the above-mentioned financial and operating deterioration, the Company’s ability to continue operating as a going concern will depend on management’s ability to generate profits, obtain waivers from its creditors and/or renegotiate the bank and bond debts or obtain new financing. The accompanying financial statements include no adjustment pertaining to the recoverability and classification of the amounts recorded as assets and the amounts and classification of the liabilities that may become necessary in the event that the Company is unable to continue in operation as a going concern. Management’s plans in this regard are mentioned in Note 1.

As mentioned in Note 19.b, the Company sold the shares of Durango Paper Co. to Operadora Omega, S.A de C.V. (related party) in October 2002, with the effects mentioned in that note.

As mentioned in Note 1.b, at the General Extraordinary Shareholders’ Meeting held on October 8, 2001, the shareholders approved the merger of Corporación Durango, S.A. de C.V. (“CODUSA”) into its subsidiary Grupo Industrial Durango, S.A. de C.V. (“GIDUSA”). The merger was effective for financial reporting purposes on October 8, 2001. In connection with the merger, the Company changed its name to Corporación Durango, S.A de C.V. on February 7, 2002, when its bylaws were amended. The merger was effected through the exchange of all of the outstanding shares in CODUSA for shares in GIDUSA, which name was changed on the same date to Corporación Durango, S.A. de C.V.

PricewaterhouseCoopers

/s/ Rafael Maya Urosa

Rafael Maya Urosa
Public Accountant

F-4

Corporación Durango, S. A. de C. V. and Subsidiaries

Consolidated balance sheets

As of December 31, 2003 and 2002

(In thousands of Mexican pesos of purchasing power of December 31, 2003)

Assets


	2003		2002
Current assets:
Cash and temporary investments	Ps.	649,955	Ps.	237,614
Trade accounts receivable – Net		1,798,935		1,706,823
Due from related parties		14,283		191,307
Inventories – Net		1,095,710		1,143,981
Prepaid expenses		22,791		30,080
Current assets of discontinued operations		84,190		389,830

Total current assets		3,665,864		3,699,635
Restricted cash		157,504
Property, plant and equipment – Net		11,341,126		12,030,512
Other assets – Net		540,333		640,006
Noncurrent assets of discontinued operations		252,847		1,702,993

Total	Ps.	15,957,674	Ps.	18,073,146

(continued)

See accompanying notes to consolidated financial statements.

F-5

Liabilities and stockholders’ equity


	2003			2002
Current liabilities:
Short-term debt	Ps.	8,535,163		Ps.	7,595,462
Current portion of long-term debt		121,290			278,577
Notes payable		52,095			52,226
Accrued interest		1,387,990			469,532
Trade accounts payable		910,329			824,178
Due to related parties					5,590
Accrued expenses and taxes other than income taxes		453,717			440,737
Employee statutory profit sharing		2,412			2,433
Current liabilities of discontinued operations		84,676			212,058

Total current liabilities		11,547,672			9,880,793

Long-term liabilities:
Long-term debt		399,423			1,021,426
Long-term notes payable		101,206			145,871
Deferred income taxes		1,918,847			1,753,282
Employee retirement obligations		199,467			166,112
Long-term liabilities of discontinued operations		190,246			466,494

Total long-term liabilities		2,809,189			3,553,185

Total liabilities		14,356,861			13,433,978

Commitments and contingencies
Stockholders’ equity:
Common stock		4,742,288			4,857,963
Treasury stock					(115,675	)
Additional paid-in capital		1,387,056			1,387,056
Retained earnings		2,466,882			6,136,985
Insufficiency in restated stockholders’ equity		(4,160,313	)		(4,558,231	)
Additional liability for employee retirement obligations					(146,450	)
Cumulative initial effect of deferred income taxes		(3,080,896	)		(3,080,896	)
Cumulative translation adjustment of foreign subsidiaries		178,020			87,283

Majority stockholders’ equity		1,533,037			4,568,035
Minority stockholders’ equity in consolidated subsidiaries		67,776			71,133

Total stockholders’ equity		1,600,813			4,639,168

Total	Ps.	15,957,674		Ps.	18,073,146

(concluded)

F-6

Corporación Durango, S. A. de C. V. and Subsidiaries

Consolidated statements of operations

For the years ended December 31, 2003, 2002 and 2001

(In thousands of Mexican pesos of purchasing power of December 31, 2003, except per share amounts)


	2003			2002			2001
Net sales	Ps.	6,831,028		Ps.	8,124,497		Ps.	10,775,303
Cost of sales		5,957,305			7,057,911			9,065,847

Gross profit		873,723			1,066,586			1,709,456
Selling, general and administrative expenses		567,343			569,960			691,403

Income from operations		306,380			496,626			1,018,053
Net comprehensive financing cost:
Interest expense		(1,186,232	)		(1,130,646	)		(1,118,520	)
Interest income		42,428			40,336			70,227
Exchange gain (loss)		(821,389	)		(998,232	)		328,015
Monetary position gain		367,014			406,673			309,842

		(1,598,179	)		(1,681,869	)		(410,436	)
Other income (expenses) – Net		(1,511,189	)		(3,126,962	)		476,430

Income (loss) from continuing operations before income taxes and employee statutory profit sharing		(2,802,988	)		(4,312,205	)		1,084,047
Income tax benefit (expense)		(216	)		677,223			(48,557	)
Employee statutory profit sharing expense		(1,733	)		(1,082	)		(4,908	)

Income (loss) from continuing operations		(2,804,937	)		(3,636,064	)		1,030,582
Discontinued operations		(549,235	)		(102,860	)		152,868
Extraordinary loss								(317,947	)

Consolidated net income (loss)	Ps.	(3,354,172	)	Ps.	(3,738,924	)	Ps.	865,503

(Continued)

F-7


	2003			2002			2001
Net income (loss):
Majority interest	Ps.	(3,348,336	)	Ps.	(3,742,169	)	Ps.	861,314
Minority interest		(5,836	)		3,245			4,189

Consolidated net income (loss)	Ps.	(3,354,172	)	Ps.	(3,738,924	)	Ps.	865,503

Basic and diluted net income (loss) per share of:
Continuing operations	Ps.	(30.12	)	Ps.	(38.69	)	Ps.	10.91
Discontinued operations		(5.91	)		(1.09	)		1.63
Extraordinary loss								(3.38	)

Basic and diluted net income (loss) per share	Ps.	(36.03	)	Ps.	(39.78	)	Ps.	9.16

Weighted average shares outstanding		92,942,916			94,072,122			94,072,122

(Concluded)

See accompanying notes to consolidated financial statements.

F-8

Corporación Durango, S. A. de C. V. and Subsidiaries

Consolidated statements of changes in stockholders’ equity

For the years ended December 31, 2003, 2002 and 2001

(In thousands of Mexican pesos of purchasing power of December 31, 2003)


													Insufficiency
				Treasury			Additional Paid-in						in Restated
	Common Stock			Stock			Capital			Retained Earnings			Stockholders’ Equity
Balances as of January 1, 2001	Ps.	2,413,876		Ps.			Ps.	(51,035	)	Ps.	5,013,057		Ps.	(24,128	)
Effects of merger		2,444,087						1,373,290			4,004,783			(3,630,618	)
Comprehensive loss											861,314			(1,009,226	)

Balances as of December 31, 2001		4,857,963						1,322,255			9,879,154			(4,663,972	)
Cancellation of swaps					(115,675	)		64,801
Comprehensive loss											(3,742,169	)		105,741

Balances as of December 31, 2002		4,857,963			(115,675	)		1,387,056			6,136,985			(4,558,231	)
Reduction of common stock		(115,675	)		115,675
Transfer of additional liability of employee retirement obligations											(146,450	)
Allowance for accounts receivable due from shareholders											(175,317	)
Comprehensive loss											(3,348,336	)		397,918

Balances as of December 31, 2003	Ps.	4,742,288		Ps.			Ps.	1,387,056		Ps.	2,466,882		Ps.	(4,160,313	)

[Additional columns below]

[Continued from above table, first column(s) repeated]


	Additional Liability						Cumulative			Minority
	for Employee			Cumulative Initial			Translation			Stockholders’ Equity
	Retirement			Effect of Deferred			Adjustment of			in Consolidated			Total Stockholders’
	Obligations			Income Taxes			Foreign Subsidiaries			Subsidiaries			Equity
Balances as of January 1, 2001	Ps.	(13,160	)	Ps.	(512,014	)	Ps.	13,264		Ps.	1,564,204		Ps.	8,404,064
Effects of merger					(2,568,882	)		(11,559	)		(1,524,875	)		86,226
Comprehensive loss		(133,290	)					121,874			4,188			(155,140	)

Balances as of December 31, 2001		(146,450	)		(3,080,896	)		123,579			43,517			8,335,150
Cancellation of swaps														50,874
Comprehensive loss								(36,296	)		27,616			(3,645,108	)

Balances as of December 31, 2002		(146,450	)		(3,080,896	)		87,283			71,133			4,639,168
Reduction of common stock Transfer of additional liability of employee retirement obligations		146,450
Allowance for accounts receivable due from shareholders														(175,317	)
Comprehensive loss								90,737			(3,357	)		(2,863,038	)

Balances as of December 31, 2003	Ps.			Ps.	(3,080,896	)	Ps.	178,020		Ps.	67,776		Ps.	1,600,813

See accompanying notes to consolidated financial statements.

F-9

Corporación Durango, S. A. de C. V. and Subsidiaries

Consolidated statements of changes in financial position

For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)


	2003			2002			2001
Operating activities:
Consolidated income (loss) from continuing operations	Ps.	(2,804,937	)	Ps.	(3,636,064	)	Ps.	1,030,582
Items that did not require (generate) resources:
Depreciation and amortization		396,462			457,828			486,686
Amortization of debt issuance costs and other financing costs		92,503			123,633			60,417
Loss on sale of property, plant and equipment		199,664			29,540			30,637
Impairment of long-lived assets		604,752			1,569,532
Loss on operations of Durango Paper Company		315,091			1,509,053
Deferred income tax		(71,892	)		(792,114	)		(194,795	)
Negative goodwill amortization								(543,206	)
Other		22,829			213,436			(3,931	)

		(1,245,528	)		(525,156	)		866,390
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade accounts receivable – Net		(90,405	)		451,812			6,522
Inventories – Net		48,271			244,317			933,029
Prepaid expenses		7,289			(12,096	)		(65,552	)
Increase (decrease) in:
Trade accounts payable		86,151			(353,832	)		(350,481	)
Accrued interest		918,458			158,831			(85,506	)
Accrued expenses and taxes other than income taxes		12,959			(41,443	)		(163,666	)
Other – Net		(81,605	)		59,473			(11,737	)
Assets of discontinued operations		5,936			(155,576	)		131,213
Liabilities of discontinued operations		75,308			(113,511	)		(28,008	)

Net resources generated by (used in) operating activities before discontinued operations and extraordinary loss		(263,116	)		(287,181	)		1,232,204
Discontinued operations, net of items that did not require resources		(178,732	)		129,587			114,854
Extraordinary loss								(317,947	)

Net resources generated by (used in) operating activities		(441,898	)		(157,594	)		1,029,111

(Continued)

F-10


	2003			2002			2001
Financing activities:
Short-term and long-term debt		259,408			2,588,475			2,558,746
Payments of long-term debt		(405,978	)		(1,703,525	)		(3,230,584	)
Translation adjustment of foreign subsidiaries		90,737			(36,296	)		121,874

Net resources generated by (used in) financing activities		(55,833	)		848,654			(549,964	)

Investing activities:
Restricted cash		(157,504	)
Acquisition of machinery and equipment		(106,719	)		(459,555	)		(846,649	)
Sale of property, plant and equipment		231,070			61,209			310,579
Revenues from sale of discontinued operations		924,620
Investment in subsidiaries					(212,899	)
Other assets		18,605			(379,382	)		(261,487	)

Net resources generated by (used in) investing activities		910,072			(990,627	)		(797,557	)

Cash and temporary investments:
Increase (decrease)		412,341			(299,567	)		(318,410	)
Balance at beginning of year		237,614			537,181			855,591

Balance at end of year	Ps.	649,955		Ps.	237,614		Ps.	537,181

(Concluded)

See accompanying notes to consolidated financial statements.

F-11

Corporación Durango, S. A. de C. V. and Subsidiaries

Notes to consolidated financial statements

For the years ended December 31, 2003, 2002 and 2001

(In thousands of Mexican pesos of purchasing power of December 31, 2003)

Activities, significant developments and subsequent event

a.		*Activities* – Corporación Durango, S. A. de C. V. (“CODUSA”) and subsidiaries (the “Company”) are primarily engaged in the manufacturing and selling of packaging (corrugated boxes and multi-wall sacks and bags), paper (containerboard, newsprint and bond) to be used in the manufacturing of corrugated boxes, newspaper, books and magazines, and other wood products (plywood and particleboard) in Mexico and in the United States of America.

b.		*Merger* – At the General Extraordinary Shareholders meeting held on October 8, 2001, the shareholders of CODUSA approved the merger of CODUSA into Grupo Industrial Durango, S. A. de C. V. (“GIDUSA”), subsidiary company. The merger was effective for financial purposes on October 8, 2001. In connection with the merger, the Company changed its name to Corporación Durango, S.A. de C.V. on February 7, 2002, when its bylaws were amended. The merger was effected through the exchange of shares in CODUSA for shares in GIDUSA. As a result of the merger, the Company recorded a net increase in stockholders’ equity of Ps.86,226 and issued 72,257,378 common nominative shares without par value. For accounting purposes the merger was accounted for in a manner similar to a pooling-of-interests, and accordingly it has been reflected retroactively in the financial statements for the year ended December 31, 2001.

c.		*Durango Paper Company –* In August 2002, Durango Paper Company (“DPC”), then a subsidiary company, suffered a boiler explosion at one of its plants located in Georgia, which resulted in the suspension of operations and the generation of significant losses. Additionally, at the date of the accident, the Company did not have insurance coverage for such an event and was exposed to the entire loss relating to the incident. In October 2002, the Company sold its investment in DPC to Operadora Omega Internacional, S.A. de C.V., a related company. 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 accounts receivable due to the Company. This sale gave rise to an aggregate loss of Ps.1,509,053, which was included in other expenses in the statement of operations. The Company granted guarantees for a bank loan of and certain letters of credit issued by DPC amounting to US$25.2 million. In 2003 the creditors called such guarantees, and the Company has initiated negotiations to restructure these debts. Due to the above, during 2003 a charge to the statement of operations of Ps.262,185 (US$23.6 million) was recorded, which corresponds to the balance of the bank debt and letters of credit at the date the debt was transferred to the Company.

d.		*Significant developments and subsequent event –* In order to expand its production facilities, the Company has contracted significant financing from banks in Mexico and abroad, mainly in the U.S. Additionally, on different dates it sold bonds on the New York securities market. However, since 2002 the Company has been severely affected by a combination of economic factors, such as the slowdown of the U.S. and the international economies, a significant drop in the world price of paper, a drastic reduction in the demand for manufactured products requiring the goods supplied by the Company, an increase in the cost of raw materials, electric power, gas and labor, and the entry of imported products into the Mexican market.

		The above-mentioned negative economic events led to a significant reduction in the generation of cash flow for the Company and its subsidiaries during the last quarter of 2002, and as a result since November 2002 the Company has been unable to cover the payment of interest and principal on certain debt and has not complied with certain obligations and restrictions imposed by the banks and bondholders to maintain the original maturities of the debt. As a result, a portion of the debt has been reclassified as short term, resulting in negative working capital and uncertainty as to the ability of the Company to continue as a going concern.

F-12

		In November 2002, the Company initiated negotiations with the banks and bondholders in an effort to restructure its debt and consider the sale of non-strategic assets. In April 2003, the Company signed a “Forbearance Agreement” with a significant portion of its creditors, under which they agreed to continue productive financial discussions regarding the terms of the debt restructuring. This agreement expired on June 30, 2003.

		On April 30, 2004, the Company and a significant portion of its bank lenders and bondholders signed a Plan Support Agreement regarding its proposed debt restructuring. Under the proposed restructuring, the Company’s unsecured creditors would exchange their existing financial debt for one or more tranches of new debt instruments, denominated the Series A, Series B, Series C and Series D Notes, to be issued in an aggregate principal amount of approximately US$715 million. In addition, participating creditors would receive an aggregate of 17% of the Company’s share equity, on a fully diluted basis. Also, the Company would make available US$43.5 million to acquire a portion of its outstanding debt at purchase prices of no more than US$650 per US$1,000 of principal.

		The Series A Notes will bear annual interest at LIBOR plus 3%, payable quarterly. Principal under the Series A notes will be amortized based on the following schedule: 5% in 2005; 12.5% in 2006; 15% in 2007; 15% in 2008; 25% in 2009; and 27.5% in 2010.

		The Series B Notes will bear annual interest at the rate of 7.75% until December 31, 2004, 8.75% during 2005, and 9.75% thereafter until maturity on December 31, 2010. Interest on the Series B Notes will be payable quarterly. The Series B Notes may be prepaid at the option of the Company at any time on or after December 31, 2005, without premium or penalty.

		The Series C Notes will not bear interest unless certain events occur, in which case interest will accrue at the annual rate of 8% retroactively from the date of issue. The Series C Notes will mature on December 31, 2012, and will be subject to redemption at the option of the Company under certain circumstances at a discount of up to 50% of face value.

		The Series D Notes will bear annual interest at the rate of 10.5%. Interest on the Series D Notes will be compounded annually and will be payable upon maturity on December 31, 2013.

		Holders of the Series A and Series B Notes will receive a restructuring fee, payable on the note issue date. The notes will be guaranteed by certain of the Company’s Mexican subsidiaries and be secured by the fixed assets of the Company and such subsidiaries. The Series C Notes will also be guaranteed by the Mexican subsidiaries, which guarantee will be subordinate to the guarantee of the Series A and Series B Notes, but without being secured by the fixed assets. The Series D Notes will not be guaranteed or secured.

		Under the terms of this agreement in principle, the creditors would support the Company’s overall financial restructuring through an exchange offer; in the event the exchange offer is not consummated but the Company obtains the necessary approvals from its creditors to support a consensual plan of reorganization, such plan could be filed under the United States of America’s bankruptcy rules.

e.		*Reorganization process* – On May 20, 2004 CODUSA announced that it has filed for “concurso mercantile” before a Mexican court, which main objective is to achieve a financial restructuring through the reorganization process based on the Mexican Businnes Reorganization Law. This process will take place at the CODUSA’s legal entity level, as a result, the operations of its subsidiaries will continue running as usual. The reorganization process allows that with the support of 51% of the creditors, the restructuring plan described above, be binding on all of CODUSA’s creditors. CODUSA anticipates that it will have the support of a sufficient percentage of votes to accomplish this goal in an expeditious manner.

F-13

Basis of presentation

a.		*Explanation for translation into English* – The accompanying consolidated financial statements have been translated from Spanish into English for use outside of Mexico. These consolidated financial statements are presented on the basis of accounting principles generally accepted in Mexico (“Mexican GAAP”). Certain accounting practices applied by the Company that conform with Mexican GAAP may not conform with accounting principles generally accepted in the country of use.

b.		*Going-concern* – The accompanying consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern. As indicated in the accompanying financial statements, during the years ended December 31, 2003 and 2002, the Company has incurred significant consolidated net losses and since 2001 its operating margin has substantially declined. As of December 31, 2003 and 2002 the Company has negative working capital and is experiencing severe liquidity problems. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

		The accompanying consolidated financial statements do not include any adjustments related to the valuation and presentation of assets or the presentation and amount of liabilities that might result if the Company is unable to continue as a going concern. As described in Note 1, since November 2002 the Company has not complied with principal and interest payments on certain debt, which as a result has been classified as short term. The Company’s ability to continue as a going concern is dependent upon its ability to generate profits and to restructure its debt. As mentioned in Note 1.d, the Company is committing significant resources to the debt restructuring efforts and has reached an agreement in principle with a significant portion of its creditors, who will support a comprehensive financial restructuring; however, there can be no assurance that the Company will be successful in its efforts.

c.		*Consolidation of financial statements* – The consolidated financial statements include those of CODUSA and its subsidiaries. The ownership percentage in the capital stock of the significant subsidiaries is shown below. Intercompany balances and transactions have been eliminated in these consolidated financial statements.


Group (or Company)	Ownership Percentage			Activity
Industrias Centauro, S. A. de C. V.		99	%	Manufacturing of containerboard, liner and medium


Compañía Papelera de Atenquique, S. A. de C. V.		98	%	Manufacturing of containerboard, liner and medium


Envases y Empaques de México, S.A. de C.V.		100	%	Manufacturing of corrugated boxes and multi-wall sacks

Empaques de Cartón Titán, S. A. de C. V. and subsidiary		100	%	Manufacturing of corrugated boxes and multi-wall sacks

Grupo Pipsamex, S. A. de C. V. and subsidiaries		100	%	Manufacturing of newsprint and bond paper

Durango McKinley Paper Company		100	%	Manufacturing of containerboard, liner and medium, and corrugated boxes

Ponderosa Industrial de México, S. A. de C. V.		100	%	Manufacturing of plywood and particleboard

F-14

d.		*Translation of financial statements of foreign subsidiaries –* To consolidate the financial statements of foreign subsidiaries that operate independently of the Company, the same accounting policies as those of the Company are followed, and the local currency financial statements are restated in the constant currency of the country in which they operate. Subsequently, such foreign currency financial statements are translated into Mexican pesos with the resulting exchange differences presented in cumulative translation adjustment of foreign entities within stockholders’ equity. For translation purposes, amounts are translated into Mexican pesos using the following exchange rates: (i) the closing exchange rate in effect at the balance sheet date for all assets and liabilities, (ii) the exchange rate in effect at the date the contributions were made for common stock, (iii) the exchange rate in effect at the end of the year in which the losses were generated for accumulated deficit, and (iv) the exchange rate in effect at the end of the year for revenues and expenses.

		The financial statements of foreign subsidiaries included in the 2002 and 2001 consolidated financial statements are restated in the constant currency of the country in which they operate and translated into Mexican pesos using the exchange rate of the latest year presented.

e.		*Comprehensive loss –* Comprehensive loss presented in the accompanying statements of changes in stockholders’ equity represents all changes in stockholders’ equity during each year except those resulting from investments by and distributions to owners, and is comprised of the net income (loss) of the year, plus other comprehensive loss items of the same period which, in accordance with Mexican GAAP, are presented directly in stockholders’ equity without affecting the consolidated statements of operations. In 2003, 2002 and 2001, the other comprehensive loss items consist of the excess (insufficiency) in restated stockholders’ equity, adjustment for additional liability for employee retirement obligation, and the translation effects of foreign subsidiaries.

f.		*Reclassifications –* Certain amounts in the financial statements as of and for the years ended December 31, 2002 and 2001 have been reclassified in order to conform to the presentation of the consolidated financial statements as of and for the year ended December 31, 2003.

3.		Summary of significant accounting policies

		The accounting policies followed by the Company are in conformity with Mexican GAAP, which require that management make certain estimates and use certain assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Although these estimates are based on management’s best knowledge of current events, actual results may differ. The significant accounting policies of the Company are as follows:

a.		*New accounting policies* – Beginning January 1, 2003, the Company adopted the provisions of new Bulletin C-8, “Intangible Assets”, which establishes that project development costs should be capitalized if they fulfill the criteria established for recognition as assets; preoperating costs that are not considered development costs should be recorded as a period expense; and intangible assets considered to have indefinite useful lives are not amortized, but instead are subject to impairment tests. The unamortized balance of capitalized preoperating costs up to December 31, 2002, will continue to be amortized according to the provisions of the former Bulletin C-8. The adoption of this new bulletin did not have significant effects on the Company’s consolidated financial position or results of operations.

		Beginning January 1, 2003, the Company also adopted the provisions of new Bulletin C-9, “Liabilities, Provisions, Contingent Assets and Liabilities and Commitments”, which establishes additional guidelines clarifying the accounting for provisions, accruals and contingent liabilities, and establishes new standards for the use of present value techniques to measure liabilities and accounting for the early settlement or substitution of obligations. The adoption of this new bulletin did not have significant effects on the Company’s consolidated financial position or results of operations.

F-15

b.		*Recognition of the effects of inflation –* The Company restates its consolidated financial statements to Mexican peso purchasing power of the most recent balance sheet date presented. Accordingly, the consolidated financial statements of the prior years have been restated to Mexican pesos of purchasing power of December 31, 2003 and, therefore, differ from those originally reported in the prior years.

c.		*Temporary investments –* Temporary investments are stated at the lower of acquisition cost, plus accrued yields, or estimated net realizable value.

d.		*Inventories and cost of sales –* Inventories are stated at the lower of net realizable value or average cost, which is similar to the most recent purchase price or production cost. Cost of sales is stated at estimated replacement cost at the time of sale.

e.		*Property, plant and equipment –* Property, plant and equipment are initially recorded at acquisition cost and restated using the National Consumer Price Index (“NCPI”). For fixed assets of foreign origin, restated acquisition cost expressed in the currency of the country of origin is converted into Mexican pesos at the market exchange rate in effect at the balance sheet date. Depreciation is calculated based on units produced in the period in relation to the total estimated production of the assets over their service lives.


	Years
Buildings		25-50
Industrial machinery and equipment		23-40
Vehicles		1-5
Computers		1-3
Office furniture and equipment		5-10

		Recurring maintenance and repair expenditures are charged to operating expense as incurred. Major overhauls to fixed assets are capitalized and amortized over the period in which benefits are expected to be received.

		Comprehensive financing cost incurred during the period of construction and installation of property, plant and equipment is capitalized and restated using the NCPI.

f.		*Impairment of long-lived assets in use –* The Company evaluates potential impairment losses to long-lived assets by assessing whether the unamortized carrying amount can be recovered over the remaining life of the assets through undiscounted future expected cash flows generated by the assets and without interest charges. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the assets, a loss is recognized for the difference between the fair value and carrying value of the assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets for which management has committed to a plan of disposal are recorded at the lower of the unamortized carrying amount or fair value less disposal cost.

g.		*Other assets* – Costs incurred in the development phase that meet certain requirements and that the Company has determined will have future economic benefits are capitalized and amortized based on the straight-line method over their estimated useful life. Those disbursements that do not meet such requirements are recorded in results of the period in which they are incurred. Intangible assets with indefinite lives are not amortized; however, their value is subject to impairment tests. Preoperating costs incurred after January 1, 2003 are recorded directly in results of the period in which they are incurred. Preoperating expenses incurred and capitalized up to December 31, 2002 are amortized using the straight-line method over three years.

F-16

h.		*Financial instruments* – Financial assets and liabilities resulting from any type of financial instrument, except for investments in financial instruments held to maturity, are presented in the balance sheet at fair value. The effects of the valuation of a financial asset or liability are recognized in results of operations of the respective period. Investments in financial instruments held to maturity are valued at acquisition cost. The costs and yields of financial instruments are recognized in results of the period in which they occur. Dividends from equity financial instruments are recognized in results of operations of the same period in which the fair value of the financial instrument is adjusted by such dividends.

i.		*Derivative financial instruments –* The internal control system established by the Company includes policies and procedures to manage its exposure to fluctuations in interest rates and in foreign currency exchange rates using derivative financial instruments. These instruments are traded only with authorized institutions and trading limits have been established for each institution. The Company does not carry out transactions with derivative financial instruments for the purpose of speculation. As of December 31, 2003 and 2002, the Company did not have derivative financial instruments.

j.		*Goodwill* – Goodwill represents the excess of cost over recorded value of subsidiaries as of the date of acquisition. It is restated using the NCPI and is amortized using the straight-line method over the estimated time period in which the acquired subsidiaries will become integrated to the Company. During 2003, 2002 and 2001, the Company did not record any amount in relation to goodwill, and there was no amortization of goodwill.

k.		*Negative goodwill* – This represents the excess of recorded value over cost of subsidiary companies and is restated using the NCPI. It is amortized using the straight-line method over the estimated time period in which the acquired subsidiaries will become integrated into the Company. During 2003 and 2002, there was no amortization of negative goodwill, and amortization in 2001 was Ps.543,206. During 2003, 2002 and 2001, the Company did not record any amount in relation to negative goodwill.

l.		*Employee retirement obligations* – Seniority premiums and pension plans are recognized as costs over employee years of service and are calculated by independent actuaries using the projected unit credit method at net discount rates. Severance is charged to results when the liability is determined to be payable.

m.		*Debt issuance costs –* Debt issuance costs, which are included in other assets, are restated by applying the NCPI and are amortized over the outstanding term of the debt on a straight-line basis.

n.		*Provisions* – Provisions are recognized for obligations that result from a past event, that are likely to result in the use of economic resources and that can be reasonably estimated. Such provisions are recorded at net present values when the effect of the discount is significant.

o.		*Income tax, tax on assets and employee statutory profit sharing* – Income tax (“ISR”) and employee statutory profit sharing (“PTU”) are recorded in results of the year in which they are incurred. 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 ISR assets are reduced by any benefits about which there is uncertainty as to their realizability. Deferred PTU is derived from temporary differences between the accounting result and income for PTU purposes and is recognized only when it can be reasonably assumed that they will generate a liability or benefit, and there is no indication that circumstances will change in such a way that the liabilities will not be paid or benefits will not be realized.

		The tax on assets paid that is expected to be recoverable is recorded as an advance payment of ISR and is presented in the balance sheet decreasing the deferred ISR liability.

F-17

	p.		*Foreign currency balances and transactions –* Foreign currency transactions are recorded at the applicable exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican pesos at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component of net comprehensive financing cost in the consolidated statements of operations, except those amounts capitalized as a component of construction cost.

	q.		*Excess (insufficiency) in restated stockholders’ equity* – Excess (insufficiency) in restated stockholders’ equity represents the accumulated monetary position result through the initial restatement of the consolidated financial statements and the increase in the restated value of machinery and equipment and inventories above (below) inflation.

	r.		*Revenue recognition* – Revenues are recognized in the period in which the risks and rewards of ownership of the inventories are transferred to the customers, which generally coincides with the delivery of products to customers in satisfaction of orders.

	s.		*Monetary position gain –* Monetary position gain, which represents the erosion of purchasing power of monetary items caused by inflation, is calculated by applying NCPI factors to monthly net monetary position. Gains result from maintaining a net monetary liability position.

	t.		*Net income (loss) per share –* Basic income (loss) per common share is calculated by dividing net income (loss) of majority stockholders by the weighted average number of shares outstanding during the year. Diluted income (loss) per share is determined by adjusting consolidated net income (loss) and common shares on the assumption that the Company’s commitments to issue or exchange its own shares would be realized.

