SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

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

OR

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

OR

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

Commission File Number: 1-13148

Corporación Durango, S.A. de C.V.

(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 34208
+52 (618) 829-1000

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

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:

91,835,193 Series A Shares, without par value and 18,805,918 Series B Shares, without par value

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

Yes o No þ

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

Yes o No þ

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 o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer þ 

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 þ 

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

Yes o No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes þ No o

 

 

INTRODUCTION

     In this annual report, “our company,” “we,” “us” and “our” refer to Corporación Durango, S.A. de C.V. and its consolidated subsidiaries, as the context may require. We are a corporation organized under the laws of the United Mexican States, or Mexico.

Presentation of Financial Information

Currency and Exchange Rates

     All references herein to “peso,” “pesos,” and “Ps” are to Mexican pesos, the official currency of Mexico. All references to “dollars,” and “US$” are to United States dollars.

     On June 27, 2006, the exchange rate for pesos into dollars was Ps 11.4180 to US$1.00, based on the official exchange rate published by the Mexican Central Bank (Banco de Mexico). The peso/dollar exchange rate was Ps 10.6344 to US$1.00 as of December 31, 2005, Ps 11.1495 to US$1.00 as of December 31, 2004 and Ps 11.2372 to US$1.00 as of December 31, 2003. The peso/dollar exchange rate fluctuates, and the peso/dollar exchange rate at June 27, 2006 may not be indicative of future exchange rates. See “Item 3: Key Information—Exchange Rate Information” for information regarding the noon buying rate for the purchase of dollars, expressed in nominal pesos per dollar, since January 1, 2001, as reported by the Federal Reserve Bank of New York.

Financial Statements

     We report our financial statements in pesos and prepare our financial statements in accordance with generally accepted accounting principles in Mexico, or Mexican GAAP, which differ in significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. Note 23 to our audited consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our consolidated net income (loss) and total stockholders’ equity as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005. We have a fiscal year end of December 31.

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

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

     Except as otherwise indicated, financial data for all periods throughout this annual report have been restated in constant pesos as of December 31, 2005.

Rounding

     We have made rounding adjustments to reach some of the figures included in this annual report. As a result, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

Market Data

     The Mexican government does not publish definitive data regarding the pulp and paper industry on a regular basis. Accordingly, information contained in this annual report regarding national production, imports, exports, apparent demand, market share and market position has been computed by us and is based on our estimates which are derived from statistics accumulated by us and our analysis of certain data obtained from the Mexican National Chamber for the Pulp and Paper Industry (Cámara Nacional de la Industria de la Celulosa y el Papel), and certain assumptions made by us based on our knowledge of the market and experience in the Mexican paper industry. Although we believe that the data taken from third parties and used in this annual report is reliable, we have not independently verified such data and take no responsibility for the accuracy of such data. Similarly, while we believe our internal research and estimates to be reliable, they have not been verified by any independent source and we cannot assure you as to their accuracy.

Special Note Regarding Forward-Looking Statements

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

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

	•		our substantial debt and significant debt service obligations;
	•		the cyclicality of the paper and packaging industries;
	•		the competitive nature of the industries in which we are operating;
	•		our ability to keep key personnel required to operate our business;
	•		developments in, or changes to, the laws, regulations and governmental policies governing our business, including environmental liabilities;
	•		changes in the dollar-peso exchange rate, interest rates and other domestic and international market and industry conditions;
	•		limitations on our access to sources of financing on competitive terms;
	•		our need for substantial capital; and
	•		interest rate levels.

     We do not intend to update or otherwise revise the forward-looking statements herein to reflect circumstances existing after the date when made or to reflect the occurrence of future events even in the event that any or all of the

assumptions underlying the forward-looking statements are shown to be in error, except as may be required under applicable securities laws.

PART I

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

     Not applicable.

Item 2. Offer Statistics and Expected Timetable.

     Not applicable.

Item 3. Key Information.

Selected Consolidated Financial Data

     The following table set forth selected consolidated financial information for our company and its consolidated subsidiaries at the dates and for each of the periods presented. The data does not represent all of our financial information. You should read this information together with, and this information is qualified in its entirety by reference to, our audited consolidated financial statements at December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005, including the notes thereto. The financial information at December 31, 2001, 2002 and 2003 and for the years ended December 31, 2001 and 2002, has been derived from audited consolidated financial statements as restated that are not included in this annual report.

     The audited consolidated financial statements have been prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. Note 23 to our audited consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our consolidated net income (loss) and total stockholders’ equity as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005.

     Mexican GAAP requires that all financial information be presented in constant pesos (having the same purchasing power for each period indicated taking into account inflation) as of the date of the most recent balance sheet. Accordingly, all of the financial information included in this annual report is presented in constant pesos as of December 31, 2005, unless otherwise noted. Although the restatement of nominal peso amounts into constant peso amounts lessens the distorting effect that inflation has on comparisons of financial statements over time, this restatement does not wholly eliminate those distortions, and evaluation of period-to-period trends may be difficult. References in this annual report to amounts in “nominal” pesos are to pesos that have not been adjusted for inflation.

		At and for the year ended December 31,
		2005				2004				2003				2002				2001
		(in millions of constant pesos, except per share data)
Statement of Income Data:
Mexican GAAP:
Net sales		Ps	8,143.3			Ps	8,039.3			Ps	7,327.3			Ps	8,632.7			Ps	11,395.6
Cost of sales			7,096.3				6,889.5				6,300.0				7,402.1				9,482.1
Gross profit			1,047.0				1,149.8				1,027.3				1,230.6				1,913.5
Selling, general and administrative expenses			677.7				694.1				698.2				675.1				802.0
Operating income			369.3				455.7				329.1				555.5				1,111.4
Other income (expense) — net			5.2				(417.9	)			(1,638.8	)			(3,322.8	)			478.0
Net comprehensive financing cost (result):
Interest expense			(592.4	)			(1,158.3	)			(1,288.1	)			(1,219.1	)			(1,202.0	)
Interest income			42.6				41.5				44.7				42.4				75.2
Exchange gain (loss) — net			334.6				62.6				(892.8	)			(1,085.0	)			356.5
Gain on monetary position			198.7				469.4				399.5				440.4				335.2

		At and for the year ended December 31,
		2005				2004				2003				2002				2001
		(in millions of constant pesos, except per share data)
Total net comprehensive financing cost (result)			(16.5	)			(584.8	)			(1,736.7	)			(1,821.3	)			(435.0	)
Income (loss) from continuing operations before income taxes, employee statutory profit sharing, and equity in income of associated companies			357.9				(547.1	)			(3,046.3	)			(4,588.6	)			1,154.4
Income tax benefit (expense)			(304.0	)			502.7				2.3				721.5				(44.5	)
Employee statutory profit-sharing expense			(0.7	)			—				(1.9	)			(1.2	)			(5.3	)
Income (loss) from continuing operations before equity in income of associated companies			53.2				(44.4	)			(3,045.9	)			(3,868.3	)			1,104.5
Equity in income of associated companies			1.9				2.7				2.1				2.2				—
Income (loss) from continuing operations			55.1				(41.7	)			(3,043.8	)			(3,866.1	)			1,104.5
Income (loss) from discontinued operations — net			108.8				105.5				(597.0	)			(111.8	)			166.2
Extraordinary loss			—				—				—				—				(334.7	)
Consolidated net income (loss)			163.9			Ps	63.9			Ps	(3,640.8	)		Ps	(3,977.9	)		Ps	936.1
Basic and diluted earnings per share (1)		Ps	1.65			Ps	0.70			Ps	(39.10	)		Ps	(42.32	)		Ps	9.90
Basic and diluted earnings per share from continuing operations (1)		Ps	0.63			Ps	(0.48	)		Ps	(32.7	)		Ps	(41.16	)		Ps	11.69
Weighted-average number of shares outstanding			108,528,665				91,834,192				92,942,916				94,072,122				94,072,122
U.S. GAAP: (2) (3)
Net sales		Ps	8,143.3			Ps	8,113.9			Ps	7,424.6			Ps	7,077.3			Ps	8,261.6
Operating income (loss)			458.3				473.0				(114.8	)			(119.1	)			1,213.2
Income (loss) before provisions for income and asset taxes, minority interest, special items and discontinued operations			566.9				314.3				(2,327.9	)			(1,728.5	)			379.4
Net income (loss)			1,344.9				756.9				(2,760.1	)			(2,101.6	)			372.5
Basic and diluted earnings per share (4)			12.39				8.24				(29.70	)			(22.34	)			3.96
Basic and diluted earnings per share from continuing operations (4)			11.38				6.97				(28.60	)			(16.45	)			3.09
Balance Sheet Data:
Mexican GAAP:
Cash and cash equivalents		Ps	700.4			Ps	859.9			Ps	697.9			Ps	250.8			Ps	572.5
Total current assets			3,657.0				3,946.6				3,951.9				3,989.4				4,790.0
Property, plant and equipment, net			10,913.1				11,433.2				12,260.1				13,002.4				16,802.3
Total assets			14,830.4				15,988.2				17,244.1				19,536.8				23,938.9

		At and for the year ended December 31,
		2005				2004				2003				2002				2001
		(in millions of constant pesos, except per share data)
Short-term debt, including current portion of long-term debt			257.6				182.0				9,405.3				8,539.4				688.1
Long-term debt			6,505.1				7,178.2				422.1				1,110.2				8,076.3
Common stock			5,445.3				5,154.6				5,154.5				5,280.3				5,280.3
Total majority stockholders’ equity			4,654.6				1,583.9				1,612.7				4,916.6				8,798.8
Total minority stockholders’ equity			58.3				80.1				73.7				77.3				47.3
Total stockholders’ equity (net assets)			4,712.9				1,663.9				1,686.4				4,993.9				8,846.1
U.S. GAAP: (2)
Total assets		Ps	14,979.6			Ps	15,691.0			Ps	16,011.3			Ps	19,093.9			Ps	20,527.8
Total stockholders’ equity (net assets)			1,681.8				482.4				(254.7	)			2,584.9				5,592.5
Other Financial Data:
Mexican GAAP:
Resources generated by (used in) operating activities		Ps	143.1			Ps	849.0			Ps	(482.6	)		Ps	(174.0	)		Ps	1,126.9
Resources generated by (used in) financing activities			(551.1	)			(625.7	)			(60.7	)			922.4				(597.8	)
Resources generated by (used in) investing activities			248.5				(61.4	)			990.4				(1,070.1	)			(866.3	)
Capital expenditures			(134.8	)			(214.2	)			(114.7	)			(493.1	)			(920.9	)
U.S. GAAP:
Cash flow provided by (used in) operating activities		Ps	(53.7	)		Ps	796.4			Ps	(343.5	)		Ps	423.2			Ps	1,352.6
Cash flow provided by (used in) financing activities			(38.0	)			(482.2	)			(441.3	)			1,491.7				(1,116.5	)
Cash flow provided by (used in) investing activities			555.6				(56.3	)			989.2				(1,574.2	)			(571.6	)

Dividends

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

Exchange Rate Information

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

		Noon Buying Rate
														Period
Year ended December 31,		High				Low				Average(1)				End
2001		Ps	9.97			Ps	9.03			Ps	9.34			Ps	9.16
2002			10.42				9.00				9.67				10.43
2003			11.41				10.11				10.79				11.24
2004			11.64				10.81				11.31				11.15
2005			11.41				10.41				10.89				10.63

		Noon Buying Rate
														Period
Month Ended		High				Low				Average(2)				End
December 31, 2005		Ps	10.77			Ps	10.41			Ps	10.63			Ps	10.63
January 31, 2006			10.64				10.44				10.54				10.44
February 28, 2006			10.53				10.43				10.48				10.45
March 31, 2006			10.95				10.46				10.75				10.45
April 30, 2006			11.16				10.86				11.05				11.09
May 31, 2006			11.30				10.84				11.09				11.29
June (through June 27)			11.46				11.28				11.40				11.42

Source: Federal Reserve Bank of New York.

On June 27, 2006, the noon buying rate was Ps 11.42 per US$1.00.

Risk Factors

     We are subject to various risks resulting from changing economic, political, industry and business and financial conditions that may affect our results of operations or financial condition, including, but not limited to, the risks described below.

Risks Related the Paper and Packaging Industry and Our Business

We have substantial debt and may be unable to generate sufficient cash to service our debt.

     At December 31, 2005, we had Ps 6,762.7 million (US$635.9 million) of total debt, substantially all of which was denominated in dollars.

