---

SECURITIES AND
EXCHANGE COMMISSION

Washington, D.C.
20549









G

OR

:

For the
        fiscal year ended December 31, 2003.

OR

G

For the
        transition period from  to



Commission file number:  82-2873

___________________________

Internacional de Cerámica, S.A. de C.V.

(Exact name of
Registrant as specified in its charter)



Ceramics
International, Inc.         
                                                                                                                          
                                        United Mexican States

(Translation of Registrant's name into English)                                              
                                          
                                                            (Jurisdiction
of incorporation or organization)



Ave. Carlos
Pacheco 7200

Chihuahua,
Chih., Mexico

(Address of
principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each Class
Name of each exchange on which registeredAmerican Depositary Shares, each representing
five Limited Voting Units
New York Stock ExchangeLimited Voting Units, which consists of
one Series D and one Series L Share
New York Stock Exchange*Series D Shares, without par value
New York Stock Exchange*Series L Shares, without par value
New York Stock Exchange*




______________

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

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

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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the
annual report:                                                       Series B Shares, without par value                                             57,906,632

Series D Shares, without par value                                            19,646,720

Series L Shares, without par value                                             19,646,720

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.

YesX                 No

Indicate by check mark which financial statement item the Registrant has elected to follow:

Item 17          Item 18X

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Table of Contents



Page

PART
I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1

ITEM 1.             Identity of Directors, Senior Management and Advisers. . . . . . . . . . . . . . .  . . .1

ITEM 2.            Offer Statistics and Expected Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .1

ITEM 3.            Key Information. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .  .
.. 1

ITEM 4.            Information on the Company. . . . . . . . .. . . . . . . . .. . . . . . . . . . . . . . . . . . . . 
10

ITEM 5.            Operating and Financial Review and Prospects. . . . . . . . . . . . . . . . . . . . . . . .36

ITEM 6.            Directors, Senior Management and Employees. . . . . . . . . . . . . . . . . . . . . . .  .51

ITEM 7.            Major Shareholders and Related Party Transactions. . . . . . . . . . . . . . . .  . . . .59

ITEM 8.            Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . ... 62

ITEM 9.             The Offer and Listing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 63

ITEM 10.          Additional Information. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . ... . . . . . . . ..69

ITEM 11.            Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . .83

ITEM 12.            Description of Securities Other Than Equity Securities . . . . . . . . . . . . . .. . . .
85

PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .86

ITEM 13.          Defaults, Dividend Arrearages and Delinquencies. . . . . . . . . . . .  . . . . . . . . . .86

ITEM 14.          Modifications to the Rights of Security Holders and Use of Proceeds. . . . . .  . 86

ITEM 15.          Controls and Procedures. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .. . .  .86

ITEM 16A.       Audit Committee Financial Expert. . . . . . . . . . . . .. . . . . . . . . . . . . . . . .  . . . .86

ITEM 16B.       Code of Ethics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . .86

ITEM 16C.       Principal Accountant Fees and Services. . . . . . . . . . . . . . . .. . . . . . . . . . . . . .87

PART III. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . ..88

ITEM 17.         Financial Statements. . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   . .  88

ITEM 18.          Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 88

ITEM 19.          Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . .88

____________________________

Unless otherwise specified or the context otherwise requires, references to “Interceramic” in this
Annual Report on Form F-20 for the fiscal year ended December 31, 2003 (this “Annual Report”) shall mean
Internacional de Cerámica, S.A. de C.V., a limited liability company with variable capital (sociedad anónima
de capital variable) organized under the laws of the United Mexican States (“Mexico”), and references to
the “Company” shall mean Interceramic collectively with its subsidiaries.

The Company maintains its financial books and records in Mexican pesos (“Pesos,” “P.” or “Ps”)
and presents its financial statements in conformity with generally accepted accounting principles in Mexico
(“Mexican GAAP”).  Pursuant to Mexican GAAP, financial data for all periods covered by the consolidated
financial statements of the Company and other financial information presented in this Annual Report, unless
otherwise indicated, have been restated in constant Pesos with purchasing power as of December 31, 2003.