Cash and temporary investments


	2003		2002
Cash	Ps.	233,448	Ps.	91,060
Temporary investments		416,507		146,554

	Ps.	649,955	Ps.	237,614

Trade accounts receivable


	2003			2002
Trade accounts receivable	Ps.	1,757,542		Ps.	1,747,003
Recoverable taxes		93,193			39,945
Other		93,458			52,272

		1,944,193			1,839,220
Allowance for doubtful accounts		(145,258	)		(132,397	)

	Ps.	1,798,935		Ps.	1,706,823

F-18

Inventories


	2003			2002
Finished goods	Ps.	208,927		Ps.	236,379
Production-in-process		10,803			30,717
Raw materials		327,731			311,559
Spare parts and materials for immediate consumption		243,079			305,088
Molds and dies		73,208			73,679
Other		26,758			15,754

		890,506			973,176
Allowance for obsolete inventories		(28,344	)		(31,175	)

		862,162			942,001
Advances to suppliers		46,007			52,488
Merchandise-in-transit		187,541			149,492

	Ps.	1,095,710		Ps.	1,143,981

Restricted cash

Corresponds to US$14 million, which was provided from the resources generated by the sale of the warehouse described in Note 16 and the sale of the Company’s participation in the equity of Productora Nacional de Papel, S.A. de C.V. described in Note 18. Under the terms of a loan agreement, the Company is required to use the resources obtained for capital expenditures.

Property, plant and equipment


	2003			2002
Buildings	Ps.	3,365,735		Ps.	3,624,486
Industrial machinery and equipment		17,668,631			17,654,725
Vehicles, computers, office furniture and equipment		1,192,198			1,403,723

		22,226,564			22,682,934
Accumulated depreciation and amortization		(9,523,226	)		(10,418,813	)
Accumulated impairment loss		(2,174,284	)		(1,569,532	)

		10,529,054			10,694,589
Land		765,166			1,096,667
Construction-in-progress		46,906			239,256

	Ps.	11,341,126		Ps.	12,030,512

The Company’s assets that were acquired through capital leases are as follows:


	2003			2002
Industrial machinery and equipment	Ps.	354,287		Ps.	368,352
Accumulated depreciation		(44,247	)		(31,775	)

	Ps.	310,040		Ps.	336,577

Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was Ps.374,262, Ps.442,683 and Ps.452,125, respectively.

F-19

			During 2003 and 2002, the Company reviewed the recoverable value of its long-lived assets, which was determined by the future cash flow generated over the useful lives of the corresponding assets, which extends from 20 to 35 years after 2003. As a result, the Company recorded Ps.604,752 and Ps.1,569,532 during 2003 and 2002, respectively, as an impairment loss for its long-lived assets. The deferred income tax effect for this reserve resulted in a benefit of Ps.193,521 and Ps.502,250 during 2003 and 2002, respectively.

			As of December 31, 2003 and 2002 the Company has assets temporarily out of use for a net amount of Ps.92,988 and Ps.348,103, respectively.

			Some loans are collateralized with the machinery and equipment acquired with those loans. Leased machinery has been pledged as collateral.

			The comprehensive financing costs capitalized in 2001 were Ps.34,145; during 2003 and 2002, the Company did not capitalize any comprehensive financing costs. Unamortized capitalized comprehensive financing cost was Ps.69,349 and Ps.72,110 at December 31, 2003 and 2002, respectively.

	9.		Other assets


	Intangible asset
	of employee
	retirement
	obligation		Debt issuance costs			Other			Total
Assets:
Balance as of January 1, 2003	Ps.	67,423	Ps.	616,658		Ps.	172,752		Ps.	856,833
Increase in additional liability related to seniority premiums		33,635								33,635
Write-off of debt issuance costs				(13,932	)					(13,932	)
Decrease in other intangible assets – Net							(4,673	)		(4,673	)

Balance as of December 31, 2003		101,058		602,726			168,079			871,863

Accumulated amortization:
Balance as of January 1, 2003				211,367			5,460			216,827
Amortization expense				83,147			31,556			114,703

Balance as of December 31, 2003				294,514			37,016			331,530

Net balance as of December 31, 2003	Ps.	101,058	Ps.	308,212		Ps.	131,063		Ps.	540,333

F-20

		During 2002 and 2001, the Company capitalized debt issuance costs amounting to Ps.224,459 and Ps.261,487, respectively; during 2003 the Company did not capitalize any debt issuance costs. In 2003, 2002 and 2001, the Company amortized Ps.83,147, Ps.123,633 and Ps.60,417, respectively, of debt issuance costs. For the year ended December 31, 2001, the Company wrote off debt issuance costs related to the Yankee Bond issuances with maturities in 2001 and 2003 of Ps.21,657 and Ps.14,412, respectively.
10.		Short-term and long-term debt

Short-term and long-term debt is summarized as follows:


	2003		2002
Continuing operations:
Short-term debt	Ps.	8,535,163	Ps.	7,595,462
Current portion of long-term debt		121,290		278,577
Long-term debt		399,423		1,021,426

		9,055,876		8,895,465

Discontinued operations:
Current portion of long-term debt		30,126		16,148
Long-term debt		111,239		104,956

		141,365		121,104

	Ps.	9,197,241	Ps.	9,016,569

Total debt classified by the main classes of liabilities are as follows:


	2003		2002
Senior Notes	Ps.	5,678,562	Ps.	5,484,786
Bank loans		2,650,174		2,628,890
Notes		540,487		522,045
Financial lease agreements		194,706		322,955
Letters of credit		74,599
Euro Commercial Paper		56,186		54,269
Other long-term debt		2,527		3,624

	Ps.	9,197,241	Ps.	9,016,569

			Senior Notes are comprised of four series, which mature in 2003, 2006, 2008 and 2009, with a total principal amount of US$505.3 million as of December 31, 2003; bearing interest at fixed rates that range from 12.625% to 13.75% annually. Wells Fargo Bank of Minnesota, N.A. acts as trustee.

			As of December 31, 2003, bank loans amount to US$238.9 million, with The Chase Manhattan Bank, N. A., Banco Nacional de México, S.A., California Commerce Bank, Bank of Albuquerque, N.A., Bancomext, S.N.C., Bancomer, S.N.C., Bank of America, N. A. and Commerze Bank; bearing interest at LIBOR plus a margin, which ranges from 1.5% to 8%. Maturities are variable, through 2010. Some bank loans are secured by the Company’s machinery and equipment.

			Notes payable for US$48.1 million to HG Estate, LLC, bearing interest at fixed rates, which range from 10% to 13% per annum, payable semiannually.

			Financial lease agreements for US$17.4 million with Arrendadora Bank of America, N.A. and GE Capital Leasing; bearing interest at LIBOR plus 3.25% through 3.5% per annum. Maturities are variable through 2009. The leased machinery has been pledged as collateral.

F-21

			Letters of credit for US$6.7 million with JPMorgan Chase Bank and Bank of America, N.A.

			The Euro Commercial Paper’s balance of US$5 million is derived from an issuance matured in February 2003. This debt bore interest at 9.75% annually prior to maturity.

	c.		The Senior Notes, bank loans and financial lease agreements contain covenants, obligations and restrictions with which CODUSA and/or its subsidiaries must comply, mainly in respect of contracting other credit lines, payment of dividends and decrease in capital stock, restrictions on transactions with related parties and the maintenance of certain financial ratios, as well as compliance with prompt payment of interest and principal upon each maturity. Since November 2002, the Company has failed to comply with the payment of interest and principal maturing on certain bank loans and notes. As a result, the Company is in default with respect to such obligations and some of these bank loans and notes have matured and not been paid. According to the terms of certain of the Company’s debt instruments, the banks and bondholders may demand in advance, the immediate payment of principal and interest outstanding on the loans and bonds in default. Therefore, the principal amount of the past due loans and notes that are in default have been classified as short-term debt.

			Payments on certain debt are guaranteed, jointly and severally on an unsecured basis by the following subsidiaries, Empaques de Cartón Titán, S.A. de C.V., Compañía Papelera de Atenquique, S.A. de C.V., Ponderosa Industrial de Mexico, S.A. de C.V. and Industrias Centauro, S.A. de C.V.

	d.		As of December 31, 2003, long-term debt matures as follows:


2005	Ps.	128,227
2006		88,146
2007		87,497
2008		65,022
2009		30,531

Thereafter	Ps.	399,423

At December 31, 2003, minimum rental commitments under capital leases are as follows:


Total minimum lease obligations	Ps.	199,410
Unearned interest		4,704

Present value of obligations		194,706
Current portion of obligations		(75,113	)

Long-term portion of capital lease obligations	Ps.	119,593

			Capital lease obligations, which include a purchase option at the end of the lease term, mature as follows:

			Year ending December 31,


2004	Ps.	75,113
2005		60,306
2006		17,826
2007		17,826
2008		17,826
Thereafter		5,809

	Ps.	194,706

F-22

11.

Financial instruments and derivative financial instruments

	a.		*Financial instruments* – The estimated fair value amounts of the Company’s financial instruments have been determined by the Company using available market information or other appropriate valuation methodologies that require considerable judgment in developing and interpreting the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

			The carrying amounts of the Company’s cash equivalents, accounts receivable, accounts payable and current notes payable approximate fair value because they have relatively short-term maturities and bear interest at rates tied to market indicators, as appropriate. The Company’s long-term debt consists of debt instruments that bear interest at fixed or variable rates tied to market indicators.

			As of December 31, 2003 and 2002, the Company was unable to calculate a reasonable estimate of the fair value of the Company’s long-term debt, because the comparable market information required to determine the estimated fair value of long-tem debt was not attainable due to the financial situation of the Company. The fair value of the Senior Notes was estimated based on quoted market prices, as follows:

2003

2002

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

Senior Notes

Ps.

5,678,562

Ps.

3,378,869

Ps.

5,484,786

Ps.

1,668,307

	b.		*Derivative financial instruments –* The Company entered into several equity swaPs. with respect to its American Depositary Receipts (“ADRs”). The difference between the fair value and the acquisition cost of those shares (including purchase expenses and premiums or discounts) as well as financing cost was recorded directly to stockholders’ equity through December 31, 2000. As a result of the adoption of Bulletin C-2, during 2001, the Company recorded Ps.22,150 in the statement of operations. The fair value of the equity swaPs. is estimated based on their quoted market price, which as of December 31, 2001, was equal to its carrying amount. The equity swap matured in May 2002, and in connection the Company purchased 2,240,000 shares that were recorded as treasury stock.

	c.		*Concentration of credit risk –* The financial instruments that potentially are subject to a concentration of credit risk are principally cash and temporary investments and trade accounts receivable. The Company deposits and invests its excess cash in recognized financial institutions. The concentration of the credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base and their dispersion across different locations in Mexico and the U.S. There were no customers exceeding 10% of net sales for any of the periods presented.

12.		Employee retirement obligations

		*México –* The Company maintains a pension plan for certain employees. In addition, in accordance with the Mexican Labor Law, the Company provides seniority premium benefits to employees under certain circumstances. These benefits consist of a lump sum payment of 12 days’ wages for each year worked, calculated using the most recent salary, not to exceed twice the legal minimum wage established by law. The related liability and annual cost of such benefits are calculated by an independent actuary on the basis of formulas defined in the plans using the projected unit credit method. The present values of these obligations and the rates used for the calculations are:

F-23


	2003			2002
Accumulated benefit obligation	Ps.	199,467		Ps.	166,112

Projected benefit obligation	Ps.	179,061		Ps.	200,114
Unrecognized items:
Variances for assumptions and adjustments based on experience		10,624			(23,148	)
Transition asset		(91,276	)		(82,292	)

Net projected liability		98,409			94,674
Additional liability related to seniority premiums		101,058			71,438

	Ps.	199,467		Ps.	166,112

The rates used in the actuarial calculations, net of effects of inflation, were:


	2003			2002			2001
	%			%			%
Discount of the projected benefit obligation at present value		5	%		5	%		5	%
Salary increase		2	%		2	%		2	%

The amortization periods for the unamortized items are as follows:


	Remaining
	Years
Transition asset		18
Variances in assumptions		18

Net period cost is comprised as follows:


	2003		2002		2001
Service costs	Ps.	5,483	Ps.	8,825	Ps.	9,141
Amortization of transition asset, variances for assumptions and adjustments based on experience		8,417		10,755		9,170
Interest cost		8,929		9,399		10,407

Net period cost	Ps.	22,829	Ps.	28,979	Ps.	28,718

			In connection with the reorganization process of the Company’s operations, there was a termination of administrative and operating personnel during 2003 that represented payments of Ps.59,262, which are included in other expenses in the accompanying consolidated statements of operations.

			*United States of America –* The subsidiaries in the United States of America have established the following defined contribution plans: a 401(k) retirement savings plan, health insurance plan, disability plan, and life insurance plan, among others. For the years ended December 31, 2003, 2002 and 2001, total expenses related to these plans were Ps.34,498, Ps.47,637 and Ps.120,576, respectively.

F-24

As of December 31, 2003 and 2002, the Company did not have any defined benefits plans; therefore, during 2003 the additional liability of employee retirement obligations, which was included within stockholders’ equity, was transferred to retained earnings. The net cost for 2001 consisted of the following:


Service costs	Ps.	8,904
Amortization of transition asset		2,980
Interest cost		37,548

	Ps.	49,432

The expected return on plan assets was Ps.47,542 for 2001. The rates used in the actuarial calculations were:


Expected long-term rate of return on plan assets	9.00	%
Discount rate	7.25	%

13.

Stockholders’ equity

Common stock shares at par value as of December 31 are comprised as follows:


	2003
	Number of		Par		Restatement
	Shares		Value		Effect		Total
Fixed capital Series A		46,610,100	Ps.	699,714	Ps.	1,707,265	Ps.	2,406,979
Variable capital Series A		45,222,022		678,873		1,656,436		2,335,309

Total shares		91,832,122	Ps.	1,378,587	Ps.	3,363,701	Ps.	4,742,288


	2002 and 2001
	Number of		Par		Restatement
	Shares		Value		Effect		Total
Fixed capital Series A		46,610,100	Ps.	699,714	Ps.	1,707,265	Ps.	2,406,979
Variable capital Series A		47,462,022		712,500		1,738,484		2,450,984

Total shares		94,072,122	Ps.	1,412,214	Ps.	3,445,749	Ps.	4,857,963

			Common stock consists of common nominative Series A shares without par value. The variable portion of capital stock cannot exceed ten times the aggregate amount of the fixed minimum portion without right to withdraw.

	b.		On June 30, 2003, the Board of Directors approved the cancellation of 2,240,000 treasury shares. Consequently, the variable portion of common stock was reduced by Ps.115,675 (Ps.33,627 at par value).

	c.		Retained earnings include the statutory legal reserve. The Mexican General Corporate Law requires that at least 5% of net income of the year be transferred to the legal reserve until the reserve equals 20% of capital stock at par value (historical pesos). The legal reserve may be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be replenished if it is reduced for any reason. At December 31, 2003 and 2002, the legal reserve, in historical pesos, was Ps.238,870.

F-25

	d.		Stockholders’ equity, except restated paid-in capital and tax retained earnings, will be subject to a tax at the rate in effect when a dividend is distributed. In 2003, the rate was 34% and will be reduced by one percentage point each year until reaching 32% in 2005. Any tax paid on such distribution, may be credited against the income tax payable of the year in which the tax on the dividend is paid and the two fiscal years following such payment.

	e.		The balances of the stockholders’ equity tax accounts as of December 31, are:


	2003		2002
Contributed capital account	Ps.	3,357,271	Ps.	3,304,135
Consolidated net tax income account		1,606,671		1,617,760
Consolidated net reinvested tax income account		871,769		838,433

Total	Ps.	5,835,711	Ps.	5,760,328

As illustrated in the preceding table, the total amount of the balances of the stockholders’ equity tax accounts exceeds stockholders’ equity, according to the accompanying balance sheet.

14.

Foreign currency balances and transactions

At December 31, the foreign currency monetary position is as follows:


	2003			2002
Thousands of U.S. dollars:
Monetary assets		39,219			27,483
Monetary liabilities		(929,657	)		(872,633	)

Monetary asset (liability) position, net		(890,438	)		(845,150	)

Equivalent in Mexican pesos	Ps.	(10,006,030	)	Ps.	(8,822,774	)
Thousands of Euros:
Monetary asset (liability) position, net		(10,346	)		(10,710	)

Equivalent in Mexican pesos	Ps.	(146,282	)	Ps.	(116,976	)

Nonmonetary assets of foreign origin at December 31, 2003 are as follows:


		Foreign		Equivalent
		Currency		in Mexican
	Currency	Balance		Pesos
Inventories	U.S. dollar		13,659	Ps.	153,397
Industrial machinery and equipment
United States of America	U.S. dollar		405,252		4,553,903
Brazil	Real		184,525		717,489
Japan	Yen		4,736,765		496,412
Germany	Euro		31,865		451,317
Canada	Canadian dollar		42,480		369,731
Other					323,843

F-26

The condensed financial information of the principal foreign subsidiaries as of December 31, 2003 are as follows:


	2003			2002			2001
				(In thousands of
				U.S. dollars)
United States of America
Net sales		146,646			291,700			343,919
Income from operations		4,471			(17,570	)		(4,413	)
Net income		(54,559	)		(96,610	)		(37,131	)
Current assets		30,216			45,203			96,028
Total assets		115,022			132,544			298,281
Current liabilities		18,960			33,522			95,772
Total liabilities		48,204			65,183			210,458

Transactions denominated in foreign currency were as follows:


	2003			2002			2001
				(In thousands of
				U.S. dollars)
Export sales		166,230			302,174			433,802
Interest expense		(96,455	)		(81,441	)		(111,876	)
Interest income		31			613			2,558
Import purchases		(167,303	)		(337,821	)		(456,771	)
Acquisition of machinery and equipment		(35,486	)		(20,978	)		(17,831	)

The exchange rates in effect at the dates of the consolidated balance sheets and of issuance of the consolidated financial statements were as follows:

December 31

April 30,

2003

2002

2004

U.S. dollar

Ps.

11.2372

Ps.

10.4393

Ps.

11.4068

Euros

14.1390

10.9221

13.6539

15.

Transaction and balances with related parties

Transactions with related parties, carried out in the ordinary course of business, were as follows:


	2003		2002		2001
Interest income	Ps.	25,077	Ps.	20,954	Ps.	7,325
Sale of paper		12,131
Sale of industrial machinery and other equipment		16,194
Sale of shares				543
Sale of accounts receivable				543
Freight expenses		42,321
Flight services paid				5,316
Other income		3,193

F-27

Balances receivable and payable with related parties are as follows:


	2003			2002
Due from related parties-
Administradora Corporativa y Mercantil, S.A. de C. V.	Ps.	175,317		Ps.	155,938
Durango Georgia Receivables Company		194,853			35,361
Durango Paper Company		58,569
Líneas Aéreas Ejecutivas de Durango, S. A. de C. V.		13,992
Other		291			8

		443,022			191,307
Allowance for doubtful accounts		(428,739	)

	Ps.	14,283		Ps.	191,307

Due to related parties-
Líneas Aéreas Ejecutivas de Durango, S.A. de C. V.	Ps.			Ps.	5,590

During 2003 the Company recorded an allowance for the account receivable due from Administradora Corporativa y Mercantil, S. A. de C. V. Since the Company’s shareholders own this company, this adjustment was recorded as a debit to retained earnings.

16.

Other expenses


	2003			2002			2001
Loss on sale of property, plant and equipment	Ps.	(199,664	)	Ps.	(29,540	)	Ps.	(30,637	)
Severance payments due to reorganization		(59,262	)
Restructuring expenses		(272,885	)
Impairment of long-lived assets		(604,752	)		(1,569,532	)
Loss on operations of DPC		(315,091	)		(1,509,053	)
Negative goodwill								543,206
Other income (expenses)		(59,535	)		(18,837	)		(36,139	)

	Ps.	(1,511,189	)	Ps.	(3,126,962	)	Ps.	476,430

			On November 25, 2003, the Company sold a warehouse for US$11.5 million. As part of the sale, the Company 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.193,891, which is presented in other expenses in the statement of operations.

			As mentioned in Note 1, the Company is committing significant resources to the debt restructuring efforts, for this reason on December 2002 a group of advisors was hired to support the Company in the restructuring of its debt and in the sale of non-strategic assets. On April 7, 2003, the Company entered into a forbearance agreement with a significant portion of its creditors, and a payment of a forbearance fee of US$12 million was required. The forbearance agreement expired on June 30, 2003.

F-28

17.

Income taxes, tax on assets and employee statutory profit sharing

			In accordance with Mexican tax law, the Company is subject to income tax (“ISR”) and tax on assets (“IMPAC”). ISR takes into consideration the taxable and deductible effects of inflation.

			The ISR 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. In 2002, the deduction for employee statutory profit sharing (“PTU”) and the obligation to withhold taxes on dividends paid to individuals or foreign residents were eliminated.

			IMPAC is calculated by applying a rate of 1.8% on the net average of the majority of restated assets less certain liabilities and is payable only to the extent that it exceeds ISR payable for the same period. If in any year IMPAC exceeds the ISR payable, the IMPAC payment for such excess may be reduced by the amount by which ISR exceeded IMPAC in the three preceding years and any required payment of IMPAC is creditable against the excess of ISR over IMPAC of the following ten years.

			The Company incurs consolidated ISR and IMPAC with its Mexican subsidiaries in the proportion that the Company owns the voting stock of its subsidiaries at the balance sheet date. Beginning on January 1, 2002, the proportion is calculated based on the average daily equity percentage that the Company owns of its subsidiaries during the year. The tax results of the subsidiaries are consolidated at 60% of such proportion and the tax results of the holding company are also consolidated at 60%. Estimated payments of ISR and IMPAC of both the Company and its subsidiaries are made as if the Company did not file a consolidated tax return.

ISR consists of the following:


	2003			2002			2001
Current	Ps.	(72,108	)	Ps.	(114,891	)	Ps.	(243,352	)
Deferred		71,892			792,114			194,795

	Ps.	(216	)	Ps.	677,223		Ps.	(48,557	)

The reconciliation of the statutory and effective ISR rates expressed as a percentage of income (loss) from continuing operations before ISR and PTU for the years ended December 31, 2003, 2002 and 2001 is:


	2003			2002			2001
Statutory rate		34.00	%		35.00	%		35.00	%
Add (deduct) the effect of permanent differences:
Non deductible expenses		(1.30	%)		(0.24	%)		1.91	%
Other		(14.59	%)		(0.75	%)		(30.64	%)
Add (deduct) the effects of inflation		0.90	%		(0.61	%)		(1.77	%)
Effect of change in statutory rate on deferred ISR		0.49	%		4.70	%
Change in valuation allowance for recoverable IMPAC and benefit of tax loss carryforwards		(19.51	%)		(22.40	%)

Effective rate		(0.01	%)		15.7	%		4.5	%

F-29

At December 31, 2003 and 2002 the main items comprising the liability balance of deferred ISR are:


	2003			2002
Deferred ISR asset (liability):
Property, plant and equipment	Ps.	2,822,829		Ps.	2,892,265
Inventories		243,904			(19,209	)
Allowance for doubtful accounts		(127,578	)		(39,562	)
Accrued expenses		(152,243	)		(55,624	)
Other assets		58,458			90,146
Other, net		(8,593	)		(155,853	)

Deferred ISR from temporary differences		2,836,777			2,712,163
Effect of tax loss carryforwards		(1,545,386	)		(1,092,446	)
Recoverable tax on assets		(316,349	)		(263,348	)

		975,042			1,356,369
Valuation allowance for the deferred ISR asset and recoverable tax on assets		943,805			396,913

Net long-term deferred ISR liability	Ps.	1,918,847		Ps.	1,753,282

	d.		Due to a deterioration in the circumstances used to assess the recovery of tax on assets paid and realization of the benefit of tax loss carryforwards, in 2003 and 2002 the valuation allowance for recoverable tax on assets and benefit of tax loss carryforwards was increased by Ps.546,892 and Ps.965,793, respectively, and charged to results of operations.

	e.		At December 31, 2003 and 2002, the Company has taxable temporary and permanent differences related to deferred PTU, mainly inventories and property, plant and equipment, for which the deferred PTU liabilities were not estimated nor recorded because the Company believes that they will not reverse due to the recurring nature of the related transactions.

	f.		Tax loss carryforwards and recoverable IMPAC for which the deferred ISR asset and prepaid ISR, respectively, have been partially recognized may be recovered subject to certain conditions. Restated amounts as of December 31, 2003 and expiration dates are:


Year of	Tax Loss		Recoverable
Expiration	Carryforwards		IMPAC
2004	Ps.	484,136	Ps.	48,673
2005		221,360		13,073
2006		169,449		26,274
2007		99,771		26,091
2008		147,317		25,308
2009		100,769		19,769
2010		112,249		23,857
2011		127,997		22,211
2012		1,950,845		58,092
2013		1,415,437		53,001

	Ps.	4,829,330	Ps.	316,349

For the years ended December 31, 2003, 2002 and 2001, the change in excess (insufficiency) in restated stockholders’ equity, as shown in the accompanying statements of changes in stockholders’ equity, is presented net of the effect of the related deferred income tax of Ps.200,679, Ps.151,170 and Ps.22,986, respectively.

F-30

18.

Discontinued operations

			In connection with the Company’s financial and operating restructuring, during 2003 the discontinuation and/or sale of some subsidiaries or significant assets was authorized. The related assets, liabilities and operating results have been presented as discontinued operations in the accompanying financial statements. Discontinued operations are as follows:

	a.		On February 27, 2003, the Company sold the assets of its molded pulp division for approximately US$53.7 million, resulting in a gain of Ps.334,969, which is included in the net loss of discontinued operations in the accompanying consolidated statements of operations for the year ended December 31, 2003. Additionally, according to the purchase agreement, the Company transferred to the buyer some accounts receivable and trade accounts payable, in order to permit the buyer to continue with production and sale of molded products.

	b.		On November 14, 2003, the Company sold its investment in Productora Nacional de Papel, S. A. de C. V. for US$28 million, giving rise to a loss of Ps.447,466, which is included in the net loss of discontinued operations in the accompanying consolidated statements of operations for the year ended December 31, 2003.

	c.		During 2003, the Company’s management authorized a plan to sell a plant located in Chihuahua, which is primarily engaged in the manufacturing of particleboard. On September 24, 2003, the Company signed a letter of intent with a potential buyer, who is in the process of performing due diligence. Based on the ongoing negotiations with the potential buyer, the Company reduced the book value of the net assets that will be sold by Ps.351,291, which is included in the net loss of discontinued operations in the accompanying consolidated statements of operations for the year ended December 31, 2003.

			The recorded value of the net assets of discontinued operations consist of the following:


	2003		2002
Cash	Ps.	3,283	Ps.	33,320
Accounts receivable – Net		56,825		165,147
Inventories – Net		23,795		190,784
Prepaid expenses		287		579

Total current assets		84,190		389,830

Property, plant and equipment – Net		252,847		1,602,182
Other assets – Net				100,811

Total noncurrent assets		252,847		1,702,993

Total assets	Ps.	337,037	Ps.	2,092,823

Short-term debt and current portion of long-term debt	Ps.	30,126	Ps.	16,148
Trade accounts payable		39,202		121,657
Other accounts payable, taxes and accrued liabilities		15,348		74,253

Total current liabilities		84,676		212,058

F-31


	2003		2002
Long-term debt		111,239		104,956
Deferred income taxes		78,297		340,754
Employee retirement obligations		710		20,784

Total long-term liabilities		190,246		466,494

Total liabilities	Ps.	274,922	Ps.	678,552

Net assets of discontinued operations	Ps.	62,115	Ps.	1,414,271

The statements of operations reflect discontinued operations, which are comprised as follows:


	2003			2002			2001
Net sales	Ps.	692,722		Ps.	847,060		Ps.	391,024
Costs of sales		703,153			612,732			261,066

Gross profit		(10,431	)		234,328			129,958
Operating expenses– Net		41,805			72,227			76,620

Income (loss) from operations		(52,236	)		162,101			53,338
Net comprehensive financing cost		(135,282	)		(159,294	)		(64,220	)
Other income (expenses) – Net		(25,117	)		86,799			88,089
Impairment of long-lived assets		(351,291	)		(100,961	)

Income (loss) from discontinued operations		(563,926	)		(11,355	)		77,207

Revenues from sales of discontinued operations		924,620
Cost of sales of discontinued operations		1,037,117

Loss on sales of discontinued operations		(112,497	)

ISR and PTU		127,188			(91,505	)		75,661

Discontinued operations – Net	Ps.	(549,235	)	Ps.	(102,860	)	Ps.	152,868

Depreciation and amortization	Ps.	37,675		Ps.	44,030		Ps.	42,165

19.

Extraordinary loss

For the year ended December 31, 2001, this item is comprised as follows:


Employee severances	Ps.	174,921
Net loss on sale of certain non-strategic assets		143,026

	Ps.	317,947

F-32

a.		Early in 2001, the Company entered into negotiations with its unions, with the objective of canceling labor contracts still in effect after approximately 50 years, regarding the operations of Compañía Papelera de Atenquique, S.A. de C.V. and Ponderosa Industrial de México, S.A. de C.V. After a few months of negotiations, such contracts were terminated and the number of workers was reduced.

b.		In April and May 2001, certain non-strategic assets of DPC were sold, generating a loss since the carrying value of the assets was higher than the price at which they were sold.

20.

Commitments

Some of the Mexican subsidiaries lease certain equipment under non-cancelable operating leases. The related rental Company’s expense was approximately Ps.50,544, Ps.59,719 and Ps.77,799 for the years ended December 31, 2003, 2002 and 2001, respectively. As of December 31, 2003, estimated future minimum lease payments under non-cancelable operating leases were as follows:


Year	Amount
2004	Ps.	21,322
2005		18,671
2006		18,671
2007		18,671
Thereafter		76,764

	Ps.	154,009

Durango McKinley Paper Company leases certain equipment under non-cancelable operating leases. Rental expense under these leases was approximately Ps.4,624, Ps.3,885 and Ps.2,218 for the years ended December 31, 2003, 2002 and 2001, respectively. Future minimum lease commitments are Ps.2,252 due in 2004.

21.

Contingencies

a.		After the sale of DPC, Chapter 11 bankruptcy proceedings before the United States Bankruptcy Court were initiated regarding Durango Georgia Paper Company (“DGPC”), the main DPC subsidiary. Additionally, although formal notice has not been served on the Company, it is known that on April 2, 2004, the DGPC Official Committee of Unsecured Creditors filed a complaint against the Company, which seeks, among other things: (i) recovery of alleged fraudulent and preferential transfers from DGPC to the Company; (ii) damages for alleged fraudulent representations and breach of an alleged oral and written guarantee of the DGPC debt; and (iii) equitable subordination of the Company’s claims against DGPC. The Company’s management believes this claim is without merit and will defend the action.

b.		Subsequent to the sale of Productora Nacional de Papel, S.A. de C.V., as described in Note 18, the Mexican National Water Commission billed the Company in the amount of Ps.157,140 related to several differences in the payments of rights for extraction and use of national water for the years 2001 and 2000. The Company filed an appeal with the Federal Tax and Administrative Court and is currently waiting for the court’s ruling. The Company’s management believes that the outcome will be favorable to the Company, since the tax authorities had not properly supported the differences assessed.

c.		On November 8, 2002, the Company initiated an arbitration proceeding against HG Estate LLC for US$85 million due to discrepancies in the calculation of the value of the fixed assets of DPC. Also, on December 19, 2002, HG Estate LLC filed a claim for US$50.2 million due to the failure of payment of capital and interest related to the acquisition of DPC. As of the date of issuance of these financial statements, the claim against the Company has been stayed while the arbitration proceeds.