     Our ability to make scheduled interest payments or to refinance our obligations with respect to our indebtedness will depend on the financial and operating performance of our subsidiaries. This performance, in turn, is subject to prevailing economic conditions in Mexico and the United States and to financial, business and other factors beyond our control, including but not limited to, fluctuations in international prices of our products as well as conditions in the paper and packaging industry conditions. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to delay capital expenditures, or sell material assets or operations, obtain additional capital or restructure our debt. Our operating performance, cash flow, and capital resources may not always be sufficient to service our debt in the future. In the event that we are required to dispose of material assets or operations or restructure our debt to meet our debt service and other obligations, we cannot assure you as to the terms of any transaction or how soon any transaction could be completed.

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

     We have entered into a common agreement, which we refer to as the Common Agreement, for the benefit of the holders of our Series B Step Up Rate Senior Secured Guaranteed Notes Due 2012, or 2012 notes, and the creditors under the Restructured Credit Agreement, dated as of February 23, 2005, among Corporación Durango, S.A. de C.V., the Guarantors named therein, the Tranche A Holders named therein, and The Bank of New York, as Administrative Agent, or the Restructured Credit Agreement. The Common Agreement, as well as some of our other

	•		incur additional debt;
	•		pay dividends, acquire shares of stock of our company or certain of our subsidiaries, make payments on subordinated debt or make investments;
	•		make distributions from our subsidiaries;
	•		issue or sell capital stock of our company or certain of our subsidiaries;
	•		issue guarantees;
	•		sell or exchange assets;
	•		enter into sale and lease-back transactions;
	•		enter into transactions with stockholders and affiliates of our company;
	•		create liens on assets of our company or certain of our subsidiaries; and
	•		effect mergers.

These negative covenants may have important consequences for our operations, including:

	•		our ability to adjust to rapidly changing market conditions, thus making us more vulnerable in the event the downturn in general economic conditions or our business continues; and
	•		our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes.

We are vulnerable to cyclicality and fluctuations in pricing.

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

We are vulnerable to competition in Mexico and the United States from producers of paper and packaging products with substantial resources.

     We face increasing competition in Mexico from international producers of paper and packaging due in part to significantly enhanced market access for imported products. Actions by our competitors, including any future increases in their capacity, may make it increasingly difficult for us to maintain our domestic market share in paper and packaging products. Increased competition from imports may have a material adverse effect on our company by driving down our prices and decreasing our revenues. Many of our competitors in Mexico are large international paper producers with substantial resources at their disposal.

     We face substantial competition in the United States from a variety of producers of paper and packaging products. Many of our competitors in the United States are substantially larger and have substantially greater financial, manufacturing, technological and marketing resources than our company.

     We anticipate that we may experience increasingly intense competition from international producers of paper and packaging products, both in Mexico and in the United States. There are no assurances that we will be able to avoid lower pricing as a result of competitive pressure. Lower pricing, changes made in response to competition and changes in consumer preferences may have an adverse effect on our financial performance.

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

     The cost of our supply of recycled fiber is directly affected by trends in international and domestic prices of old corrugated containers, or OCC, and old newsprint, or ONP, which stem from market fluctuations caused by factors beyond our control. Generally, demand and prices for finished paper vary directly with demand and prices for these raw materials. In addition, the cost of OCC in Mexico is affected both by inflation and exchange rates.

     We might not be able to recoup any future increases in the costs of raw materials through increases in sales prices for our products, which would adversely affect our operating income. We cannot assure that raw material prices will not further increase in the future. Increases in the prices of raw materials would increase our cost of sales and adversely affect our business results. Our operations may be adversely affected by increases in the price of raw materials.

Fluctuations in energy costs may adversely affect our costs of operations and our revenues.

     The price and supply of energy is unpredictable and fluctuates based on events beyond our control, including, among others, geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries and regional production patterns. Because our plants and facilities use significant amounts of electricity, natural gas and other forms of energy, increases in the cost of energy will increase our operating expenses and may have a material adverse effect upon our business, financial condition and results of operations.

Lack of water availability may adversely affect us.

     Water is an essential raw material in the paper production process. Some of our plants satisfy their water requirements through water wells licensed by the Mexican National Water Commission (Comisión Nacional del Agua). The Mexican government has the power to limit our water consumption and the volume of water that we may use according to our licenses, and it also has the power to revoke such licenses, in the event of our breach of the licenses’ terms.

     Although we believe that we are in compliance with our obligations under the licenses, we cannot assure you that the licenses will not be revoked. We also cannot be certain that the terms of any renewal of these licenses will be favorable, or that the volume of water that is currently available for use in manufacturing our products will be sufficient to satisfy our production requirements in the future. If our licenses are revoked, or the water that we may consume under our licenses is not sufficient to satisfy our production requirements, it may have an adverse effect on our cash flow, financial condition and operations.

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

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

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

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

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

Our principal stockholders own 78.9% of our shares and may take actions not in the interest of other holders of our shares

     We are controlled by the Rincón family, which indirectly owns 78.9% of our outstanding voting stock. See “Item 7. Major Stockholders and Related Party Transactions.” As a result, the Rincón family has the power to elect the majority of our directors and determine the outcome of any action requiring stockholder approval, including transactions with related parties, corporate reorganizations and the timing and payment of any future dividends. The interests of the Rincón family as stockholders may differ from the interests of other holders of our shares.

Risks Relating to Mexico

Political developments in Mexico may adversely affect our business.

     Political events in Mexico may significantly affect our business. In the Mexican federal elections held on July 2, 2000, Vicente Fox of the Partido Acción Nacional (the National Action Party) or PAN, won the presidency. Although his victory ended more than 70 years of presidential rule by the Partido Revolucionario Institucional (the Institutional Revolutionary Party), or PRI, neither the PRI nor the PAN succeeded in securing a majority in the Mexican congress. In elections in 2003 and 2004, the PAN lost additional seats in the Mexican congress and state governorships. The resulting legislative gridlock, which is expected to continue at least until the Mexican presidential elections in July 2006, has impeded the progress of structural reforms in Mexico, which may adversely affect economic conditions in Mexico, and consequently, our business results.

     The Mexican presidential election will result in a change in administration, as presidential reelection is not permitted in Mexico. The presidential race is highly contested among a number of different parties, including the PRI, the PAN and the Partido de la Revolución Democrática (the Party of the Democratic Revolution) or PRD, each with its own political platform. As a result, we cannot predict which party will prevail in the elections or whether changes in Mexican governmental policy will result from a change in administration. Such changes may adversely affect economic conditions or the industry in which we operate in Mexico and therefore our results of operations and financial position.

Adverse economic developments in Mexico may adversely affect our financial condition and results of operations.

     We are a Mexican company with a substantial part of our operations and assets in Mexico. For the year ended December 31, 2005, 79.5% of our total revenues were attributable to Mexico. In the past, Mexico has experienced both prolonged periods of weak economic conditions and dramatic deteriorations in economic conditions that have had a negative impact on our company. We cannot assume that such conditions will not return or that such conditions will not have a material adverse effect on our financial condition and results of operations.

     Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation in Mexico, interest rates in Mexico and exchange rates for the Mexican peso. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. Because a

large percentage of our costs and expenses are fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, and our profit margins may suffer as a result.

Downturns in the Mexican economy adversely affect us.

     The majority of our customers are Mexican companies or individuals and a substantial part of our operations and our assets are located in Mexico. For these reasons, our operations, results and financial condition are dependent upon the level of economic activity in Mexico. Paper and packaging prices in Mexico and our revenues are highly affected by the level of economic activity in Mexico and the general purchasing power of individuals and companies. Mexican gross domestic product, or GDP, grew by 1.4% in 2003, 4.2% in 2004 and 3.0% in 2005. If the Mexican economy experiences a slow rate of growth, our business, financial condition and results of operations may be adversely affected because our customers may reduce their consumption of our products.

Depreciation of the Mexican peso relative to the dollar may impair our ability to service our debt and adversely affect our profitability.

     The peso has depreciated substantially against the dollar in the past and may depreciate significantly in the future. The value of the peso, based on the exchange rate calculated and published by Banco de México (the Mexican Central Bank), declined by 7.6% against the dollar in 2003, and appreciated by 0.8% against the dollar in 2004 and by 4.6% against the dollar in 2005. Depreciation of the peso relative to the dollar adversely affects our results of operations by increasing our dollar-based costs, including our cost of borrowing, since the peso cost of interest payments on our dollar-denominated indebtedness increases. For example, the 7.6% depreciation of the peso against the dollar that occurred in 2003 generated an exchange loss of Ps 892.8 million which was one of the factors leading to our net loss of Ps 3,640.8 million in 2003. Substantially all of our indebtedness is denominated in dollars, while a majority of our revenues and operating expenses are denominated in pesos. We do not have in place hedging arrangements with respect to depreciation risk because we do not believe them to be cost effective for our company.

     A severe devaluation or depreciation of the peso may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert pesos into dollars for the purpose of making timely payments of interest and principal on our dollar-denominated indebtedness. While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange rate policies in the future, as it has done in the past. Currency fluctuations may have an adverse effect on our financial condition, results of operations and cash flows in future periods.

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

     Our profitability may be adversely affected by increases in inflation. Inflation in Mexico, as measured by changes in the NCPI, as provided by the Mexican Central Bank, was 4.0% in 2003, 5.2% in 2004 and 3.3% in 2005. However, Mexico has experienced high levels of inflation in the past. High levels of inflation would cause our operating costs to increase because approximately 82.5% of our cost of goods sold and selling, general and administrative expenses are payable in pesos and generally are based on short-term contracts, which may be subject to inflationary pressures. However, the prices that we charge for our products are generally denominated in dollars or are dollar-linked and may not increase at the same rate as our costs because the prices that we charge our customers for products are either fixed by long-term contract or effectively limited by the competitive nature of the markets in which we operate. If we are unable to pass on the increased costs of our inputs to our customers, the real prices of our products will not keep pace with inflation, and as a result, our operating income may decline.

Risks Relating to Our Series A Shares, CPOs and ADSs

The market for the ADSs and the Series A Shares is limited

     The Series A Shares are listed on the Mexican Stock Exchange, which is Mexico’s only stock exchange. There is no public market outside of Mexico for the Series A Shares. The Mexican securities market is not as large or as active as securities markets in the United States and certain other developed market economies. As a result, the

Mexican securities market has experienced less liquidity and more volatility than has been experienced in such other markets.

     Prior to July 15, 2004, the ADSs were listed on the New York Stock Exchange, or the NYSE. On May 25, 2004, following our filing of concurso mercantil, the NYSE announced the trading of our ADSs would be suspended immediately. On July 15, 2004, our ADSs were delisted from the NYSE. Our ADSs are presently being quoted, and have been quoted since May 27, 2004, on the Pink Sheets Electronic Quotation Service, or the Pink Sheets, maintained by Pink Sheets LLC for the National Quotation Bureau, Inc. The ticker symbol CDURQ has been assigned to our ADSs for over-the-counter quotations.

     Shares traded on the Pink Sheets generally experience lower trading volume than those traded on the organized exchanges. The trading volume of the ADSs has decreased substantially since the NYSE delisting and the transfer of the ADSs to the Pink Sheets. In addition, companies listed on the Pink Sheets are not subject to the corporate governance standards adopted by the organized exchanges. We have no plans to list our ADSs on any organized exchange in the United States. There is no assurance that a significant trading market for the ADSs will develop on the Pink Sheets. If an active trading market does not develop, holders of ADSs may be unable to sell their ADSs. In addition, these market characteristics may adversely affect the market price of the ADSs.

Future sales of our Series A Shares directed by Banamex may affect the stock prices of our Series A Shares and ADSs

     Administradora Corporativa y Mercantil, S.A. de C.V., or ACM, and a trust organized for the benefit of certain members of the Rincón family have pledged Series A Shares representing approximately 28.0% of our issued and outstanding capital stock in favor of Banco Nacional de México, S.A., or Banamex. Under the terms of the pledge agreements, Banamex has the right to cause ACM and the trust to sell all or part of the Series A Shares held by ACM or the trust if the price of the Series A Shares on the Mexican Stock Exchange meets or exceeds the peso equivalent of US$1.50. Banamex may exercise this right at any time whether or not an event of default under these pledge agreements has occurred. Any such sales could adversely affect the market price of the Series A Shares and the ADSs.