This Annual Report contains translations of certain Peso amounts into dollars (“Dollars,” “US $”
or “$”), the currency of the United States of America (the “United States”), at specified exchange rates solely
for the convenience of the reader.  These translations should not be construed as representations that the Peso
amounts actually represent Dollar amounts or could be converted into Dollars at the rate or rates indicated.
Unless otherwise indicated, Dollar amounts have been translated from Pesos at the exchange rate of Ps
11.235 to US $1.00, the exchange rate as quoted to the Company byWells Fargo Bank, N.A. as the rate
representing the interbank exchange rate (the “Interbank Rate”) at the close of business on December 31,
2003.  There are several other commonly available rates of conversion of Pesos to Dollars and no
representation can be made as to the accuracy of one rate as compared to any other, many of which may vary
significantly from time to time from the Interbank Rate.

The manufacturing operations and the principal offices of the Company are based primarily in
Mexico and the Company’s consolidated financial statements are expressed in Pesos; however, all of the
Company’s indebtedness and a significant portion of the other liabilities of the Company are designated in
Dollars, and the Company generates a material amount of Dollar denominated revenues and/or expenses
payable in Dollars.  Such Dollar amounts are translated into Pesos for financial statement purposes in
accordance with Mexican GAAP.

The Company generally measures its ceramic floor tile production and sales in terms of square
meters.  For purposes of converting the Company’s production and sales information from square meters into
square feet, the Company has used a convention of 11 square feet to each square meter rather than the actual
numerical conversion of 10.762 square feet to each square meter.  In Mexico, the Company’s measurement
of product generally is based upon the actual surface area of the tile produced or sold.  In the United States,
the Company observes the convention of measuring product based upon the surface area covered by the
applied ceramic tile, which includes standard one-quarter inch grout joints.

This Annual Report contains forward-looking statements, within the meaning of Section 27A of the
United States Securities Act of 1933, as amended (the “1933 Act”), and Section 21E of the United States
Securities Exchange Act of 1934, as amended (the “1934 Act”), which reflect the Company’s views about
future events and financial performance.  Statements that are not historical facts, including without limitation
statements about the Company’s hopes, beliefs, strategies and expectations, are forward-looking statements
and involve inherent risks and uncertainties.  The Company’s forward-looking statements are based on
current plans, estimates and projections and, accordingly, undue reliance should not be placed upon them.
Actual results could differ materially from those projected in forward looking statements for a variety of
reasons that may be beyond the control of the Company, including without limitation effects on the Company
from competition, economic, political and social events that might occur in Mexico, changes in
circumstances that might adversely impact the Company’s ability to access sources of financing on
competitive terms, events that might impact the construction industry in Mexico generally, changes in
Mexican GAAP, changes in law and other factors.  In any event, the forward-looking statements contained
in this Annual Report speak only as of their dates and the Company undertakes no obligation to update or
revise any of them, whether as a result of new information, future events or otherwise.  In preparing its
financial statements, the Company makes estimates concerning a variety of matters.  Some of these matters
are highly uncertain, and the estimates involve judgments based on the information available to the
Company. Certain discussions in this Annual Report concern matters for which the financial presentation
would be materially affected if either (i) the Company relied on different estimates that it could reasonably
use or (ii) in the future the Company changes its estimates in response to changes that are reasonably likely
to occur.

Interceramic’s registered office in Mexico, and principal executive office, is located at Ave. Carlos
Pacheco 7200, Chihuahua, Mexico, and its telephone number is 011.52.614.429.1111.  The address for the
corporate offices of the Company’s United States subsidiaries is 2333 South Jupiter Road, Garland, Texas
75041, telephone number 214.503.5500.

PART I

ITEM 1.           Identity of Directors, Senior Management and Advisers

Not applicable.

ITEM 2.           Offer Statistics and Expected Timetable

Not applicable.

ITEM 3.           Key Information

A.  Selected Financial Data

The table on the following page presents selected consolidated financial data of the Company.  The
data presented should be read in conjunction with, and are qualified in their entirety by reference to, the
Financial Statements included under Item 18 in this Annual Report (the “Financial Statements”).  The
Financial Statements have been audited by Mancera, S.C., a member practice of Ernst & Young Global,
independent auditors.

The Financial Statements have been prepared in accordance with Mexican GAAP, which differ in
certain significant respects from generally accepted accounting principles in the United States (“US GAAP”).
See Note 13 to the Financial Statements for a description of the principal differences between Mexican
GAAP and US GAAP as they relate to the Company and reconciliation to US GAAP of net earnings and
shareholders’ equity.