F-33

d.		The Company was sued on February 25, 2003 by Compass Income Master Fund, Inc. due to the nonpayment of principal and interest of US$3.5 million on the Euro Commercial Paper, which matured February 12, 2003. Company’s management believes that payment of this liability will be made under the same terms and conditions reached as a result of its debt restructuring.

e.		The Company has initiated an injunction against the Mexican tax authorities regarding the methodology used to determine its employee statutory profit sharing. Management does not believe that any liabilities relating to this injunction are likely to have a material adverse effect on the Company’s consolidated financial condition or results of operations.

f.		The Company has initiated an injunction against the Mexican tax authorities regarding the unconstitutionality of the Substitutive Tax of the Wage Credit. Management believes that the outcome of this process will be favorable to the Company, which represents a contingent asset of Ps.12,196.

g.		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 the Company are not similar to those used with or between independent parties in comparable transactions.

22.		Information by industry segment and geographical area

		In April 2003, the Mexican Institute of Public Accountants (“MIPA”) issued Bulletin B-5, “Financial Information by Segment”, whose adoption is mandatory as of April 2003. The information on operating segments is presented based on a management focus. In addition, general information is presented by product, geographical area and homogeneous client groups.

Analytical information by operating segment of continuing operations:


2003
						Other			Total					Total
	Paper			Packaging		Segments			Segments		Eliminations			Consolidated
Sales to customers	Ps.	2,806,858		Ps.	3,942,603	Ps.	81,567		Ps.	6,831,028	Ps.			Ps.	6,831,028
Intersegment sales		2,497,232			133,334		16,119			2,646,685		(2,646,685	)

Total sales		5,304,090			4,075,937		97,686			9,477,713		(2,646,685	)		6,831,028
Depreciation and amortization		265,850			119,590		11,022			396,462					396,462
Income from operations		(109,553	)		430,439		(14,506	)		306,380					306,380
Total assets		18,475,951			24,709,451		933,989			44,119,391		(28,498,754	)		15,620,637
Capital expenditures		75,267			30,917		535			106,719					106,719


2002
					Other			Total					Total
	Paper		Packaging		Segment			Segments		Eliminations			Consolidated
Sales to customers	Ps.	4,082,248	Ps.	3,948,581	Ps.	93,668		Ps.	8,124,497	Ps.			Ps.	8,124,497
Intersegment sales		2,756,895		93,505		45,565			2,895,965		(2,895,965	)

Total sales		6,839,143		4,042,086		139,233			11,020,462		(2,895,965	)		8,124,497
Depreciation and amortization		334,325		113,408		10,095			457,828					457,828
Income from operations		2,472		495,062		(908	)		496,626					496,626
Total assets		17,008,990		20,064,711		1,082,256			38,155,957		(22,175,634	)		15,980,323
Capital expenditures		217,528		147,298		94,729			459,555					459,555

F-34


2001
					Other		Total					Total
	Paper		Packaging		Segment		Segments		Eliminations			Consolidated
Sales to customers	Ps.	6,041,402	Ps.	4,590,438	Ps.	143,463	Ps.	10,775,303	Ps.			Ps.	10,775,303
Intersegment sales		3,511,238		95,135		46,088		3,652,461		(3,652,461	)

Total sales		9,552,640		4,685,573		189,551		14,427,764		(3,652,461	)		10,775,303
Depreciation and amortization		354,871		114,543		17,272		486,686					486,686
Income from operations		439,138		485,189		93,726		1,018,053					1,018,053
Total assets		22,729,620		22,421,624		1,173,014		46,324,258		(25,695,839	)		20,628,419
Capital expenditures		265,305		428,608		152,736		846,649					846,649

General information of continuing operations by product:


Net Revenues	2003		2002		2001
Packaging-
Corrugated container	Ps.	3,645,682	Ps.	3,562,111	Ps.	4,058,485
Paper sacks		294,023		379,359		524,007
Tubes		2,898		7,111		7,946
Paper-
Paper for packaging		1,545,344		1,570,035		1,583,424
Newsprint		646,461		730,963		1,721,023
Uncoated free sheet		615,053		671,402		833,990
Kraft paper				328,493		415,070
Coated bleached board				781,355		1,487,895
Other segment		81,567		93,668		143,463

Total consolidated	Ps.	6,831,028	Ps.	8,124,497	Ps.	10,775,303

General segment information of continuing operations by geographical area:


2003
							Capital
	Revenues			Total Assets			Expenditures
Mexico	Ps.	7,426,589		Ps.	41,005,595		Ps.	90,235
United States of America		2,051,124			3,113,796			16,484
Intersegment eliminations		(2,646,685	)		(28,498,754	)

Consolidated	Ps.	6,831,028		Ps.	15,620,637		Ps.	106,719

F-35


2002
							Capital
	Revenues			Total Assets			Expenditures
Mexico	Ps.	7,670,024		Ps.	34,253,436		Ps.	301,513
United States of America		3,350,438			3,902,521			158,042
Intersegment eliminations		(2,895,965	)		(22,175,634	)

Consolidated	Ps.	8,124,497		Ps.	15,980,323		Ps.	459,555


2001
							Capital
	Revenues			Total Assets			Expenditures
Mexico	Ps.	9,879,093		Ps.	37,562,168		Ps.	678,508
United States of America		4,548,671			8,762,090			168,141
Intersegment eliminations		(3,652,461	)		(25,695,839	)

Consolidated	Ps.	10,775,303		Ps.	20,628,419		Ps.	846,649

d.		Homogeneous clients:

		Annual revenues from the following client groups to which the Company sells are:


	2003		2002		2001
Food and beverage	Ps.	2,702,866	Ps.	3,418,340	Ps.	4,542,012
Agribusiness		495,813		477,323		511,369
Aviculture		244,261		249,348		292,211
Maquila sector		266,135		267,158		284,094
Cement		151,739		237,553		345,316
Lime and plaster		52,345		51,177		64,829
Editorial		1,530,000		1,609,000		1,794,000
Scholastic		228,000		179,000		207,000
Furniture manufacturers		81,567		93,668		143,463
Other		1,078,302		1,541,930		2,591,009

Total	Ps.	6,831,028	Ps.	8,124,497	Ps.	10,775,303

F-36

23.		New accounting principles

		In March 2003, the Mexican Institute of Public Accountants (“MIPA”) issued Bulletin C-15, “Impairment of the Value of Long-Lived Assets and Their Disposal” (“C-15”), whose adoption is mandatory for fiscal years beginning on or after January 1, 2004, although early adoption is encouraged. C-15 establishes, among other things, new rules for the calculation and recognition of impairment losses for long-lived assets and their reversal. It also provides guidance as to indicators of potential impairment in the carrying amount of tangible and intangible long-lived assets in use, including goodwill. Companies must test for impairment unless there is conclusive evidence that the indicators of impairment are temporary. The calculation of such loss requires the determination of the recoverable value, which is now defined as the greater of the net selling price of a cash-generating unit and its value in use, which is the net present value of discounted future net cash flows. The accounting principles issued prior to this new Bulletin used future net cash flows, without requiring the discounting of such cash flows. During 2003 and 2002 indicators of potential impairment were identified by the Company, and in conformity with the accounting principles in effect until December 31, 2003, the Company recorded the effects of this impairment, reducing the machinery’s value by approximately Ps.956,043 and Ps.1,670,493, respectively, and reducing the deferred income tax liability by Ps.305,933 and Ps.534,558, respectively, with a net charge to results of operations for those years of Ps.650,110 and Ps.1,135,935, respectively. However, since the present value of estimated future net cash flows from the use of this machinery is less than its book value as of December 31, 2003, the Company estimates that the adoption of C-15 as of January 1, 2004, will result in additional impairment of this machinery, reducing its value by approximately Ps.914,146 and reducing the deferred income tax liability by Ps.292,527, with a net charge to the statement of operations of Ps.621,619.

		In May 2003, the MIPA issued Bulletin C-12, “Financial Instruments of a Debt or Equity Nature or a Combination of Both” (“C-12”), whose application is mandatory for financial statements for periods beginning on or after January 1, 2004, although early adoption is encouraged. C-12 is the compilation of the standards issued by the MIPA with respect to the issue of debt or equity financial instruments, or a combination of both, and includes additional standards on the accounting recognition for these instruments. Consequently, C-12 indicates the basic differences between liabilities and stockholders’ equity and establishes the rules for classifying and valuing the components of debt and equity of combined financial instruments in the initial recognition. Subsequent recognition and valuation of liabilities and stockholders’ equity of the financial instruments is subject to the standards issued previously in the applicable bulletins. Since the Company has not issued any financial instruments with characteristics of both debt and equity, management believes this new accounting principle will not have any effects on its financial situation and results of operations.

24.		Differences Between Mexican GAAP and US GAAP

		The consolidated financial statements of the Company are prepared in accordance with Mexican GAAP, which differs in certain significant respects from US GAAP. A reconciliation of the reported majority net income (loss), majority stockholders’ equity (deficit) and majority comprehensive income (loss) to US GAAP is presented in Note 25. It should be noted that this reconciliation to US GAAP does not include the reversal of the restatement of the financial statements for the effects of inflation as required by Bulletin B-10, “Recognition of the Effects of Inflation in the Financial Information”, of Mexican GAAP. The application of this bulletin represents a comprehensive measure of the effects of price-level changes in the Mexican economy and, as such, is considered a more meaningful presentation than historical cost-based financial reporting in Mexican pesos for both Mexican and US accounting purposes.

F-37

The differences between Mexican GAAP and US GAAP included in the reconciliation that affect the consolidated financial statements of the Company are described below.

a.		*Restatement of prior year financial statements* – As explained in Notes 3.b and 3.p, in accordance with Mexican GAAP, the financial statements for Mexican subsidiaries for prior years have been restated using Mexican inflation factors, and for foreign subsidiaries and affiliated companies for prior years have been restated using the inflation rate of the country in which the foreign subsidiary or affiliated company is located, then translated to Mexican pesos at the year-end exchange rate.

		Under US GAAP, the Company applies the regulations of the Securities and Exchange Commission of the United States of America (“SEC”), which require that prior year financial statements be restated in constant units of the reporting currency, in this case the Mexican peso, which requires the restatement of such prior year amounts using inflation factors.

		Additionally, all other US GAAP adjustments for prior years have been restated based upon the SEC methodology.

b.		*Classification differences* – Certain items require a different classification in the balance sheet or statement of operation under US GAAP. These include:

•		As explained in Note 6, under Mexican GAAP, advances to suppliers are recorded as inventories. Under US GAAP, advances to suppliers are classified as prepaid expenses.

•		The impairment of long-lived assets, the gain or loss on the disposition of fixed assets, all severance indemnities, and employee profit sharing must be included in operating expenses under US GAAP.

•		As explained in Note 18, under Mexican GAAP, the 2002 consolidated balance sheet has been reformulated to reflect the discontinuation and/or sale of certain subsidiaries or significant assets, which are presented as discontinued operations. Under US GAAP, the 2002 condensed consolidated balance sheet has not been reformulated for such discontinued operations.

c.		*Deferred start-up and research and development costs* – In 2002, under Mexican GAAP the Company deferred certain costs basically in relation to the reconstruction of a manufacturing plant that suffered a fire (Ponderosa Industrial de México, S.A. de C.V.) and the development of a new paper manufacturing process. Under US GAAP, SFAS No. 2, “Accounting for Research and Development Costs” and SOP 98-5, “Reporting on the Costs of Start-up Activities”, require that the Company expense the start-up and research and development costs as incurred. As such, at December 31, 2003 and 2002, the start-up and research and development costs have been included in the calculation of net income (loss) under US GAAP.

d.		*Restatement of imported fixed assets* – As explained in Note 3.e, under Mexican GAAP, fixed assets of foreign origin have been restated by applying the inflation rate of the country of origin and then translated at the year-end exchange rate of the Mexican peso.

		Under US GAAP, the Company applies the SEC regulations, which require that all machinery and equipment, both domestic and imported, be restated using Mexican inflation factors.

e.		*Capitalization of net comprehensive financing cost* – Under Mexican GAAP, the capitalization of net comprehensive financing cost (interest, exchange gain (loss) and monetary position gain) generated by loan agreements is optional, and the Company has elected to capitalize such cost only when there are specific borrowings obtained to finance the investment projects.

F-38

		In accordance with US GAAP, if interest is incurred during the construction of qualifying assets, capitalization is required as part of the cost of such assets. Accordingly, a reconciling item for the capitalization of a portion of the comprehensive financing cost is included in the US GAAP reconciliation of the majority net income (loss) and majority stockholders’ equity (deficit). If the borrowings are denominated in US dollars, the weighted-average interest rate on all such outstanding debt is applied to the balance of construction-in-progress to determine the amount to be capitalized. If the borrowings are denominated in Mexican pesos, the amount of interest to be capitalized as noted above is reduced by the gain on monetary position associated with the debt.

f.		*Deferred income taxes and employee profit sharing* – The Company follows SFAS No. 109, “Accounting for Income Taxes,” for US GAAP purposes, which differs from Mexican GAAP as follows:

•		Under Mexican GAAP, deferred taxes are classified as non-current, while under US GAAP deferred taxes are based on the classification of the related asset or liability.

•		Under Mexican GAAP, the effects of inflation on the deferred tax balance generated by monetary items are recognized in the result on monetary position. Under US GAAP, the deferred tax balance is classified as a non-monetary item. As a result, the consolidated statement of operations differs with respect to the presentation of the gain (loss) on monetary position and deferred income tax provision.

•		Under Mexican GAAP, deferred employee profit sharing is calculated considering only those temporary differences that arise during the year and which are expected to turn around within a defined period, while under US GAAP, the same liability method as used for deferred income taxes is applied.

•		The US GAAP adjustments to the accounting basis of assets and liabilities generate a difference calculating the deferred income tax under US GAAP compared to the one presented under Mexican GAAP (see Note 17).

•		Under US GAAP, in view of the going-concern uncertainty, a full valuation allowance has been provided for all deferred tax assets not assured of realization. Under Mexican GAAP, an entity-by-entity analysis of the realizability of all deferred tax assets has been performed to determine the required valuation allowance.

The tax effects of temporary differences that generated deferred tax liabilities (assets) under US GAAP are as follows:


	2003			2002
Deferred ISR (asset) liability:
Property, plant and equipment	Ps.	2,523,731		Ps.	3,114,854
Inventories		(44,457	)		57,745
Allowance for doubtful accounts		(41,839	)		(41,315	)
Accrued expenses		(104,082	)		(143,787	)
Other assets		34,408			52,740
Other		24,421			13,155

Deferred ISR from temporary differences		2,392,182			3,053,392
Tax loss carryforwards		(1,545,386	)		(1,705,994	)
Recoverable tax on assets		(316,349	)		(404,099	)

		530,447			943,299
Valuation allowance		2,082,199			2,110,093

Net deferred ISR liability	Ps.	2,612,646		Ps.	3,053,392

F-39

The changes in the balance of the deferred income taxes for the year under US GAAP are as follows:


	2003			2002
Balance at beginning of the year	Ps.	3,053,392		Ps.	3,065,775
Provision for the year		(86,080	)		(19,847	)
Change in deferred income tax liability of discontinued operations		(354,666	)		7,464

Balance at end of the year	Ps.	2,612,646		Ps.	3,053,392

The tax effects of temporary differences that generated deferred profit sharing liabilities (assets) under US GAAP are as follows:


	2003			2002
Deferred employee profit sharing (asset) liability:
Property, plant and equipment	Ps.	798,969		Ps.	1,048,306
Inventories		(13,893	)		17,498
Allowance for doubtful accounts		(13,075	)		(12,876	)
Accrued expenses		(30,427	)		(46,576	)
Other assets		(3,020	)		427
Other		(24,233	)		60,826

		714,321			1,067,605
Valuation allowance		68,895

Net deferred employee profit sharing liability	Ps.	783,216		Ps.	1,067,605

The changes in the balance of the deferred employee profit sharing liability for the year under US GAAP are as follows:


	2003			2002
Balance at beginning of the year	Ps.	1,067,605		Ps.	1,019,336
Provision for the year		(183,994	)		113,940
Change in the deferred employee profit sharing liability of discontinued operations		(100,395	)		(65,671	)

Balance at end of the year	Ps.	783,216		Ps.	1,067,605

The deferred income tax and profit sharing classification in the condensed consolidating balance sheet as of December 31, 2003 and 2002 is as follows:


				2003
				Employee
	Income Tax			Profit Sharing			Total
Deferred asset:
Current	Ps.	(145,921	)	Ps.	(67,735	)	Ps.	(213,656	)
Long term		(138,468	)		(46,291	)		(184,759	)

		(284,389	)		(114,026	)		(398,415	)
Deferred liability:
Current		373,304			98,273			471,577
Long term		2,523,731			798,969			3,322,700

		2,897,035			897,242			3,794,277

Deferred liability, net	Ps.	2,612,646		Ps.	783,216		Ps.	3,395,862

F-40


				2002
				Employee
	Income Tax			Profit Sharing			Total
Deferred assets:
Current	Ps.	(185,102	)	Ps.	(59,452	)	Ps.	(244,554	)
Long term		(380,364	)		(118,864	)		(499,228	)

		(565,466	)		(178,316	)		(743,782	)
Deferred liability:
Current		504,004			197,188			701,192
Long term		3,114,854			1,048,733			4,163,587

		3,618,858			1,245,921			4,864,779

Deferred liability, net	Ps.	3,053,392		Ps.	1,067,605		Ps.	4,120,997

g.		*Employee retirement obligations* – Under Mexican GAAP, the liabilities for employee benefits are determined using actuarial computations in accordance with Bulletin D-3, “Labor Obligations”, which is substantially the same as US GAAP SFAS No. 87, “Employers’ Accounting for Pensions”.

		Under Mexican GAAP and US GAAP, there is no difference in the liabilities for seniority premiums and pension plans.

		The following sets forth the changes in benefit obligations, and the funded status of such plans for 2003 and 2002 reconciled with the amounts reported in the condensed consolidated balance sheets under US GAAP.


	2003			2002
Accumulated benefit obligation:
Continued operations	Ps.	199,467		Ps.	166,112
Discontinued operations		710			20,784

	Ps.	200,177		Ps.	186,896

Projected benefit obligation at beginning of year	Ps.	225,717		Ps.	222,452
Less projected benefit obligation of discontinued operations at beginning of year		(25,603	)

		200,114			222,452
Service costs		5,483			8,825
Interest cost		8,929			9,399
Actuarial loss		(16,286	)		(2,123	)
Benefits paid		(19,179	)		(14,905	)
Net change in benefit obligation of discontinued operations					2,069

Projected benefit obligation at end of year	Ps.	179,061		Ps.	225,717

F-41


	2003			2002
Amounts recognized in the balance sheets consist of:
Unfunded liability	Ps.	179,061		Ps.	225,717
Less-
Plan assets
Unrecognized transition obligation and other		(80,652	)		(118,070	)

Net projected liability		98,409			107,647
Intangible asset		101,058			79,249

Liability recognized under US and Mexican GAAP	Ps.	199,467		Ps.	186,896

h.		*Minority interest* – Under Mexican GAAP, the minority interest in consolidated subsidiaries is presented as a separate component within stockholders’ equity in the consolidated balance sheet.

		Under US GAAP, this item must be excluded from consolidated stockholders’ equity in the consolidated balance sheet. Additionally, the minority interest in the net earnings (losses) of consolidated subsidiaries is excluded from consolidated net income (loss).

		The US GAAP adjustments shown in Note 25.a and 25.b are calculated on a consolidated basis. Therefore, the minority interest effect is presented as a separate line item, in order to obtain net income (loss) and stockholders’ equity.

i.		*Acquisitions* – As discussed in Note 3.k, under Mexican GAAP, the Company recorded negative goodwill that arose from various acquisitions realized in prior years, which represents the excess of the book value of the net assets acquired over the purchase price. Such negative goodwill was amortized into income over the period in which the Company integrated these operations into the entity.

		Under US GAAP, the excess of the book value of the net assets acquired over the purchase price was recorded as a reduction in the carrying value of the long-term assets (primarily fixed assets).

		Additionally, US GAAP allows the recognition of termination costs and the effect of conforming the accounting policies of the acquired companies as liabilities assumed at the acquisition date. Such costs are considered components of the net investments.

j.		*Reversal of loss on sale of fixed assets* – As disclosed in Note 19.b, “Extraordinary loss”, during 2001 the Company sold certain non-strategic assets. The US GAAP carrying value of the assets sold differed from the carrying value recorded under Mexican GAAP due to differences in the application of purchase accounting. As a result, the Company reversed the additional loss recognized under Mexican GAAP. Further, under Mexican GAAP, special items are presented as a separate line item in the statement of operations, whereas for US GAAP purposes such items are presented as a part of operating income. Therefore, for US GAAP purposes, the Company reclassified special items to operating income after giving effect to the reversal of the loss on sale of fixed assets.

k.		*Loss on extinguishment of Yankee Bonds* – In February 2001, the Company prepaid its US$150 million Yankee Bonds maturing in 2001 (“2001 Yankee Bonds”). Under Mexican GAAP, the Company capitalized the consent fee totaling Ps.33,516 paid to the bondholders of the 2001 Yankee Bonds and is amortizing such amount over the term of the new US$180 million Yankee Bonds maturing in 2006 (“2006 Yankee Bond”), which were issued simultaneously. Under Mexican GAAP, for the years ended December 31, 2003, 2002 and 2001 amortization of the debt issuance cost of the 2006 Yankee Bond totaled Ps.22,897, Ps.30,880 and Ps.16,022, respectively. In addition, the Company wrote-off Ps.15,679 of unamortized debt issuance cost related to the 2001 Yankee Bonds. Under US GAAP, this consent fee and the write-off of unamortized debt issuance cost would be recognized in earnings immediately and considered as part of the cost of extinguishing the 2001 Yankee Bonds. Under US GAAP, the loss on extinguishment of the 2001 Yankee Bonds (which includes the consent fee) would have totaled Ps.47,929. Under US GAAP, for the years ended December 31, 2003, 2002

F-42

		and 2001, amortization of the debt issuance cost of the 2006 Yankee Bond totaled Ps.17,999, Ps.16,096 and Ps.14,753, respectively.

l.		*Debt issuance costs* – In August 2001, the Company exchanged US$138.7 million of its US$250 million Yankee Bonds maturing in 2003 (“2003 Yankee Bonds”) for an additional US$128.3 million 2006 Yankee Bonds and US$10.4 million Yankee Bonds maturing in 2008 (“2008 Yankee Bonds”). Under Mexican GAAP, the Company capitalized Ps.109,593 of fees and expenses, excluding consent fees, incurred in connection with the exchange offering as debt issuance costs. During 2003, 2002 and 2001, the Company amortized Ps.28,693, Ps.26,332 and Ps.7,455, respectively, in relation to these costs. In addition, the Company wrote-off Ps.21,657 representing the unamortized debt issuance cost of the 2003 Yankee Bonds.

		Under US GAAP, debt issuance costs, excluding consent fees, relating to the exchange offering would be expensed since the terms of the 2006 and 2008 Yankee Bonds are not considered substantially different from the 2003 Yankee Bonds. Furthermore, the unamortized portion of original 2003 Yankee bonds, which totaled Ps.7,102, Ps.4,261 and Ps.1,420 for the years ended December 31, 2003, 2002 and 2001, respectively, would be amortized over the new term of the 2006 and 2008 Yankee Bonds.

		In September 2002, the Company initiated the process to register the 2009 Senior Notes. Under Mexican GAAP, the Company capitalized Ps.26,487 of fees and expenses. Under US GAAP those expenses were charged to operations in the condensed statement of operations, as the Company could not complete the registration process.

m.		*Impairment of long-lived assets* – For US GAAP purposes, beginning on January 1, 2002, the Company follows SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

		For the year ended December 31, 2001, the Company followed SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. SFAS Nos. 144 and 121 provide criteria for when and under what circumstances an impairment loss (write-down) should be recorded and the manner in which the write-down should be measured. An evaluation of impairment is undertaken whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Under SFAS Nos. 144 and 121, the impairment criteria are met when the carrying value of assets exceeds the sum of expected future cash flows (undiscounted and without interest charges) of the related assets. If it is determined that an asset is impaired, it is written down to its fair value.

		The Company tested certain long-lived assets for recoverability in 2003 and 2002 in response to significant adverse changes in business climate occurring during these years (see Note 1.d). Under US GAAP, certain assets being evaluated for recoverability had lower book values than under Mexican GAAP and negative goodwill resulting from acquisitions has reduced the US GAAP carrying value of the assets. As such, in 2003 and 2002 the impairment charge recorded under Mexican GAAP was greater than the impairment charge calculated under US GAAP. As a result, during 2003 and 2002, the Company recognized an adjustment to US GAAP net income (loss) of Ps.256,525 and Ps.776,744, respectively. Theses expenses relate primarily to machinery and equipment.

n.		*Adjustment to loss on sale of subsidiary and discontinued operations* – As described in Note 1.c, in October 2002, the Company sold its shares of DPC. Additionally, as disclosed in Note 18, during 2003 the Company sold its investment in Pronal and the assets of its molded pulp division, and approved a plan to sell a particleboard plant located in Chihuahua.

F-43

		Historically, under US GAAP the carrying value of such subsidiary and discontinued operations differed from the carrying value recorded under Mexican GAAP due to deferred income taxes, negative goodwill, fixed asset impairment, and the reversal of loss on sale of fixed assets. As such, the Company reversed the amount of the US GAAP cumulative prior period adjustments relating to DPC, Pronal, the molded pulp division and the particleboard plant. In accordance with SFAS No. 144, the sales of these components of the Company have been presented as discontinued operations in the condensed statement of income for all periods presented.

o.		*Equity swap agreements* – In prior years, the Company has entered into “Equity Share Swap Transactions” (collectively, “Equity Swaps”) with financial institutions, with respect to its American Depository Receipts (“ADRs”) at prices ranging from US$10.4489 to US$14.2813. The Equity Swaps had notional amounts of US$6.06 at December 31, 2001 bearing interest at LIBOR plus 2.95% payable semiannually and was due in 2002. Under Mexican GAAP, the Company recorded the fair value of the Equity Swaps on the balance sheet, with a corresponding adjustment to stockholders’ equity through December 31, 2000.

		Upon adoption of Bulletin C-2 under Mexican GAAP effective January 1, 2001, the Company recorded the fair value of the Equity Swaps with a corresponding adjustment to the income (loss) for the period. Under US GAAP, the fair value of the Equity Swaps was recorded in income (loss) for the period. The Equity Swaps matured in May 2002; therefore, the Company had no outstanding swaps at December 31, 2003 or 2002.

p.		*Statement of cash flows* – Under Mexican GAAP, the Company presents a consolidated statement of changes in financial position in accordance with Bulletin B-12, “Statement of Changes in Financial Position”, which identifies the generation and application of resources by the differences between beginning and ending financial statement balances in constant Mexican pesos. Bulletin B-12 also requires that monetary and foreign exchange gains and losses be treated as cash items for the determination of resources generated by operations.

		In accordance with US GAAP, the Company follows SFAS No. 95, “Statement of Cash Flows,” which is presented below excluding the effects of inflation.

q.		*Summarized financial information under US GAAP* – The condensed consolidated balance sheets as of December 31, 2003 and 2002, and the condensed consolidated statements of operations, changes in stockholders’ equity and cash flows for the three years ended December 31, 2003, 2002 and 2001, reflecting US GAAP adjustments, are presented below.

		Condensed consolidated balance sheets:


	2003			2002
Total current assets	Ps.	3,879,520		Ps.	4,418,151
Property, plant and equipment – Net		10,183,703			12,610,456
Other assets – Net		1,066,362			536,460

Total assets	Ps.	15,129,585		Ps.	17,565,067

Current liabilities	Ps.	12,050,369		Ps.	10,739,951
Total long-term liabilities		4,213,037			5,675,969

Total liabilities		16,263,406			16,415,920
Minority interest in consolidated subsidiaries		58,687			58,811
Stockholders’ equity		(1,192,508	)		1,090,336

Total liabilities and stockholders’ equity	Ps.	15,129,585		Ps.	17,565,067

F-44

Condensed consolidated statements of operations:


	2003			2002			2001
Net sales	Ps.	6,831,028		Ps.	6,510,982		Ps.	7,600,882
Cost of sales and operating expenses		6,936,659			6,620,573			6,484,643

Income (loss) from operations		(105,631	)		(109,591	)		1,116,239
Net comprehensive financing cost		(1,636,309	)		(1,539,438	)		(657,144	)
Other income (expenses) – Net		(401,129	)		58,888			(109,980	)
Income tax benefit (expense)		13,972			(95,040	)		(77,988	)
Minority interest in results of consolidated subsidiaries		2,602			(12,172	)		(5,469	)

Income (loss) from continuing operations		(2,126,495	)		(1,697,353	)		265,658
Discontinued operations – Net		(93,436	)		(509,737	)		(16,737	)

Net income (loss)	Ps.	(2,219,931	)	Ps.	(2,207,090	)	Ps.	248,921

Basic and diluted net income (loss) per share of:
Continuing operations	Ps.	(22.88	)	Ps.	(18.04	)	Ps.	2.82
Discontinued operations		(1.01	)		(5.42	)		(0.18	)

	Ps.	(23.88	)	Ps.	(23.46	)	Ps.	2.64

Net income (loss)	Ps.	(2,219,931	)	Ps.	(2,207,090	)	Ps.	248,921
Excess (insufficiency) in restated stockholders’ equity		(11,320	))		(1,277,700	)		70,009
Additional liability for employee retirement obligations								(133,290	)
Cumulative translation adjustment of foreign subsidiaries		123,724			357,351			(77,481	)

US GAAP comprehensive income (loss)	Ps.	(2,107,527	)	Ps.	(3,127,439	)	Ps.	108,159

F-45

Changes in stockholders’ equity:


	2003			2002
Balance at beginning of the year	Ps.	1,090,336		Ps.	4,217,775
Net income (loss) under US GAAP		(2,219,931	)		(2,207,090	)
Excess (insufficiency) in restated stockholders’ equity		(11,320	)		(1,277,700	)
Cumulative translation adjustment of foreign subsidiaries		123,724			357,351
Allowance for accounts receivable due from shareholders		(175,317	)

Balance at end of the year	Ps.	(1,192,508	)	Ps.	1,090,336

Condensed consolidated statements of cash flows:


	2003			2002			2001
Operating activities:
Income (loss) from continuing operations	Ps.	(2,126,495	)	Ps.	(1,697,353	)	Ps.	265,658
Items that did not require resources		1,389,634			2,114,226			309,227
Changes in operating assets and liabilities		614,166			482,342			686,782
Discontinued operations		(191,428	)		(509,737	)		(16,737	)

Net resources generated by (used in) operating activities		(314,123	)		389,478			1,244,930
Financing activities:
Short-term and long-term debt – Net		(405,978	)		1,422,414			(792,526	)
Other financing activities					(50,027	)		(234,650	)

Net resources generated by (used in) financing activities		(405,978	)		1,372,387			(1,027,176	)

Investing activities:
Acquisition of machinery and equipment		(106,719	)		(468,764	)		(932,949	)
Sale of (investment in) subsidiaries		924,620			(746,887	)		(6,920	)
Other investments activities		92,171			(232,656	)		413,993

Net resources generated by (used in) investing activities		910,072			(1,448,307	)		(525,876	)

Effect of inflation and exchange rate changes on cash and temporary investments		194,121			(563,596	)		(13,611	)

Increase (decrease) in cash and temporary investments		384,092			(250,038	)		(321,733	)
Balance at beginning of year		265,863			515,901			837,634

Balance at end of year	Ps.	649,955		Ps.	265,863		Ps.	515,901

Supplemental cash flow information:
Interest paid	Ps.	143,770		Ps.	803,755		Ps.	970,035
Income tax and tax on asset paid		163,774			195,809			251,605

	Ps.	307,544		Ps.	999,564		Ps.	1,221,640

F-46

25.