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

     We prepare our financial statements in accordance with Mexican GAAP. These principles differ in significant respects from U.S. GAAP as further discussed in note 23 to our audited consolidated financial statements. In particular, all Mexican companies must incorporate the effects of inflation directly in their accounting records and published financial statements. The effects of inflation accounting under Mexican GAAP are not eliminated in the reconciliation to U.S. GAAP. For this and other reasons, the presentation of our financial statements and reported earnings may differ from that of companies in other countries.

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

The protections afforded to minority shareholders in Mexico are different from those afforded to minority shareholders in the United States.

     Under Mexican law, the protections afforded to minority shareholders are different from, and may be less than, those afforded to minority shareholders in the United States. Mexican laws concerning duties of directors are not well developed, there is no procedure for class actions as such actions are conducted in the United States and there are different procedural requirements for bringing shareholder lawsuits for the benefit of companies. Therefore, it

may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholders than it would be for minority shareholders of a United States company.

Holders of ADSs are not able to vote at our shareholder meetings.

     Holders of our ADSs may not vote at our shareholders meetings. Each of our ADSs represents two CPOs and each CPO represents a financial interest in one Series A Share. Holders of CPOs are not entitled to exercise any voting rights with respect to the Series A Shares held in the CPO Trust. Such voting rights are exercisable only by the trustee, which is required by the terms of the trust agreement to vote such Series A Shares in the same manner as the majority of the Series A Shares that are not held in the CPO Trust that are voted at any shareholders’ meeting. Currently the Rincón Family Trust owns a majority of the shares of Series A Shares that are not held in the CPO Trust.

Holders of ADSs may not be entitled to participate in any future preemptive rights offering, which may result in a dilution of such holders equity interest in our company.

     Under Mexican law, if we issue new shares for cash as a part of a capital increase, we generally must grant our stockholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in our company. Rights to purchase shares in these circumstances are commonly referred to as preemptive rights. We may not be legally permitted to allow holders of ADSs in the United States to exercise preemptive rights in any future capital increase unless (1) we file a registration statement with the United States Securities and Exchange Commission, or the SEC, with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of ADSs in the United States and any other factors that we consider important in determining whether to file a registration statement.

     We cannot make any assurances that we will file a registration statement with the SEC to allow holders of ADSs in the United States to participate in a preemptive rights offering or that an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended, will be available. As a result, the equity interests of holders of ADSs would be diluted to the extent that ADS holders cannot participate in a preemptive rights offering.

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

     The market value of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. Mexican securities markets are, to varying degrees, influenced by economic and market conditions in other emerging market countries, especially those in Latin America. Although economic conditions are different in each country, investors’ reaction to developments in one country may affect the securities markets and the securities of issuers in other countries, including Mexico. We cannot assure you that the market for Mexican securities will not continue to be affected negatively by events elsewhere, particularly in emerging markets, or that such developments will not have a negative impact on the market value of the Series A and ADSs.

Investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons.

     We are organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

Item 4. Information on Our Company.

     We are a vertically integrated producer of paper and packaging products with a distribution network that links our strategically located facilities with our customers. We believe that these factors, as well as our investment in modern manufacturing technology and our access to raw materials as Mexico’s only producer of unbleached virgin kraft pulp and one of Mexico’s largest users of recycled paper, based on information published by the Mexican National Chamber for the Pulp and Paper Industry, allow us to be one of the industry’s lowest cost producers. In 2005, our total sales volume was 1,336.5 thousand short tons.

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

	•		Paper: containerboard (linerboard and corrugating medium), newsprint and uncoated free sheet;
	•		Packaging: corrugated containers and multi-wall sacks; and
	•		Other: plywood.

     We sell our products to a broad range of Mexican and United States manufacturers of consumable and durable goods, including the maquiladora sector and Mexico’s major exporters. Our customers in the United States and Mexico include many of the largest industrial, construction, consumer, agreicultural and media companies such as Pepsico, Vitro, El Universal, Apasco, Kimberly Clark, Comisión Nacional de Libros de Texto Gratuitos and Chiquita. In Mexico, we produce containerboard, corrugated containers, multi-wall sacks, newsprint, uncoated free sheet and plywood. In the United States, we produce containerboard and corrugated containers.

     Our net sales were Ps 8,143.3 million in 2005. In 2005, approximately 24.9% of our sales were made in dollars, with the balance primarily dollar-linked. In 2005, 79.5% of our total sales were made in Mexico and 20.5% were made in and into the United States.

     We are a corporation (sociedad anónima de capital variable) operating under the laws of Mexico. Our corporate domicile and principal executive offices are located at Torre Corporativa Durango, Potasio 150, Ciudad Industrial, Durango, Durango, United Mexican States 34208, and our telephone number is +52 (618) 829-1000.

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

Paper and Packaging Industry Overview

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

	•		packaging paper, which includes linerboard, corrugating medium, kraft paper, and tubing and folding cartons;
	•		printing and writing paper, which includes newsprint, bond paper, business and writing forms and other papers used for photocopying and commercial printing;
	•		sanitary paper; and
	•		specialty paper.

     We produce products within the packaging paper and printing and writing paper categories.

North American Paper and Packaging Industry

     Since mid-1995, the North American paper and packaging industry has experienced a prolonged down-cycle characterized by continued price pressures, excess capacity and the inability of many industry participants to earn satisfactory returns on capital. To maintain reasonable capacity utilization, U.S. paper producers have generally maintained high export levels over the past three years, including in the exports to Mexico. These exports have increased supply in the Mexican market and kept pressure on Mexican paper prices during 2005.

Mexican Paper Industry

Apparent Demand for Paper Industry

     Based on installed capacity, Mexico’s paper industry is one of the largest in Latin America, according to the 2005 annual report of the Mexican National Chamber for the Pulp and Paper Industry. The total size of Mexico’s paper industry in 2005, based on “apparent demand,” was 7,012 million short tons according to the 2005 annual report of the Mexican National Chamber for the Pulp and Paper Industry. Mexican production is distributed among 64 plants. Apparent demand consists of domestic production, as reported by manufacturers, plus imports, minus exports.

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

     Over the past decade, levels of apparent demand for paper have fluctuated according to changes in gross domestic product. Thus, as gross domestic product increases, apparent demand also increases.

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

		Aggregate												Apparent				%				% GDP
Year		Production				Imports				Exports				Demand				Change				Change
2001			4,272				1,884				237				5,919				1.1	%			(0.2	)%
2002			4,451				1,997				227				6,221				5.1	%			0.8	%
2003			4,497				2,090				197				6,391				2.7	%			1.4	%
2004			4,766				2,227				282				6,711				5.0	%			4.2	%
2005			4,904				2,381				273				7,012				4.5	%			3.0	%

     The dominant portion of the total market for paper products is the market for packaging paper. The table below shows Mexican apparent demand from 2001 to 2005 for packaging paper in short tons. In 2005, packaging paper accounted for 57.7% of Mexico’s total paper production and 54.7% of apparent demand for paper. Mexican production of packaging paper as a percentage of apparent demand has declined from 77.2% in 2000 to 73.7% in 2005.

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

		Aggregate												Apparent				%
Year		Production				Imports				Exports				Demand				Change
2001			2,478				878				73				3,283				2.9	%
2002			2,622				928				68				3,482				6.1	%
2003			2,645				955				54				3,546				1.8	%
2004			2,788				1,054				111				3,731				5.2	%
2005			2,829				1,114				107				3,836				2.8	%

     The table below shows Mexican apparent demand in short tons from 2001 to 2005 for printing and writing paper. In 2005, printing and writing paper accounted for 16.2% of Mexico’s total paper production and 19.1% of apparent demand for paper. Mexican production of printing and writing paper as a percentage of apparent demand has declined from 68.3% in 2000 to 59.3% in 2005.

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

		Aggregate												Apparent				%
Year		Production				Imports				Exports				Demand				Change
2001			726				388				15				1,099				(1.1	)%
2002			769				409				22				1,156				5.2	%
2003			763				448				11				1,200				3.8	%
2004			761				492				20				1,233				2.8	%
2005			795				569				23				1,341				8.4	%

     The table below shows Mexican apparent demand in short tons from 2001 to 2005 for newsprint in short tons. In 2005, newsprint accounted for 5.8% of Mexico’s total paper production and 6.3% of apparent demand for paper. Mexican production of newsprint as a percentage of apparent demand declined from 63.0% in 2000 to 47.9% in 2003, but recovered in 2004 and 2005 reaching 64.1% in 2005.

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

		Aggregate												Apparent				%
Year		Production				Imports				Exports				Demand				Change
2001			263				210				23				450				0.9%
2002			217				214				—				431				(4.3)%
2003			213				235				3				445				3.3%
2004			278				188				1				465				4.5%
2005			282				164				6				440				(5.4)%

Pricing

     In the past three years, prices in Mexico for the types of paper that we make have been influenced by a combination of factors, including:

	•		the rate of growth of the Mexican economy and the demand for packaging;
	•		prevailing inflation rates in Mexico;
	•		U.S. paper price levels;
	•		prevailing international prices for paper and packaging; and
	•		fluctuations in the peso/dollar exchange rate.

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

     Prevailing international prices for containerboard decreased by 1.3% during 2003, and increased by 26.0% in 2004 and approximately 3% in 2005. Prevailing international prices for uncoated free sheet increased by approximately 8% in 2003, 2% in 2004 and 4% in 2005. Prevailing international prices for newsprint increased by 5.2% in 2003, 7.7% during 2004 and approximately 7% in 2005.

     With generally low prices for containerboard in the United States over the last three years, competition in Mexico from imports has increased. Changes in our prices for containerboard are generally correlated to changes prevailing prices in the United States, although we and other Mexican containerboard producers generally set prices at a discount to prevailing prices in the United States.

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

	•		resistance specifications;
	•		quality control;
	•		customer service;
	•		printing and graphics specifications;
	•		volume of production runs; and
	•		proximity to customers and industrial centers (due to the transportation cost of converted products).

     With generally low prices for packaging products in the United States over the last three years, competition in Mexico from imports has increased. Changes in our prices for packaging products are generally correlated to changes prevailing prices in the United States, although we and other Mexican packaging producers generally set prices at a discount to prevailing prices in the United States.

Tariffs

     Under NAFTA, most of Mexico’s tariffs were eliminated during or prior to 2003. As a result of an antidumping complaint brought by the Mexican National Chamber for the Pulp and Paper Industry, in August 2004 Mexico imposed provisional antidumping duties on one international producer of newsprint of 18.2% and on another international producer of newsprint of 5.5%. Both of these producers prevailed in this proceeding and the provisional antidumping duties were eliminated in May 2005.

     As a result of an earlier complaint filed by the Mexican National Chamber for the Pulp and Paper Industry, in October 1998 Mexico imposed definitive antidumping duties on U.S. cut-size free sheet paper. The duties ranged from 5.3% to 17.7%. In October 2003, Mexico initiated a review proceeding to determine whether the antidumping duties should be continued or revoked. Pursuant to that review proceeding, Mexico decided to continue the antidumping duties, at the previously established rates, until October 2008.

History and Development of Our Company

     We were incorporated on January 22, 1982 for a period of 99 years. However, some of our underlying operating companies have been in existence since 1975. We were formed in 1975 from the combination of a forest products transportation company and a regional wholesaler of building products. Between 1987 and 2000 we pursued a strategy of vertical integration, implemented by both acquisitions and internal expansion, to attain our present position as Mexico’s largest producer, in terms of capacity, of containerboard and corrugated containers, based on information published by the Mexican National Chamber for the Pulp and Paper Industry.

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

Significant Developments During 2005 and Recent Developments

Financial Restructuring

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

     On May 18, 2004, we filed a voluntary petition under Mexico’s Business Reorganization Act (Ley de Concursos Mercantiles, or the LCM) with the First Federal District Court in Durango, Mexico, or the Mexican court. On May 20, 2004, our foreign representative, Gabriel Villegas Salazar, commenced a proceeding under section 304 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York (the “304 Proceeding”) on our behalf and on behalf of guarantors of our existing unsecured financial indebtedness. None of our other subsidiaries filed for concurso mercantil or other bankruptcy protection.

     On August 13, 2004, we reached an agreement in principle with creditors collectively holding approximately 68% of our unsecured debt regarding the terms of a proposed plan of reorganization and a proposed new plan support agreement.

     On August 25, 2004, the Mexican court declared that we had satisfied all of the requirements to be a debtor under the LCM. On November 17, 2004, the Mexican court certified the list of recognized claims in our concurso mercantil proceeding.