Pursuant to Mexican GAAP, the Financial Statements and the selected consolidated financial data
set forth below have been prepared giving effect to Bulletin B-10, Bulletin B-12 and Bulletin B-15 of the
Instituto Mexicano de Contadores Públicos, the Mexican Institute of Public Accountants (the “IMCP”).
Bulletin B-10, as amended, provides for the recognition of the effects of inflation on financial information.
For years ending prior to January 1, 1997, Bulletin B-10 allowed the Company to restate non-monetary assets
at current replacement cost, as determined by independent appraisers, to restate the components of
shareholders’ equity using the Consumer Price Index for Mexico (the “NCPI”), and to record gains or losses
in purchasing power from holding monetary liabilities or assets.  Bulletin B-10 also requires restatement of
all financial statements to constant Pesos as of the date of the most recent balance sheet presented and,
accordingly, all data in the Financial Statements and in the selected consolidated financial data set forth
below have been restated in Pesos with purchasing power of December 31, 2003, unless otherwise indicated.
See Note 1 to the Financial Statements.  The effect of these inflation accounting principles has not been
reversed in the reconciliation to US GAAP.  See Note 13 to the Financial Statements.

The IMCP published the Fifth Amendment to Bulletin B-10, applicable to financial statements for
periods beginning on or after January 1, 1997, which abandons the use of appraisals for the valuation of fixed
assets and instead imposes a specific cost method.  Under this method, certain fixed assets acquired in
Mexico, such as machinery and equipment, are to be valued based on their historical cost.  If an asset was
acquired from outside of Mexico, the historical cost is restated using the consumer price index of the country
of origin, converted into Pesos at the exchange rate prevailing at the time of valuation.  For items acquired
in Mexico, or for which the country or origin is uncertain, the historical cost is restated using the NCPI.  The
Company implemented this change commencing with the fiscal year ended  December 31, 1997.  See Note
1(h) to the Financial Statements.

Bulletin B-12 specifies the appropriate presentation of the statement of changes in financial position
when financial statements have been restated in constant Pesos in accordance with Bulletin B-10 and prior
years’ presentations have been restated accordingly. Bulletin B-12 further requires (i) identification of the
generation and application of resources representing differences between beginning and ending financial
statement balances in constant Pesos and (ii) that monetary and foreign exchange gains and losses not be
treated as nonmonetary items in the determination of resources provided by operations.  Under Bulletin B-15,
which became effective on January 1, 1998, prior period financial statements must be restated using an
actualization factor determined by weighing the Company’s respective operations in the United States and
Mexico, each as effected by inflation in the applicable country and currency exchange rates in the applicable
currencies.  In this respect, Bulletin B-15 is inconsistent with the requirements of Rule 3-20(e) of Regulation
S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) with respect to
filings under the 1933 Act and the 1934 Act, and is treated as a difference between Mexican GAAP and US
GAAP in the Financial Statements.  See Note 1(a) and Note 13 to the Financial Statements.

Effective January 1, 2000, the Company adopted the requirements of the Accounting Principles
Bulletin D-4, “Accounting for Income Tax, Asset Tax and Employee Profit Sharing,” issued by the IMCP.
Bulletin D-4 requires the recognition of deferred taxes on all temporary differences in balance sheet accounts
for financial and tax reporting purposes, using the enacted income tax rate at the date the temporary
differences are expected to reverse.  Through December 31, 1999, deferred taxes were recognized only on
temporary differences that were considered to be non-recurring and that had a known turnaround period.

The accumulated effect of these new requirements at the beginning of 2000 was applied to
stockholders’ equity, without restatement of prior years’ financial statements.  The cumulative effect of
adopting this new bulletin increased deferred tax liabilities and decreased stockholders’ equity by Ps
319,986.