Reconciliation of Mexican GAAP to US GAAP

Reconciliation of net income (loss) for the year


	2003			2002			2001
Net income (loss) corresponding to majority interest under Mexican GAAP	Ps.	(3,348,336	)	Ps.	(3,742,169	)	Ps.	861,314
Deferred income taxes		64,879			(633,171	)		(300,463	)
Deferred employee statutory profit sharing expense		253,268			(48,269	)		15,389
Purchase accounting adjustments:
Amortization of negative goodwill								(467,036	)
Depreciation		156,926			156,926			173,348
Reversal of loss on sale of discontinued operations		71,372
Reversal of loss on sale of fixed assets					(128,108	)		128,108
Effect of fifth amendment to Bulletin B-10		(67,358	)		(64,050	)		(64,525	)
Loss on extinguishment of Yankee Bonds		14,717			14,717			(32,250	)
Debt issuance costs		29,962			(2,734	)		(81,901	)
Capitalized financing costs		11,910			32,439			26,939
Effect of Bulletin B-15 on prior years					55,472			(8,722	)
Adjustment to fixed asset impairment		256,525			776,744
Adjustment to loss on sale of subsidiary		246,380			1,539,564
Equity swaps					(50,875	)
Deferred start up and research and development costs		93,058			(104,650	)
Effect of US GAAP adjustments on minority interest		(3,234	)		(8,926	)		(1,280	)

US GAAP net income (loss)	Ps.	(2,219,931	)	Ps.	(2,207,090	)	Ps.	248,921

Under US GAAP, the monetary position effect of the statement of operations adjustments is included in each adjustment, except for the capitalization of the comprehensive financing cost, intangible assets and goodwill, which are non-monetary.

F-47

Reconciliation of stockholders’ equity


	2003			2002
Total stockholders’ equity corresponding to majority interest under Mexican GAAP	Ps.	1,533,037		Ps.	4,568,035
Deferred income taxes		(693,794	)		(964,344	)
Deferred employee statutory profit sharing		(814,337	)		(1,067,605	)
Purchase accounting adjustments:
Accumulated negative goodwill		(4,090,350	)		(4,809,394	)
Accumulated depreciation		793,118			751,958
Effect of fifth amendment to Bulletin B-10:
Fixed assets		2,845,154			3,687,143
Fixed assets accumulated depreciation		(1,711,026	)		(1,437,716	)
Repurchase of Yankee Bonds:
Loss on extinguishment of Yankee Bonds		(33,516	)		(33,516	)
Accumulated amortization		30,701			15,984
Debt issuance costs:
Reversal of capitalized debt issuance costs		(114,704	)		(114,704	)
Accumulated amortization		60,030			30,068
Capitalized financing costs:
Capitalized financing costs		72,690			60,557
Accumulated depreciation		(1,402	)		(1,180	)
Effect of restatement of prior year amounts per Bulletin B-15					(32,987	)
Adjustment to fixed asset impairment		934,393			776,744
Adjustment to loss on sale of subsidiary					(246,380	)
Deferred start up and research and development costs		(11,592	)		(104,650	)
Effect of US GAAP adjustments on minority interest		9,089			12,323

Total US GAAP stockholders’ equity (deficit)	Ps.	(1,192,508	)	Ps.	1,090,336

Reconciliation of comprehensive income (loss)


	2003			2002			2001
Majority comprehensive income (loss) under Mexican GAAP	Ps.	(2,859,681	)	Ps.	(3,672,724	)	Ps.	(159,328	)
US GAAP adjustments:
Net income (loss)		1,128,405			1,535,079			(612,393	)
Translation adjustment		32,987			393,647			1,079,237
Result of holding non-monetary assets		(409,238	)		(1,383,441	)		(199,357	)

Comprehensive income (loss)	Ps.	(2,107,527	)	Ps.	(3,127,439	)	Ps.	108,159

F-48

26.

Future impact of recently issued accounting standards under US GAAP not yet in effect

a.		*SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities”)* – In April 2003 the FASB issued SFAS No. 149, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. The changes in this Statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The new standard will be effective for contracts entered into or modified after September 30, 2003, except as stated below and for hedging relationships designated after September 3, 2003. In addition, except as stated below, all provisions of this Statement should be applied prospectively.

		The provisions of this Statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to September 15, 2003, should continue to be applied in accordance with their respective effective dates. The Company does not anticipate that this new standard will have a significant impact on its financial position or results of operations.

b.		*FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”)* – In January 2003, the FASB issued FIN 46. FIN 46 clarified the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all variable interests held by the Company in a variable interest entity created after January 31, 2003. For a variable interest held by the Company in a variable interest entity created before February 1, 2003, the Company will be required to apply the provisions of FIN 46 as of December 31, 2004. The Company does not currently have any variable interests in a variable interest entity.

27.		Guarantor financial information

		On June 24, 2002, the Company issued US$175 million in 13^3/4 Senior Notes due 2009. These notes are guaranteed, jointly and severally, on an unsecured basis by certain wholly owned and non-wholly owned subsidiaries of the Company. Additionally, upon the issuance of the notes, the initial subsidiary guarantors also equally and ratably guaranteed the 2006 and 2008 Notes.

		Presented below is condensed consolidating financial information as of December 31, 2003 and 2002 and for the three years ended December 31, 2003, 2002 and 2001 for CODUSA; non-wholly owned combined guarantor subsidiaries; wholly owned combined guarantor subsidiaries; the combined non-guarantor subsidiaries; eliminations and; the Company’s consolidated totals.

		Where applicable the equity method has been used by CODUSA and guarantors with respect to their investment in certain subsidiaries for the respective periods presented. The Company has not presented separate financial statements for the wholly owned guarantor subsidiaries since management has determined that such information is not material to investors. The Company has presented separate financial statements of the non-wholly owned subsidiaries. Other disclosures concerning the guarantor subsidiaries were not included because management has determined that such information is not material to investors.

F-49

Condensed consolidating balance sheet
As of December 31, 2003


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			Owned			Owned			subsidiaries			Eliminations			Consolidated
Cash and temporary investments	Ps.	411		Ps.	1,751		Ps.	527,527		Ps.	120,266		Ps.			Ps.	649,955
Due from related parties		6,569,031			4,042,965			4,854,618			2,477,967			(17,930,298	)		14,283
Other current assets		83,586			363,127			1,746,666			1,125,780			(317,533	)		3,001,626
Investment in shares of subsidiaries and/or affiliated companies		6,875,417						246,028			2,299,829			(9,421,274	)
Property, plant and equipment – Net		401,552			3,422,988			3,282,127			4,234,459						11,341,126
Other assets		889,726			75,027			383,230			203,049			(600,348	)		950,684

Total assets	Ps.	14,819,723		Ps.	7,905,858		Ps.	11,040,196		Ps.	10,461,350		Ps.	(28,269,453	)	Ps.	15,957,674

Due to related parties	Ps.	3,864,966		Ps.	4,820,656		Ps.	8,252,532		Ps.	1,216,928		Ps.	(18,155,082	)	Ps.
Other current liabilities		9,379,240			453,509			473,571			1,559,178			(317,826	)		11,547,672
Total long-term liabilities		42,480			933,352			1,158,209			1,275,496			(600,348	)		2,809,189

Total liabilities		13,286,686			6,207,517			9,884,312			4,051,602			(19,073,256	)		14,356,861

Capital stock		4,742,288			4,614,832			3,811,539			12,519,089			(20,945,460	)		4,742,288
Additional paid-in capital		1,387,056						664						(664	)		1,387,056
Other stockholders’ equity accounts		(4,596,307	)		(2,916,491	)		(2,656,319	)		(6,109,341	)		11,682,151			(4,596,307	)

Majority stockholder’ equity		1,533,037			1,698,341			1,155,884			6,409,748			(9,263,973	)		1,533,037
Minority stockholders’ equity in consolidated subsidiaries														67,776			67,776

Total stockholders’ equity		1,533,037			1,698,341			1,155,884			6,409,748			(9,196,197	)		1,600,813

Total liabilities and stockholders’ equity	Ps.	14,819,723		Ps.	7,905,858		Ps.	11,040,196		Ps.	10,461,350		Ps.	(28,269,453	)	Ps.	15,957,674

Majority stockholders’ equity under Mexican GAAP	Ps.	1,533,037		Ps.	1,698,341		Ps.	1,155,884		Ps.	6,409,748		Ps.	(9,263,973	)	Ps.	1,533,037
US GAAP adjustments:
Deferred income taxes		(704,034	)		(267,420	)		66,294			211,366						(693,794	)
Deferred employee profit sharing					(348,502	)		(289,522	)		(176,313	)					(814,337	)
Purchase accounting adjustments:
Accumulated negative goodwill		(1,787,416	)		(90,055	)		501,495			(2,302,934	)		(411,440	)		(4,090,350	)
Accumulated depreciation		367,863			28,526			(42,852	)		425,254			14,327			793,118
Effect of fifth amendment of Bulletin B-10:
Fixed assets		90,617			400,866			720,904			1,632,767						2,845,154
Fixed assets accumulated depreciation		(12,913	)		93,930			113,106			(1,905,148	)					(1,711,025	)
Repurchase of Yankee Bonds:
Loss on extinguishment of Yankee Bonds		(33,516	)														(33,516	)
Accumulated amortization		30,701															30,701
Debt issuance costs:
Reversal of capitalized debt issuance costs		(114,704	)														(114,704	)
Accumulated amortization		60,030															60,030
Capitalization of financing cost:
Capitalization of financing cost		12,133									60,557						72,690
Accumulated amortization		(222	)								(1,180	)					(1,402	)
Adjustment to fixed asset impairment											934,393						934,393
Deferred start-up and research and development costs					(11,592	)		(68,618	)		68,618						(11,592	)
Investment in subsidiaries		(634,084	)					(92,890	)					726,974
Effect of US GAAP adjustments on minority interest								4			9,085						9,089

Total US GAAP stokholders’ equity (deficit)	Ps.	(1,192,508	)	Ps.	1,504,094		Ps.	2,063,805		Ps.	5,366,213		Ps.	(8,934,112	)	Ps.	(1,192,508	)

F-50

Condensed consolidating statement of operations
For the year ended December 31, 2003


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			owned			owned			subsidiaries			Eliminations			Consolidated
Net sales	Ps.			Ps.	1,742,112		Ps.	3,736,352		Ps.	3,919,583		Ps.	(2,567,019	)	Ps.	6,831,028
Cost of sales and operating expenses		5,306			1,744,040			3,368,810			4,061,826			(2,655,334	)		6,524,648

Income (loss) from operations		(5,306	)		(1,928	)		367,542			(142,243	)		88,315			306,380
Net comprehensive financing cost		(517,496	)		(216,443	)		(650,896	)		(140,325	)		(73,019	)		(1,598,179	)
Other income (expenses) – Net		(124,079	)		(492,814	)		25,255			(827,564	)		(91,987	)		(1,511,189	)
Income tax and employee statutory profit sharing expense		233,708			163,785			168,736			(494,975	)		(73,203	)		(1,949	)
Equity in losses of subsidiaries and/or affiliated companies		(2,978,520	)		(1,756	)		(109,957	)		(912,723	)		4,002,956

Loss from continuing operations		(3,391,693	)		(549,156	)		(199,320	)		(2,517,830	)		3,853,062			(2,804,937	)
Discontinued operations – Net		43,357						(188,577	)		(507,786	)		103,771			(549,235	)

Consolidated net loss	Ps.	(3,348,336	)	Ps.	(549,156	)	Ps.	(387,897	)	Ps.	(3,025,616	)	Ps.	3,956,833		Ps.	(3,354,172	)

Net income (loss) corresponding to majority interest under Mexican GAAP	Ps.	(3,348,336	)	Ps.	(549,156	)	Ps.	(387,897	)	Ps.	(3,024,297	)	Ps.	3,961,350		Ps.	(3,348,336	)
US GAAP adjustments:
Deferred income taxes		227,681			(81,296	)		58,978			(140,484	)					64,879
Deferred employee profit sharing					77,727			219,442			(43,901	)					253,268
Purchase accounting adjustments:
Depreciation		58,320			2,900			(16,325	)		98,605			13,426			156,926
Reversal of loss on sales of discontinued operations											71,372						71,372
Effect of fifth amendment to Bulletin B-10		(1,472	)		4,520			(22,744	)		(47,662	)					(67,358	)
Loss on extinguishment of Yankee Bonds		14,717															14,717
Debt issuance costs		29,962															29,962
Capitalization of financing cost		11,910															11,910
Adjustment to fixed asset impairment					25,624						230,901						256,525
Adjustment to loss on sale of subsidiary		246,380															246,380
Deferred start-up and research and development costs					3,241						89,817						93,058
Investments in subsidiaries		540,907												(540,907	)
Effect of US GAAP adjustments on minority interest								787			(4,021	)					(3,234	)

Net loss for the year under US GAAP	Ps.	(2,219,931	)	Ps.	(516,440	)	Ps.	(147,759	)	Ps.	(2,769,670	)	Ps.	3,433,869		Ps.	(2,219,931	)

F-51

Condensed consolidating statement of changes in financial position
For the year ended December 31, 2003


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			owned			owned			subsidiaries			Eliminations			Consolidated
Operating activities:
Loss from continuing operations	Ps.	(3,391,693	)	Ps.	(549,156	)	Ps.	(199,320	)	Ps.	(2,517,830	)	Ps.	3,853,062		Ps.	(2,804,937	)
Items that did not require (generate) resources		2,567,047			431,343			961,491			2,216,980			(4,617,452	)		1,559,409
Changes in operating assets and liabilities		2,541,695			81,930			(1,251,476	)		(883,514	)		493,727			982,362
Discontinued operations and extraordinary loss		43,357						(654,498	)		328,637			103,772			(178,732	)

Net resources used in (generated by) operating activities		1,760,406			(35,883	)		(1,143,803	)		(855,727	)		(166,891	)		(441,898	)

Financing activities:
Short-term and long-term debt – Net		141,333			(2,020	)		(14,001	)		(272,806	)					(146,570	)
Other financing activities											90,737						90,737

Net resources generated by (used in) financing activities		141,333			(2,020	)		(14,001	)		(182,069	)					(55,833	)

Investing activities:
Acquisition of machinery and equipment					39,836			(30,810	)		(33,270	)		(82,475	)		(106,719	)
Sale of (investment in) subsidiaries		(2,026,698	)					1,094,841			719,986			211,871
Revenues from sale of discontinued operations								612,582			312,038						924,620
Other investing activities		123,432			(869	)		(498	)		(66,465	)		36,571			92,171

Net resources generated by (used in) investing activities		(1,903,266	)		38,967			1,676,115			932,289			165,967			910,072

Increase (decrease) in cash and temporary investments:		(1,527	)		1,064			518,311			(105,507	)					412,341
Balance at beginning of year		1,938			687			9,216			225,773						237,614

Balance at end of year	Ps.	411		Ps.	1,751		Ps.	527,527		Ps.	120,266		Ps.			Ps.	649,955

F-52

Condensed consolidating statements of cash flow
For the year ended December 31, 2003


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			Owned			Owned			subsidiaries			Eliminations			Consolidated
Operating activities:
Income (loss) from continuing operations	Ps.	(2,713,251	)	Ps.	(516,440	)	Ps.	40,818		Ps.	(2,263,203	)	Ps.	3,325,581		Ps.	(2,126,495	)
Items that did not require (generate) resources		2,496,225			403,411			781,238			2,353,907			(4,645,147	)		1,389,634
Changes in operating assets and liabilities		1,640,136			74,253			(1,344,681	)		(1,257,301	)		1,501,759			614,166
Discontinued operations and extraordinary loss		493,320						(654,498	)		315,941			(346,191	)		(191,428	)

Net resources generated by (using in) operating activities		1,916,430			(38,776	)		(1,177,123	)		(850,656	)		(163,998	)		(314,123	)

Financing activities:
Short-term and logn-term debt – Net		(118,075	)		(1,648	)		(13,449	)		(272,806	)					(405,978	)

Net resources generateb by (used in) financing activities		(118,075	)		(1,648	)		(13,449	)		(272,806	)					(405,978	)

Investing activities:
Acquisition of machinery and equipment					(31,295	)		(42,154	)		(33,270	)					(106,719	)
Sale of (investment in) subsidiaries		(2,026,698	)					1,094,841			719,986			211,871
Income for sale of discontinued operations								612,582			312,038						924,620
Other investing activities		123,432			72,783			10,294			(66,465	)		(47,873	)		92,171

Net resources generate by (used in) investing activities		(1,903,266	)		41,488			1,675,563			932,289			163,998			910,072

Effect of inflation and exchange rate changes on cash and cash equivalents		103,384									90,737						194,121

Increase (decrease) in cash and temporary investments		(1,527	)		1,064			484,991			(100,436	)					384,092
Balance at beginning of year		1,938			687			42,536			220,702						265,863

Balance end of year	Ps.	411		Ps.	1,751		Ps.	527,527		Ps.	120,266		Ps.			Ps.	649,955

F-53

Condensed consolidating balance sheet
As of December 31, 2002


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			Owned			Owned			subsidiaries			Eliminations			Consolidated
Cash and temporary investments	Ps.	1,938		Ps.	687		Ps.	9,216		Ps.	225,773		Ps.			Ps.	237,614
Due from related parties		6,052,389			417,818			1,132,011			732,268			(8,143,179	)		191,307
Other current assets		14,947			389,643			1,541,235			1,444,715			(119,826	)		3,270,714
Investment in shares of subsidiaries and/or affiliated companies		6,894,009			140,286			350,484						(7,384,779	)
Property, plant and equipment – Net		450,476			3,364,157			3,592,495			4,623,384						12,030,512
Other assets		753,730			85,239			898,799			953,670			(348,439	)		2,342,999

Total assets	Ps.	14,167,489		Ps.	4,397,830		Ps.	7,524,240		Ps.	7,979,810		Ps.	(15,996,223	)	Ps.	18,073,146

Due to related parties	Ps.	1,640,314		Ps.	1,221,948		Ps.	4,233,861		Ps.	158,879		Ps.	(7,239,412	)	Ps.	5,590
Other current liabilities		7,855,482			304,323			1,212,886			1,514,269			(1,011,757	)		9,875,203
Total long term-liabilities		103,658			921,491			1,341,151			1,535,327			(348,442	)		3,553,185

Total liabilities		9,599,454			2,447,762			6,777,898			3,208,475			(8,599,611	)		13,433,978

Capital stock		4,857,963			4,289,289			1,717,076			3,336,226			(9,342,591	)		4,857,963
Treasury stock		(115,675	)														(115,675	)
Additional paid-in capital		1,387,056															1,387,056
Other stockholders’ equity accounts		(1,561,309	)		2,339,221			(1,107,651	)		1,831,303			1,615,569			(1,561,309	)

Majority stockholders’ equity		4,568,035			1,950,068			609,425			5,167,529			(7,727,022	)		4,568,035
Minority stockholders’ equity in consolidated subsidiaries								136,917			(396,194	)		330,410			71,133

Total stockholders’ equity		4,568,035			1,950,068			746,342			4,771,335			(7,396,612	)		4,639,168

Total liabilities and stockholders’ equity	Ps.	14,167,489		Ps.	4,397,830		Ps.	7,524,240		Ps.	7,979,810		Ps.	(15,996,223	)	Ps.	18,073,146

Majority stockholders’ equity under Mexican GAAP	Ps.	4,568,035		Ps.	1,950,068		Ps.	609,425		Ps.	5,167,529		Ps.	(7,727,022	)	Ps.	4,568,035
US GAAP adjustments:
Deferred income taxes		(503,321	)		(286,499	)		(535,611	)		361,087						(964,344	)
Deferred employee profit sharing					(406,657	)		(531,423	)		(129,525	)					(1,067,605	)
Purchase accounting adjustments:
Accumulated negative goodwill		(1,787,417	)					411,440			(3,021,978	)		(411,439	)		(4,809,394	)
Accumulated depreciation		309,543						(901	)		442,415			901			751,958
Effect of fifth amendment of Bulletin B-10:
Fixed assets		58,806			587,662			638,068			2,402,607						3,687,143
Fixed assets accumulated depreciation		(5,013	)		92,502			200,477			(1,725,682	)					(1,437,716	)
Repurchase of Yankee Bonds:
Loss on extinguishment of Yankee Bonds		(33,516	)														(33,516	)
Accumulated amortization		15,984															15,984
Debt issuance costs:
Reversal of capitalized debt issuance costs		(114,704	)														(114,704	)
Accumulated amortization		30,068															30,068
Capitalization of financing cost:
Capitalization of financing cost											60,557						60,557
Accumulated amortization											(1,180	)					(1,180	)
Effect of restatement of prior year amounts per Bulletin B-15		(32,987	)								(32,987	)		32,987			(32,987	)
Adjustment to fixed asset impairment											776,744						776,744
Adjustment to loss on sale of subsidiary		(246,380	)														(246,380	)
Deferred start-up and research and development costs					(14,833	)		(68,619	)		(21,198	)					(104,650	)
Investment in subsidiaries		(1,168,762	)					(92,890	)					1,261,652
Effect of US GAAP adjustments on minority interest								4			12,319						12,323

Total US GAAP stockholders’ equity	Ps.	1,090,336		Ps.	1,922,243		Ps.	629,970		Ps.	4,290,708		Ps.	(6,842,921	)	Ps.	1,090,336

F-54

Condensed consolidating statement of operations
For the year ended December 31, 2002


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			owned			owned			subsidiaries			Eliminations			Consolidated
Net sales	Ps.			Ps.	1,564,591		Ps.	3,607,396		Ps.	4,986,348		Ps.	(2,033,838	)	Ps.	8,124,497
Cost of sales and operating expenses		11,853			1,380,580			3,158,770			3,138,069			(61,401	)		7,627,871

Income (loss) from operations		(11,853	)		184,011			448,626			1,848,279			(1,972,437	)		496,626
Net comprehensive financing cost		(199,383	)		(199,903	)		(850,277	)		(343,888	)		(88,418	)		(1,681,869	)
Other expenses – Net		(1,467,376	)		(429,245	)		(106,984	)		(1,080,787	)		(42,570	)		(3,126,962	)
Income tax and employee statutory profit sharing expense		406,905			270,147			239,568			(240,479	)					676,141
Equity in income (losses) of subsidiaries and/or affiliated companies		(2,470,462	)		(48,092	)		(44,963	)					2,563,517

Loss from continuing operations		(3,742,169	)		(223,082	)		(314,030	)		183,125			460,092			(3,636,064	)
Discontinued operations – Net								(29,695	)		(159,970	)		86,805			(102,860	)

Consolidated net income (loss)	Ps.	(3,742,169	)	Ps.	(223,082	)	Ps.	(343,725	)	Ps.	23,155		Ps.	546,897		Ps.	(3,738,924	)

Net income (loss) corresponding to majority interest under Mexican GAAP	Ps.	(3,742,169	)	Ps.	(223,082	)	Ps.	(343,725	)	Ps.	23,155		Ps.	546,897		Ps.	(3,738,924	)
US GAAP adjustments:
Deferred income taxes		(520,932	)		(152,409	)		537,650			(632,876	)		135,396			(633,171	)
Deferred employee profit sharing					(12,139	)		220,577			(267,733	)		11,026			(48,269	)
Purchase accounting adjustments:
Depreciation		46,371									110,555						156,926
Effect of fifth amendment to Bulletin B-10		(1,381	)		26,663			(4,522	)		(41,378	)		(43,432	)		(64,050	)
Reversal of loss on sale of fixed assets		(128,108	)														(128,108	)
Loss on extinguishment of Yankee Bonds		14,717															14,717
Debt issuance costs		(2,734	)														(2,734	)
Capitalization of financing cost											32,439						32,439
Equity swaps											(50,875	)					(50,875	)
Adjustment to fixed asset impairment											776,744						776,744
Adjustment to loss on sale of subsidiary		1,539,564															1,539,564
Adjustment to loss on sale of an affiliated company					88,027									(88,027	)
Deferred start-up and research and development costs					(14,833	)		(68,618	)		(21,199	)					(104,650	)
Equity swaps		(50,875	)								50,875
Effect of restatement fo prior year amounts per Bulletin B-15		55,472						(59,855	)		19,258			40,597			55,472
Equity income of affiliated company		582,985						(33,428	)					(549,557	)
Effect of US GAAP adjustments on minority interest								(10,663	)		1,737			(3,245	)		(12,171	)

Net income (loss) for the year under US GAAP	Ps.	(2,207,090	)	Ps.	(287,773	)	Ps.	237,416		Ps.	702		Ps.	49,655		Ps.	(2,207,090	)

F-55

Condensed consolidating statement of changes in financial position
For the year ended December 31, 2002


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			owned			owned			subsidiaries			Eliminations			Consolidated
Operating activities:
Income (loss) from continuing operations	Ps.	(3,742,169	)	Ps.	(223,082	)	Ps.	(314,030	)	Ps.	183,125		Ps.	460,092		Ps.	(3,636,064	)
Items that did not require (generate) resources		3,585,529			296,363			119,105			1,541,576			(2,431,665	)		3,110,908
Changes in operating assets and liabilities		131,797			(51,460	)		(777,345	)		(917,932	)		1,852,915			237,975
Discontinued operations and extraordinary loss								(37,717	)		50,804			116,500			129,587

Net resources generated by (used in) operating activities		(24,843	)		21,821			(1,009,987	)		857,573			(2,158	)		(157,594	)

Financing activities:
Short-term and long-term debt – Net		1,338,626			(1,217	)		25,704			(478,163	)					884,950
Other financing activities								(963	)		(37,491	)		2,158			(36,296	)

Net resources generated by (used in) financing activities		1,338,626			(1,217	)		24,741			(515,654	)		2,158			848,654

Investing activities:
Acquisition of machinery and equipment					(11,512	)		71,629			(519,672	)					(459,555	)
Sale of (investment in) subsidiaries		(1,292,454	)					1,065,575			13,980						(212,899	)
Other investing activities		(357,244	)		(11,888	)		(155,415	)		206,374						(318,173	)

Net resources generated by (used in) investing activities		(1,649,698	)		(23,400	)		981,789			(299,318	)					(990,627	)

Increase (decrease) in cash and temporary investments:		(335,915	)		(2,796	)		(3,457	)		42,601						(299,567	)
Balance at beginning of year		337,853			3,483			12,673			183,172						537,181

Balance at end of year	Ps.	1,938		Ps.	687		Ps.	9,216		Ps.	225,773		Ps.			Ps.	237,614

F-56

Condensed consolidating statement of cash flow
For the year ended December 31, 2002


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			Owned			Owned			subsidiaries			Eliminations			Consolidated
Operating activities:
Income (loss) from continuing operations	Ps.	(2,207,090	)	Ps.	(287,773	)	Ps.	273,280		Ps.	561,380		Ps.	(37,150	)	Ps.	(1,697,353	)
Items that did not require (generate) resources		4,851,246			463,912			(748,420	)		(4,312,512	)		1,860,000			2,114,226
Changes in operating assets and liabilities		(953,206	)		(10,312	)		1,469,692			1,883,665			(1,907,497	)		482,342
Discontinued operations and extraordinary loss								(35,864	)		(560,678	)		86,805			(509,737	)

Net resources generated by (used in) operating activities		1,690,950			165,827			958,688			(2,428,145	)		2,158			389,478

Financing activities:
Short-term and long-term debt – Net		349,215			(1,124	)		26,970			1,047,353						1,422,414
Other financing activities					371			(1,515,081	)		1,466,841			(2,158	)		(50,027	)

Net resources generateb by (used in) financing activities		349,215			(753	)		(1,488,111	)		2,514,194			(2,158	)		1,372,387

Investing activities:
Acquisition of machinery and equipment					(10,201	)		(245,745	)		(212,818	)					(468,764	)
Other investing activities		(2,244,666	)		1,858			687,009			576,256						(979,543	)

Net resources generated by (used in) investing activities		(2,244,666	)		(8,343	)		441,264			363,438						(1,448,307	)

Effect of inflation and exchange rate changes on cash and temporary investment		(132,351	)		(159,527	)		118,020			(389,738	)					(563,596	)

Increase (decrease) in cash and temporary investments		(336,852	)		(2,796	)		29,861			59,749						(250,038	)
Balance at beginning of year		338,790			3,483			12,675			160,953						515,901

Balance end of year	Ps.	1,938		Ps.	687		Ps.	42,536		Ps.	220,702		Ps.			Ps.	265,863

F-57

Condensed consolidating statement of operations
For the year ended December 31, 2001


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			owned			owned			subsidiaries			Eliminations			Consolidated
Net sales	Ps.			Ps.	1,352,425		Ps.	3,745,950		Ps.	6,440,346		Ps.	(763,418	)	Ps.	10,775,303
Cost of sales and operating expenses		(102,692	)		1,132,273			3,244,838			4,847,443			635,388			9,757,250

Income from operations		102,692			220,152			501,112			1,592,903			(1,398,806	)		1,018,053
Net comprehensive financing cost		643,648			30,521			(677,479	)		(320,636	)		(86,490	)		(410,436	)
Other expenses – Net		72,812			(27,620	)		(23,536	)		503,079			(48,305	)		476,430
Income tax and employee statutory profit sharing expense		(216,340	)		71,497			74,184			17,194						(53,465	)
Equity in income (losses) of subsidiaries and/or affiliated companies		258,502			38,213			151,851			(496,300	)		47,734

Income from continuing operations		861,314			332,763			26,132			1,296,240			(1,485,867	)		1,030,582
Discontinued operations – Net								52,738			36,408			63,722			152,868
Extraordinary loss					(164,203	)					(153,744	)					(317,947	)

Consolidated net income	Ps.	861,314		Ps.	168,560		Ps.	78,870		Ps.	1,178,904		Ps.	(1,422,145	)	Ps.	865,503