     On December 23, 2004, the conciliator (conciliadora) appointed by the Mexican Federal Institute of Commercial Reorganization Specialists (Instituto Federal de Especialistas de Concursos Mercantiles) in our concurso mercantil proceeding submitted our plan of reorganization to the holders of recognized claims and the plan was executed by us and the holders of recognized claims representing approximately 65% of the total number of recognized claims.

     The plan of reorganization provided that, in exchange for their debt, our unsecured financial creditors would receive new debt equal to approximately 85% of the aggregate outstanding principal amount of our unsecured debt. In addition to the new debt, the plan of reorganization provided that our unsecured financial creditors would receive shares of our series B common stock, no par value, or Series B Shares, representing an aggregate of approximately 17% of our capital stock on a fully diluted basis.

     On January 11, 2005, the conciliator submitted the executed plan of reorganization to the Mexican court, and on February 7, 2005, the Mexican court approved the plan of reorganization.

     On January 19, 2005, the U.S. bankruptcy court overseeing our 304 Proceeding entered an order permanently enjoining our creditors from taking action against our company in respect of their claims that were restructured in the concurso mercantil proceeding, as well as recognizing and giving effect to our plan of reorganization and the order from the Mexican court confirming the same.

     On February 23, 2005, our plan of reorganization was consummated. As a result:

•

Bank creditors of our company with claims against our company in the aggregate amount of US$136.3 million (Ps 1,611.3 million) received 2,392,957 of our Series B Shares, representing 2.16% of our issued and outstanding capital stock, and the principal amount of the debt outstanding with respect to these claims was amended and restated under the Restructured Credit Agreement. Under the Restructured Credit

Agreement, notes in an aggregate principal amount of US$116.1 million (Ps 1,294.6 million) were issued to the holders of these claims. These notes bear interest at a rate of LIBOR plus 2.75% per annum, payable quarterly in arrears, and the principal amount of these notes will be amortized quarterly until the maturity of these notes on December 30, 2012.

•

Unsecured creditors of our company with claims against our company in the aggregate amount of US$510.3 million (Ps 5,689.9 million) related to our 12 5/8% Senior Notes due 2003, or 2003 notes, our 13 1/8% Senior Notes due 2006, or 2006 notes, our 13 1/2% Senior Notes due 2008, or 2008 notes, our 13 3/4% Senior Notes due 2009, or 2009 notes, and the note issued under our Euro Commercial Paper Program, or ECP note, received 16,412,961 of our Series B Shares, representing 14.84% of our issued and outstanding capital stock, and an aggregate principal amount of US$433.8 million (Ps 4,836.5 million) of our 2012 notes in respect to these claims. The 2012 notes bear interest at a rate of 7.50% per annum until December 31, 2005, 8.50% per annum from January 1, 2006 through December 31, 2006, and 9.50% per annum thereafter, payable quarterly in arrears, and mature on December 30, 2012.

Acquisition of Empaques del Norte

     On April 11, 2005, our company entered into an agreement to acquire all of the capital stock of Empaques del Norte, S.A. de C.V. for US$5.8 million (Ps 64.9 million). The purchase price was paid in installments between April 2005 and May 2006. Empaques del Norte, S.A. de C.V. owns a corrugated container plant with an annual production capacity of 25,000 short tons.

Acquisition of Líneas Aéreas

     On April 18, 2005, our company purchased substantially all of the capital stock of Líneas Aéreas Ejecutivas de Durango, S.A. de C.V., or Líneas Aéreas, for Ps 15.0 thousand from certain members of the Rincón family and some of their children. Líneas Aéreas owns two business jets and provides transportation services to our subsidiaries and third parties. In connection with this transaction, we assumed a financial lease agreement with GE Capital Leasing with respect to one of the business jets. We have entered into a contract to sell one of these business jets for US$6.0 million and expect that the closing under this contract will occur in July 2006.

Acquisition of Inmobiliaria Industrial

     On June 28, 2005, our company acquired 99.99% of the capital stock of Inmobiliaria Industrial de Durango, S.A. de C.V. for Ps 735.0 thousand. This company was owned by some of the members of the Rincón family.

Sale of Chihuahua Particleboard Plant

     On July 15, 2005, our subsidiaries, Ponderosa Industrial de México, S.A. de C.V., or Ponderosa, and Compañía Forestal de Durango, S.A. de C.V., sold the assets of our Chihuahua particleboard plant for Ps 334.4 million (US$30 million). As a result of this sale, the capacity of our other segment was reduced by 200 thousands short tons, we ceased producing particleboard and, as of the date of this annual report, we no longer have any discontinued operations.

Recapitalization of Series A Shares and Series B Shares

     On January 25, 2006 and February 20, 2006, respectively, our board of directors and shareholders approved a recapitalization of our company under which we created a new sole series of common stock, no par value, and each of our outstanding Series A Shares and Series B Shares will be converted into one newly issued share of common stock. Following this recapitalization:

	•		each of our outstanding CPOs will represent a financial interest in one share of our common stock;
	•		each of our outstanding ADSs will continue to represent two CPOs; and
	•		we expect that our common stock will be listed on the Mexican Stock Exchange.

     We expect that the new common stock will be publicly traded over the Mexican Stock Exchange, subject to the approval of the CNBV and to the registration of the new common stock with the National Stock Registry of the CNBV. If approved and registered by the CNBV, we expect that the recapitalization and public trading of the new common stock will become effective within 15 days following the date on which the CNBV grants its approval.

Debt Reduction Program

     On February 27, 2006, we announced a debt reduction program to be undertaken during 2006. As of June 27, 2006, we have prepaid US$66.4 million of our outstanding debt and made amortization and payments at maturity of an additional US$4 million. The following are the most significant pre-payments made under this debt redection program:

	•		we have prepaid US$47.0 million to Bancomext under certain outstanding loan agreements;
	•		we have prepaid US$10.0 million to Bank of Albuquerque, representing the full amount outstanding under our loan agreement with Bank of Albuquerque;
	•		we have prepaid US$4.8 million to GE Capital Leasing under our capital leases, representing the full amount outstanding under these leases; and
	•		we have prepaid US$4.6 million to GE Capital Corporation under an outstanding capital lease.

We have financed these prepayments through the issuance and sale of capital stock of Pipsamex to our majority stockholders, the proceeds from the divestiture of some minor non-strategic assets and operating cash flow.

Tizayuca Mill Lease Agreement

     On March 31, 2006, we purchased land and an industrial facility in Tizayuca, Hidalgo at which a paper mill and converter are located for US$10.0 million. Effective March 31, 2006, we entered into an operating lease agreement under which we lease machinery and equipment with installed capacity of 200,000 short tons of linerboard and 100,000 short tons of corrugated boxes located at the Tizayuca industrial facility. The lease agreement has a term of 7.5 years and requires payments over its term of US$65.9 million. We have an option to purchase the machinery and equipment for fair market value on the seventh anniversary of the commencement of this lease.

Subsidiaries and Operating Divisions

     The following chart sets forth our organizational structure as of June 27, 2006.

* CONICEPA =		Compañía Norteamericana de Inversiones en Celulosa y Papel, S.A. de C.V.		(1) (2) (3)		4.92% is controlled through Empaques de Cartón Titán 16.19% is controlled through Compañia Papelera de Atenquique 19.80% is controlled through Empaques de Cartón Titán, and 27.24% is controlled through Corporación Durango

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

	•		Paper: the Grupo Durango division, the Grupo Pipsamex division and Durango McKinley Paper Company
	•		Packaging: Titán and its subsidiaries, or the Titán Group, and Durango McKinley Paper Company
	•		Other: Ponderosa

     Our operating divisions are:

	•		Grupo Durango. The Grupo Durango division produces containerboard. In 2005, approximately 85% of the 651.1 thousand short tons of linerboard and corrugating medium shipped by the Grupo Durango division was used to supply the Titán Group. The remainder of its production was sold to third party manufacturers in Mexico and the United States.
	•		Grupo Pipsamex. The Grupo Pipsamex division produces newsprint and bond paper. In 2005, the Grupo Pipsamex division sold 142.4 thousand short tons of newsprint and 133.0 thousand short tons of uncoated

free sheet. The Grupo Pipsamex division’s sales are predominantly to the Mexican market with the balance primarily sold in the United States.

	•		Durango McKinley. Durango McKinley Paper Company is a recycled linerboard manufacturer located in the southwestern United States that serves the maquiladora region. Durango McKinley Paper Company is a significant collector of OCC material, which is processed to create recycled fiber. In 2005, approximately 81% of the paper needs of our packaging operations in Texas were supplied by other paper producers that supplied this paper in exchange for paper produced by Durango McKinley Paper Company.
	•		Packaging. Our packaging division, which includes the packaging operations of Durango McKinley Paper Company and the Titán Group, is a large paper-based packaging manufacturer. The packaging division’s 2005 sales of 708.6 thousand short tons consisted almost entirely of corrugated containers and multi-wall sacks. The Grupo Durango division supplies approximately 97% of the Titán Group’s containerboard requirements. Waste material generated in production of corrugated containers is sold back to the Grupo Durango division for recycling and to produce pulp. The Titán Group’s sales are primarily to Mexico and the export sector.
	•		Ponderosa. Ponderosa, a forest-based building products manufacturer, markets its products throughout the NAFTA region. In 2005, Ponderosa’s continuing operations sold 9.7 thousand short tons of plywood.

     The Grupo Durango division, Durango McKinley Paper Company and the Titán Group are vertically integrated with the Grupo Durango division and Durango McKinley Paper Company supplying substantially all of the containerboard used by our packaging division. This integration enables us to limit purchases from external suppliers and reduce costs.

Our Products

General

     Our main product groups are:

	•		Paper—containerboard (linerboard and corrugating medium), newsprint and uncoated free sheet (bond, book stock, miscellaneous free sheet);
	•		Packaging—corrugated containers and multi-wall sacks; and
	•		Other—plywood.

     The total capacity of our continuing operations by product and number of mills and plants as of December 31, 2005, and our actual production for the periods indicated, is as follows:

										Production at December 31,
		Installed Capacity at				Mills/
Product Type		December 31, 2005				Plants				2005				2004				2003
		(in thousands of short
		tons per year)								(in thousands of short tons)
Paper:
Containerboard			900.0				6				924.0				891.8				859.9
Newsprint			160.0				1				148.1				160.4				131.0
Uncoated free sheet			155.0				1				155.4				133.1				143.5
Total Paper			1,215.0				8				1,227.5				1,185.4				1,134.3
Packaging:
Corrugated containers			917.0	(1)			19	(1)			662.8				632.5				627.6
Multi-wall sacks			66.0				3				43.6				39.2				36.9
Total Packaging			983.0				22				706.4				671.6				664.6
Other products (2)			58.0				3				9.9				10.5				10.2
Total Production			2,256.0				33				1,943.8				1,867.5				1,809.1

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

		December 31,
Product Type		2005								2004								2003
		Sales volume				Net Sales				Sales volume				Net Sales				Sales volume				Net Sales
		(in thousands				(in millions of				(in thousands				(in millions of				(in thousands				(in millions of
		of short tons)				constant pesos)				of short tons)				constant pesos)				of short tons)				constant pesos)
Paper:
Containerboard			342.8			Ps	1,381.3				341.6			Ps	1,575.9				312.7			Ps	1,252.6
Newsprint			142.4				936.7				158.1				955.4				130.8				734.2
Uncoated free sheet			133.0				1,172.1				121.1				1,023.2				124.4				1,000.8
Total Paper			618.1				3,490.1				620.7				3,554.5				567.9				2,987.6
Packaging:
Corrugated containers			665.1				4,153.0				632.2				4,027.0				615.6				3,928.3
Multi-wall sacks			42.0				388.9				39.9				347.2				35.9				319.6
Paper tubes (1)			1.5				10.9				—				—				0.4				3.2
Total Packaging			708.6				4,552.8				672.1				4,374.2				652.0				4,251.0
Other products			9.7				100.4				11.7				110.5				10.8				88.7
Total Sales Volume			1,336.5			Ps	8,143.3				1,304.5			Ps	8,039.3				1,230.7			Ps	7,327.3

Paper Products

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

		Product Description and Usage
Containerboard		We produce linerboard and corrugating medium, white-top and mottled white linerboard and paper, and high-performance linerboard. Our products are used by corrugated container manufacturers in the production of a wide variety of corrugated containers.
Newsprint		We produce standard, peach and improved newsprint. Our products are used by newspaper and magazine publishers and advertisers for newspapers, books, advertisements, and magazines.
Uncoated free sheet		We produce bond, forms, tablet, copy, and book stock and miscellaneous free sheet. Our products are used by consumer goods and office supplies producers for printing and writing paper, office supplies, and educational books.