AS OF AND FOR
YEAR ENDED DECEMBER 31,1999
2000
2001
2002
2003
2003(IN THOUSANDS OF PESOS AS OF
December 31, 2003(1)
Thnds.
of
Dollars(9)INCOME STATEMENT DATA:
MEXICAN GAAP:Net sales
2,954,519
3,036,053
3,174,154
3,267,385
3,424,926
304,844Cost of sales
(1,911,750)
(1,926,221)
(1,993,310)
(2,058,976)
(2,236,376)
(199,054)Gross profit
1,042,769
1,112,832
1,180,844
1,208,409
1,188,550
105,790Selling and administrative expenses
(779,952)
(797,177)
(819,259)
(898,570)
(959,388)
(85,392)Operating income
262,817
315,656
361,585
309,839
229,162
20,398Comprehensive financing (cost) income
26,722
(67,879)
(26,666)
(168,266)
(111,923)
(9,962)Other income (expense), net
(26,887)
(30,565)
(5,358)
(12,830)
(8,690)
(773)Equity in results of associated companies (2)
839
0
1,426
(450)
488
43Write-off of assets
0
0
(48,152)
0
0
0Income and asset tax
(17,282)
(16,750)
(18,244)
(20,852)
(21,105)
(1,879)Deferred income tax
0-
(39,453)
(31,770)
9,024
(25,726)
(2,290)Employee profit sharing (3)
(3,475)
(2,652)
(3,701)
(3,798)
0
0Consolidated net income
242,284
158,357
229,120
112,667
62,206
5,537Minority net income (loss)
5,996
(816)
24,940
19,660
29,989
2,669Majority net income
236,287
159,173
204,180
93,007
32,217
2,868Net income per Unit (4)
4.36
2.91
3.52
1.63
0.65
0.06Weighted average Units outstanding (000's)(4)
54,175
54,625
57,928
57,184
49,555
49,555US GAAP AMOUNTS(5):Majority net income
236,434
123,490
206,996
63,848
209,588
18,655Net  income per Unit (4)
4.46
2.32
3.65
1.14
4.31
0.38Diluted net income per Unit (4)
4.42
2.31
3.65
1.14
4.31
0.38AS OF AND FOR
YEAR ENDED DECEMBER 31,1999
2000
2001
2002
2003
2003(IN THOUSANDS OF PESOS AS OF
December 31, 2003(1)
Thnds.
of
Dollars(9)BALANCE SHEET DATA:
MEXICAN GAAPCurrent assets
1,298,426
1,329,777
1,324,119
1,349,488
1,385,920
123,357Property, plant and equipment, net
2,021,267
1,915,973
1,747,954
1,847,975
1,966,173
175,004Total assets
3,373,025
3,293,540
3,128,495
3,271,443
3,448,668
306,957Current liabilities
633,647
598,776
1,427,315
744,636
786,601
70,013Short term debt (6)
200,603
143,851
1,090,618
278,936
385,969
34,354Long term debt
1,561,344
1,327,169
263,358
1,012,667
972,419
86,552Total stockholders’ equity
1,174,139
989,036
1,095,721
1,163,268
1,241,398
110,494US GAAP AMOUNTS(5):Total stockholders’ equity
63,171
260,768
361,168
439,491
562,059
50,028Weighted average units outstanding(10)
5,100
6,367
7,000
7,000
7,000
7,000CHANGE IN FINANCIAL POSITION:
MEXICAN GAAP:Resources provided by  operating activities
377,195
333,980
345,263
169,291
103,819
9,241Resources (used in) received from financing
activities
(263,465)
(156,158)
(140,812)
(131,519)
(12,269)
(1,092)Resources used in investing activities
(141,951)
(100,337)
(116,226)
(181,793)
(133,936)
(11,921)CASH FLOW DATA:
US GAAP:Cash flow provided by operating activities
151,481
153,415
198,239
61,647
54,214
4,825Cash flow  used in investing activities
(142,858)
(96,441)
(108,884)
(176,959)
(133,936)
(11,921)Cash flow (used in) provided by  financing
activities
(78,933)
53,875
(56,355)
(166,872)
(35,706)
(3,178)Effect on inflation accounting
36,536
(37,449)
46,020
150,677
75,527
6,722OTHER DATA:
MEXICAN GAAP:Depreciation and amortization
166,051
153,515
152,430
160,054
175,645
15,634Capital expenditures
(141,950)
(100,341)
(116,226)
(181,793)
(133,936)
(11,921)Working capital
664,780
731,001
(103,196)
604,852
599,319
53,344EBITDA (11)
428,867
469,170
514,016
469,893
404,807
36,032OPERATING INFORMATION:Gross profit margin (7)
35.29%
36.62%
37.20%
36.98%
34.70%
34.70%Operating profit margin (7)
8.90%
10.39%
11.39%
9.48%
6.69%
6.69%EBITDA (7)
14.52%
15.44%
16.19%
14.38%
11.82%
11.82%Personnel at period end
3,811
3,381
3,127
3,089
3,045
3,045AVERAGE EXCHANGE RATES (8)
YEAR END
EXCHANGE RATE
9.55

9.50
9.47

9.61
9.33

9.19
9.75

10.39
10.85

11.235




Notes:

(1)        In thousands, except for net income per Unit and operating information.