Net income (loss) corresponding to majority interest under US GAAP	Ps.	861,314		Ps.	168,560		Ps.	78,870		Ps.	1,178,904		Ps.	(1,422,145	)	Ps.	865,503
US GAAP adjustments:
Deferred income taxes		(19,085	)		19,237			(51,358	)		(219,472	)		(29,785	)		(300,463	)
Deferred employee profit sharing					49,314			48,536			(55,544	)		(26,917	)		15,389
Purchase accounting adjustments:
Amortization of negative goodwill											(467,036	)					(467,036	)
Depreciation		46,370									126,978						173,348
Reversal of loss on fixed assets											128,108						128,108
Effect of fifth amendment to Bulletin B-10		(1,864	)		2,243			3,075			(54,659	)		(13,320	)		(64,525	)
Loss on extinguishment of Yankee Bonds		(32,250	)														(32,250	)
Debt issuance costs		(81,901	)														(81,901	)
Capitalization of financing cost											26,939						26,939
Effect of restatement of prior year amounts per Bulletin B-15		942						19,265			(34,404	)		5,475			(8,722	)
Investment in subsidiaries		(524,605	)											524,605
Equity income of affiliated company					21,707									(21,707	)
Effect of US GAAP adjustments on minority interest								(1,134	)		(146	)		(4,189	)		(5,469	)

US GAAP net income (loss)	Ps.	248,921		Ps.	261,061		Ps.	97,254		Ps.	629,668		Ps.	(987,983	)	Ps.	248,921

F-58

Condensed consolidating statements of changes in financial position
For the year ended December 31, 2001


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			owned			owned			subsidiaries			Eliminations			Consolidated
Operating activities:
Income from continuing operations	Ps.	861,314		Ps.	332,763		Ps.	26,132		Ps.	1,296,240		Ps.	(1,485,867	)	Ps.	1,030,582
Items that did not require (generate) resources		(80,329	)		(49,394	)		(45,626	)		(196,494	)		207,651			(164,192	)
Changes in operating assets and liabilities		(458,043	)		(79,812	)		285,892			693,122			(75,345	)		365,814
Discontinued operations and extraordinary loss					(164,203	)		52,737			(155,349	)		63,722			(203,093	)

Net resources generated by operating activities		322,942			39,354			319,135			1,637,519			(1,289,839	)		1,029,111

Financing activities:
Short-term and long-term debt – Net		119,085			(133,996	)		88,870			(745,797	)					(671,838	)
Other financing activities		—			(1,264	)					121,874			1,264			121,874

Net resources generated by (used in) financing activities		119,085			(135,260	)		88,870			(623,923	)		1,264			(549,964	)

Investing activities:
Acquisition of machinery and equipment		(114,204	)		97,616			(328,225	)		(501,836	)					(846,649	)
Sale of (investment in) subsidiaries		1,136,247						(88,377	)					(1,047,870	)
Other investing activities		(1,175,242	)								(1,112,111	)		2,336,445			49,092

Net resources generated by (used in) investing activities		(153,199	)		97,616			(416,602	)		(1,613,947	)		1,288,575			(797,557	)

Increase (decrease) in cash and temporary investments:		288,828			1,710			(8,597	)		(600,351	)					(318,410	)
Balance at beginning of year		49,025			1,773			21,270			783,523						855,591

Balance at end of year	Ps.	337,853		Ps.	3,483		Ps.	12,673		Ps.	183,172		Ps.			Ps.	537,181

F-59

Condensed consolidating statement of cash flow
For the year ended December 31, 2001


				Guarantor subsidiaries
				Non-wholly			Wholly			Non-guarantor
	CODUSA			Owned			Owned			subsidiaries			Eliminations			Consolidated
Operating activities:
Income (loss) from continuing operations	Ps.	248,921		Ps.	261,061		Ps.	97,253		Ps.	646,406		Ps.	(987,983	)	Ps.	265,658
Items that did not require (generate) resources		192,525			(168,849	)		(156,493	)		714,750			(272,706	)		309,227
Changes in operating assets and liabilities		(489,291	)		16,756			636,608			1,071,317			(548,608	)		686,782
Discontinued operations											(16,737	)					(16,737	)

Net resources generated by (used in) operating activities		(47,845	)		108,968			577,368			2,415,736			(1,809,297	)		1,244,930

Financing activities:
Short-term and long-term debt – Net		(32,719	)		123,921			(115,133	)		(768,595	)					(792,526	)
Other financing activities					(254,853	)		253,589			(234,650	)		1,264			(234,650	)

Net resources generated by (used in) financing activities		(32,719	)		(130,932	)		138,456			(1,003,245	)		1,264			(1,027,176	)

Investing activities:
Acquisition of machinery and equipment		(114,204	)		(58,731	)		(390,513	)		(369,501	)					(932,949	)
Other investing activities		68,043			176,287			(1,936	)		(1,643,354	)		1,808,033			407,073

Net resources generated by (used in) investing activities		(46,161	)		117,556			(392,449	)		(2,012,855	)		1,808,033			(525,876	)

Effect of inflation and exchange rate changes on cash and temporary investments		416,490			(93,882	)		(331,970	)		(4,249	)					(13,611	)

Increase (decrease) in cash and temporary investments		289,765			1,710			(8,595	)		(604,613	)					(321,733	)
Balance at beginning of year		49,025			1,773			21,270			765,566						837,634

Balance at end of year	Ps.	338,790		Ps.	3,483		Ps.	12,675		Ps.	160,953		Ps.			Ps.	515,901

* * * * * *

F-60

Report of Independent Registered Public
Accounting firm to the Board of Directors and
Stockholders of Compañía Papelera de
Atenquique, S. A. de C. V.

We have audited the accompanying balance sheet of Compañía Papelera de Atenquique, S. A. de C. V., formerly Compañía Industrial de Atenquique, S. A. de C. V. (the “Company”), a 98% owned subsidiary of Corporación Durango, S. A. de C. V. (“CODUSA”), as of December 31, 2003, and the related statements of operations, changes in stockholders’ equity and changes in financial position for the year then ended, all expressed in thousands of Mexican pesos of purchasing power of December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the 2003 financial statements present fairly, in all material respects, the financial position of Compañía Papelera de Atenquique, S. A. de C. V. as of December 31, 2003, and the results of its operations, changes in its stockholders’ equity and changes in its financial position for the year then ended in conformity with accounting principles generally accepted in Mexico.

Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of stockholders’ equity and net loss as of and for the year ended December 31, 2003 to the extent summarized in Note 20.

The accompanying financial statements as of December 31, 2003 and for the year then ended have been prepared assuming that the Company will continue as a going concern. As described in Note 2.c to the financial statements, during 2003, 2002 and 2001 the Company incurred significant net losses, and during 2003 had an operating loss. As of December 31, 2003 and 2002, the Company had negative working capital and, like CODUSA, is experiencing severe liquidity problems. Additionally, as mentioned in Note 16.a to the financial statements, the Company is guarantor of several financing agreements granted to CODUSA totaling US$599.5 million. Since November 2002 CODUSA has failed to comply with the payments of interest and principal related to such financing agreements and, as described in Note 1 to the financial statements, is currently in a debt restructuring process with its creditors. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans related to these matters and the description of CODUSA’s plan of restructuring are described in Note 1; however, this plan has not been completed. The Company’s ability to continue as a going concern is dependent upon its ability to generate profits and the restructuring of CODUSA’s debt. The accompanying financial statements do not include any adjustments related to the valuation and presentation of assets or the presentation and amount of liabilities that might result if the Company is unable to continue as a going concern.

F-61

The accompanying financial statements have been translated into English for the convenience of readers in the United States of America.

Galaz, Yamazaki, Ruiz Urquiza, S. C.
A member firm of Deloitte Touche Tohmatsu

C.P.C. Claudia Leticia Rizo Navarro

April 30, 2004
(June 28, 2004 as to Notes 1.f, 19, 20 and 21)

F-62

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Guadalajara, Jal., March 8, 2003, except with respect to the restatement to constant pesos as of December 31, 2003 as to which the date is July 13, 2004.

To the Board of Directors and Shareholders of
Compañía Papelera de Atenquique, S. A. de C. V.
(formerly Compañía Industrial de Atenquique, S. A. de C. V.)

We have audited the accompanying combined balance sheet of Compañía Papelera de Atenquique, S. A. de C. V. and subsidiary (formerly Compañía Industrial de Atenquique, S. A. de C. V. and subsidiaries) and Papelera Heda, S.A. de C.V. (HEDA), (collectively, the “Company”) as of December 31, 2002 and the related combined statements of income, of changes in shareholders’ equity and of changes in financial position for each of the two years in the period ended December 31, 2002, which, as described in Note 2, have been prepared on the basis of accounting principles generally accepted in Mexico. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America) as well as generally accepted auditing standards in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Company as of December 31, 2002 and the combined results of their operations, the changes in their combined shareholders’ equity and the changes in their combined financial position for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in Mexico.

Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted in the Unites States of America. The application of the latter would have affected the determination of stockholders’ equity as of December 31, 2002 and net loss for the two years in the period ended December 31, 2002 to the extent summarized in Note 20.

As mentioned in Note 1b, from April to September 2001, the Atenquique plant suspended its operations due to a labor conflict. All related expenses consisting of severance payments

F-63

paid to employees, as well as the costs of suspending and restarting the operations are presented as an extraordinary item in the accompanying income statements. As a result of the operational shutdown, all personnel was liquidated, and during September, 2001 the Company rehired part of the personnel, and restarted the operations. Severance expense amounted $107,763, net of $32,801 related to seniority premiums liability cancellation, and the cost of suspending and restarting operations amounted $56,441. Consequently, during 2001, the Atentiquique plant operated for only seven months.

As mentioned in Note 1, in 2003, the Company has experienced significant operating losses and its current liabilities have exceeded in current assets. Further, as explained in Note 16, the Company is a guarantor of several financing arrangements granted to its parent Corporacion Durango, S.A. de C.V. (CODUSA) which as further explained in Note 1, CODUSA is currently in default on such obligations. Since November 2002, CODUSA has failed to comply with the payments of interest and principal related to such financing agreements and, is currently in a debt restructuring process with its creditors. These factors, amongst others, raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on management’s ability to generate profits as well as the successful debt restructuring of CODUSA. The accompanying financial statements include no adjustment pertaining to the recoverability and classification of the amounts recorded as assets and the amounts and classification of liabilities that may become necessary in the event that the Company is unable to continue in operation as a going concern. Management’s plans in this regard are mentioned in Note 1.

As mentioned in Note 1, on July 1, 2003, HEDA, was merged into Compañía Papelera de Atenquique, S. A. de C. V. The merger of HEDA into Compañía Papelera de Atenquique, S. A. de C. V was accounted for as a transaction between entities under common control and consequently, has been reflected on a historical cost basis retroactive to the January 1, 2001.

PricewaterhouseCoopers

/s/ José Luis Franco Murayama

C.P.C. José Luis Franco Murayama
Public Accountant

F-64

Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% Subsidiary of Corporación Durango, S. A. de C. V.)

Balance sheets

As of December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003)

Assets


	2003		2002
Current assets:
Cash	Ps.	1,337	Ps.	142
Accounts receivable – Net		61,285		53,145
Due from related parties		176,946		101,646
Inventories – Net		52,661		50,513
Prepaid expenses		2,296		601

Total current assets		294,525		206,047
Investment in associated company				140,286
Property, plant and equipment – Net		1,446,323		1,274,488
Intangible asset of employee retirement obligations		42,938		45,084
Other assets – Net		17,333		25,483

Total	Ps.	1,801,119	Ps.	1,691,388

See accompanying notes to financial statements.

F-65

Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% Subsidiary of Corporación Durango, S. A. de C. V.)
Balance sheets
As of December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003)

Liabilities and stockholders’ equity


	2003			2002
Current liabilities:
Current portion of long-term debt	Ps.	1,228		Ps.	1,182
Notes payable		1,829			264
Trade accounts payable		99,162			90,614
Due to related parties		447,131			255,564
Accrued expenses and taxes, other than income taxes		144,165			134,662

Total current liabilities		693,515			482,286

Long-term liabilities:
Long-term debt		1,299			2,441
Long-term notes payable		5,672
Deferred income taxes		375,409			303,031
Employee retirement obligations		43,711			45,897

Total long-term liabilities		426,091			351,369

Total liabilities		1,119,606			833,655

Commitments and contingencies
Stockholders’ equity:
Common stock		2,098,765			2,098,358
Accumulated deficit		(199,951	)		(147,560	)
Insufficiency in restated stockholders’ equity		(564,831	)		(668,710	)
Cumulative initial effect of deferred income taxes		(424,355	)		(424,355	)
Receivable from sale of shares to CODUSA		(228,115	)

Total stockholders’ equity		681,513			857,733

Total	Ps.	1,801,119		Ps.	1,691,388

See accompanying notes to financial statements.

F-66

Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% Subsidiary of Corporación Durango, S. A. de C. V.)

Statements of operations
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)


	2003			2002			2001
Net sales	Ps.	628,769		Ps.	617,879		Ps.	317,076
Cost of sales		606,079			516,032			289,740

Gross profit		22,690			101,847			27,336
Selling, general and administrative expenses		37,390			33,595			20,539

Income (loss) from operations		(14,700	)		68,252			6,797
Net comprehensive financing cost:
Interest expense		(79,522	)		(76,499	)		(50,327	)
Interest income		10,885			16,574			14,508
Exchange gain (loss)		57			(42,285	)		1,364
Monetary position gain		10,465			17,983			11,225

		(58,115	)		(84,227	)		(23,230	)
Other expenses – Net		(39,225	)		(58,581	)		(6,105	)

Loss before deferred income tax, equity in income (loss) of associated company and extraordinary item		(112,040	)		(74,556	)		(22,538	)
Deferred income tax benefit (expense)		(14,744	)		69,224			99,109

Income (loss) before equity in income (loss) of associated company		(126,784	)		(5,332	)		76,571
Equity in income (loss) of associated company		(1,756	)		(48,092	)		38,213

Income (loss) before extraordinary item		(128,540	)		(53,424	)		114,784
Extraordinary item								(164,203	)

Net loss	Ps.	(128,540	)	Ps.	(53,424	)	Ps.	(49,419	)

See accompanying notes to financial statements.

F-67

Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% Subsidiary of Corporación Durango, S. A. de C. V.)

Statements of changes in stockholders’ equity
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)


													Receivable from
							Insufficiency			Cumulative Initial			Sale of			Total
							in Restated			Effect of Deferred			Shares to			Stockholders’
	Common Stock			Accumulated Deficit			Stockholders’ Equity			Income Taxes			CODUSA			Equity
Balances as of January 1, 2001	Ps.	2,101,961		Ps.	(44,443	)	Ps.	(546,972	)	Ps.	(424,967	)	Ps.			Ps.	1,085,579
Reimbursement of paid-in capital		(3,603	)		(274	)		2,001			612						(1,264	)
Comprehensive income					(49,419	)		220,706									171,287

Balances as of December 31, 2001		2,098,358			(94,136	)		(324,265	)		(424,355	)					1,255,602
Comprehensive loss					(53,424	)		(344,445	)								(397,869	)

Balances as of December 31, 2002		2,098,358			(147,560	)		(668,710	)		(424,355	)					857,733
Gain on holding and sale of investment in associated company					76,149												76,149
Net loss					(128,540	)											(128,540	)
Excess in restated stockholders’ equity								56,997									56,997

Comprehensive income					(52,391	)		56,997									4,606
Increase due to merger		407						46,882									47,289
Receivable from sale of shares to CODUSA														(228,115	)		(228,115	)

Balances as of December 31, 2003	Ps.	2,098,765		Ps.	(199,951	)	Ps.	(564,831	)	Ps.	(424,355	)	Ps.	(228,115	)	Ps.	681,513

See accompanying notes to financial statements.

F-68

Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% subsidiary of Corporación Durango, S. A. de C. V.)

Statements of changes in financial position
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)


	2003			2002			2001
Operating activities:
Income (loss) before extraordinary item	Ps.	(128,540	)	Ps.	(53,424	)	Ps.	114,784
Items that did not require (generate) resources:
Depreciation and amortization		49,327			45,059			34,855
(Income) loss on sale of property, plant and equipment		(2,521	)		924			1,167
Employee retirement obligations		265			300			184
Impairment of long-lived assets		64,131			51,462
Deferred income taxes		14,744			(69,224	)		(99,109	)
Equity in loss (income) of associated company		1,756			48,092			(38,213	)

		(838	)		23,189			13,668
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		18,850			(41,444	)		63,340
Related parties		5,196			(9,332	)		7,993
Inventories – Net		(1,682	)		2,401			26,770
Prepaid expenses		(780	)		136			226
Increase (decrease) in:
Trade accounts payable		(2,887	)		40,812			(51,897	)
Accrued expenses and taxes, other than income taxes		5,072			3,305			105,138
Other – Net		(208	)		(8,695	)		(21,496	)

Net resources generated by (used in) operating activities before extraordinary item		22,723			10,372			143,742
Extraordinary item								(164,203	)

Net resources generated by (used in) operating activities		22,723			10,372			(20,461	)

(Continued)

F-69


	2003			2002			2001
Financing activities:
Payments of long-term debt and notes payable		(2,020	)		(1,217	)		(1,685	)
Reimbursement of paid-in capital								(1,264	)

Net resources used in financing activities		(2,020	)		(1,217	)		(2,949	)

Investing activities:
Acquisition of machinery and equipment		(23,725	)		(9,680	)		(13,925	)
Sale of property, plant and equipment		4,792			73			37,384
Other assets		(869	)

Net resources generated by (used in) investing activities		(19,802	)		(9,607	)		23,459

Cash:
Net increase (decrease)		901			(452	)		49
Cash increase due to merger		294
Balance at beginning of year		142			594			545

Balance at end of year	Ps.	1,337		Ps.	142		Ps.	594

(Concluded)

See accompanying notes to financial statements.

F-70

Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% subsidiary of Corporación Durango, S. A. de C. V.)

Notes to financial statements
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)

Activities, significant developments and subsequent event

a.		*Activities –* Compañía Papelera de Atenquique, S. A. de C. V. (the “Company”) is subsidiary of Corporación Durango, S. A. de C. V. (“CODUSA”). The Company’s main activity is the manufacture and sale of containerboard to be used in the manufacturing of corrugated boxes.

b.		*Termination of unionized employees* – Early in 2001, the Company entered into negotiations with its employees’ labor union with the objective of canceling the labor contract that had been in effect for approximately 50 years. After a few months of negotiations, such contract was terminated, and the Company was forced to suspend operations from April to September 2001. The total number of employees was significantly reduced, and severance payments and other fixed costs of Ps.164,203 were incurred. These costs were recorded as an extraordinary item in the results of 2001.

c.		*Change of legal name –* At the General Extraordinary Shareholders Meeting held on September 28, 2001, the shareholders of the Company approved the change of legal name from Compañía Industrial de Atenquique, S.A. de C.V. to Compañía Papelera de Atenquique, S.A. de C.V.

d.		*Merger –* At the General Extraordinary Shareholders Meeting held on July 1, 2003, the merger of Papelera Heda, S. A. de C. V. (“HEDA”), Papeles Guadalajara, S. A. de C. V. (“PAPELES Guadalajara”) and Forestal de Jalisco, S. A. de C. V. (“FOJASA”), into the Company was approved. HEDA and PAPELES Guadalajara were engaged in the manufacture and sale of containerboard to be used in the manufacturing of corrugated boxes, and FOJASA was engaged in the forest products industry (it was dormant at the date of the merger).

		Prior to the merger, FOJASA was a subsidiary of the Company, and therefore up to December 31, 2002 the Company prepared consolidated financial statements. PAPELES Guadalajara was incorporated on July 1, 2003, as a result of a spin-off of the assets and liabilities of a containerboard production plant of Empaques de Cartón Titán, S. A. de C. V. (“TITAN”), a subsidiary of CODUSA, and on the same date of its incorporation it was merged into the Company.

e.		*Sale of investment in associated company –* The Company held shares representing 41.97% of the common stock of Envases y Empaques de Mexico, S. A. de C. V. (“EYEMSA”). At the General Ordinary Shareholders Meeting held on April 1, 2003, an increase in the common stock of EYEMSA of Ps. 860,000 was approved, which TITAN fully subscribed and paid, resulting in a reduction of the Company’s participation to 16.19%. This transaction resulted in a gain for the Company in the amount of Ps. 56,443. On July 1, 2003, the Company sold the shares representing its 16.19% participation in EYEMSA to CODUSA for US$20.3 million, which resulted in a gain of Ps. 19,706. As this is a transaction among enterprises under common control that did not represent a change in the entity, the aggregate gain on this transaction of Ps. 76,149 was recorded directly in retained earnings, and the selling price, which has not yet been collected, was reclassified from accounts receivable from related parties to a reduction of stockholders’ equity.

F-71

f.		*Significant developments and subsequent event –* In order to expand its production facilities, CODUSA and its subsidiaries (“CODUSA Group”) have contracted significant financing from banks in Mexico and abroad, mainly in the U.S. Additionally, on different dates it sold bonds on the New York securities market. However, since 2002 CODUSA Group has been severely affected by a combination of economic factors, such as the slowdown of the U.S. and the international economies, a significant drop in the world price of paper, a drastic reduction in the demand for manufactured products requiring the goods supplied by CODUSA’s subsidiaries, an increase in the cost of raw materials, electric power, gas and labor, and the entry of imported products into the Mexican market.

		The above-mentioned negative economic events led to a significant reduction in the generation of cash flow for CODUSA Group during the last quarter of 2002, and as a result since November 2002 CODUSA has been unable to cover the payment of interest and principal on certain debt and has not complied with certain obligations and restrictions imposed by the banks and bondholders to maintain the original maturities of the debt. As a result, a portion of the debt has been reclassified as short term, resulting in negative working capital and uncertainty as to its ability to continue as a going concern.

		In November 2002, CODUSA Group initiated negotiations with the banks and bondholders in an effort to restructure its debt and consider the sale of non-strategic assets. In April 2003, CODUSA Group signed a “Forbearance Agreement” with a significant portion of its creditors, under which they agreed to continue productive financial discussions regarding the terms of the debt restructuring. This agreement expired on June 30, 2003.

		On April 30, 2004, CODUSA Group and a significant portion of its bank lenders and bondholders signed a Plan Support Agreement regarding its proposed debt restructuring. Under the proposed restructuring, CODUSA’s unsecured creditors would exchange their existing financial debt for one or more tranches of new debt instruments, denominated the Series A, Series B, Series C and Series D Notes, to be issued in an aggregate principal amount of approximately US$715 million. In addition, participating creditors would receive an aggregate of 17% of CODUSA’s share equity, on a fully diluted basis. Also, CODUSA would make available US$43.5 million to acquire a portion of its outstanding debt at purchase prices of no more than US$650 per US$1,000 of principal.

		Under the terms of this agreement in principle, the creditors would support CODUSA Group’s overall financial restructuring through an exchange offer; in the event the exchange offer is not consummated but CODUSA Group obtains the necessary approvals from its creditors to support a consensual plan of reorganization, such plan could be filed under the United States of America’s bankruptcy rules.

		On May 20, 2004 CODUSA announced that it has filed for “concurso mercantil” before a Mexican court, which main objective is to achieve a financial restructuring through the reorganization process based on the Mexican Business Reorganization Law. This process will take place at the CODUSA’s legal entity level, as a result, the operations of its subsidiaries will continue running as usual. The reorganization process allows that with the support of 51% of the creditors, the restructuring plan described above, be binding on all of CODUSA’s creditors. CODUSA anticipates that it will have the support of a sufficient percentage of votes to accomplish this goal in an expeditious manner.

Basis of presentation

a.		*Explanation for translation into English* – The accompanying financial statements have been translated from Spanish into English for use outside of Mexico. These financial statements are presented on the basis of accounting principles generally accepted in Mexico (“Mexican GAAP”). Certain accounting practices applied by the Company that conform with Mexican GAAP may not conform with accounting principles generally accepted in the country of use.

b.		*Merger* – The merger with FOJASA and HEDA was accounted for in a manner similar to a pooling-of-interests, and accordingly it has been reflected retroactively in the financial statements for all periods. The assets and liabilities of PAPELES Guadalajara as of the date of the merger, and the statement of operations for the six-month period ended on December 31, 2003, are as follows:

F-72


	June 30,
	2003
Current assets	Ps.	113,501
Industrial machinery and equipment		184,609
Current liabilities		(199,726	)
Long-term liabilities		(51,095	)

Net assets	Ps.	47,289


	July 1 to
	December 31,
	2003
Net sales	Ps.	79,598
Cost of sales, selling, general and administrative expenses		(90,867	)
Net comprehensive financing cost		(1,526	)
Other income		147

Net loss	Ps.	(12,648	)

c.		*Going-concern –* The accompanying financial statements have been prepared on the assumption that the Company will continue as a going concern. As indicated in the accompanying financial statements, during the years ended December 31, 2003, 2002 and 2001, the Company has incurred significant net losses and during 2003 had an operating loss. As of December 31, 2003, 2002 and 2001 the Company has negative working capital and as CODUSA, is experiencing severe liquidity problems. The Company is guarantor of a portion of CODUSA’s debt. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

		The accompanying financial statements do not include any adjustments related to the valuation and presentation of assets or the presentation and amount of liabilities that might result if the Company is unable to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate profits and the restructuring of CODUSA Group debt. As mentioned in Note 1, CODUSA is committing significant resources to the debt restructuring efforts and has reached an agreement in principle with a significant portion of its creditors, who will support a comprehensive financial restructuring; however, there can be no assurance that CODUSA will be successful in its efforts.

d.		*Comprehensive income (loss) –* Comprehensive income (loss) presented in the accompanying statements of changes in stockholders’ equity represents all changes in stockholders’ equity during each year except those resulting from investments by and distributions to owners, and is comprised of the net income (loss) of the year, plus other comprehensive income (loss) items of the same period which, in accordance with Mexican GAAP, are presented directly in stockholders’ equity without affecting the statements of operations. In 2003, 2002 and 2001, the other comprehensive loss items consist of the excess (insufficiency) in restated stockholders’ equity and for the gain on holding and sale of investment in associated company.

e.		*Reclassifications –* Certain amounts in the financial statements as of and for the years ended December 31, 2002 and 2001 have been reclassified in order to conform to the presentation of the financial statements as of and for the year ended December 31, 2003.

F-73

3.		Summary of significant accounting policies

		The accounting policies followed by the Company are in conformity with Mexican GAAP, which require that management make certain estimates and use certain assumptions that affect the amounts reported in the financial statements and the accompanying notes. Although these estimates are based on management’s best knowledge of current events, actual results may differ. The significant accounting policies of the Company are as follows:

a.		*New accounting policies* – Beginning January 1, 2003, the Company adopted the provisions of new Bulletin C-8, “Intangible Assets”, which establishes that project development costs should be capitalized if they fulfill the criteria established for recognition as assets; preoperating costs that are not considered development costs should be recorded as a period expense; and intangible assets considered to have indefinite useful lives are not amortized, but instead are subject to impairment tests. The unamortized balance of capitalized preoperating costs up to December 31, 2002, will continue to be amortized according to the provisions of the former Bulletin C-8.

		Beginning January 1, 2003, the Company also adopted the provisions of new Bulletin C-9, “Liabilities, Provisions, Contingent Assets and Liabilities and Commitments”, which establishes additional guidelines clarifying the accounting for provisions, accruals and contingent liabilities, and establishes new standards for the use of present value techniques to measure liabilities and accounting for the early settlement or substitution of obligations.

		The adoption of these new bulletins did not have significant effects on the Company’s financial position or results of operations.

b.		*Recognition of the effects of inflation –* The Company restates its financial statements to Mexican peso purchasing power of the most recent balance sheet date presented. Accordingly, the financial statements of the prior years have been restated to Mexican pesos of purchasing power of December 31, 2003 and, therefore, differ from those originally reported in the prior years.

c.		*Inventories and cost of sales –* Inventories are stated at the lower of net realizable value or average cost, which is similar to the most recent purchase price or production cost. Cost of sales is stated at estimated replacement cost at the time of sale.

d.		*Investment in associated company* – Until its sale in 2003, the investment in associated company was valued using the equity method.

e.		*Property, plant and equipment –* Property, plant and equipment are initially recorded at acquisition cost and restated using the National Consumer Price Index (“NCPI”). For fixed assets of foreign origin, restated acquisition cost expressed in the currency of the country of origin is converted into Mexican pesos at the market exchange rate in effect at the balance sheet date. Depreciation is calculated based on units produced in the period in relation to the total estimated production of the assets over their service lives.


	Years
Buildings		25-50
Industrial machinery and equipment		23-40
Vehicles		1-5
Computers		1-3
Office furniture and equipment		5-10

Recurring maintenance and repair expenditures are charged to operating expense as incurred. Major overhauls to fixed assets are capitalized and amortized over the period in which benefits are expected to be received.

F-74

		Comprehensive financing cost incurred during the period of construction and installation of property, plant and equipment is capitalized and restated using the NCPI.

f.		*Impairment of long-lived assets in use* – The Company evaluates potential impairment losses to long-lived assets by assessing whether the unamortized carrying amount can be recovered over the remaining life of the assets through undiscounted future expected cash flows generated by the assets and without interest charges. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets, a loss is recognized for the difference between the fair value and carrying value of the assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets for which management has committed to a plan of disposal are recorded at the lower of the unamortized carrying amount or fair value less disposal cost.

g.		*Other assets* – Costs incurred in the development phase that meet certain requirements and that the Company has determined will have future economic benefits are capitalized and amortized based on the straight-line method over their estimated useful life. Those disbursements that do not meet such requirements are recorded in results of the period in which they are incurred. Intangible assets with indefinite lives are not amortized; however, their value is subject to impairment tests. Preoperating costs incurred after January 1, 2003, are recorded directly in results of the period in which they are incurred. Preoperating expenses incurred and capitalized up to December 31, 2002 are amortized using the straight-line method over four years.

h.		*Financial instruments* – Financial assets and liabilities resulting from any type of financial instrument, except for investments in financial instruments held to maturity, are presented in the balance sheet at fair value. The effects of the valuation of a financial asset or liability are recognized in results of operations of the respective period. Investments in financial instruments held to maturity are valued at acquisition cost. The costs and yields of financial instruments are recognized in results of the period in which they occur. Dividends from equity financial instruments are recognized in results of operations of the same period in which the fair value of the financial instrument is adjusted by such dividends.

i.		*Employee retirement obligations* – Seniority premiums and pension plans are recognized as costs over employee years of service and are calculated by independent actuaries using the projected unit credit method at net discount rates. Severance is charged to results when the liability is determined to be payable.

j.		*Provisions* – Provisions are recognized for obligations that result from a past event, that are likely to result in the use of economic resources and that can be reasonably estimated. Such provisions are recorded at net present values when the effect of the discount is significant.

k.		*Income tax, tax on assets and employee statutory profit sharing* – Income tax (“ISR”) and employee statutory profit sharing (“PTU”) are recorded in results of the year in which they are incurred. 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 ISR assets are reduced by any benefits about which there is uncertainty as to their realizability. Deferred PTU is derived from temporary differences between the accounting result and income for PTU purposes and is recognized only when it can be reasonably assumed that they will generate a liability or benefit, and there is no indication that circumstances will change in such a way that the liabilities will not be paid or benefits will not be realized.