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

Packaging Products

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

		Product Description and Usage
Corrugated containers		We produce corrugated containers manufactured in converting plants from containerboard. Our products are used by consumer, industrial and agricultural goods producers to ship products including home appliances, electronics, spare parts, grocery products, produce, books, tobacco and furniture.
Multi-wall sacks		We produce flat, expandable, glued, sewn and laminated sacks. Our products are used by cement, powdered foods and chemicals manufacturers for delivery of cement, flour, powdered food, chemical products, gypsum and lime products.

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

Other Products

     We produce pine plywood. Our pine plywood is used in the construction industry in Mexico and the United States. Other uses are for signs, doors, concrete pouring, and toys.

Customers

     We primarily sell our products in Mexico and the United States. In 2005, 79.5% of our total sales were made in Mexico and 20.5% were made in and into the United States.

     Our major customers in Mexico and the United States include:

Paper		Packaging		Other Products
Mexico:		Mexico:		Mexico:
El Universal Compañía Periodística Nacional, S.A. de C.V.		Grupo Vitro, S.A. de C.V.		Maderería El Cueramo, S.A. de C.V.
Duro Bag Comisión Nacional de Libros de Texto Gratuitos		Grupo Pepsico, S.A. de C.V. Kimberly Clark de Mexico, S.A. de C.V.		Mexicana Pacific, S.A. de C.V. Triplay Alameda, S.A. de C.V. Aglomerados y Triplay VIC, S.A. de C.V.
		Allen del Norte, S.A. de C.V. Grupo Apasco, S.A. de C.V. Chiquita, S.A. de C.V.
United States:		United States:
South Key Mission		Harris Packaging Bronco Packaging Bana, Inc. Victor Pkg — Dallas

Sales and Marketing

     In 2005, sales to our 10 largest customers accounted for approximately 28% of our net sales. None of our customers accounted for a material amount of our revenues. We do not believe that the loss of any single customer would have a material adverse effect on our business.

     Our sales and marketing staff are responsible for identifying and developing markets as well as notifying our research and development staff of customer product requirements. We sell our products through our direct sales force at our Mexican offices located in Mexico City, Guadalajara and Monterrey, Mexico, and our U.S. offices located in Albuquerque, New Mexico and Dallas, Texas. As of December 31, 2005, we had approximately 208 employees involved in direct sales. We make substantially all of our sales directly to our clients. We use brokers only in limited circumstances.

     Our sales strategy involves targeting niche markets, such as the maquiladora sector, growing manufacturing regions in central and southern Mexico, Mexican export markets and lightweight markets. A core element of our sales strategy is to establish long-term customer relationships by ensuring that we satisfy our customers’ specific requirements. The customized service we provide and the strategic relationships we have developed ensure we retain our existing customers while attracting new ones. To enable us to maintain the advantages of strategically located facilities, we continue to update our distribution network to accommodate the trends of our important manufacturing customers.

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

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

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

Raw Materials

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

Recycled Fiber

     Our business is affected by trends in international and domestic prices of OCC and ONP material. In Mexico, the price differential between domestic and imported OCC and ONP material fluctuates in peso terms, due to demand and currency fluctuations, and at any given time we may supply ourselves from either market, depending on the then current price differential. In 2005, approximately 73% of the fiber we used in our Mexican operations was recycled and approximately 49% of this recycled fiber was imported from third party producers.

     In the United States, our McKinley mill uses only recycled fiber. In 2005, our recycling centers in Albuquerque, Phoenix and El Paso provided approximately 39% of our fiber requirements in the United States and we obtained the balance of our recycled fiber requirements in the open market.

Pulp

     We are Mexico’s sole producer of unbleached kraft pulp and we are currently able to produce 80,000 short tons of unbleached kraft pulp per year, which is more than sufficient to supply our internal requirements for virgin kraft pulp. We are also able to produce 79,000 short tons per year of chemical thermo-mechanical pulp, 52,000 short tons

per year of thermo-mechanical pulp, 79,000 short tons per year of sugar cane bagasse pulp, and 197,000 short tons per year of deinked pulp.

     In Mexico, we buy our wood, the raw material from which we produce virgin kraft pulp, from small property owners and ejidos, which are small plots of land granted by the Mexican government to small groups of land workers. The wood is purchased from sellers located in the states of Durango, Jalisco, Oaxaca and Michoacán. In total we have access to approximately 600,000 hectares of forestry land. We have traditionally managed our supply of resources through direct negotiations with landowners. In general, we believe that our existing wood supply arrangements are sufficient to provide for our currently anticipated rates of consumption for the foreseeable future. We also have a strong presence in the Mexican forestry sector that allows us to effectively source our wood supply.

Water

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

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

Electric Power

     Our Mexpape and Tuxtepec mills generate approximately 50% of their electric power, and our Centauro and Atenquique paper mills generate approximately 20% of their electric power. The balance of our electricity requirements in Mexico is purchased from the Comisión Federal de Electricidad, the Mexican state-owned electric company. The contracts for electric power supply signed with the Mexican state-owned electric company are the standard contracts used for all Mexican companies and there is no specific termination date for the contracts.

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

Distribution and Supply of Our Products

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

     At December 31, 2005, we owned approximately 90 trailer trucks and had access to approximately 1,500 additional trailer trucks owned by independent operators who provide services principally to us. We use our trucks to transport wood from forests to our production facilities, and we also use our trucks, and trucks operated by independent operators, to ship finished products to our customers in Mexico and in the United States. The independent operators benefit from their relationship with us because they can frequently haul our finished goods to industrial centers and raw material in the form of recycled fiber to our plants on a single round trip. This also reduces our shipping costs.

     Among our products, containerboard, newsprint and printing grades, which are transported in large rolls, can be economically shipped over long distances. Corrugated containers and multi-wall sacks have a much smaller

economic shipping radius because their low density results in a relatively high transport cost per ton compared to paper. Consequently, our broad network of container and bag plants, located near major industrial centers around Mexico, is an important factor in the timely and economic delivery of our packaging products to both local and national customers.

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

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

Our Competition

     In 2005, approximately 68% of our net sales of paper to third parties were to customers in Mexico and the remainder was to customers in the United States. In 2005, approximately 88% of our net sales of packaging products to third parties were to customers in Mexico and the remainder was to customers in the United States.

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

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

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

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

Environmental Matters

     Our Mexican operations are subject to federal, state and local laws and regulations, including the Mexican General Law of Ecological Stabilization and Environment Protection (Ley General del Equilibrio Ecológico y de Protección al Ambiente) and the rules and regulations published under this law. Under this law, companies engaged in industrial activities are subject to the regulatory jurisdiction of the Mexican Ministry of the Environment and Natural Resources.

     In 1988, we agreed with Mexican environmental regulatory authorities on a compliance plan that we proceeded to implement. Today, our paper mills are in compliance with general standards established by law and with specific standards promulgated by the Mexican regulatory authorities. In 1995, we purchased approximately 26% of Planta Ecológica Industrial, S.A. de C.V., a joint venture of industrial water users in Monterrey, Nuevo León. The venture

processes and recycles water used by plants in the industrial park where our Monterrey paper mill is located. Our paper mills in Mexico are subject to periodic environmental audits by the Mexican Ministry of the Environment and Natural Resources. We have frequently been recognized for our environmental record and our role in implementing modern forest management techniques. However, there can be no assurance that relevant Mexican authorities will continue to find our environmental procedures adequate, or that more stringent environmental laws will not be enacted by Mexico in the future. Were enforcement of existing laws to increase, or new environmental laws to be enacted, we could incur material compliance costs.

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

     We are committed to protecting the health and welfare of our employees, the public, and the environment and we strive to maintain compliance with all state and federal environmental regulations in a manner that is also cost effective. See “Item 5. Operating and Financial Review and Prospects—Contractual Commitments and Capital Expenditures—Capital Expenditures.” In any construction of new facilities and the modernization of existing facilities, we intend to use modern technology for our air and water emissions. These forward-looking programs will minimize the impact that changing regulations have on capital expenditures for environmental compliance.

Insurance

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

Property, Plant and Equipment

     The table below sets forth information regarding the identity, location, products and capacity of our production facilities as of December 31, 2005:

		Short tons
		per year
Paper:
Containerboard
Centauro Mill (Durango)			275,000
Atenquique Mill (Jalisco)			145,000
McKinley Mill (New Mexico, U.S.)			210,000
Monterrey Mill (Nuevo León)			138,000
Guadalajara Mill (Jalisco)			55,000
Texcoco Mill (Edo. de México)			27,000
Tuxtepec Mill (Oaxaca) (2)			50,000
Total			900,000
Newsprint
Tuxtepec Mill (Oaxaca) (2)			160,000
Uncoated Free Sheet
Mexpape Mill (Veracruz)			155,000
			1,215,000
Pulp:
Unbleached Softwood Pulp
Atenquique Mill (Jalisco)			80,000
Bleached Chemical Thermomecanical Pulp
Pipsamex Pulp Mill (Durango) (3)			79,000
Thermomecanical Pulp (TMP)
Tuxtepec Pulp Mill (Oaxaca)			52,000

		Short tons
		per year
Bleached Bagasse Pulp
Mexpape Pulp Mill (Veracruz) (3)			79,000
Bleached Deinking Pulp
Tuxtepec DIP Mill (Oaxaca)			92,000
Mexpape DIPHB Mill (Veracruz)			105,000
Total			197,000
			487,000
Packaging:
Corrugated containers
Mexicali Plant (Baja California Norte) (1)			39,000
Chihuahua Plant (Chihuahua)			37,000
Monterrey Centro Plant (Nuevo León)			52,000
Cartonpack (Nuevo León) (1)			59,000
Monterrey Plant (Nuevo León)			56,000
Culiacán Plant (Sinaloa) (1)			39,000
Guadalajara Plant (Jalisco) (1)			52,000
Guadalajara Ceosa Plant (Jalisco)			39,000
Guadalajara San Sebastián Plant (Jalisco)			16,000
Querétaro Plant (Querétaro)			47,000
Atenpack Juárez Plant (DF)			51,000
Atenpack Tultitlan Plant (Edo. De México)			52,000
Titán Tlalnepantla Plant (Edo. De México) (1)(3)(4)			58,000
Eyemsa Izcalli Plant (Edo. de México)			47,000
Eyemsa Tlalnepantla Plant (Edo. de México)			46,000
Eyemsa Tapachula Plant (Chiapas)			52,000
Eyemsa Tepatitlán Plant (Jalisco)			50,000
Empaques del Norte Plant (Monterrey)			25,000
Durango McKinley Paper Dallas Plant (Texas, U.S.)			100,000
Total			917,000
Multi-wall Sacks
Cd. Guzmán Plant (Jalisco)			22,000
Tula Plant (Hidalgo) (1)			22,000
Apasco Plant (Edo. de México)			22,000
Total			66,000
			983,000
Other:
Plywood Anahuac Mill (Chihuahua) (3)			26,000
Particleboard Durango Mill (Durango) (3)			17,000
Plywood Durango Mill (Durango)			15,000
Total			58,000

     Effective March 31, 2006, we entered into an operating lease agreement under which we lease machinery and equipment with installed capacity of 200,000 short tons of linerboard and 100,000 short tons of corrugated boxes located at the Tizayuca industrial facility. The capacity of this industrial facility is not included in the table above. The raw materials used by the Tizayuca paper mill consist entirely of OCC purchased in Mexico, a substantial portion of which is supplied by a nearby recycling facility. The Tizayuca industrial facility includes a generator

fueled by natural gas which generates all of the electricity used by this facility, and obtains all of its water from wells located at this facility.

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

Item 5.		Operating and Financial Review and Prospects.

     The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements at December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 included in this annual report, as well as with the information presented under “Introduction—Presentation of Financial and Other Information” and “Item 3: Key Information—Selected Consolidated Financial Data.”

     The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Introduction—Special Note Regarding Forward-Looking Statements” and “Item 3: Key Information—Risk Factors.”