(2)        The equity in results of associated companies reflects the participation of the Company in the
earnings of certain non-consolidated affiliates.  See Note 1(g) to the Financial Statements.

(3)        See Note 9 to the Financial Statements.

(4)        Calculated by dividing majority net income by the weighted average Units outstanding for the
respective period.

(5)        See Note 13 to the Financial Statements.

(6)        Includes bank loans and the current portion of long term debt.  See Note 5 to the Financial
Statements.

(7)        Expressed as a percentage of net sales.

(8)        Average Interbank Rate at the end of month during each period.  At June 4, 2004, the Interbank Rate
was Ps 11.42 to US $1.00.  For the six months from December 2003 through May 2004, the high and
low exchange rates were as follows:

Month

High
LowDecember 2003

11.390
11.167January 2004

11.235
10.817February 2004

11.170
10.940March 2004

11.225
10.930April 2004

11.470
11.167May 2004

11.710
11.415


(9)        Solely for the convenience of the reader, figures as of December 31, 2003 have been translated into
Dollars as the rate of Ps 11.235 to US $1.00, the Interbank Rate at December 31, 2003.

(10)      The weighted average Units outstanding is calculated under US GAAP under which only the fixed
portion of stockholders’ equity is taken into account.

(11)      EBITDA represents earnings before interest, taxes, depreciation and amortization.  EBITDA is not
a measure of performance under either US GAAP or Mexican GAAP and should not be considered
a substitute for cash flow from operations, net earnings or other measures of performance as defined
by US GAAP, or as a measure of profitability or liquidity.  EBITDA does not give effect to the cash
that must be used to service debt or to pay income taxes and thus does not reflect the funds actually
available for capital expenditures or other discretionary uses.  The presentation of EBITDA used by
the Company may not be comparable to other similarly titled captions of other companies due to
differences in the methods of calculation.  It is included herein to provide additional information
with respect to the Company’s ability to meet its consolidated debt service obligations and its capital
expenditure and working capital requirements.  It is also included because it is used as a measure
in a financial covenant contained in the Company’s primary loan agreement.  The calculation of
EBITDA is as follows:

YEAR ENDED DECEMBER 31,1999
2000
2001
2002
2003
2003IN THOUSANDS OF PESOS AS OF
December 31, 2003(1)
Thnds. of
Dollars(9)Majority net income
236,287
159,173
204,180
93,007
32,217

2,868Reconciliation to EBITDAComprehensive financing (cost) income
(26,722)
67,879
26,666
168,266
111,923

9,962Other income, net
26,887
30,565
5,358
12,830
8,690

773Equity in results of associated companies (2)
(389)
0
(1,426)
450
(488)

(43)Income and asset tax
17,282
16,750
18,244
20,852
21,105

1,879Deferred income tax
0
39,453
31,770
(9,024)
25,726

2,290Employee profit sharing (3)
3,475
2,652
3,701
3,798
0

0Minority net income (loss)
5,996
(816)
24,940
19,660
29,989

2,669Depreciation and amortization
166,051
153,515
152,430
160,054
175,645

15,634EBITDA
428,867
469,170
514,016
469,893
404,807

36,032


B.  Capitalization and Indebtedness

Not applicable.

C.  Reasons for Offer and Use of Proceeds

Not applicable.

D.  Risk Factors

There are certain risk factors that are specific to Interceramic, its industry and its business.  These
may include the following:

Risks Relating to Developments in Mexico and Other Emerging Market Countries

Mexican political, social, and economic conditions and might adversely impact our sales and profitability

Over 75 percent of our assets are located in Mexico, and on average about 50 percent of our sales
each year are achieved in Mexico. As a result, demand for our products and our selling prices may decline
as a result of adverse general economic and social conditions in Mexico, Mexican political developments,
devaluation of the Peso and inflation and high interest rates in Mexico.