		The tax on assets paid that is expected to be recoverable is recorded as an advance payment of ISR and is presented in the balance sheet decreasing the deferred ISR liability.

F-75

l.		*Foreign currency balances and transactions –* Foreign currency transactions are recorded at the applicable exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican pesos at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component of net comprehensive financing cost in the statements of operations, except those amounts capitalized as a component of construction cost.

m.		*Insufficiency in restated stockholders’ equity* – Excess (insufficiency) in restated stockholders’ equity represents the accumulated monetary position result through the initial restatement of the financial statements and the increase in the restated value of machinery and equipment and inventories above (below) inflation.

n.		*Revenue recognition* – Revenues are recognized in the period in which the risks and rewards of ownership of the inventories are transferred to the customers, which generally coincides with the delivery of products to customers in satisfaction of orders.

o.		*Monetary position gain* – Monetary position gain, which represents the erosion of purchasing power of monetary items caused by inflation, is calculated by applying NCPI factors to monthly net monetary position. Gains result from maintaining a net monetary liability position.

Accounts receivable


	2003			2002
Trade accounts receivable	Ps.	61,587		Ps.	45,386
Recoverable taxes		10			6,895
Other		6,611			3,180

		68,208			55,461
Allowance for doubtful accounts		(6,923	)		(2,316	)

	Ps.	61,285		Ps.	53,145

Inventories


	2003			2002
Finished goods	Ps.	8,276		Ps.	5,961
Production-in-process		48			223
Raw materials		13,249			16,887
Spare parts and materials for immediate consumption		14,192			16,970
Other		1,491

		37,256			40,041
Allowance for obsolete inventories		(1,680	)		(30	)

		35,576			40,011
Advances to suppliers		5,819			5,061
Merchandise-in-transit		11,266			5,441

	Ps.	52,661		Ps.	50,513

6.		Investment in associated company

		As described in Note 1, in 2003 the Company sold its participation in EYEMSA, an associated company, which at the date of the sale was 16.19% and as of December 31, 2002 was 41.97%. The condensed balance sheet as of December 31, 2002 and the condensed statement of operations for the period from January 1 to June 30, 2003, and the years ended December 31, 2002 and 2001, of the associated company are as follows:

F-76


	2002
Balance sheet:
Total assets	Ps.	2,075,666
Total liabilities		(1,741,414	)

Stockholders’ equity	Ps.	334,252

Company’s participation	Ps.	140,286


	2003			2002			2001
Statements of operations:
Income	Ps.	745,785		Ps.	1,649,099		Ps.	1,654,167
Gross profit		103,493			413,050			222,281
Net (loss) income		(10,846	)		(142,526	)		91,407

Company’s participation	Ps.	(1,756	)	Ps.	(48,092	)	Ps.	38,213

Property, plant and equipment


	2003			2002
Buildings	Ps.	656,676		Ps.	656,584
Industrial machinery and equipment		2,780,490			2,133,526
Vehicles, computers, office furniture and equipment		185,139			180,932

		3,622,305			2,971,042
Accumulated depreciation and amortization		(2,317,303	)		(1,899,339	)
Accumulated impairment loss		(113,629	)		(51,462	)

		1,191,373			1,020,241
Land		253,227			249,936
Construction-in-progress		1,723			4,311

	Ps.	1,446,323		Ps.	1,274,488

		Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was Ps. 41,659, Ps. 41,869 and Ps. 22,444, respectively.

		During 2003 and 2002, the Company reviewed the recoverable value of its long-lived assets, which was determined by the future cash flow generated over the useful lives of the corresponding assets, which extends to 22 years after 2003. As a result, the Company recorded Ps. 64,131 and Ps. 51,462 during 2003 and 2002, respectively, as an impairment loss for its long-lived assets. The deferred income tax effect for this reserve resulted in a benefit of Ps. 20,522 and Ps. 16,468 during 2003 and 2002, respectively.

		As of December 31, 2003 and 2002 the Company has assets temporarily out of use for a net amount of Ps. 17,136 and Ps. 55,008, respectively.

		In 2001, the Company sold its secondary fiber treatment plant to Arrendadora Bank of America, S. A. in Ps. 37,043. The proceeds and the cost of the sale were recorded in the statement of operations of 2001, resulting in a loss of Ps. 1,265, such loss was recorded in other expenses. Subsequently, CODUSA acquired the plant through a financing lease and subleased it to the Company.

F-77

8.		Long-term debt

		Long-term debt relates to a loan denominated in U.S. dollars from Nacional Financiera, S. A., which bears interest based on LIBOR plus a margin in a range from 0.825% to 1.25%, to be amortized in 52 quarterly installments from January 1995 to 2006. The outstanding balance on this loan as of December 31, 2003 and 2002 is US$224 (Ps. 2,527) and US$334 (Ps. 3,623), respectively. This loan is secured with the machinery and equipment acquired with its proceeds and is guaranteed by CODUSA.

		As of December 31, 2003, long-term debt matures as follows:


2005	Ps.	650
2006		649

	Ps.	1,299

Financial instruments and derivative financial instruments

a.		*Financial instruments* – The estimated fair value amounts of the Company’s financial instruments have been determined by the Company using available market information or other appropriate valuation methodologies that require considerable judgment in developing and interpreting the estimates of fair value. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

		The carrying amounts of the Company’s accounts receivable, accounts payable and current notes payable approximate fair value because they have relatively short-term maturities and bear interest at rates tied to market indicators, as appropriate. The Company’s long-term debt consists of debt instruments that bear interest at variable rates tied to market indicators.

b.		*Concentration of credit risk –* The financial instruments that potentially are subject to a concentration of credit risk is principally trade accounts receivable. The concentration of the credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base and their dispersion across different locations in Mexico. There were no customers exceeding 10% of net sales for any of the periods presented.

10.

Employee retirement obligations

The Company maintains a pension plan for certain employees. In addition, in accordance with the Mexican Labor Law, the Company provides seniority premium benefits to employees under certain circumstances. These benefits consist of a lump sum payment of 12 days’ wages for each year worked, calculated using the most recent salary, not to exceed twice the legal minimum wage established by law. The related liability and annual cost of such benefits are calculated by an independent actuary on the basis of formulas defined in the plans using the projected unit credit method. The present values of these obligations and the rates used for the calculations are:

F-78


	2003			2002
Accumulated benefit obligation	Ps.	43,711		Ps.	45,897

Projected benefit obligation	Ps.	938		Ps.	796
Unrecognized items:
Variances for assumptions and adjustments based on experience		(123	)		168
Transition asset		(42	)		(151	)

Net projected liability		773			813
Additional liability related to seniority premiums		42,938			45,084

	Ps.	43,711		Ps.	45,897

The rates used in the actuarial calculations, net of effects of inflation, were:


	2003		2002		2001
	%		%		%
Discount of the projected benefit obligation to present value		5		5		5
Salary increase		2		5		5

The amortization periods for the unamortized items are as follows:


	Remaining
	Years
Transition asset		18
Variances in assumptions		18

Net period cost is comprised as follows:


	2003		2002		2001
Service costs	Ps.	239	Ps.	292	Ps.	180
Amortization of transition asset, variances for assumptions and adjustments based on experience		2		4		1
Interest cost		24		4		3

Net period cost	Ps.	265	Ps.	300	Ps.	184

In connection with the reorganization process of the Company’s operations, there was a termination of administrative and operating personnel during 2003 that represented payments of Ps.1,114, which are included in other expenses in the accompanying statements of operations.

11.

Stockholders’ equity

Common stock shares at par value as of December 31 are comprised as follows:

F-79


2003
	Number of		Par		Restatement
	Shares		Value		Effect		Total
Fixed capital Series A		100,000	Ps.	100	Ps.	115,786	Ps.	115,886
Variable capital Series B		2,117,642		2,118		1,980,761		1,982,879

Total shares		2,217,642	Ps.	2,218	Ps.	2,096,547	Ps.	2,098,765


2002
	Number of		Par		Restatement
	Shares		Value		Effect		Total
Fixed capital Series A		100,000	Ps.	100	Ps.	115,786	Ps.	115,886
Variable capital Series B		1,710,711		1,711		1,980,761		1,982,472

Total shares		1,810,711	Ps.	1,811	Ps.	2,096,547	Ps.	2,098,358

		Common stock consists of nominative shares with a par value of one peso each. Variable capital is unlimited.

b.		On August 2001, a reimbursement of paid-in capital resulted in a reduction of shareholders’ equity in the amount of Ps..1,264.

c.		At the General Extraordinary Shareholders Meeting held on July 1, 2003, the issuance of 406,931 shares in the amount of Ps..407 was approved, increasing the variable portion of the common stock. All the aforementioned shares were distributed among the shareholders of the merged companies, ratably based on the shareholders’ equity of the merged companies as of June 30, 2003.

d.		Retained earnings include the statutory legal reserve. Mexican General Corporate Law requires that at least 5% of net income of the year be transferred to the legal reserve until the reserve equals 20% of capital stock at par value (historical pesos). The legal reserve may be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be replenished if it is reduced for any reason. At December 31, 2003 and 2002, the legal reserve, in historical pesos, was Ps.30,579.

e.		Stockholders’ equity, except restated paid-in capital and tax retained earnings, will be subject to a tax at the rate in effect when a dividend is distributed. In 2003, the rate was 34% and will be reduced by one percentage point each year until reaching 32% in 2005. Any tax paid on such distribution, may be credited against the income tax payable of the year in which the tax on the dividend is paid and the two fiscal years following such payment.

f.		The balances of the stockholders’ equity tax accounts as of December 31, are:


	2003		2002
Contributed capital account	Ps.	789,864	Ps.	517,595
Net tax income account		862,386		729,837

Total	Ps.	1,652,250	Ps.	1,247,432

F-80

As illustrated in the preceding table, the total amount of the balances of the stockholders’ equity tax accounts exceeds stockholders’ equity, according to the accompanying balance sheet.

12.

Foreign currency balances and transactions

At December 31, the foreign currency monetary position is as follows:


	2003			2002
Thousands of U.S. dollars:
Monetary assets		27,762			2,915
Monetary liabilities		(32,683	)		(33,781	)

Monetary liability position, net		(4,921	)		(30,866	)

Equivalent in Mexican pesos	Ps.	(55,298	)	Ps.	(322,219	)

Nonmonetary assets of foreign origin at December 31, 2003 are as follows:

Foreign

Equivalent

Currency

in Mexican

Currency

Balance

Pesos

Inventories

U.S. dollar

311

Ps.

3,497

Industrial machinery and equipment-

United States of America

U.S. dollar

34,003

382,097

Canada

Canadian dollar

29,124

253,484

Germany

Euro

1,257

17,805

Transactions denominated in foreign currency were as follows:


	2003		2002		2001
			(In thousands of
			U.S. dollars)
Export sales		1,150		2,867		206
Interest income		330		279		209
Interest expense		3,244		4,163		36
Import purchases		1,389		12,531		370
Acquisition of machinery and equipment		572				691
Acquisition of spare parts and services		2,618
Other		109		134		253

The exchange rates in effect at the dates of the balance sheets and of issuance of the financial statements were as follows:

December 31

April 30,

2003

2002

2004

U.S. dollar

Ps.

11.2372

Ps.

10.4393

Ps.

11.4068

F-81

13.

Transaction and balances with related parties

Transactions with related parties, carried out in the ordinary course of business, were as follows:


	2003		2002		2001
Revenues:
Sales	Ps.	524,264	Ps.	507,621	Ps.	278,216
Leases		1,265		13,380		13,903
Interest income		9,163		3,938		2,159
Sale of industrial machinery and other equipment		2,066
Sale of investment in associated company		228,115
Other		1,566		28,704		8,574
Expenses:
Purchases	Ps.	41,855	Ps.	160,366	Ps.	34,318
Interest expense		71,741		73,564		48,871
Acquisition of machinery and equipment		11
Administrative services		9,792		9,083		17,702
Leases of machinery and equipment		7,476		4,447
Other expenses		6,608		2,506		7,406

Balances receivable and payable with related parties are as follows:


	2003			2002
Due from related parties-
Administración Corporativa de Durango, S. A. de C. V.	Ps.	52,893		Ps.	1,560
Envases y Empaques de México, S. A. de C. V.		44,011			33,036
Empaques de Cartón Titán, S. A. de C. V.		3,593			24,164
Administradora Corporativa y Mercantil, S. A. de C. V.		10,557
CODUSA, mainly for sale of shares		267,244
Fábrica de Papel Tuxtepec, S. A. de C. V.		9,518			1,704
Fábrica Mexicana de Papel, S. A. de C. V.		10,320			11,867
Grupo Pipsamex, S. A. de C. V.		3,877			4,172
Papeles Formatodo, S. A. de C. V.		294
Ponderosa Industrial de México, S. A. de C. V.		984			713
Productora Nacional de Papel, S. A. de C. V.					3,151
Tubos y Especialidades de México, S. A. de C. V.		1,571			17,825
Cartonpack, S. A. de C. V.					2,914
Cajas y Corrugados de Chihuahua, S. A. de C. V.					495
Other		199			45

		405,061			101,646
Effect of sale of shares to CODUSA		(228,115	)

	Ps.	176,946		Ps.	101,646

F-82


	2003		2002
Due to related parties-
Porteadores de Durango, S. A. de C. V.	Ps.	3	Ps.	435
Durango McKinley Paper Company		1,484		6,635
Industrias Centauro, S. A. de C. V.		445,594		104,222
Corporación Durango, S. A. de C. V.				144,075
Other		50		197

	Ps.	447,131	Ps.	255,564

		The Company has current account agreements with CODUSA, Administración Corporativa de Durango, S. A. de C. V. and Industrias Centauro, S. A. de C. V. (“Centauro”). According to these agreements, the debt or credit balances bear interest at 8% and 15% on Mexican peso balances and at 3% and 13.8% on the U.S. dollar denominated balances.

		On July 1, 2003, the Company and TITAN entered into a lease agreement for the building where PAPELES Guadalajara is located. The contract is for undefined time period and establishes that the rent payment will be calculated by adding 1% to the expenses incurred by TITAN related to the building.

14. Other expenses


	2003			2002			2001
Impairment of long-lived assets	Ps.	(64,131	)	Ps.	(51,462	)	Ps.
Recovery of federal rights		26,654
Other expenses		(1,748	)		(7,119	)		(6,105	)

	Ps.	(39,225	)	Ps.	(58,581	)	Ps.	(6,105	)

		In May 2000, the Company initiated an injunction against a change in the Federal Law of Water Extraction Rights published in December 1999, related to the extraction an use of national water. During April 2003, the Company received a favorable ruling and recovered the federal rights paid related to these proceedings.

15.		Income taxes, tax on assets and employee statutory profit sharing

		In accordance with Mexican tax law, the Company is subject to income tax (“ISR”) and tax on assets (“IMPAC”). ISR takes into consideration the taxable and deductible effects of inflation.

		The ISR 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. In 2002, the deduction for employee statutory profit sharing (“PTU”) and the obligation to withhold taxes on dividends paid to individuals or foreign residents were eliminated.

		IMPAC is calculated by applying a rate of 1.8% on the net average of the majority of restated assets less certain liabilities and is payable only to the extent that it exceeds ISR payable for the same period. If in any year IMPAC exceeds the ISR payable, the IMPAC payment for such excess may be reduced by the amount by which ISR exceeded IMPAC in the three preceding years and any required payment of IMPAC is creditable against the excess of ISR over IMPAC of the following ten years.

F-83

The Company incurs ISR and IMPAC with CODUSA in the proportion that CODUSA owns the voting stock of its subsidiaries at the balance sheet date. Beginning on January 1, 2002, the proportion is calculated based on the average daily equity percentage that CODUSA owns of its subsidiaries during the year. The tax results of the subsidiaries are at 60% of such proportion and the tax results of the holding company are also at 60%. Estimated payments of ISR and IMPAC of both CODUSA and its subsidiaries are made as if CODUSA did not file a consolidated tax return.

The reconciliation of the statutory and effective ISR rates expressed as a percentage of loss before ISR, equity in income (loss) of associated company and extraordinary item for the years ended December 31, 2003, 2002 and 2001 is:


	2003			2002			2001
Statutory rate		34.0	%		35.0	%		35.0	%
Add (deduct) the effect of permanent differences other than inflation		(36.6	%)		36.7	%		386.5	%
Add (deduct) the effects of inflation		(4.0	%)		(14.7	%)		(18.2	%)
Effect of change in statutory rate on deferred ISR		4.2	%		35.8	%
Change in valuation allowance for recoverable IMPAC and benefit of tax loss carryforwards		(10.8	%)

Effective rate		(13.2	%)		92.8	%		439.7	%

At December 31, 2003 and 2002 the main items comprising the liability balance of deferred ISR are:


	2003			2002
Deferred ISR (asset) liability:
Property, plant and equipment	Ps.	408,194		Ps.	346,355
Inventories		12,978			7,488
Allowance for doubtful accounts		(2,215	)		(741	)
Accrued expenses		(38,421	)		(37,327	)
Deferred assets		5,682			8,109
Other – net		1,336			1,425

Deferred ISR from temporary differences		387,554			325,309
Effect of tax loss carryforwards		(11,721	)		(18,348	)
Recoverable tax on assets		(2,343	)		(3,930	)

		373,490			303,031
Valuation allowance for the recoverable tax on assets		1,919

Net long-term deferred ISR liability	Ps.	375,409		Ps.	303,031

c.		Due to deterioration in the circumstances used to assess the recovery of tax on assets paid in 2003 the valuation allowance for recoverable tax on assets was increased by Ps.1,919.

d.		At December 31, 2003 and 2002, the Company has taxable temporary and permanent differences related to deferred PTU, mainly inventories and property, plant and equipment, for which the deferred PTU liabilities were neither estimated nor recorded because the Company believes that they will not reverse due to the recurring nature of the related transactions.

F-84

Tax loss carryforwards and recoverable IMPAC for which the deferred ISR asset and prepaid ISR, respectively, have been partially recognized may be recovered subject to certain conditions. Restated amounts as of December 31, 2003 and expiration dates are:


Year of	Tax Loss		Recoverable
Expiration	Carryforwards		IMPAC
2009	Ps.	1,057	Ps.	40
2010				34
2011				175
2012		29,780		175
2013		5,793		1,919

	Ps.	36,630	Ps.	2,343

16.

Commitments

a.		On June 24, 2002, CODUSA issued US$175 million in 13 3/4 Senior Notes due 2009. These notes are jointly and severally guaranteed on an unsecured basis by the Company. Additionally, upon the issuance of the notes, the Company also equally and ratably guaranteed the 2006 and 2008 Notes. The total amount guaranteed by the Company is US$487.1 million. Further, the Company is guarantor of other financing agreements for CODUSA in the amount of US$112.4 million. Since the last months of 2002, CODUSA is in default of interest and principal payments related to these financing agreements, and as described in Note 1, is currently in a restructuring process with it creditors.

b.		The Company entered into a 74-month non-cancelable machinery and equipment operating lease agreement with CODUSA starting on June 1, 2001. The related lease expense for 2003, 2002 and 2001 amounted to Ps.6,079, Ps.3,914 and Ps.1,034, respectively. Minimum lease payments under this contract as a December 31, 2003 were as follows:


Year	Amount (Thousands of U.S. dollars)
2004		595
2005		595
2006		595
2007		397

		2,182

17.

Contingencies

The Company has initiated an injunction against the Mexican tax authorities regarding the unconstitutionality of the Substitutive Tax of the Wage Credit. Management believes that the outcome of this process will be favorable to the Company, which represents a contingent asset of Ps.1,190.

F-85

b.		As of December 31, 2003 labor suits existed derived from the liquidation of personnel in September 2001. These suits are in process, and the contingent liability is estimated to be approximately Ps.7,000. Management believes the outcome of these labor suits will be favorable to the Company therefore, no liability has been recorded.

c.		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 the Company are not similar to those used with or between independent parties in comparable transactions.

18.		New accounting principles

		In March 2003, the Mexican Institute of Public Accountants (“MIPA”) issued Bulletin C-15, “Impairment of the Value of Long-Lived Assets and Their Disposal” (“C-15”), whose adoption is mandatory for fiscal years beginning on or after January 1, 2004, although early adoption is encouraged. C-15 establishes, among other things, new rules for the calculation and recognition of impairment losses for long-lived assets and their reversal. It also provides guidance as to indicators of potential impairment in the carrying amount of tangible and intangible long-lived assets in use, including goodwill. Companies must test for impairment unless there is conclusive evidence that the indicators of impairment are temporary. The calculation of such loss requires the determination of the recoverable value, which is now defined as the greater of the net selling price of a cash-generating unit and its value in use, which is the net present value of discounted future net cash flows. The accounting principles issued prior to this new bulletin used future net cash flows, without requiring the discounting of such cash flows. However, since the present value of estimated future net cash flows from the use of this machinery is greater than its book value as of December 31, 2003, the Company estimates that the adoption of C-15 as of January 1, 2004, will not have any effects on its financial situation and results of operations.

		In May 2003, the MIPA issued Bulletin C-12, “Financial Instruments of a Debt or Equity Nature or a Combination of Both” (“C-12”), whose application is mandatory for financial statements for periods beginning on or after January 1, 2004, although early adoption is encouraged. C-12 is the compilation of the standards issued by the MIPA with respect to the issue of debt or equity financial instruments, or a combination of both, and includes additional standards on the accounting recognition for these instruments. Consequently, C-12 indicates the basic differences between liabilities and stockholders’ equity and establishes the rules for classifying and valuing the components of debt and equity of combined financial instruments in the initial recognition. Subsequent recognition and valuation of liabilities and stockholders’ equity of the financial instruments is subject to the standards issued previously in the applicable bulletins. Since the Company has not issued any financial instruments with characteristics of both debt and equity, management believes this new accounting principle will not have any effects on its financial situation and results of operations.

19.		Differences Between Mexican GAAP and US GAAP

		The financial statements of the Company are prepared in accordance with Mexican GAAP, which differs in certain significant respects from US GAAP. A reconciliation of the reported net loss, stockholders’ equity and comprehensive income (loss) to US GAAP is presented in Note 20. It should be noted that this reconciliation to US GAAP does not include the reversal of the restatement of the financial statements for the effects of inflation as required by Bulletin B-10, “Recognition of the Effects of Inflation in the Financial Information”, of Mexican GAAP. The application of this bulletin represents a comprehensive measure of the effects of price-level changes in the Mexican economy and, as such, is considered a more meaningful presentation than historical cost-based financial reporting in Mexican pesos for both Mexican and US accounting purposes.

F-86

The differences between Mexican GAAP and US GAAP included in the reconciliation that affect the financial statements of the Company are described below.

Classification differences – Certain items require a different classification in the balance sheet or statement of operation under US GAAP. These include:

•		As explained in Note 5, under Mexican GAAP, advances to suppliers are recorded as inventories. Under US GAAP, advances to suppliers are classified as prepaid expenses.

•		The impairment of long-lived assets, the gain or loss on the disposition of fixed assets, all severance indemnities, plant fixed cost, and employee profit sharing must be included in operating expenses under US GAAP.

b.		*Deferred start-up and research and development costs* – In 2002, under Mexican GAAP the Company deferred certain costs basically in relation to the development of a new paper manufacturing process. Under US GAAP, SFAS No. 2, “Accounting for Research and Development Costs” and SOP 98-5, “Reporting on the Costs of Start-up Activities”, require that the Company expense the start-up and research and development costs as incurred. As such, at December 31, 2003 and 2002, the start-up and research and development costs have been included in the calculation of net income (loss) under US GAAP.

c.		*Restatement of imported fixed assets* – As explained in Note 3.e, under Mexican GAAP, fixed assets of foreign origin have been restated by applying the inflation rate of the country of origin and then translated at the year-end exchange rate of the Mexican peso.

		Under US GAAP, the Company applies the regulations of the Securities and Exchange Commission (“SEC”), which require that all machinery and equipment, both domestic and imported, be restated using Mexican inflation factors.

d.		*Deferred income taxes and employee profit sharing* – The Company follows SFAS No. 109, “Accounting for Income Taxes,” for US GAAP purposes, which differs from Mexican GAAP as follows:

•		Under Mexican GAAP, deferred taxes are classified as non-current, while under US GAAP deferred taxes are based on the classification of the related asset or liability.

•		Under Mexican GAAP, the effects of inflation on the deferred tax balance generated by monetary items are recognized in the result on monetary position. Under US GAAP, the deferred tax balance is classified as a non-monetary item. As a result, the statement of operations differs with respect to the presentation of the gain (loss) on monetary position and deferred income tax provision.

•		Under Mexican GAAP, deferred employee profit sharing is calculated considering only those temporary differences that arise during the year and which are expected to turn around within a defined period, while under US GAAP, the same liability method as used for deferred income taxes is applied.

•		The US GAAP adjustments to the accounting basis of assets and liabilities generate a difference calculating the deferred income tax under US GAAP compared to the one presented under Mexican GAAP (see Note 15).

•		Under US GAAP, in view of the going-concern uncertainty, a full valuation allowance has been provided for all deferred tax assets not assured of realization.

F-87

The tax effects of temporary differences that generated deferred tax liabilities (assets) under US GAAP are as follows:


	2003			2002
Deferred ISR (asset) liability:
Property, plant and equipment	Ps.	640,869		Ps.	609,358
Inventories		9,659			10,038
Allowance for doubtful accounts		(2,215	)
Accrued expenses		(33,955	)		(39,381	)
Other assets		5,513			9,242
Other		(2,766	)

Deferred ISR from temporary differences		617,105			589,257
Tax loss carryforwards		(11,722	)		(18,348	)
Recoverable tax on assets		(424	)		(3,930	)

		604,959			566,979
Valuation allowance		12,146			22,278

Net deferred ISR liability	Ps.	617,105		Ps.	589,257

The changes in the balance of the deferred income taxes for the year under US GAAP are as follows:


	2003			2002
Balance at beginning of the year	Ps.	589,257		Ps.	644,682
Provision for the year		29,782			(55,425	)
Decrease due to merger		(1,934	)

Balance at end of the year	Ps.	617,105		Ps.	589,257

The tax effects of temporary differences that generated deferred profit sharing liabilities (assets) under US GAAP are as follows:


	2003			2002
Deferred employee profit sharing (asset) liability:
Property, plant and equipment	Ps.	207,237		Ps.	197,241
Inventories		3,018			3,043
Allowance for doubtful accounts		(692	)
Accrued expenses		(10,611	)		(15,486	)
Other assets		1,723			2,800
Other		(225	)		4,137

Net deferred employee profit sharing liability	Ps.	200,450		Ps.	191,735

The changes in the balance of the deferred employee profit sharing liability for the year under US GAAP are as follows:


	2003		2002
Balance at beginning of the year	Ps.	191,735	Ps.	190,622
Provision for the year		8,715		1,113

Balance at end of the year	Ps.	200,450	Ps.	191,735

F-88

The deferred income tax and profit sharing classification in the condensed balance sheet as of December 31, 2003 and 2002 is as follows:


				2003
				Employee
	Income Tax			Profit Sharing			Total
Deferred assets:
Current	Ps.	(38,936	)	Ps.	(11,528	)	Ps.	(50,464	)
Long term		(7,193	)		(2,248	)		(9,441	)

		(46,129	)		(13,776	)		(59,905	)
Deferred liability:
Current		16,852			5,266			22,118
Long term		646,382			208,960			855,342

		663,234			214,226			877,460

Deferred liability, net	Ps.	617,105		Ps.	200,450		Ps.	817,555


				2002
				Employee
	Income Tax			Profit Sharing			Total
Deferred asset:
Current	Ps.	(39,381	)	Ps.	(15,486	)	Ps.	(54,867	)
Long term		(7,193	)		(2,249	)		(9,442	)

		(46,574	)		(17,735	)		(64,309	)
Deferred liability:
Current		17,231			9,428			26,659
Long term		618,600			200,042			818,642

		635,831			209,470			845,301

Deferred liability, net	Ps.	589,257		Ps.	191,735		Ps.	780,992

e.		*Employee retirement obligations* – Under Mexican GAAP, the liabilities for employee benefits are determined using actuarial computations in accordance with Bulletin D-3, “Labor Obligations”, which is substantially the same as US GAAP SFAS No. 87, “Employers’ Accounting for Pensions”.

		Under Mexican GAAP and US GAAP, there is no difference in the liabilities for seniority premiums and pension plans.

		The following sets forth the changes in benefit obligations, and the funded status of such plans for 2003 and 2002 reconciled with the amounts reported in the condensed balance sheets under US GAAP.


	2003			2002
Accumulated benefit obligation	Ps.	43,711		Ps.	45,897

Projected benefit obligation at beginning of year	Ps.	796		Ps.	510
Service costs		239			292
Interest cost		24			4
Actuarial loss		56			(10	)
Benefits paid		(177	)

Projected benefit obligation at end of year	Ps.	938		Ps.	796

F-89


	2003			2002
Amounts recognized in the balance sheets consist of:
Unfunded liability	Ps.	938		Ps.	796
Less- Unrecognized transition obligation and other		(165	)		17

Net projected liability		773			813
Intangible asset		42,938			45,084

Liability recognized under US and Mexican GAAP	Ps.	43,711		Ps.	45,897

f.		*Equity in earnings of associated company* – The Company’s net investment in EYEMSA under US GAAP differed from that recorded under Mexican GAAP due to the restatement of imported fixed assets and the deferred income taxes of its interest in Centauro.

		During 2002, EYEMSA sold its investment in Centauro. The US GAAP carrying value of such investment was different to the carrying value recorded under Mexican GAAP due to the difference mentioned in the preceding paragraph. As a result the Company recognized a gain due to the reversal of the US GAAP adjustments.

g.		*Negative goodwill* – Under Mexican GAAP, CODUSA recorded negative goodwill that arose from the acquisition of TITAN realized in prior years, which represents the excess of the book value of the net assets acquired over the purchase price. Such negative goodwill was amortized into income over the period in wich CODUSA integrated these operations into the entity.

		Under US GAAP, such excess of the book value was recorded as a reduction in the carrying value of the long-term assets (primarily fixed assets) of TITAN.

		As described in Note 1.b, PAPELES Guadalajara was incorporated as a result of a spin-off of TITAN and subsequently was merged into the Company; consequently, the carrying value of its long-term assets recorded under Mexican GAAP differs from the US GAAP carrying values.

h.		*Statement of cash flows* – Under Mexican GAAP, the Company presents a statement of changes in financial position in accordance with Bulletin B-12, “Statement of Changes in Financial Position”, which identifies the generation and application of resources by the differences between beginning and ending financial statement balances in constant Mexican pesos. Bulletin B-12 also requires that monetary and foreign exchange gains and losses be treated as cash items for the determination of resources generated by operations.