General

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

	•		a brief overview of our company and the principal factors that influence our results of operations, financial condition and liquidity;
	•		a review of our financial presentation and accounting policies, including our critical accounting estimates;
	•		a discussion of the principal factors that influence our results of operations and liquidity;
	•		a discussion of developments since the end of 2005 that may materially affect our results of operations, financial condition and liquidity;
	•		a discussion of our results of operations for the years ended December 31, 2005, 2004 and 2003;
	•		a discussion of our liquidity and capital resources, including our changes in financial position for the years ended December 31, 2005, 2004 and 2003, and our long-term indebtedness;
	•		a discussion of our capital expenditures and our contractual commitments; and
	•		a discussion of the principal differences between Mexican GAAP and U.S. GAAP as they relate to our financial statements.

Overview

     We are a vertically integrated producer of paper and packaging products with an extensive distribution network that links our strategically located facilities with our customers. We believe that these factors, as well as our investment in modern manufacturing technology and our access to raw materials as Mexico’s only producer of unbleached virgin kraft pulp and one of Mexico’s largest users of recycled paper, based on information published by

the Mexican National Chamber for the Pulp and Paper Industry, allow us to be one of the industry’s lowest cost producers.

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

	•		the substantial reduction in our production capacity and product offerings as a result of the disposition of Pronal and the molded pulp division of Empaques de Cartón Titán, or Titán, and our disposition of our Chihuahua particleboard plant;
	•		the level of our outstanding indebtedness and the interest we are obligated to pay on this indebtedness, which affects our net financial expenses;
	•		the Mexican and U.S. market prices of corrugated containers, containerboard and newsprint, which significantly affect our net revenue;
	•		the level of production capacity in the United States and Mexico for the products that we sell and our capacity utilization rate, which significantly affects the cost of producing our products and may lead to the impairment of our assets;
	•		the Mexican and U.S. market prices of OCC and ONP, the principal raw materials in our paper manufacturing operations, which significantly affect the cost of producing our products;
	•		the growth rates of Mexican GDP and U.S. GDP, which affect the demand for our products, and consequently our sales volume;
	•		the exchange rate of the peso against the dollar, which affects our net sales in pesos and our financing costs;
	•		inflation rates in Mexico; and
	•		our ability to use our net operating loss carryforwards.

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

	•		our financial restructuring following our defaults on our unsecured debt in November 2002;
	•		our ability to generate cash flows from our operations;
	•		prevailing domestic and international interest rates and movements in exchange rates, which affect our debt service requirements;
	•		our limited ability to borrow funds from Mexican and international financial institutions or to sell our debt securities in the Mexican and international securities markets, primarily as a result of covenants included in our restructured indebtedness; and
	•		our capital expenditure requirements, which consist primarily of maintenance of our operating facilities.

Financial Presentation and Accounting Policies

Consolidated Financial Statements

     We have prepared our audited consolidated financial statements at December 31, 2005 and 2004 and for the three years ended December 31, 2005 in accordance with Mexican GAAP, which differs in significant respects from U.S. GAAP. Note 23 to our audited consolidated financial statements provides a description of the principal

differences between Mexican GAAP and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP of our consolidated net income (loss) and total stockholders’ equity as of December 31, 2005 and 2004 and for the three years ended December 31, 2005.

Business Segments

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

	•		Paper — This segment includes our production and sale of containerboard (linerboard and corrugating medium), newsprint and uncoated free sheet. This segment includes the operating results of the Grupo Durango division and the Grupo Pipsamex division in Mexico and Durango McKinley Paper Company’s paper operations in the United States.
	•		Packaging — This segment includes the production and sale of corrugated containers, multi-wall sacks and paper tubes. This segment includes the operating results of the packaging division in Mexico and the U.S.
	•		Other — This segment includes the production and sale of plywood.

     In 2005, paper products accounted for 42.9% of our net sales to third parties, packaging products accounted for 55.9% of our net sales to third parties and other products accounted for the remaining 1.2% of our net sales to third parties.

Discontinued Operations

     In connection with our financial and operating restructuring, during 2003 we authorized the discontinuation and/or sale of some subsidiaries or significant assets. The related assets, liabilities and operating results are presented in our audited consolidated financial statements as discontinued operations. In 2003, our discontinued operations consisted of (1) the molded pulp division of Titán, which we sold on February 27, 2003, (2) Pronal, which we sold on November 14, 2003, and (3) the Chihuahua particleboard plant of Ponderosa. In 2004, our discontinued operations consisted of the Chihuahua particleboard plant of Ponderosa. In 2005, our discontinued operations consisted of the Chihuahua particleboard plant of Ponderosa, which we sold on July 15, 2005.

Critical Accounting Estimates

     We have identified the most critical accounting estimates that involve a higher degree of judgment and complexity and that management believes are important to a more complete understanding of our financial position and results of operations. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In order to provide an understanding about how we form our judgments and estimates about certain future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to the following critical accounting estimates under Mexican GAAP.

Allowance for doubtful accounts

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

Deferred taxes

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

     Significant management judgment is required in determining our provision for income taxes, and any valuation allowance recorded against our deferred tax assets. In evaluating the need for a valuation allowance for deferred income tax assets related to tax loss carryforwards, we first consider the reversal of existing taxable temporary differences that are expected to generate taxable income during the tax loss carryforward periods. Subsequently, we consider any tax planning strategies if prudent and feasible.

Property, plant and equipment

     Fixed assets and intangible assets are assigned useful lives, which impact the annual depreciation and amortization expense. The assignment of useful lives involves significant judgments and the use of estimates. Changes in technology or changes in intended use of these assets may cause the estimated useful life to change. We also evaluate the carrying value of property, plant and equipment to be held and used and any assets to be disposed of when events or circumstances suggest that the carrying value may not be recoverable, such as temporary shut downs of plants or permanent closures. Such reviews have been necessary in recent years.

     Prior to December 31, 2003, Mexican GAAP required the calculation of impairment of long-lived assets by comparing the unamortized carrying amount of the asset to the undiscounted future expected cash flows to be generated by the assets, without interest charges. Under these rules, if the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss was recognized for the difference between the fair value and carrying value of the assets. We recorded impairment losses for our long-lived assets of Ps 656.1 million during 2003 in other income (expenses) — net in our statement of operations and reserved these amounts against the value of our property, plant and equipment on our balance sheet. The deferred income tax effect for this reserve resulted in a benefit of Ps 210.0 million during 2003, which was recorded in income tax benefit (expenses) in our statement of operations.

     On January 1, 2004, we adopted Bulletin C-15, “Impairment of the Value of Long-Lived Assets and Their Disposal,” issued by MIPA, or Bulletin C-15. Bulletin C-15 establishes general criteria for the identification and, if applicable, recording of losses from impairment or the decrease in value of long-lived tangible and intangible assets, including goodwill. Bulletin C-15 requires the calculation of impairment of long-lived assets by comparing the unamortized carrying amount of the asset to the net present value of future expected net cash flows. Under Bulletin C-15, if the net present value of future expected net cash flows is less than the carrying amount of the asset, a loss was recognized for the difference between the net present value of future expected net cash flows and carrying value of the assets. We recorded a favorable adjustment of Ps 113.8 million and a charge of Ps 479.1 million during 2005 and 2004, respectively, in other income (expenses).

     For U.S. GAAP purposes, beginning on January 1, 2002, we follow SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 provides criteria for when and in 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 144, the impairment criteria is 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, if available or the present value of expected future cash flows.

     The estimates of undiscounted cash flows and the net present value of future expected net cash flows takes into consideration expectations of future macroeconomic conditions as well as our company’s internal strategic plans. Therefore, inherent in the estimated future cash flows is a certain level of risk that we have considered in our valuation; nevertheless, actual future results may differ.

     For assets to be disposed of, our company assesses whether machinery or equipment can be used at other facilities and if not, estimates the proceeds to be realized upon sale of the assets. Our company has recorded impairment losses related to certain unused assets and such losses may potentially occur in the future. We reviewed the fair value less disposal cost of the long-lived assets for which management has committed to a plan of disposal, principally Ponderosa’s Chihuahua particleboard plant in 2003, and recorded impairment losses for these assets of Ps 381.8 million during 2003 in income (loss) from discontinued operations — net in our statement of operations. The deferred income tax effect for this reserve resulted in a benefit of Ps 122.1 during 2003, which was recorded in income (loss) from discontinued operations — net in our statement of operations.

Pension plans, seniority premiums and indemnities

     The determination of our obligations for pension plans, seniority premiums and indemnities are dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in note 11 to our audited consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and healthcare costs. In accordance with generally accepted accounting principles, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension and other post-retirement obligations and our future expense.

Negative goodwill

     Until December 31, 2004, negative goodwill is amortized under the straight-line method over a period not to exceed two years, which in our opinion, approximates the period in which the acquired subsidiaries are integrated into our company. Determination of the period that it takes an acquired subsidiary to be integrated into our company involves significant judgments and the use of estimates.

     Effective January 1, 2005, Statement B-7, “Business Acquisitions”, establishes, among other things, that the purchase method should be used to account for business acquisition. In addition, it modifies the accounting treatment of goodwill, ceasing its amortization, but subjecting it to annual impairment test. Statement B-7 also provides specific guidance for the accounting for acquisition of minority interest and transfer of assets of stock among entities under common control.

     Leasing operations are registered under Statement D-5, “Leasing”. We capitalize leased asset related to industrial machinery and equipment. These assets are depreciated under the depreciation rates of the common acquired assets.

Principal Factors Affecting Our Results of Operations and Liquidity

Our Financial Restructuring

     In November 2002, we defaulted on payments of principal and interest under our unsecured indebtedness. As a result of the factors described below, we did not generate sufficient cash flows from our operations to make a total of US$52.2 million of principal or a total of US$34.7 million of interest payments that were due on our unsecured indebtedness during 2002. In 2003, we did not pay a total of US$77.3 million of principal or a total of US$78.3 million of interest that was due on our unsecured indebtedness. In 2004, we did not pay a total of US$66.4 million of principal or a total of US$72.9 million of interest that was due on our unsecured indebtedness.

     Our liquidity crisis was caused by, among other things:

	•		the substantial capital expenditures required to expand our production capacity, which resulted in a substantial debt service burden and led to our default on our unsecured indebtedness, which has restricted our access to the capital markets;
	•		the economic slow-down in the U.S. and Mexico, which resulted in a reduction in the demand for manufactured products requiring the goods supplied by our company;
	•		a significant drop in international market prices for paper and packaging products;
	•		the significant increase in raw material costs and other production costs;
	•		the devaluation of the peso against the dollar from 2002 to 2004; and
	•		a significant delay in the implementation of our planned divestiture of certain non-strategic assets.

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

     On May 18, 2004, we filed a voluntary petition for concurso mercantil (commercial reorganization) under the LCM with the Mexican court. None of our subsidiaries filed for concurso mercantil or other bankruptcy protection in Mexico. On August 25, 2004, the Mexican court declared that we had satisfied all of the requirements to be a debtor under the LCM.

     We continued to negotiate with our creditors, and on August 13, 2004, we reached an agreement in principle with creditors collectively holding approximately 68% of our unsecured debt regarding the terms of a proposed plan of reorganization and a proposed plan support agreement. On November 17, 2004, the Mexican court certified the list of recognized claims in our commercial reorganization proceeding. On December 23, 2004, the conciliator (conciliadora) appointed by the Mexican Federal Institute of Commercial Reorganization Specialists (Instituto Federal de Especialistas de Concursos Mercantiles) in our commercial reorganization proceeding submitted our plan of reorganization to the holders of recognized claims that were party to our plan support agreement. The plan of reorganization provided that, in exchange for their debt, our unsecured financial creditors would receive new debt equal to approximately 85% of the outstanding principal amount of our unsecured debt. In addition to the new debt, the plan of reorganization provided that our unsecured financial creditors would receive a number of our Series B Shares representing an aggregate of approximately 17% of our capital stock on a fully diluted basis. The plan was executed by our company and the holders of a majority of the recognized claims on December 23, 2004.

     The conciliator submitted our executed plan of reorganization to the Mexican court on January 11, 2005, and it was approved by the Mexican court on February 7, 2005. On February 23, 2005, our plan of reorganization was consummated. As a result:

•

Bank creditors of our company with claims against our company in the amount of US$136.3 million (Ps 1,611.3 million) received 2,392,957 of our Series B Shares, representing 2.16% of our issued and outstanding capital stock, and the principal amount of the debt outstanding with respect to these claims was amended and restated under the Restructured Credit Agreement. Under the Restructured Credit Agreement, notes in an aggregate principal amount of US$116.1 million (Ps 1,294.6 million) were issued to the holders of these claims. These notes bear interest at a rate of LIBOR plus 2.75% per annum, payable quarterly in arrears, and the principal amount of these notes will be amortized quarterly until the maturity of these notes on December 30, 2012.