Mexico has experienced adverse economic conditions that make our profitability vulnerable to factors
beyond our control

Since 2001, Mexico has experienced a prolonged period of slow-growth, with the gross domestic
product or “GDP” growing at the rate of 0.3 percent, 0.9 percent and 1.16 percent in 2001, 2002 and 2003,
respectively.  If the Mexican economy falls into a recession, our business, financial condition and results
of operations may suffer materially for a number of reasons, including lack of consumer demand for our
products, declining selling prices and increased cost of the materials, supplies and services we need in
Mexico to make our products.

Policies of the Mexican government could adversely effect the value of your investment in our company

The Mexican government has exercised and continues to exercise a significant influence over many
aspects of the Mexican economy. With the improving economic stability in recent times, the government
has materially loosened its control over the economy, however in deteriorating economic circumstances
the government could be expected to reinsert itself into the economy which could result in governmental
controls on prices, currency exchange rates and inflation.  Accordingly, Mexican government actions
concerning the economy could have a significant effect on us and other private sector entities and on
market conditions and the prices and returns on Mexican equity securities, including our equity securities.

Political considerations in Mexico can adversely impact our operations and the value of your investment
in our company

Political events in Mexico may significantly affect our business conditions, financial condition and
results of operations as well as the price of our securities. In recent years, political and social unrest and
disturbances have adversely impacted the Mexican securities markets. In 2000, the citizens of Mexico
elected Vincente Fox President of Mexico, the first opposition candidate to win the Presidency since 1929.
Mr. Fox, a member of the National Action Party, ran for office on a program advocating reform of the
political process in Mexico.  However, the Institutional Revolutionary Party, which had held the presidency
since 1929, maintains a majority, together with the Partido de la Revolución Democrática in both houses
of the Mexican Congress and conflict between the President and the Congress has made it very difficult
for Mr. Fox to accomplish the reforms he had advocated during his campaign.  Continued conflict between
the two branches of government could lead to political paralysis in Mexico which could adversely effect
operations and the price of our securities.

Depreciation or fluctuation of the Peso relative to the Dollar could adversely affect our financial
condition and results of operations

All of our debt and a material amount of our revenues and expenses are denominated in Dollars.
Accordingly, we are affected by fluctuations in the value of the Peso against the Dollar. During periods
when the Peso devalues against the Dollar, we recognize foreign exchange losses on our financial
statements, while exchange gains are recognized during periods that the Peso strengthens against the
Dollar. For example, while in 2001 the Company recognized foreign exchange gains of Ps 52.8 million as
the Peso appreciated against the Dollar, in 2002 the opposite was true and the Company recognized foreign
exchange losses of Ps 115.8 million. In 2003 the Company registered a foreign exchange loss of Ps 91.5
million. Currency fluctuations are likely to continue to have an effect on our financial position, results of
operations and cash flows in future periods.

Severe devaluation or depreciation of the Peso may also result in disruption of international foreign
exchange markets and limit our ability to convert Pesos into Dollars for purposes of paying our debt as well
as other obligations that we incur in Dollars.  Although the Mexican government does not currently restrict
the ability of persons to convert Pesos into Dollars or otherwise export currencies out of Mexico, it has
done so in the past and it could institute restrictive policies which might adversely affect our ability to
convert Pesos into Dollars in the future.

High levels of inflation and high interest rates in Mexico could adversely affect our financial condition
and results of operations

Even though we are currently experiencing the lowest interest and inflation rates in decades,
Mexico has historically experienced high interest rates and high levels of inflation. Measured by changes
in the National Consumer Price Index, inflation in Mexico for 2001 was 4.40 percent, 5.70 percent for 2002
and 3.97 percent for 2003.  High rates of inflation can adversely affect the Company’s results of operations
or a variety of reasons, including the inability to always match the pace of inflation in the prices of goods
and services needed to make products with the price the Company can obtain in the markets for the sale
of its products.  During periods of high inflation in Mexico, domestic interest rates have increased
significantly.  During 2002, the interest rate of the 28-day Mexican government securities called “Cetes”
averaged 7.08 percent. During 2003, the interest rate of the 28-day Mexican government securities called
“Cetes” averaged 6.23 percent.  While these recent interest rates represent a considerable change from
interest rates in excess of ten percent less than a decade ago, these low levels may not be maintained.  High
interest rates not only would increase our cost of borrowing money in Mexico, but also might make it more
difficult to borrow or acquire goods and services on credit, thereby impairing our ability to manufacture
our products as and when needed to service consumer demand.