		In accordance with US GAAP, the Company follows SFAS No. 95, “Statement of Cash Flows,” which is presented below excluding the effects of inflation.

i.		*Summarized financial information under US GAAP* – The condensed balance sheets as of December 31, 2003 and 2002, and the condensed statements of operations, changes in stockholders’ equity and cash flows for the three years ended December 31, 2003, 2002 and 2001, reflecting US GAAP adjustments, are presented below.

F-90

Condensed balance sheets:


	2003		2002
Total current assets	Ps.	344,989	Ps.	260,915
Property, plant and equipment – Net		2,171,073		2,062,140
Other assets – Net		58,120		205,461

Total assets	Ps.	2,574,182	Ps.	2,528,516

Current liabilities	Ps.	715,633	Ps.	508,945
Total long-term liabilities		906,023		866,980

Total liabilities		1,621,656		1,375,925
Stockholders’ equity		952,526		1,152,591

Total liabilities and stockholders’ equity	Ps.	2,574,182	Ps.	2,528,516

Condensed statements of operations:


	2003			2002			2001
Net sales	Ps.	628,769		Ps.	617,879		Ps.	317,076
Cost of sales and operating expenses		(661,167	)		(582,341	)		(463,159	)

Income (loss) from operations		(32,398	)		35,538			(146,083	)
Net comprehensive financing cost		(55,518	)		(83,442	)		(23,230	)
Other income (expenses) – Net		(40,981	)		(18,646	)		53,814
Income tax benefit (expense)		(29,782	)		55,425			88,560

Net loss	Ps.	(158,679	)	Ps.	(11,125	)	Ps.	(26,939	)

Net loss	Ps.	(158,679	)	Ps.	(11,125	)	Ps.	(26,939	)
Excess (insufficiency) in restated stockholders’ equity		55,308			(355,988	)		(57,309	)
Gain on holding and sale of investment in associated company		76,149

US GAAP comprehensive loss	Ps.	(27,222	)	Ps.	(367,113	)	Ps.	(84,248	)

F-91

Changes in stockholders’ equity:


	2003			2002
Balance at beginning of the year	Ps.	1,152,591		Ps.	1,519,704
Net loss under US GAAP		(158,679	)		(11,125	)
Excess (insufficiency) in restated stockholders’ equity		55,308			(355,988	)
Gain on holding and sale of investment in associated company		76,149
Increase due to merger		55,272
Receivable from sale of shares to CODUSA		(228,115	)

Balance at end of the year	Ps.	952,526		Ps.	1,152,591

Condensed statements of cash flows:


	2003			2002			2001
Operating activities:
Net loss	Ps.	(158,679	)	Ps.	(11,125	)	Ps.	(26,939	)
Items that did not require (generate) resources		154,980			11,699			(128,012	)
Changes in operating assets and liabilities		23,529			29,403			159,118

Net resources generated by operating activities		19,830			29,977			4,167
Financing activities:
Short-term and long-term debt – Net		(1,648	)		(1,124	)		(1,251	)
Other financing activities					371			(1,264	)

Net resources used in financing activities		(1,648	)		(753	)		(2,515	)

Investing activities:
Acquisition of machinery and equipment		(23,725	)		(8,226	)		(13,925	)
Other investing activities		6,444			13,983			36,262

Net resources generated by (used in) investing activities		(17,281	)		5,757			22,337

Effect of inflation and exchange rate changes on cash					(35,433	)		(23,940	)

Increase (decrease) in cash		1,195			(452	)		49
Cash increase due to merger		294
Balance at beginning of year		142			594			545

Balance at end of year	Ps.	1,337		Ps.	142		Ps.	594

Supplemental cash flow information:
Interest paid	Ps.	85		Ps.	179		Ps.	369
Income tax and tax on asset paid		400			913			612

	Ps.	485		Ps.	1,092		Ps.	981

F-92

Reconciliation of Mexican GAAP to US GAAP

Reconciliation of net loss for the year


	2003			2002			2001
Net loss under Mexican GAAP	Ps.	(128,540	)	Ps.	(53,424	)	Ps.	(49,419	)
Deferred income taxes		(12,441	)		(13,014	)		(10,549	)
Deferred employee statutory profit sharing expense		(8,715	)		(1,113	)		22,398
Purchase accounting adjustments:
Depreciation		1,360
Effect of fifth amendment to Bulletin B-10		(13,584	)		(16,768	)		(11,076	)
Equity in earnings of associated company					88,027			21,707
Deferred start-up and research and development costs		3,241			(14,833	)

	Ps.	(158,679	)	Ps.	(11,125	)	Ps.	(26,939	)

Under US GAAP, the monetary position effect of the statement of operations adjustments is included in each adjustment, except for intangible assets and goodwill, which are non-monetary.

Reconciliation of stockholders’ equity


	2003			2002
Total stockholders’ equity under Mexican GAAP	Ps.	681,513		Ps.	857,733
Deferred income taxes		(241,695	)		(286,226	)
Deferred employee statutory profit sharing		(200,450	)		(191,735	)
Purchase accounting adjustments:
Accumulated negative goodwill		(42,223	)
Accumulated depreciation		13,375
Effect of fifth amendment to Bulletin B-10:
Fixed assets		1,399,164			1,379,075
Fixed assets accumulated depreciation		(645,566	)		(591,423	)
Deferred start-up and research and development costs		(11,592	)		(14,833	)

Total US GAAP stockholders’ equity	Ps.	952,526		Ps.	1,152,591

Reconciliation of comprehensive income (loss)


	2003			2002			2001
Comprehensive income (loss) under Mexican GAAP	Ps.	4,606		Ps.	(397,869	)	Ps.	171,287
US GAAP adjustments:
Net income (loss)		(30,139	)		42,299			22,480
Result of holding non-monetary assets		(1,689	)		(11,543	)		(278,015	)

Comprehensive loss	Ps.	(27,222	)	Ps.	(367,113	)	Ps.	(84,248	)

F-93

21.

Future impact of recently issued accounting standards under US GAAP not yet in effect

a.		*SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities”* – In April 2003 the FASB issued SFAS No. 149, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. The changes in this Statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The new standard will be effective for contracts entered into or modified after September 30, 2003, except as stated below and for hedging relationships designated after September 3, 2003. In addition, except as stated below, all provisions of this Statement should be applied prospectively.

		The provisions of this Statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to September 15, 2003, should continue to be applied in accordance with their respective effective dates. The Company does not anticipate that this new standard will have a significant impact on its financial position or results of operations.

b.		*FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”)* – In January 2003, the FASB issued FIN 46. FIN 46 clarified the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all variable interests held by the Company in a variable interest entity created after January 31, 2003. For a variable interest held by the Company in a variable interest entity created before February 1, 2003, the Company will be required to apply the provisions of FIN 46 as of December 31, 2004. The Company does not currently have any variable interests in a variable interest entity.

* * * * * *

F-94

Report of Independent Registered Public
Accounting Firm to the Board of Directors and
Stockholders of Industrias Centauro, S. A. de C. V.

We have audited the accompanying balance sheet of Industrias Centauro, S. A. de C. V. (the “Company”), a 99% owned subsidiary of Corporación Durango, S. A. de C. V. (“CODUSA”), as of December 31, 2003, and the related statements of operations, changes in stockholders’ equity and changes in financial position for the year then ended, all expressed in thousands of Mexican pesos of purchasing power of December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the 2003 financial statements present fairly, in all material respects, the financial position of Industrias Centauro, S. A. de C. V. as of December 31, 2003, and the results of its operations, changes in its stockholders’ equity and changes in its financial position for the year then ended in conformity with accounting principles generally accepted in Mexico.

Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of stockholders’ equity and net loss as of and for the year ended December 31, 2003 to the extent summarized in Note 18.

The accompanying financial statements as of December 31, 2003 and for the year then ended have been prepared assuming that the Company will continue as a going concern. As described in Note 2.c to the financial statements, during 2003 and 2002 the Company incurred significant net losses, and since 2001 its operating margin has declined substantially. As of December 31, 2003 and 2002, the Company had negative working capital and, like CODUSA, is experiencing severe liquidity problems. Additionally, as mentioned in Note 14.b to the financial statements, the Company is guarantor of several financing agreements granted to CODUSA totaling US$623.7 million. Since November 2002 CODUSA has failed to comply with the payments of interest and principal related to such financing agreements and, as described in Note 1 to the financial statements, is currently in a debt restructuring process with its creditors. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans related to these matters and the description of CODUSA’s plan of restructuring are described in Note 1; however, this plan has not been completed. The Company’s ability to continue as a going concern is dependent upon its ability to generate profits and the restructuring of CODUSA’s debt. The accompanying financial statements do not include any adjustments related to the valuation and presentation of assets or the presentation and amount of liabilities that might result if the Company is unable to continue as a going concern.

F-95

The accompanying financial statements have been translated into English for the convenience of readers in the United States of America.

Galaz, Yamazaki, Ruiz Urquiza, S. C.
A member firm of Deloitte Touche Tohmatsu

C.P.C. Claudia Leticia Rizo Navarro

April 30, 2004
(June 28, 2004 as to Notes 1.d, 17, 18 and 19)

F-96

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Mexico City, April 8, 2003, except with respect to restatement to constant pesos as December 31, 2003 as to which the date is July 13, 2004.

To the Board of Directors and Shareholders of
Industrias Centauro, S. A. de C. V.:

We have audited the accompanying balance sheet of Industrias Centauro, S. A. de C. V. (the “Company”), as of December 31, 2002 and the related statements of income, of changes in shareholders’ equity and of changes in financial position for each of the two years in the period ended December 31, 2002, which, as described in Note 2, have been prepared on the basis of accounting principles generally accepted in Mexico. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Industrias Centauro, S. A. de C. V., as of December 31, 2002 and the results of its operations, the changes in its shareholders’ equity and the changes in its financial position for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in Mexico.

F-97

Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted in the Unites States of America. The application of accounting principles generally accepted in the United States of America would have affected the determination of the net income for each of the two years in the period ended December 31, 2002 and the determination of the shareholders’ equity as of December 31, 2002, to the extent summarized in Note 18 to the financial statements.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which assumes that assets will be realized and liabilities will be settled in the normal course of business operations. As mentioned in Note 2, the Company has incurred significant net losses, and its operating margin has declined substantially. As of December 31, 2002, the Company had negative working capital and similar to its parent, Corporacion Durango, S.A. de C.V. (“CODUSA”), is experiencing severe liquidity problems. Additionally, as mentioned in Note 14.b to the financial statements, the Company is guarantor of several financing agreements granted to CODUSA. Since November 2002, CODUSA has failed to comply with the payments of interest and principal related to such financing agreements and, as described in Note 1, is currently in a debt restructuring process with its creditors. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements include no adjustment pertaining to the recoverability and classification of the amounts recorded as assets and the amounts and classification of the liabilities that may become necessary in the event that the Company is unable to continue in operation as a going concern. Management’s plans in this regard are mentioned in Note 1.

PricewaterhouseCoopers

/s/ PricewaterhouseCoopers

F-98

Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.)

Balance sheets
As of December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003)


	2003			2002
Assets
Current assets:
Cash	Ps.	414		Ps.	545
Accounts receivable – Net		104,161			70,498
Due from related parties		3,866,019			316,172
Inventories – Net		142,080			214,709
Prepaid expenses		644			177

Total current assets		4,113,318			602,101
Investment in shares		2,494			2,593
Property, plant and equipment – Net		1,976,662			2,089,669
Intangible asset of employee retirement obligations		350			191
Other assets – Net		11,911			11,888

Total	Ps.	6,104,735		Ps.	2,706,442

Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	Ps.	100,728		Ps.	57,649
Due to related parties		4,373,524			966,384
Accrued expenses and taxes, other than income taxes		106,395			18,021
Income tax payable					991
Employee statutory profit sharing					940

Total current liabilities		4,580,647			1,043,985

Long-term liabilities:
Deferred income taxes		505,021			568,572
Employee retirement obligations		2,239			1,550

Total long-term liabilities		507,260			570,122

Total liabilities		5,087,907			1,614,107

Commitments and contingencies
Stockholders’ equity:
Common stock		2,516,067			2,190,931
Retained earnings (accumulated deficit)		(245,368	)		175,248
Insufficiency in restated stockholders’ equity		(603,355	)		(623,328	)
Cumulative initial effect of deferred income taxes		(650,516	)		(650,516	)

Total stockholders’ equity		1,016,828			1,092,335

Total	Ps.	6,104,735		Ps.	2,706,442

See accompanying notes to financial statements.

F-99

Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.)

Statements of operations
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)


	2003			2002			2001
Net sales	Ps.	1,113,343		Ps.	946,712		Ps.	1,035,344
Cost of sales		1,050,178			787,437			774,705

Gross profit		63,165			159,275			260,639
Selling, general and administrative expenses		50,393			43,516			47,289

Income from operations		12,772			115,759			213,355
Net comprehensive financing (cost) income:
Interest expense		(475,451	)		(70,582	)		(55,307	)
Interest income		379,618			35,996			21,211
Exchange (loss) gain		(91,123	)		(116,671	)		50,825
Monetary position gain		28,628			35,581			37,022

		(158,328	)		(115,676	)		53,751
Other expenses – Net		(453,589	)		(370,664	)		(21,515	)

Income (loss) before income taxes and employee statutory profit sharing		(599,145	)		(370,581	)		245,591
Income tax benefit (expense)		178,529			201,917			(26,660	)
Employee statutory profit sharing expense					(994	)		(952	)

Net income (loss)	Ps.	(420,616	)	Ps.	(169,658	)	Ps.	217,979

See accompanying notes to financial statements.

F-100

Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.)

Statements of changes in stockholders’ equity
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)


						Insufficiency			Cumulative initial
			Retained earnings			in restated			effect of deferred			Total stockholders’
	Common stock		(accumulated deficit)			stockholders’ equity			income taxes			equity
Balances as of January 1, 2001	Ps.	2,190,931	Ps.	126,927		Ps.	(326,293	)	Ps.	(650,516	)	Ps.	1,341,049
Comprehensive loss				217,979			(218,966	)					(987	)

Balances as of December 31, 2001		2,190,931		344,906			(545,259	)		(650,516	)		1,340,062
Comprehensive loss				(169,658	)		(78,069	)					(247,727	)

Balances as of December 31, 2002		2,190,931		175,248			(623,328	)		(650,516	)		1,092,335
Increase due to merger (see Note 1.b)		325,136					(63,448	)					261,688
Comprehensive loss				(420,616	)		83,421						(337,195	)

Balances as of December 31, 2003	Ps.	2,516,067	Ps.	(245,368	)	Ps.	(603,355	)	Ps.	(650,516	)	Ps.	1,016,828

See accompanying notes to financial statements.

F-101

Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.)

Statements of changes in financial position
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)


	2003			2002			2001
Operating activities:
Net income (loss)	Ps.	(420,616	)	Ps.	(169,658	)	Ps.	217,979
Items that did not require (generate) resources:
Depreciation and amortization		60,708			69,849			62,290
Loss on sale of industrial machinery and equipment		366			20			7,682
Employee retirement obligations		128			369			376
Deferred income taxes		(178,529	)		(201,917	)		(18,626	)
Impairment of long-lived assets		420,968			351,429

		(116,975	)		50,092			269,701
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable – Net		(13,360	)		22,623			15,462
Inventories – Net		(75,294	)		22			37,451
Prepaid expenses		(277	)		6,847			(6,734	)
Increase (decrease) in:
Trade accounts payable		60,074			(24,769	)		(98,980	)
Due to related parties – Net		20,514			(32,789	)		(169,605	)
Accrued expenses and taxes, other than income taxes		79,142			(10,552	)		12,399
Other – Net		(12,724	)		(25	)		121

Net resources generated by (used in) operating activities		(58,900	)		11,449			59,815

Financing activities:
Net resources used in payments of debt								(132,311	)

Investing activities:
Acquisition of industrial machinery and equipment		(7,570	)		(1,975	)
Sale of industrial machinery and equipment		66,339			70			74,157
Other assets					(11,888	)

Net resources generated by (used in) investing activities		58,769			(13,793	)		74,157

Cash:
Net increase (decrease)		(131	)		(2,344	)		1,661
Balance at beginning of year		545			2,889			1,228

Balance at end of year	Ps.	414		Ps.	545		Ps.	2,889

See accompanying notes to financial statements.

F-102

Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.)

Notes to financial statements
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)

Activities, significant developments and subsequent event

a.		*Activities* –Industrias Centauro, S. A. de C. V. (the “Company”) is subsidiary of Corporación Durango, S. A. de C. V. (“CODUSA”). The Company’s main activity is the manufacture and sale of paper to be used in the manufacturing of corrugated boxes.

b.		*Merger* – On July 1, 2003, the Company’s shareholders approved the merger of Papeles Monterrey, S. A. de C. V. (“PAPELES Monterrey”) into the Company, with the Company assuming all rights and obligations of PAPELES Monterrey. PAPELES Monterrey was incorporated on July 1, 2003 as a result of a spin-off of the assets and liabilities of a containerboard production plant of Empaques de Cartón Titán, S. A. de C. V. (“TITAN”), a subsidiary of CODUSA, and on the same date of its incorporation it was merged into the Company.

c.		*Change of parent company* – In January 2002 TITAN, sold its 71.49% participation in the Company to CODUSA. As a result, the Company became a subsidiary of CODUSA effective that date.

d.		*Significant developments and subsequent event* – In order to expand its production facilities, CODUSA and its subsidiaries (“CODUSA Group”) have contracted significant financing from banks in Mexico and abroad, mainly in the U.S. Additionally, on different dates it sold bonds on the New York securities market. However, since 2002 the CODUSA Group has been severely affected by a combination of economic factors, such as the slowdown of the U.S. and the international economies, a significant drop in the world price of paper, a drastic reduction in the demand for manufactured products requiring the goods supplied by CODUSA’s subsidiaries, an increase in the cost of raw materials, electric power, gas and labor, and the entry of imported products into the Mexican market.

		The above-mentioned negative economic events led to a significant reduction in the generation of cash flow for CODUSA Group during the last quarter of 2002, and as a result since November 2002 CODUSA has been unable to cover the payment of interest and principal on certain debt and has not complied with certain obligations and restrictions imposed by the banks and bondholders to maintain the original maturities of the debt. As a result, a portion of the debt has been reclassified as short term, resulting in negative working capital and uncertainty as to its ability to continue as a going concern.

		In November 2002, the CODUSA Group initiated negotiations with the banks and bondholders in an effort to restructure its debt and consider the sale of non-strategic assets. In April 2003, CODUSA Group signed a “Forbearance Agreement” with a significant portion of its creditors, under which they agreed to continue productive financial discussions regarding the terms of the debt restructuring. This agreement expired on June 30, 2003.

		On April 30, 2004, CODUSA Group and a significant portion of its bank lenders and bondholders signed a Plan Support Agreement regarding its proposed debt restructuring. Under the proposed restructuring, CODUSA’s unsecured creditors would exchange their existing financial debt for one or more tranches of new debt instruments, denominated the Series A, Series B, Series C and Series D Notes, to be issued in an aggregate principal amount of approximately US$715 million. In addition, participating creditors would receive an aggregate of 17% of CODUSA’s share equity, on a fully diluted basis. Also, CODUSA would make available US$43.5 million to acquire a portion of its outstanding debt at purchase prices of no more than US$650 per US$1,000 of principal.

F-103

		Under the terms of this agreement in principle, the creditors would support CODUSA’s overall financial restructuring through an exchange offer; in the event the exchange offer is not consummated but CODUSA obtains the necessary approvals from its creditors to support a consensual plan of reorganization, such plan could be filed under the United States of America’s bankruptcy rules.

		On May 20, 2004 CODUSA announced that it has filed for “concurso mercantil” before a Mexican court, which main objective is to achieve a financial restructuring through the reorganization process based on the Mexican Business Reorganization Law. This process will take place at the CODUSA’s legal entity level, as a result, the operations of its subsidiaries will continue running as usual. The reorganization process allows that with the support of 51% of the creditors, the restructuring plan described above, be binding on all of CODUSA’s creditors. CODUSA anticipates that it will have the support of a sufficient percentage of votes to accomplish this goal in an expeditious manner.

Basis of presentation

a.		*Explanation for translation into English* – The accompanying financial statements have been translated from Spanish into English for use outside of Mexico. These financial statements are presented on the basis of accounting principles generally accepted in Mexico (“Mexican GAAP”). Certain accounting practices applied by the Company that conform with Mexican GAAP may not conform with accounting principles generally accepted in the country of use.

b.		*Merger* – The financial statements as of and for the year ended December 31, 2003 include the effects of the PAPELES Monterrey merger described in Note 1.b. The assets and liabilities of PAPELES Monterrey as of the date of the merger, and the statements of operations for the six-month period ended on December 31, 2003, are as follows:


	June 30,
	2003
Current assets	Ps.	247,798
Industrial machinery and equipment		200,838
Other assets		2,997
Current liabilities		(39,700	)
Long-term liabilities		(150,245	)

Net assets	Ps.	261,688


	July 1 to
	December 31,
	2003
Net sales	Ps.	149,567
Cost of sales, selling, general and administrative expenses		(156,343	)
Net comprehensive financing income		91
Other expenses		(16,547	)

Loss before income tax and employee statutory profit sharing		(23,232	)
Income tax and employee statutory profit sharing		(2,446	)

Net loss	Ps.	(25,678	)

F-104

c.		*Going-concern* – The accompanying financial statements have been prepared on the assumption that the Company will continue as a going concern. As indicated in the accompanying financial statements, during the years ended December 31, 2003 and 2002, the Company has incurred significant net losses and since 2002, its operating margin has declined substantially. As of December 31, 2003 and 2002 the Company has negative working capital and as CODUSA, is experiencing severe liquidity problems. The Company is guarantor of a portion of CODUSA’s debt. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

		The accompanying financial statements do not include any adjustments related to the valuation and presentation of assets or the presentation and amount of liabilities that might result if the Company is unable to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to generate profits and the restructuring of CODUSA Group debt. As mentioned in Note 1, CODUSA is committing significant resources to the debt restructuring efforts and has reached an agreement in principle with a significant portion of its creditors, who will support a comprehensive financial restructuring; however, there can be no assurance that CODUSA will be successful in its efforts.

d.		*Comprehensive loss* – Comprehensive loss presented in the accompanying statements of changes in stockholders’ equity represents all changes in stockholders’ equity during each year except those resulting from investments by and distributions to owners, and is comprised of the net (loss) income of the year, plus other comprehensive income (loss) items of the same period which, in accordance with Mexican GAAP, are presented directly in stockholders’ equity without affecting the statements of operations. In 2003, 2002 and 2001, the other comprehensive loss items consist of the excess (insufficiency) in restated stockholders’ equity.

e.		*Reclassifications* – Certain amounts in the financial statements as of and for the years ended December 31, 2002 and 2001 have been reclassified in order to conform to the presentation of the financial statements as of and for the year ended December 31, 2003.

3.		Summary of significant accounting policies

		The accounting policies followed by the Company are in conformity with Mexican GAAP, which require that management make certain estimates and use certain assumptions that affect the amounts reported in the financial statements and the accompanying notes. Although these estimates are based on management’s best knowledge of current events, actual results may differ. The significant accounting policies of the Company are as follows:

a.		*New accounting policies* – Beginning January 1, 2003, the Company adopted the provisions of new Bulletin C-8, “Intangible Assets”, which establishes that project development costs should be capitalized if they fulfill the criteria established for recognition as assets; preoperating costs that are not considered development costs should be recorded as a period expense; and intangible assets considered to have indefinite useful lives are not amortized, but instead are subject to impairment tests. The unamortized balance of capitalized preoperating costs up to December 31, 2002, under the former Bulletin C-8 will continue to be amortized according to the provisions of that Bulletin.

		Beginning January 1, 2003, the Company also adopted the provisions of new Bulletin C-9, “Liabilities, Provisions, Contingent Assets and Liabilities and Commitments”, which establishes additional guidelines clarifying the accounting for provisions, accruals and contingent liabilities, and establishes new standards for the use of present value techniques to measure liabilities and accounting for the early settlement or substitution of obligations.

		The adoption of these new bulletins did not have significant effects on the Company’s financial position or results of operations.

F-105

b.		*Recognition of the effects of inflation –* The Company restates its financial statements to Mexican peso purchasing power of the most recent balance sheet date presented. Accordingly, the financial statements of the prior years have been restated to Mexican pesos of purchasing power of December 31, 2003 and, therefore, differ from those originally reported in the prior years.

c.		*Inventories and cost of sales –* Inventories are stated at the lower of net realizable value or average cost, which is similar to the most recent purchase price or production cost. Cost of sales is stated at estimated replacement cost at the time of sale.

d.		*Property, plant and equipment –* Property, plant and equipment are initially recorded at acquisition cost and restated using the National Consumer Price Index (“NCPI”). For fixed assets of foreign origin, restated acquisition cost expressed in the currency of the country of origin is converted into Mexican pesos at the market exchange rate in effect at the balance sheet date. Depreciation is calculated based on units produced in the period in relation to the total estimated production of the assets over their service lives.


	Years
Buildings		25-50
Industrial machinery and equipment		23-40
Vehicles		1-5
Computers		1-3
Office furniture and equipment		5-10

		Recurring maintenance and repair expenditures are charged to operating expense as incurred. Major overhauls to fixed assets are capitalized and amortized over the period in which benefits are expected to be received.

		Comprehensive financing cost incurred during the period of construction and installation of property, plant and equipment is capitalized and restated using the NCPI.

e.		*Impairment of long-lived assets in use –* The Company evaluates potential impairment losses to long-lived assets by assessing whether the unamortized carrying amount can be recovered over the remaining life of the assets through undiscounted future expected cash flows generated by the assets and without interest charges. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets, a loss is recognized for the difference between the fair value and carrying value of the assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived assets for which management has committed to a plan of disposal are recorded at the lower of the unamortized carrying amount or fair value less disposal cost.

f.		*Other assets* – Costs incurred in the development phase that meet certain requirements and that the Company has determined will have future economic benefits are capitalized and amortized based on the straight-line method over their estimated useful life. Those disbursements that do not meet such requirements are recorded in results of the period in which they are incurred. Intangible assets with indefinite lives are not amortized; however, their value is subject to impairment tests. Preoperating costs incurred after January 1, 2003, are recorded directly in results of the period in which they are incurred. Preoperating expenses incurred and capitalized up to December 31, 2002 are amortized using the straight-line method over four years.

F-106

g.		*Financial instruments* – Financial assets and liabilities resulting from any type of financial instrument, except for investments in financial instruments held to maturity, are presented in the balance sheet at fair value. The effects of the valuation of a financial asset or liability are recognized in results of operations of the respective period. Investments in financial instruments held to maturity are valued at acquisition cost. The costs and yields of financial instruments are recognized in results of the period in which they occur. Dividends from equity financial instruments are recognized in results of operations of the same period in which the fair value of the financial instrument is adjusted by such dividends.

h.		*Employee retirement obligations* – Seniority premiums are recognized as costs over employee years of service and are calculated by independent actuaries using the projected unit credit method at net discount rates. Severance is charged to results when the liability is determined to be payable.

i.		*Provisions* – Provisions are recognized for obligations that result from a past event, that are likely to result in the use of economic resources and that can be reasonably estimated. Such provisions are recorded at net present values when the effect of the discount is significant.

j.		*Income tax, tax on assets and employee statutory profit sharing* – Income tax (“ISR”) and employee statutory profit sharing (“PTU”) are recorded in results of the year in which they are incurred. 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 ISR assets are reduced by any benefits about which there is uncertainty as to their realizability. Deferred PTU is derived from temporary differences between the accounting result and income for PTU purposes and is recognized only when it can be reasonably assumed that they will generate a liability or benefit, and there is no indication that circumstances will change in such a way that the liabilities will not be paid or benefits will not be realized.

		The tax on assets paid that is expected to be recoverable is recorded as an advance payment of ISR and is presented in the balance sheet decreasing the deferred ISR liability.

k.		*Foreign currency balances and transactions –* Foreign currency transactions are recorded at the applicable exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Mexican pesos at the applicable exchange rate in effect at the balance sheet date. Exchange fluctuations are recorded as a component of net comprehensive financing cost in the statements of operations, except those amounts capitalized as a component of construction cost.

l.		*Insufficiency in restated stockholders’ equity* – Insufficiency in restated stockholders’ equity represents the accumulated monetary position result through the initial restatement of the financial statements and the increase in the restated value of machinery and equipment and inventories above (below) inflation, net of its related deferred ISR.

m.		*Revenue recognition* – Revenues are recognized in the period in which the risks and rewards of ownership of the inventories are transferred to the customers, which generally coincides with the delivery of products to customers in satisfaction of orders.

n.		*Monetary position gain –* Monetary position gain, which represents the erosion of purchasing power of monetary items caused by inflation, is calculated by applying NCPI factors to monthly net monetary position. Gains result from maintaining a net monetary liability position.

F-107

Accounts receivable


	2003			2002
Trade accounts receivable	Ps.	89,797		Ps.	60,284
Recoverable taxes		20,290			11,681
Other		803			396

		110,890			72,361
Allowance for doubtful accounts		(6,729	)		(1,863	)

	Ps.	104,161		Ps.	70,498

Inventories


	2003			2002
Finished goods	Ps.	6,248		Ps.	4,119
Raw materials		34,309			25,060
Spare parts and materials for immediate consumption		59,590			54,777

		100,147			83,956
Allowance for obsolete inventories		(4,728	)		(4,612	)

		95,419			79,344
Advances to suppliers		12,628			11,663
Merchandise-in-transit		34,033			123,702

	Ps.	142,080		Ps.	214,709

Property, plant and equipment


	2003			2002
Buildings	Ps.	557,087		Ps.	636,327
Industrial machinery and equipment		2,919,893			2,947,927
Vehicles, computers, office furniture and equipment		224,358			234,777

		3,701,338			3,819,031
Accumulated depreciation		(1,736,930	)		(1,491,615	)
Accumulated impairment loss		(102,936	)		(351,429	)

		1,861,472			1,975,987
Land		108,755			108,742
Construction-in-progress		6,435			4,940

	Ps.	1,976,662		Ps.	2,089,669

		Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was Ps.58,157, Ps.69,849 and Ps.62,290, respectively.

		During 2003 and 2002, the Company reviewed the recoverable value of its long-lived assets, which was determined by the future cash flow generated over the useful lives of the corresponding assets, which extends from 20 to 35 years after 2003. As a result, the Company recorded Ps.420,968 and Ps.351,429 during 2003 and 2002, respectively, as an impairment loss for its long-lived assets. The deferred income tax effect for this reserve resulted in a benefit of Ps.134,710 and Ps.112,457 during 2003 and 2002, respectively.

		As of December 31, 2002 the Company had assets temporarily out of use in the amount of Ps.235,864. Such assets were sold to an affiliated company during 2003.

F-108

		During 2003, 2002 and 2001 the Company did not capitalize any comprehensive financing costs. Unamortized capitalized comprehensive financing cost was Ps.52,924 and Ps.55,183 at December 31, 2003 and 2002, respectively.