•

Unsecured creditors of our company with claims against our company in the amount of US$510.3 million (Ps 5,689.9 million) related to our 2003 notes, 2006 notes, 2008 notes, 2009 notes and ECP note received 16,412,961 of our Series B Shares, representing 14.84% of our issued and outstanding capital stock, and an aggregate principal amount of US$433.8 million (Ps 4,836.5 million) of our 2012 notes in respect to these claims. The 2012 notes bear interest at a rate of 7.50% per annum until December 31, 2005, 8.50% per

annum from January 1, 2006 through December 31, 2006, and 9.50% per annum thereafter, payable quarterly in arrears, and mature on December 30, 2012.

     Our obligations under the Restructured Credit Agreement and the 2012 notes are guaranteed by the following subsidiaries: (1) Administración Corporativa de Durango, S. A. de C. V., or ACD, (2) Empaques de Cartón Titán, S.A. de C.V. or Titán (3) Envases y Empaques de México, S. A. de C. V., or Eyemex, (4) Cartonpack, S.A. de C.V., or Cartonpack, (5) Industrias Centauro, S.A. de C.V., or Centauro, (6) Compañía Papelera de Atenquique, S. A. de C. V., or Atenquique, (7) Ponderosa Industrial de México, S.A. de C. V. or Ponderosa, (8) Porteadores de Durango, S. A. de C. V., (9) Compañía Norteamericana de Inversiones en Celulosa y Papel, S. A. de C. V., (10) Reciclajes Centauro, S. A. de C. V., (11) Durango Internacional, S.A. de C. V. and (12) Durango International, Inc.

     In addition, our obligations under the Restructured Credit Agreement and the 2012 notes are secured by (1) the shares of Grupo Pipsamex and Durango McKinley Paper Company, (2) the real property of ACD, Titán, Eyemex, Cartonpack, Centauro, Atenquique and Ponderosa, and (3) certain assets of Titán and Eyemex.

Disposition of Certain of Our Operations

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

Disposition of Molded Pulp Division

     On February 27, 2003, our subsidiary, Titán, sold the assets of its molded pulp division for approximately US$53.7 million (Ps 650.8 million), resulting in a gain of Ps 364.1 million, which is included in income (loss) from discontinued operations — net in the statement of operations for 2003. Pursuant to the asset purchase agreement, Titán transferred to the buyer some accounts receivable and trade accounts payable, in order to enable the buyer to continue with the production and selling of molded products. As a result of this sale, the capacity of our packaging segment was reduced by 40 thousand short tons and we ceased producing molded pulp products.

Disposition of Pronal

     On November 14, 2003, our subsidiary, Grupo Pipsamex, sold its subsidiary, Pronal, for US$28.0 million (Ps 354.2 million), resulting in a loss of Ps 486.4 million, which is included in income (loss) from discontinued operations — net in the statement of operations for 2003. As a result of this sale, the capacity of our paper segment was reduced by 160 thousand short tons and we ceased being the sole Mexican producer of newsprint.

     A portion of the proceeds of this sale was pledged to Bancomext under the terms of our loan agreements with Bancomext, and was included in our balance sheet as restricted cash as of December 31, 2003. On September 29, 2004, we used this restricted cash to prepay a portion of our loans to Bancomext.

Disposition of Mexico City Warehouse

     On November 25, 2003, our subsidiary, Grupo Pipsamex, sold a warehouse located in Mexico City for US$11.5 million (Ps 140.4 million). As part of the sale, Grupo Pipsamex reserved the right to use a portion of the warehouse representing approximately one third of the entire property for a period of five years at no cost. This sale generated a loss of Ps 210.7 million, which is recorded in other expenses — net in our statement of operations for 2003.

     A portion of the proceeds of this sale is pledged to Bancomext under the terms of our loan agreements with Bancomext, and was included in our balance sheet as restricted cash as of December 31, 2003. On September 29, 2004, we used this restricted cash to prepay a portion of our loans to Bancomext.

Disposition of Chihuahua Particleboard Operations

     During 2003, our management authorized a plan to sell a plant located in Chihuahua, which is primarily engaged in the manufacturing of particleboard. Based on negotiations with a potential buyer, we reduced the book value of

the net assets to be sold by Ps 381.8 million, which reduction is included in the net loss of discontinued operations in the statement of operations for 2003.

     On July 15, 2005, our subsidiaries, Ponderosa and Compañía Forestal de Durango S.A. de C.V., sold the assets of our Chihuahua particleboard plant for US$30 million. As a result of this sale, the capacity of our other segment was reduced by 200 thousand short tons, we ceased producing particleboard and, as of the date of this annual report, we no longer have any discontinued operations.

Effect of Level of Indebtedness and Interest Rates

     At December 31, 2005, our total outstanding indebtedness on a consolidated basis was Ps 6,762.7 million. As a result of our substantial indebtedness, our company incurred interest expenses of Ps 592.4 million in 2005, Ps 1,158.3 million in 2004 and Ps 1,228.1 million in 2003. In addition, because substantially all of our indebtedness is denominated in dollars and the peso depreciated significantly against the dollar during 2003, our company incurred foreign exchange losses of Ps 892.8 million in 2003. These interest expenses and foreign exchange losses were substantial factors in our losses from continuing operations in 2004 and 2003.

     Our debt obligations with variable interest rates expose our company to market risks from changes in the London interbank offered rate, or LIBOR.

     As a result of our defaults on our unsecured debt, Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard & Poor’s, and Moody’s Investors Service, or Moody’s, have ceased rating our company and our debt instruments. As a result of the cessation of these ratings agencies’ coverage of our company and debt instruments, our access to sources of short-term and long-term financing has been severely restricted.

Pricing of Our Products

     In 2005, paper products accounted for 42.9% of our net sales to third parties and packaging products accounted for 55.9% of our net sales to third parties. The pricing of our products is influenced by a number of factors, including:

	•		industry capacity utilization and significant increases in capacity in the industry;
	•		recycled fiber prices;
	•		demand for packaging products as a result of the level of growth of the Mexican and U.S. economies;
	•		fluctuations in the exchange rate between the peso and the dollar; and
	•		prevailing inflation rates.

     Containerboard. Our prices for containerboard primarily reflect international paper prices. During 2003, our average price per short ton for containerboard declined by 5.7%, principally due to the slow economic recovery in the United States and Mexico. During 2004, our average price per short ton for containerboard increased by 15.2%, principally as a result of increased economic activity in Mexico and the United States. During 2005, our average price per short ton for containerboard declined by 12.7%, principally as a result of the contraction of the manufacturing industry in Mexico during 2005.

     Uncoated Free Sheet. Our prices for uncoated free sheet primarily reflect international paper prices. During 2003, our average price per short ton for uncoated free sheet decreased by 2.2%, principally due to the slow economic recovery in the United States and Mexico. During 2004, our average price per short ton for uncoated free sheet increased by 5.1%, principally as a result of increased economic activity in the United States and Mexico. During 2005, our average price per short ton for uncoated free sheet increased by 4.3%, principally reflecting the recovery of international prices of uncoated free sheet.

     Newsprint. Our prices for newsprint primarily reflect international paper prices. We were the only producer of newsprint in Mexico from the end of 1998, when we acquired Grupo Pipsamex, until November 2003, when we sold Pronal. During 2003, our average price per short ton for newsprint decreased by 5.3%, principally due to the slow economic recovery in the United States and Mexico. During 2004, our average price per short ton for newsprint increased by 7.7%, principally as a result of the recovery of the international price of newsprint. During 2005, our average price per short ton for newsprint increased by 8.9%, principally reflecting the recovery of international prices of newsprint.

     Packaging products. In general, the prices of our packaging products fluctuate in accordance with international prices. As a result of generally low prices for packaging products in the United States, competition in Mexico from imports has increased. During 2003, our average price per short ton for corrugated containers decreased by 2.5%, principally due to the slow economic recovery in the United States and Mexico. During 2004, our average price per short ton for corrugated containers decreased by 0.2%. During 2005, our average price per short ton for corrugated containers decreased by 2.0%, principally due to the contraction of the manufacturing industry in Mexico during 2005.

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

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

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

	•		cyclical trends in general business and economic activity produce swings in demand for paper and packaging products;
	•		during periods of reduced demand, the high fixed cost structure of the capital intensive paper industry generally leads producers to compete aggressively on price in order to maximize capacity utilization;
	•		significant capacity additions, whether through plant expansion or construction, can take two to three years to implement and are therefore necessarily based upon estimates of future demand; and
	•		as competition in paper and packaging products is generally focused on price, being a low-cost producer is critical to improved profitability. This favors producers with larger plants that maximize economies of scale but construction of high capacity plants may result in significant increases in capacity that can outstrip demand growth.

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

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

Capacity Utilization

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

     The table below sets forth capacity utilization rates with respect to the production facilities for some of our principal products for the years ended December 31, 2005, 2004 and 2003.

		Year Ended December 31,
		2005				2004				2003
Containerboard			100	%			99	%			99	%
Newsprint and uncoated free sheet			96	%			93	%			94	%
Corrugated containers			72	%			71	%			70	%
Multi-wall sacks			66	%			59	%			56	%

Effects of Fluctuations in Raw Materials Prices

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

Recycled Fiber Costs

     OCC and ONP are the primary raw materials used in the production of our paper products. In 2005, OCC and ONP represented approximately 40% of the total cost of goods sold of our paper segment and approximately 30% of our consolidated cost of goods sold. The cost of OCC and ONP varies in accordance with international market prices, which fluctuate depending upon the supply of OCC and ONP and the demand for finished paper. Mexican OCC or ONP prices tend to follow price movements in the United States, but are generally lower because Mexican OCC or ONP is lower in quality.

     We believe that we are one of Mexico’s largest users of recycled paper and operate recycling centers in the United States in Albuquerque and Phoenix. In 2005, approximately 39% of the OCC and ONP used in our United States paper production were collected by our recycling centers. We purchase the remainder of our OCC and ONP requirements in the open market.

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

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

     The international market price of OCC and ONP has fluctuated significantly in the past, and we expect that it will continue to do so in the future. The international market price of OCC and ONP has been subject to significant upward pressures during the past several years as a result of significantly increased demand for OCC and ONP in Asia, particularly China. Significant increases in the price of OCC and ONP and, consequently, the cost of producing our products, reduces our gross margins and negatively affects our results of operations to the extent that we are unable to pass all of these increased costs on to our customers and could result in reduced sales volumes of our products. Conversely, significant decreases in the price of OCC and ONP and, consequently, the cost of producing our products, would likely increase our gross margins and our results of operations and could result in increased sales volumes if this lower cost leads us to lower our prices. We do not currently hedge our exposure to changes in the prices of OCC and ONP.

Energy Costs

     In 2005, energy cost represented approximately 19% of our cost of production. In particular, our paper mills consume significant amounts of electric power. We purchase approximately 70% of the electric power needs of our Mexican operations from the Federal Electricity Commission (Comisión Federal de Electricidad), the Mexican state-owned electric company, under long-term contracts and we produce the remainder at our own power plants. These long-term contracts guarantee the supply of electric power at prices that have historically increased by the Mexican inflation rate. In the United States, our McKinley mill is supplied 100% by a rural electric cooperative at formula prices under a long-term contract. Our U.S. converting facilities purchase electric power from local utilities.

Mexican and United States Demand for Our Products

     We sell paper and packaging products in Mexico and the United States. The following is our geographic segment sales information for the periods indicated.

		Year Ended December 31,
		2005				2004				2003
		(in million of constant pesos)
Mexico		Ps	10,555.4			Ps	10,016.5			Ps	8,072.0
United States			2,291.4				2,358.6				2,072.7
Eliminations			(4,703.5	)			(4,335.8	)			(2,817.4	)
Total		Ps	8,143.3			Ps	8,039.3			Ps	7,327.3

     In 2005:

•

approximately 68% of our net sales of paper to third parties was to customers in Mexico, and the remainder was to customers in the United States; and

•

approximately 88% of our net sales of packaging products to third parties was to customers in Mexico, and the remainder was to customers in the United States.