Adverse developments in other emerging market countries may lower the value of your investment in
our company

The market value of the securities of Mexican companies is periodically subject to economic, social
and political developments in other emerging market countries. Although economic conditions in other
countries may differ materially from those in Mexico, and although many of these other countries may have
immaterial connections to the Mexican economy, investors’ reactions to developments in other countries,
particularly in emerging market economies, may result in a decrease in the market value of our securities.

Risks relating to us and our business generally

The construction business is cyclical and a decrease in demand for tile products may lower our sales

A recession or decline in the construction industry in Mexico or in the United States could result
in decreased demand for our products and lower price levels. The tile industry is highly dependent on
construction activity—including new construction and remodeling—which is cyclical in nature and is
significantly affected by changes in general and local economic conditions. These changes include
employment levels, financing availability, interest rates, consumer confidence and housing demand.
Further, material unanticipated fluctuations in the demand for ceramic tile products could result in increases
in inventories which may not be readily saleable by us at profitable prices.

We use significant amounts of natural gas in our production process and increased natural gas prices
will adversely effect our profitability

Energy accounts for on average around 15 percent of our production cost, the largest component
of which is for purchases of natural gas.  Increases in the price of natural gas cannot easily be recovered
from the prices of our products, and thus a significant increase in the price of natural gas is likely to have
a detrimental effect on our gross profit.  With the current uncertainty in the Middle East and the protracted
conflict in Iraq, natural gas prices have been increasing over recent months, currently is almost 25 percent
more expensive than it was at this time in 2003.  In the past, we have entered into fixed price contracts or
other arrangements to limit our exposure to unfavorable fluctuations in energy prices, but we have none
of these arrangements in place in 2004.

We are highly leveraged and disruptions in cash flow may impair our ability to fund operations

Although we have been decreasing our debt in recent years, we are still relatively highly leveraged,
with consolidated indebtedness of US $99.4 million and a total debt to equity ratio of 0.65 to 1 as of March
31, 2004.  Substantially all of our physical assets have been pledged to secure repayment of our debts.
Because a substantial portion of our cash provided by operations is needed to pay our debts, funds available
for operations and for needed capital expenditures have been reduced in recent periods, and our ability to
generate sufficient cash flow to adequately fund operations and capital expenditures in future periods may
be impaired. Additionally, our highly leveraged position makes us more vulnerable to adverse economic
conditions than less leveraged competitors.  Furthermore, the discretion of our management with respect
to certain business matters is limited by covenants contained in some of our loan agreements.

We may not generate enough cash flow to pay substantial debt amortizations in coming periods

In June of 2002, we entered into a Credit Agreement with an international consortium of lenders,
pursuant to which we borrowed US $100.0 million to refinance our then-maturing $90.0 million notes and
for other general working capital purposes.  Although the Credit Agreement is on generally favorable
terms, it provides for significant amortization of principal, with US $13.1 million due in 2004, US $20.0
million due in 2005, US $22.5 million due in 2006 and the remaining US $25.0 million due in 2007.  We
also have US $6.1 million in short-term debt due in 2004.  These significant debt service obligations may
materially impact our cash flow and impede our ability to fund operations.  In 2002 and 2003, our cash flow
was substantially reduced over prior periods.  In the event we are unable to generate sufficient cash flow
to service debt obligations when due, we will be required to either renegotiate the terms of our debt
obligations or replace them on conditions that are more favorable than currently.  If we were unable to do
so, it could impair our ability to fund operations and adversely impact our profitability.

We face significant competition in all markets and pricing pressures may decrease our profitability

Significant competition generally is reflected in lower prices for our products, and any further
decreases in our selling prices could decrease our profitability and impair our cash flow.  The markets for
our products in both Mexico and the United States are highly competitive. In Mexico, we compete for
market share primarily with domestic manufacturers and independent distributors of ceramic tile, many
with greater resources than we possess. We dedicate significant resources to advertising, marketing and
product presentation strategies in Mexico in order to generate and maintain consumer interest in our
products. A failure of one or more of our strategies could result in decreased sales in Mexico.  In the United
States, we face significant competition, primarily from Italian and Spanish producers. Much of our
competition in the United States is against products similar to ours and pricing pressures are significant.
Although the recent weakness of the Dollar against the European common currency, or “Euro,” has
increased the cost of products of many European competitors, most of these competitors still retain a
pricing advantage over us due to generally lower costs of production.