7.		Financial instruments

a.		*Financial instruments* – The estimated fair value amounts of the Company’s financial instruments have been determined by the Company using available market information or other appropriate valuation methodologies that require considerable judgment in developing and interpreting the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

		The carrying amounts of the Company’s accounts receivable and accounts payable approximate fair value because they have relatively short-term maturities and bear interest at rates tied to market indicators, as appropriate. The accounts receivable balance represents the expected cash flows to be collected by the Company.

b.		*Concentration of credit risk –* The financial instruments that potentially are subject to a concentration of credit risk is principally trade accounts receivable. The concentration of the credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base and their dispersion across different locations in Mexico. There were no customers exceeding 10% of net sales for any of the periods presented.

8.		Employee retirement obligations

		In accordance with the Mexican Labor Law, the Company provides seniority premium benefits to employees under certain circumstances. These benefits consist of a lump sum payment of 12 days’ wages for each year worked, calculated using the most recent salary, not to exceed twice the legal minimum wage established by law. The related liability and annual cost of such benefits are calculated by an independent actuary on the basis of formulas defined in the plans using the projected unit credit method. The present values of these obligations and the rates used for the calculations are:


	2003			2002
Accumulated benefit obligation	Ps.	2,239		Ps.	1,550

Projected benefit obligation	Ps.	2,612		Ps.	1,965
Unrecognized items:
Variances for assumptions and adjustments based on experience		8,423			457
Transition asset		(9,146	)		(1,063	)

Net projected liability		1,889			1,359
Intangible asset		350			191

	Ps.	2,239		Ps.	1,550

F-109

The rates used in the actuarial calculations, net of effects of inflation, were:


	2003		2002		2001
	%		%		%
Discount of the projected benefit obligation to present value		5		5		5
Salary increase		2		2		2

The amortization periods for the unamortized items are as follows:


	Remaining
	Years
Transition asset		18
Variances in assumptions and adjustments based on experience		18

Net period cost is comprised as follows:


	2003			2002		2001
Service costs	Ps.	113		Ps.	247	Ps.	246
Amortization of transition asset, variances for assumptions and adjustments based on experience		(45	)		30		41
Interest cost		60			92		89

Net period cost	Ps.	128		Ps.	369	Ps.	376

In connection with the reorganization process of the Company’s operations, there was a termination of administrative and operating personnel during 2003 that represented payments of Ps.26,833, which are included in other expenses in the accompanying statement of operations.

Stockholders’ equity

Common stock shares at par value as of December 31 are comprised as follows:


	2003
	Number of		Par		Restatement
	Shares		Value		Effect		Total
Fixed capital Series A		245,492	Ps.	2,233	Ps.	3,401	Ps.	5,634
Variable capital Series B		815,559,656		1,191,338		1,319,095		2,510,433

Total shares		815,805,148	Ps.	1,193,571	Ps.	1,322,496	Ps.	2,516,067

F-110


	2002
	Number of		Par		Restatement
	Shares		Value		Effect		Total
Fixed capital Series A		245,492	Ps.	2,233	Ps.	3,401	Ps.	5,634
Variable capital Series B		592,979,758		866,202		1,319,095		2,185,297

Total shares		593,225,250	Ps.	868,435	Ps.	1,322,496	Ps.	2,190,931

Common stock consists of nominative shares without a par value. Variable capital is unlimited.

b.		As a consequence of the merger described in Note 1.b, at the General Extraordinary Shareholders Meeting held on July 1, 2003, the issuance of 222,579,898 shares, without par value, in the amount of Ps.325,136, was approved, increasing the variable portion of the common stock.

c.		Retained earnings include the statutory legal reserve. Mexican General Corporate Law requires that at least 5% of net income of the year be transferred to the legal reserve until the reserve equals 20% of capital stock at par value (historical pesos). The legal reserve may be capitalized but may not be distributed unless the entity is dissolved. The legal reserve must be replenished if it is reduced for any reason. At December 31, 2003 and 2002, the legal reserve, in historical pesos, was Ps.11,256.

d.		Stockholders’ equity, except restated paid-in capital and tax retained earnings, will be subject to a tax at the rate in effect when a dividend is distributed. In 2003, the rate was 34% and will be reduced by one percentage point each year until reaching 32% in 2005. Any tax paid on such distribution, may be credited against the income tax payable of the year in which the tax on the dividend is paid and the two fiscal years following such payment.

e.		The balances of the stockholders’ equity tax accounts as of December 31, are:


	2003		2002
Contributed capital account	Ps.	3,010,005	Ps.	2,643,710
Net tax income account		1,085,870		623,026

Total	Ps.	4,095,875	Ps.	3,266,736

As illustrated in the preceding table, the total amount of the balances of the stockholders’ equity tax accounts exceeds stockholders’ equity, according to the accompanying balance sheets.

10.

Foreign currency balances and transactions

At December 31, the foreign currency monetary position is as follows:


	2003			2002
Thousands of U.S. dollars:
Monetary assets		253,712			2,189
Monetary liabilities		(369,103	)		(89,820	)

Monetary liability position, net		(115,391	)		(87,631	)

Equivalent in Mexican pesos	Ps.	(1,296,672	)	Ps.	(914,806	)

F-111

Nonmonetary assets of foreign origin at December 31, 2003 are as follows:


		Foreign		Equivalent
		Currency		in Mexican
	Currency	Balance		Pesos
Inventories	U.S. dollar		2,624		29,486
Industrial machinery and equipment-
United States of America	U.S. dollar		64,321		722,792
Brazil	Real		174,170		677,226
Japan	Yen		24,170		2,533
Canada	Canadian dollar		2,057		17,899

Transactions denominated in foreign currency were as follows:


	2003		2002		2001
			(In thousands of
			U.S. dollars)
Export sales		1,544		4,408		5,754
Interest income		24,013
Interest expense		24,333		5,077		2,714
Import purchases		21,948		11,432		11,757
Acquisition of machinery and equipment		43				925
Services and spare parts purchases		2,663		2,354		2,109

The exchange rates in effect at the dates of the balance sheets and of issuance of the financial statements were as follows:

December 31

April 30,

2003

2002

2004

U.S. dollar

Ps.

11.2372

Ps.

10.4393

Ps.

11.4068

11.

Transaction and balances with related parties

Transactions with related parties, carried out in the ordinary course of business, were as follows:


	2003		2002		2001
Revenues:
Sales	Ps.	979,881	Ps.	853,952	Ps.	916,146
Administrative services		1,619		9,374		10,184
Leasing		1,250		1,983		5,781
Interest income		369,129		33,573		15,560
Other income		4,926		29,140		91,600
Sale of industrial machinery and equipment		66,281

F-112


	2003		2002		2001
Expenses:
Purchases	Ps.	256,688	Ps.	280,794	Ps.	397,153
Interest expenses		463,975		68,115		52,837
Acquisition of industrial machinery and equipment		15,845				50,797
Services		117,204		6,756		7,096
Leasing		22,976
Other expenses		24,407		61,057		110,018

Balances receivable and payable with related parties are as follows:


	2003		2002
Due from related parties-
Empaques de Cartón Titán, S. A. de C. V.	Ps.	2,387,932	Ps.	48,851
Administración Corporativa de Durango, S. A. de C. V.		754,722		24,977
Compañía Papelera de Atenquique, S. A. de C. V.		445,594		104,222
Envases y Empaques de México, S. A. de C. V.		88,865		95,006
Cartonpack, S. A. de C. V.		65,021		12,472
Administradora Corporativa y Mercantil, S. A. de C. V.		46,354
Grupo Pipsamex, S. A. de C. V.		62,375
Ectsa International Corporation		11,267		13,810
Cajas y Corrugados de Chihuahua, S. A. de C. V.				6,890
Fibras de Durango, S. A. de C. V.				5,432
Other		3,889		4,512

	Ps.	3,866,019	Ps.	316,172

Due to related parties-
Corporación Durango, S. A. de C. V.	Ps.	4,334,091	Ps.	924,700
Fibras de Durango, S. A. de C. V.		14,036
Fiber Management of Texas		16,704
Porteadores de Durango, S. A. de C. V.		8,535		12,205
Durango McKinley Paper Company				28,594
Other		158		885

	Ps.	4,373,524	Ps.	966,384

In 2003, the Company entered into debt assignment agreements, through these agreements the Company assumed debt with CODUSA, denominated in Mexican pesos and U.S. dollars, originally due from TITAN and Compañía Papelera de Atenquique, S. A. de C. V., affiliated companies. The accounts payable and receivable bear interest at 15% in Mexican pesos and 13.8% in U.S. dollars.

On July 1, 2003, the Company and TITAN entered into a lease agreement for the building where PAPELES Monterrey is located. The contract is for an undefined time period and establishes that the rent payment will be calculated by adding 1% to the expenses incurred by TITAN related to the building.

F-113

12.

Other expenses


	2003		2002		2001
Impairment of long-lived assets	Ps.	420,968	Ps.	351,429	Ps.
Severance payments due to reorganization		26,833
Other expenses – Net		5,788		19,235		21,515

	Ps.	453,589	Ps.	370,664	Ps.	21,515

13.

Income taxes, tax on assets and employee statutory profit sharing

In accordance with Mexican tax law, the Company is subject to income tax (“ISR”) and tax on assets (“IMPAC”). ISR takes into consideration the taxable and deductible effects of inflation.

The ISR 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. In 2002, the deduction for employee statutory profit sharing (“PTU”) and the obligation to withhold taxes on dividends paid to individuals or foreign residents were eliminated.

IMPAC is calculated by applying a rate of 1.8% on the net average of the majority of restated assets less certain liabilities and is payable only to the extent that it exceeds ISR payable for the same period. If in any year IMPAC exceeds the ISR payable, the IMPAC payment for such excess may be reduced by the amount by which ISR exceeded IMPAC in the three preceding years and any required payment of IMPAC is creditable against the excess of ISR over IMPAC of the following ten years.

ISR consists of the following:


	2003		2002		2001
Current	Ps.		Ps.		Ps.	(45,286	)
Deferred		178,529		201,917		18,626

	Ps.	178,529	Ps.	201,917	Ps.	(26,660	)

The reconciliation of the statutory and effective ISR rates expressed as a percentage of income (loss) before ISR and PTU for the years ended December 31, 2003, 2002 and 2001 is:

F-114


	2003			2002			2001
Statutory rate		34.00	%		35.00	%		35.00	%
(Deduct) add the effect of permanent differences other than inflation		(4.69	%)		18.51	%		(19.24	%)
Deduct the effects of inflation		(0.21	%)		(6.22	%)		(4.90	%)
Effect of change in statutory rate on deferred ISR		0.21	%		7.20	%
Change in valuation allowance for recoverable IMPAC and benefit of tax loss carryforwards		0.48	%

Effective rate		29.79	%		54.49	%		10.86	%

At December 31, 2003 and 2002 the main items comprising the liability balance of deferred ISR are:


	2003			2002
Deferred ISR (asset) liability:
Property, plant and equipment	Ps.	595,249		Ps.	510,188
Inventories		45,465			68,706
Allowance for doubtful accounts		(2,153	)		(596	)
Accrued expenses		(21,516	)		(496	)
Deferred assets		3,250			3,804
Other – Net		3,726			(321	)

Deferred ISR from temporary differences		624,021			581,285
Effect of tax loss carryforwards		(117,697	)		(11,410	)
Recoverable tax on assets		(9,296	)		(6,438	)

		497,028			563,437
Valuation allowance for the deferred ISR asset and recoverable tax on assets		7,993			5,135

Net long-term deferred ISR liability	Ps.	505,021		Ps.	568,572

d.		Due to deterioration in the circumstances used to assess the recovery of tax on assets paid in 2003 the valuation allowance for recoverable tax on assets was increased by Ps.2,858.

e.		At December 31, 2003 and 2002, the Company has taxable temporary and permanent differences related to deferred PTU, mainly inventories and property, plant and equipment, for which the deferred PTU liabilities were neither estimated nor recorded because the Company believes that they will not reverse due to the recurring nature of the related transactions.

f.		Tax loss carryforwards and recoverable IMPAC for which the deferred ISR asset and prepaid ISR, respectively, have been partially recognized may be recovered subject to certain conditions. Restated amounts as of December 31, 2003 and expiration dates are:

F-115


Year of	Tax Loss		Recoverable
Expiration	Carryforwards		IMPAC
2004	Ps.		Ps.	6,438
2012		35,656
2013		332,147		2,858

	Ps.	367,803	Ps.	9,296

14.

Commitments

The Company entered into a 74-month non-cancelable machinery and equipment operating lease agreement with CODUSA starting on May 25, 2001. The related lease expense for 2003, 2002 and 2001 amounted to Ps.22,354, Ps.14,909 and Ps.9,193, respectively. Minimum lease payments under this contract as a December 31, 2003 were as follows:


	Amount
	(In thousands of
Year	U.S. dollars)
2004		2,449
2005		2,449
2006		2,449
2007		1,943

		9,290

On June 24, 2002, CODUSA issued US$175 million in 13 3/4 Senior Notes due 2009. These notes are jointly and severally guaranteed on an unsecured basis by the Company. Additionally, upon the issuance of the notes, the Company also equally and ratably guaranteed the 2006 and 2008 Notes. The total amount guaranteed by the Company is US$487.1 million. Further, the Company is guarantor of other financing agreements for CODUSA in the amount of US$136.6 million. Since the last months of 2002, CODUSA is in default of interest and principal payments related to these financing agreements, and as described in Note 1, is currently in a restructuring process with it creditors.

15.

Contingencies

a.		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 the Company are not similar to those used with or between independent parties in comparable transactions.

b.		The Company has initiated an injunction against the Mexican tax authorities regarding the unconstitutionality of the Substitutive Tax of the Wage Credit. Management believes that the outcome of this process will be favorable to the Company, which represents a contingent asset of Ps.1,139.

F-116

16.		New accounting principles

		In March 2003, the Mexican Institute of Public Accountants (“MIPA”) issued Bulletin C-15, “Impairment of the Value of Long-Lived Assets and Their Disposal” (“C-15”), whose adoption is mandatory for fiscal years beginning on or after January 1, 2004, although early adoption is encouraged. C-15 establishes, among other things, new rules for the calculation and recognition of impairment losses for long-lived assets and their reversal. It also provides guidance as to indicators of potential impairment in the carrying amount of tangible and intangible long-lived assets in use, including goodwill. Companies must test for impairment unless there is conclusive evidence that the indicators of impairment are temporary. The calculation of such loss requires the determination of the recoverable value, which is now defined as the greater of the net selling price of a cash-generating unit and its value in use, which is the net present value of discounted future net cash flows. The accounting principles issued prior to this new bulletin used future net cash flows, without requiring the discounting of such cash flows. However, since the present value of estimated future net cash flows from the use of this machinery is greater than its book value as of December 31, 2003, the Company estimates that the adoption of C-15 as of January 1, 2004, will not have any effects on its financial situation and results of operations.

		In May 2003, the MIPA issued Bulletin C-12, “Financial Instruments of a Debt or Equity Nature or a Combination of Both” (“C-12”), whose application is mandatory for financial statements for periods beginning on or after January 1, 2004, although early adoption is encouraged. C-12 is the compilation of the standards issued by the MIPA with respect to the issue of debt or equity financial instruments, or a combination of both, and includes additional standards on the accounting recognition for these instruments. Consequently, C-12 indicates the basic differences between liabilities and stockholders’ equity and establishes the rules for classifying and valuing the components of debt and equity of combined financial instruments in the initial recognition. Subsequent recognition and valuation of liabilities and stockholders’ equity of the financial instruments is subject to the standards issued previously in the applicable bulletins. Since the Company has not issued any financial instruments with characteristics of both debt and equity, management believes this new accounting principle will not have any effects on its financial situation and results of operations.

17.		Differences Between Mexican GAAP and US GAAP

		The financial statements of the Company are prepared in accordance with Mexican GAAP, which differs in certain significant respects from US GAAP. A reconciliation of the net income (loss), stockholders’ equity and comprehensive income (loss) to US GAAP is presented in Note 18. It should be noted that this reconciliation to US GAAP does not include the reversal of the restatement of the financial statements for the effects of inflation as required by Bulletin B-10, “Recognition of the Effects of Inflation in the Financial Information”, of Mexican GAAP. The application of this bulletin represents a comprehensive measure of the effects of price-level changes in the Mexican economy and, as such, is considered a more meaningful presentation than historical cost-based financial reporting in Mexican pesos for both Mexican and US accounting purposes.

		The differences between Mexican GAAP and US GAAP included in the reconciliation that affect the financial statements of the Company are described below.

Classification differences – Certain items require a different classification in the balance sheet or statement of operation under US GAAP. These include:

•

As explained in Note 5, under Mexican GAAP, advances to suppliers are recorded as inventories. Under US GAAP, advances to suppliers are classified as prepaid expenses.

F-117

•

The impairment of long-lived assets, the gain or loss on the disposition of fixed assets, all severance indemnities, and employee profit sharing must be included in operating expenses under US GAAP.

b.		*Restatement of imported fixed assets* – As explained in Note 3.d, under Mexican GAAP, fixed assets of foreign origin have been restated by applying the inflation rate of the country of origin and then translated at the year-end exchange rate of the Mexican peso.

		Under US GAAP, the Company applies the regulations of the Securities and Exchange Commission (“SEC”), which require that all machinery and equipment, both domestic and imported, be restated using Mexican inflation factors.

Deferred income taxes and employee profit sharing – The Company follows SFAS No. 109, “Accounting for Income Taxes,” for US GAAP purposes, which differs from Mexican GAAP as follows:

•		Under Mexican GAAP, deferred taxes are classified as non-current, while under US GAAP deferred taxes are based on the classification of the related asset or liability.

•		Under Mexican GAAP, the effects of inflation on the deferred tax balance generated by monetary items are recognized in the result on monetary position. Under US GAAP, the deferred tax balance is classified as a non-monetary item. As a result, the statement of operations differs with respect to the presentation of the gain (loss) on monetary position and deferred income tax provision.

•		Under Mexican GAAP, deferred employee profit sharing is calculated considering only those temporary differences that arise during the year and which are expected to turnaround within a defined period, while under US GAAP, the same liability method as used for deferred income taxes is applied.

•		The US GAAP adjustments to the accounting basis of assets and liabilities generate a difference calculating the deferred income tax under US GAAP compared to the one presented under Mexican GAAP (see Note 13).

•		Under US GAAP, in view of the going-concern uncertainty, a full valuation allowance has been provided for all deferred tax assets not assured of realization.

The tax effects of temporary differences that generated deferred tax liabilities (assets) under US GAAP are as follows:


	2003				2002
Deferred ISR (asset) liability:
Property, plant and equipment		Ps.	501,974			Ps.	494,942
Inventories			45,465				70,981
Allowance for doubtful accounts			(2,153	)			(596	)
Accrued expenses			(21,516	)			(146	)
Deferred assets			3,250				3,985
Other – Net			3,726				(321	)

Deferred ISR from temporary differences			530,746				568,845
Effect of tax loss carryforwards			(117,697	)			(11,410	)
Recoverable tax on assets			(9,296	)			(6,438	)

			403,753				550,997
Valuation allowance			126,993				17,848

Net long-term deferred ISR liability		Ps.	530,746			Ps.	568,845

F-118

The changes in the balance of the deferred income taxes for the year under US GAAP are as follows:


	2003				2002
Balance at beginning of the year		Ps.	568,845			Ps.	631,114
Provision for the year			(110,489	)			(62,269	)
Increase due to merger			72,390

Balance at end of the year		Ps.	530,746			Ps.	568,845

The tax effects of temporary differences that generated deferred profit sharing liabilities (assets) under US GAAP are as follows:


	2003				2002
Deferred employee profit sharing (asset) liability:
Property, plant and equipment		Ps.	148,384			Ps.	187,712
Inventories			14,208				21,509
Allowance for doubtful accounts			(673	)			(188	)
Acrued expenses			(6,608	)			(135	)
Other assets			1,016				1,207
Other – Net			(8,275	)			4,817

Net deferred employee profit sharing liability		Ps.	148,052			Ps.	214,922

The changes in the balance of the deferred employee profit sharing liability for the year under US GAAP are as follows:


	2003				2002
Balance at beginning of the year		Ps.	214,922			Ps.	203,896
Provision for the year			(86,442	)			11,026
Increase due to merger			19,572

Balance at end of the year		Ps.	148,052			Ps.	214,922

The deferred income tax and profit sharing classification in the condensed balance sheet as of December 31, 2003 and 2002 is as follows:


					2003
					Employee
	Income Tax				Profit Sharing				Total
Deferred asset:
Current		Ps.	(19,943	)		Ps.	(16,604	)		Ps.	(36,547	)
Deferred liability:
Current			45,465				15,256				60,721
Long term			505,224				149,400				654,624

			550,689				164,656				715,345

Deferred liability, net		Ps.	530,746			Ps.	148,052			Ps.	678,798

F-119


					2002
					Employee
	Income Tax				Profit Sharing				Total
Deferred assets:
Current		Ps.	(1,064	)		Ps.				Ps.	(1,064	)
Long term							(321	)			(321	)

			(1,064	)			(321	)			(1,385	)
Deferred liability:
Current			70,982				26,324				97,306
Long term			498,927				188,919				687,846

			569,909				215,243				785,152

Deferred liability, net		Ps.	568,845			Ps.	214,922			Ps.	783,767

Employee retirement obligations – Under Mexican GAAP, the liabilities for employee benefits are determined using actuarial computations in accordance with Bulletin D-3, “Labor Obligations”, which is substantially the same as US GAAP SFAS No. 87, “Employers’ Accounting for Pensions”.

Under Mexican GAAP and US GAAP, there is no difference in the liabilities for seniority premiums and pension plans.

The following sets forth the changes in benefit obligations, and the funded status of such plans for 2003 and 2002 reconciled with the amounts reported in the condensed balance sheets under US GAAP.


	2003				2002
Accumulated benefit obligation:		Ps.	2,239			Ps.	1,550

Projected benefit obligation at beginning of year		Ps.	1,965			Ps.	1,114
Service costs			113				247
Interest cost			60				92
Actuarial loss			474				686
Benefits paid							(174	)

Projected benefit obligations at end of year		Ps.	2,612			Ps.	1,965

Amounts recognized in the balance sheets consist of:
Unfunded liability		Ps.	2,612			Ps.	1,965
Less- Unrecognized transition obligation and other			(723	)			(606	)

Net projected liability			1,889				1,359
Intangible asset			350				191

Liability recognized under US and Mexican GAAP		Ps.	2,239			Ps.	1,550

Negative goodwill – Under Mexican GAAP, CODUSA recorded negative goodwill that arose from the acquisition of TITAN realized in prior years, which represents the excess of the book value of the net assets acquired over the purchase price. Such negative goodwill was amortized into income over the period in which CODUSA integrated these operations into the entity.

Under US GAAP, such excess of the book value was recorded as a reduction in the carrying value of the long-term assets (primarily fixed assets) of TITAN.

F-120

		As described in Note 1.b, PAPELES Monterrey was incorporated as a result of a spin-off of TITAN and subsequently was merged into the Company; consequently, the carrying value of its long-term assets recorded under Mexican GAAP differs from the US GAAP carrying values.

f.		*Impairment of long-lived assets* – For US GAAP purposes, beginning on January 1, 2002, the Company follows SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

		For the year ended December 31, 2001, the Company followed SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”. SFAS Nos. 144 and 121 provide criteria for when and under what circumstances an impairment loss (write-down) should be recorded and the manner in which the write-down should be measured. An evaluation of impairment is undertaken whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Under SFAS Nos. 144 and 121, the impairment criteria are met when the carrying value of assets exceeds the sum of expected future cash flows (undiscounted and without interest charges) of the related assets. If it is determined that an asset is impaired, it is written down to its fair value.

		The Company tested certain long-lived assets for recoverability in 2003 and 2002 in response to significant adverse changes in business climate occurring during these years (see Note 1.d). Under US GAAP, certain assets being evaluated for recoverability had lower book values than under Mexican GAAP and negative goodwill resulting from acquisitions has reduced the US GAAP carrying value of the assets. As such, in 2003 the impairment charge recorded under Mexican GAAP was greater than the impairment charge calculated under US GAAP. As a result, during 2003, the Company recognized an adjustment to US GAAP net income (loss) of Ps.8,976. Theses expenses relate primarily to machinery and equipment.

g.		*Statement of cash flows* – Under Mexican GAAP, the Company presents a statement of changes in financial position in accordance with Bulletin B-12, “Statement of Changes in Financial Position”, which identifies the generation and application of resources by the differences between beginning and ending financial statement balances in constant Mexican pesos. Bulletin B-12 also requires that monetary and foreign exchange gains and losses be treated as cash items for the determination of resources generated by operations.

		In accordance with US GAAP, the Company follows SFAS No. 95, “Statement of Cash Flows,” which is presented below excluding the effects of inflation.

h.		*Summarized financial information under US GAAP* – The condensed consolidated balance sheets as of December 31, 2003 and 2002, and the condensed statements of operations, changes in stockholders’ equity and cash flows for the three years ended December 31, 2003, 2002 and 2001, reflecting US GAAP adjustments, are presented below.

		Condensed balance sheets:


	2003			2002
Total current assets		Ps.	4,149,865		Ps.	653,665
Property, plant and equipment – Net			1,685,179			1,982,181
Other assets – Net			14,755			14,859

Total assets		Ps.	5,849,799		Ps.	2,650,705

F-121


	2003			2002
Current liabilities		Ps.	4,641,369		Ps.	1,186,841
Total long-term liabilities			656,862			694,212

Total liabilities			5,298,231			1,881,053
Stockholders’ equity			551,568			769,652

Total liabilities and stockholders’ equity		Ps.	5,849,799		Ps.	2,650,705

Condensed statements of operations:


	2003				2002				2001
Net sales		Ps.	1,113,343			Ps.	1,012,284			Ps.	1,099,594
Cost of sales and operating expenses			1,389,829				1,216,543				846,955

Income (loss) from operations			(276,486	)			(204,259	)			252,639
Net comprehensive financing (cost) income			(159,143	)			(115,422	)			51,988
Other expenses – Net			(32,621	)			(19,236	)			(21,518	)
Income tax benefit			110,489				62,269				4,891

Net income (loss)		Ps.	(357,761	)		Ps.	(276,648	)		Ps.	288,000

Net income loss		Ps.	(357,761	)		Ps.	(276,648	)		Ps.	288,000
Excess (insufficiency) in restated stockholders’ equity			(8,198	)			(9,800	)			(50,911	)

US GAAP comprehensive income (loss)		Ps.	(365,959	)		Ps.	(286,448	)		Ps.	237,089

Changes in stockholders’ equity:


	2003				2002
Balance at beginning of the year		Ps.	769,652			Ps.	1,056,100
Net loss under US GAAP			(357,761	)			(276,648	)
Increase due to merger			147,875
Deficit from restatement			(8,198	)			(9,800	)

Balance at end of the year		Ps.	551,568			Ps.	769,652

F-122

Condensed consolidated statements of cash flows:


	2003				2002				2001
Operating activities:
Net income (loss)		Ps.	(357,761	)		Ps.	(276,648	)		Ps.	288,000
Items that did not require (generate) resources			248,431				452,213				(40,837	)
Changes in operating assets and liabilities			50,430				(39,715	)			(142,362	)

Net resources generated by (used in) operating activities			(58,900	)			135,850				104,801
Financing activities:
Short-term and long-term debt – Net											125,172
Other financing activities											(253,589	)

Net resources used in financing activities											(128,417	)

Investing activities:
Acquisition of machinery and equipment			(7,570	)			(1,975	)			(44,806	)
Other investing activities			66,339				(12,125	)			140,025

Net resources generated by (used in) investing activities			58,769				(14,100	)			95,219

Effect of inflation and exchange rate changes on cash							(124,094	)			(69,942	)

Increase (decrease) in cash			(131	)			(2,344	)			1,661
Balance at beginning of year			545				2,889				1,228

Balance at end of year		Ps.	414			Ps.	545			Ps.	2,889

Supplemental cash flow information:
Interest paid		Ps.				Ps.				Ps.
Income tax and tax on asset paid			400				21,006				986

		Ps.	400			Ps.	21,006			Ps.	986

18.

Reconciliation of Mexican GAAP to US GAAP

Reconciliation of net income (loss) for the year


	2003				2002				2001
Net income (loss) under Mexican GAAP		Ps.	(420,616	)		Ps.	(169,658	)		Ps.	217,979
Deferred income taxes			(68,855	)			(139,395	)			29,786
Deferred employee statutory profit sharing expense			86,442				(11,026	)			26,916
Purchase accounting adjustments:
Depreciation			1,540
Effect of fifth amendment to Bulletin B-10			25,624				43,431				13,319
Adjustment to fixed asset impairment			18,104

US GAAP net income (loss)		Ps.	(357,761	)		Ps.	(276,648	)		Ps.	288,000

F-123

Under US GAAP, the monetary position effect of the statement of operations adjustments is included in each adjustment, except for goodwill, which is non-monetary.

Reconciliation of stockholders’ equity


	2003				2002
Total stockholders’ equity under Mexican GAAP		Ps.	1,016,828			Ps.	1,092,335
Deferred income taxes			(25,725	)			(273	)
Deferred employee statutory profit sharing			(148,052	)			(214,922	)
Purchase accounting adjustments:
Accumulated negative goodwill			(47,832	)
Accumulated depreciation			15,151
Effect of fifth amendment to Bulletin B-10:
Fixed assets			(998,298	)			(791,413	)
Fixed assets accumulated depreciation			739,496				683,925

Total US GAAP stockholders’ equity		Ps.	551,568			Ps.	769,652

Reconciliation of comprehensive income (loss)


	2003				2002				2001
Comprehensive loss under
Mexican GAAP		Ps.	(337,195	)		Ps.	(247,727	)		Ps.	(987	)
US GAAP adjustments:
Net income (loss)			62,855				(106,990	)			70,021
Result of holding non-monetary assets			(91,619	)			68,269				168,055

Comprehensive income (loss)		Ps.	(365,959	)		Ps.	(286,448	)		Ps.	237,089

19.

Future impact of recently issued accounting standards under US GAAP not yet in effect

a.		*SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities”* – In April 2003 the FASB issued SFAS No. 149, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. The changes in this Statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The new standard will be effective for contracts entered into or modified after September 30, 2003, except as stated below and for hedging relationships designated after September 3, 2003. In addition, except as stated below, all provisions of this Statement should be applied prospectively.

		The provisions of this Statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to September 15, 2003, should continue to be applied in accordance with their respective effective dates. The Company does not anticipate that this new standard will have a significant impact on its financial position or results of operations.

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FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) – In January 2003, the FASB issued FIN 46. FIN 46 clarified the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all variable interests held by the Company in a variable interest entity created after January 31, 2003. For a variable interest held by the Company in a variable interest entity created before February 1, 2003, the Company will be required to apply the provisions of FIN 46 as of December 31, 2004. The Company does not currently have any variable interests in a variable interest entity.

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