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

     In addition, because a significant portion of our operations are in the United States and a large portion of our packaging products are used in Mexico to package consumer, agricultural, manufacturing and industrial products destined for the United States, our results of operations and financial condition have been, and will continue to be, affected by the growth rate of the United States’ GDP.

     Mexican GDP growth has fluctuated significantly, and we anticipate that it will likely continue to do so. Mexican GDP grew by 1.4% in 2003, 4.2% in 2004 and 3.0% in 2005 . Our management believes that economic growth in Mexico would positively affect our future net sales and results of operations. However, a recession in Mexico would likely reduce our future net sales and negatively impact our results of operations.

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

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

	•		a substantial portion of our net sales are denominated in dollars or linked to dollars;
	•		we have significant amounts of dollar-denominated liabilities that require us to make principal and interest payments in dollars;
	•		the operations of our subsidiary, Durango McKinley Paper Company, are conducted in the United States;

	•		our costs for some of our raw materials, principally imports of OCC and OPP to Mexico and certain chemicals required in our production processes, are incurred in dollars or are dollar-linked; and
	•		we are permitted to deduct our foreign exchange losses in calculating our taxable income and, conversely, are required to treat foreign exchange gains as taxable income.

     Approximately 25% of our sales were made in dollars during 2005 with the balance primarily dollar-linked. Historically, costs of production in Mexico have been incurred in pesos, although substantially all of the costs and expenses of Durango McKinley Paper Company are incurred in dollars. During 2005, approximately 18% of our consolidated cost of goods sold was incurred in dollars or was dollar-linked. The primary dollar costs of our Mexican operations are incurred for imports of OCC and ONP. Fluctuations in the peso affect the cost of imported OCC and ONP and other dollar-linked or imported raw materials. The peso depreciated by 7.6% in 2003, appreciated by 0.8% against the dollar in 2004 and appreciated by 4.6% in 2005.

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

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

     At December 31, 2005, substantially all of our indebtedness was denominated in dollars. As a result, when the peso depreciates against the dollar:

	•		the interest costs on our dollar-denominated indebtedness in pesos increases, which negatively affects our results of operations;
	•		the amount of our dollar-denominated indebtedness in pesos increases, and our total liabilities in pesos increase; and
	•		our financial expenses increase as a result of foreign exchange losses that we must record.

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

     Conversely, when the peso appreciates against the dollar:

	•		the interest costs on our dollar-denominated indebtedness in pesos decreases, which positively affects our results of operations;
	•		the amount of our dollar-denominated indebtedness in pesos decreases, and our total liabilities in pesos decrease; and
	•		our financial expenses tend to decrease as a result of foreign exchange gains that we must record.

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

Effects of Inflation

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

•

most of our costs and expenses are incurred in pesos in Mexico and are subject to inflationary pressures while most of our sales are denominated in dollars or are dollar-linked and are made at prices set by reference to international market prices; and

•

our monetary assets and liabilities are restated to give effect to the rate of Mexican inflation, as expressed by the NCPI, and as a result we record monetary position gains and losses that depend on our net monetary asset (liability) position and the rate of Mexican inflation.

     A component of our net comprehensive financing cost includes our gain or loss from monetary position, which refers to the gains or losses, due to the effects of inflation, from holding net monetary liabilities or assets. A gain from monetary position results from holding net monetary liabilities during periods of inflation as the purchasing power represented by nominal peso liabilities declines over time. Accordingly, since our monetary liabilities, including debt and other payables, exceeded our monetary assets, including cash, cash equivalents and accounts receivable, in 2003, 2004 and 2005 we recorded a gain from monetary position for those periods.

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

		Year Ended December 31,
		2005				2004				2003
		(in millions of constant pesos,
		except percentages)
Inflation			3.3	%			5.2	%			4.0	%
Gain from monetary position		Ps	198.7			Ps	469.4			Ps	399.5

Effect of Taxes on Our Income

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

Income Taxes and Employee Statutory Profit Sharing

     The income tax rate was 34% in 2003, 33% in 2004 and 30% in 2005. Mexican income taxes take into consideration the taxable and deductible effects of inflation. As a result of an amendment to the Income Tax Law that became effective on November 13, 2004, the income tax rate will be 29% and 28% in 2006 and 2007, respectively. These reductions in the income tax rate resulted in a decrease in the value of our deferred income tax liability of Ps 23.3 million in 2004 and Ps 17.2 million in 2005, which increases were charged to income tax benefit (expenses) in our statement of operations.

     Like other Mexican companies, we are required by law to pay our employees, in addition to their agreed compensation and benefits, profit sharing in an aggregate amount equal to 10% of our taxable income (calculated without reference to inflation adjustments). Prior to 2002, the payment of employee statutory profit sharing was deductible in certain instances. This deduction was completely eliminated in 2002, but is scheduled to be reinstated in 2006. Deferred income tax assets and liabilities are recognized for temporary differences resulting from comparing the book and tax values of assets and liabilities plus any future benefits from tax loss carryforwards. Deferred income tax assets are reduced by any benefits about which there is uncertainty as to their realizability.

Asset Taxes

     Taxes on assets are calculated by applying a rate of 1.8% on the net average of the majority of our restated assets less certain liabilities and is payable only to the extent that it exceeds income tax payable for the applicable period.

If in any year the asset tax exceeds the income tax payable, the asset tax payment for such excess may be reduced by the amount by which income taxes exceeded asset taxes in the three preceding years and any required payment of asset taxes may be credited against the excess of income taxes over asset taxes of the following ten years. The asset taxes paid that are expected to be recoverable are recorded as an advance payment of income taxes and decrease the deferred income tax liability on our balance sheet.

Tax Loss Carryforwards and Recoverable Asset Taxes

     Tax loss carryforwards and recoverable asset taxes for which the deferred income tax asset and prepaid income tax, respectively, have been partially recognized may be recovered subject to certain conditions. Due to a deterioration in the circumstances used to assess the realization of the benefit of tax loss carryforwards and recovery of tax on assets paid, the valuation allowance for benefit of tax loss carryforwards and recoverable tax on assets was increased by Ps 183.2 million in 2005 and Ps 181.4 million in 2004 and charged to results of operations.

     Restated amounts as of December 31, 2005 and expiration dates are:

		Tax Loss				Recoverable
Year of expiration		Carryforwards				Asset Taxes
		(millions of constant pesos)
2006		Ps	158.3			Ps	28.6
2007			107.6				28.4
2008			149.2				27.5
2009			70.6				21.5
2010			63.6				25.9
2011			87.2				24.1
2012			361.2				64.1
2013			1,128.2				59.7
2014			384.3				6.4
2015			1,038.0				1.0
Total		Ps	3,548.2			Ps	287.2

Recent Developments

Recapitalization of Series A Shares and Series B Shares

     On January 25, 2006 and February 20, 2006, respectively, our board of directors and shareholders approved a recapitalization of our company under which we created a new sole series of common stock, no par value, and each of our outstanding Series A Shares and Series B Shares will be converted into one newly issued share of common stock. Following this recapitalization:

	•		each of our outstanding CPOs will represent a financial interest in one share of our common stock;
	•		each of our outstanding ADSs will continue to represent two CPOs; and
	•		we expect that our common stock will be listed on the Mexican Stock Exchange.

     We expect that the new common stock will be publicly traded over the Mexican Stock Exchange, subject to the approval of the CNBV and to the registration of the new common stock with the National Stock Registry of the CNBV. If approved and registered by the CNBV, we expect that the recapitalization and public trading of the new common stock will become effective within 15 days following the date on which the CNBV grants its approval.

Debt Reduction Program

     On February 27, 2006, we announced a debt reduction program to be undertaken during 2006. As of June 27, 2006, we have prepaid US$66.4 million of our outstanding debt and made amortization and payments at maturity of

an additional US$4 million. The following are the most significant pre-payments made under this debt redection program:

	•		we have prepaid US$47.0 million to Bancomext under certain outstanding loan agreements;
	•		we have prepaid US$10.0 million to Bank of Albuquerque, representing the full amount outstanding under our loan agreement with Bank of Albuquerque;
	•		we have prepaid US$4.8 million to GE Capital Leasing under our capital leases, representing the full amount outstanding under these leases; and
	•		we have prepaid US$4.6 million to GE Capital Corporation under an outstanding capital lease.

We have financed these prepayments through the issuance and sale of capital stock of Pipsamex to our majority stockholders, the proceeds from the divestiture of some minor non-strategic assets and operating cash flow.

Pipsamex Capital Increase

     On March 6, 2006, Pipsamex issued and sold 2,177,042,255 shares of its series B capital stock, representing 13.3% of Pipsamex’ outstanding capital stock to NKM Corporativo, S.A. de C.V., a company owned and controlled by the Rincón family, for Ps 314.6 million. The proceeds of this sale were used to fund our debt reduction program.

Tizayuca Mill Lease Agreement

     On March 31, 2006, we purchased land and an industrial facility in Tizayuca, Hidalgo at which a paper mill and converter are located for US$10.0 million. Effective March 31, 2006, we entered into an operating lease agreement under which we lease machinery and equipment with installed capacity of 200,000 short tons of linerboard and 100,000 short tons of corrugated boxes located at the Tizayuca industrial facility. The lease agreement has a term of 7.5 years and requires payments over its term of US$66.0 million. We have an option to purchase the machinery and equipment for fair market value on the seventh anniversary of the commencement of this lease.

Results of Operations

     The following discussion of our results of operations is based on our audited consolidated financial statements prepared in accordance with Mexican GAAP. The discussion of the results of our business segments is based upon financial information reported for each of the three segments of our business, as detailed in note 21 to our audited consolidated financial statements.

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

     The following table sets forth consolidated financial information for each of the three years ended December 31, 2005.

		Year Ended December 31,
		2005				2004				2003
		(in millions of constant pesos)
Net sales		Ps	8,143.3			Ps	8,039.3			Ps	7,327.3
Cost of sales			7,096.3				6,889.5				6,300.0
Gross profit			1,047.0				1,149.8				1,027.3
Selling, general and administrative expenses			677.7				694.1				698.2
Operating income			369.3				455.7				329.1
Other income (expense), net			5.2				(417.9	)			(1,638.8	)
Net comprehensive financing cost:
Interest expense			(592.4	)			(1,158.3	)			(1,288.1	)
Interest income			42.6				41.5				44.7

		Year Ended December 31,
		2005				2004				2003
		(in millions of constant pesos)
Foreign exchange gain (loss)			334.6				62.6				(892.8	)
Monetary position gain			198.7				469.4				399.5
			(16.5	)			(584.8	)			(1,736.7	)
Loss from continuing operations before income taxes and employee statutory profit sharing			357.9				(547.1	)			(3,046.3	)
Income tax benefit			(304.0	)			502.7				2.3
Employee statutory profit sharing expense			(0.7	)			—				(1.9	)
Loss before equity in income of associated companies			53.2				(44.4	)			(3,045.9	)
Equity in income of associated companies			1.9				2.7				2.1
Loss from continuing operations			55.1				(41.7	)			(3,043.8	)
Discontinued operations			108.8				105.5				(597.0	)
Consolidated net income (loss)		Ps	163.9			Ps	63.9			Ps	(3,640.8	)

     The following table sets forth consolidated financial information for our business segments for each of the three years ended December 31, 2005.

		Year Ended December 31,
		2005				2004				2003
		(in millions of constant pesos, except percentages)
Paper
Sales to third parties		Ps	3,490.1			Ps	3,554.5			Ps	2,987.6
Intersegment sales			4,199.8				4,029.7				2,655.0
Total sales			7,689.8				7,584.2				5,642.6
Operating income (loss)			122.5				55.5				(122.6	)
Operating margin (%)			3.5	%			1.6	%			(4.1	)%
Depreciation and amortization			276.6				293.1				285.7
Packaging
Sales to third parties		Ps	4,552.8			Ps	4,374.2			Ps	4,251.0
Intersegment sales			413.3				306.0				144.9
Total sales			4,966.2				4,680.2				4,395.9
Operating income			236.7				398.9				467.5
Operating margin (%)			5.2	%			9.1	%			11.0	%
Depreciation and amortization			133.4				137.4				128.8
Other
Sales to third parties		Ps	100.4			Ps	110.5			Ps	88.7
Intersegment sales			90.4				0.1				17.5
Total sales			190.8				110.6				106.2
Operating income (loss)			10.1				1.2				(15.8	)
Operating margin (%)			10.0	%			1.1	%			(17.8	)%
Depreciation and amortization			11.6				7.7				12.0