Import tariffs in the United States provide some competitors with pricing advantages that put us at a
competitive disadvantage

United States tile manufacturers can charge less for their products than we do because they are not
subject to import tariffs, making our products less competitive and adversely effecting our sales revenues.
Mexico, the United States and Canada are parties to the North American Free Trade Agreement, or
NAFTA, created to establish a “free trade” zone and to eliminate import duties, tariffs and barriers among
the three countries.  However, under NAFTA tariffs on ceramic tile imported from Mexico into the United
States were not eliminated and are to be phased out over a period of 15 years (the current NAFTA tariff
rate for substantially all of our products is 5.00 percent). United States producers are not subject to any
tariffs in the United States markets and thus enjoy a competitive advantage against importers like us.  The
benefits of NAFTA to us may only be realized gradually with increased access to the United States market
and increased sales in the United States as the tariffs are reduced.  It is also possible that European or
United States manufacturers may locate or expand production facilities in Mexico to take advantage of
reduced tariff levels, resulting in increased competition not only in the United States market but in the
Mexican market as well.

The United States is also a party to the General Agreement on Tariffs and Trade, or GATT. Under
GATT, the United States currently imposes a tariff on products like ours from non-NAFTA countries at
a rate of 8.50 percent. The reduction of tariff rates under GATT may result in increased competition within
the United States ceramic tile markets from European and other foreign producers of ceramic tile products.

Risks relating to our controlling shareholders and our capital structure

Our controlling shareholders may cause us to take actions that may not be in the best interest of other
shareholders

Over half of our general voting securities are held or controlled by members or associates of the
Oscar Almeida Chabre family of Chihuahua, Chihuahua, México. This controlling group may have
objectives for our company that differ from those of minority shareholders on a variety of issues, including
for example business strategies, product development and capital investment.  Because of this, the value
of your investment is subject in many respects to the decisions of management over which you are unable
to exercise any control.  By virtue of its ownership, this group has the effective power to designate a
majority of the Board of Directors and to determine the outcome of other actions requiring a vote of the
shareholders, except in very limited cases that require a vote of the holders of the Series D Shares and the
Series L Shares.  Further, under Mexican law, you may have less protection as a minority shareholder than
you do under the laws of the United States. See the discussion under the heading “Item 10. Additional
Information–B.  Memorandum and Articles of Association” contained in this annual report.

A change in our control may result in management changes and defaults under loan agreements that
could result in acceleration of significant debt obligations

As a result of shareholdings and certain agreements, the Almeida Family currently controls a
majority of our general voting securities. The Almeida Family has controlled the senior management of
our company since its inception, and a loss of control could result in a loss of experienced executive and
other management personnel which might harm our ability to competitively operate our business.  Also,
most of our loan agreements contain provisions that would allow our lenders to accelerate our debts if the
Almeida Family ceases to own a certain percentage of the Company.  If all or even a portion of our debts
were accelerated, we may be unable to pay or refinance them. The Almeida Family is not obligated to
maintain their holdings in our securities, however, and if they chose to dispose of all or a portion of their
Series B Shares the control of Interceramic could change.

On December 7, 2004, the then outstanding Series L Shares will automatically convert to Series
B Shares.  As a result, the Almeida Family will, based upon their current ownership, cease to own or
control over 50 percent of our general voting securities.

Your ability to recover damages from or enforce a judgment against us may be limited

We are organized under the laws of Mexico and all of our officers and all but two of the members
of our board of directors reside in Mexico.  Also, more than 75 percent of our assets are located in Mexico.
As a result, if you were to have a claim against us, whether predicated upon the civil liability provisions
of the federal securities laws of the United States or otherwise, it may not be possible for you to effect
service of process within the United States upon our management or to enforce the payment by us or our
management of damages that might be awarded to you by courts in the United States.

ITEM 4.           Information on the Company

A.  History and Development of the Company

Interceramic was founded on February 17, 1978 as a closely held  a limited liability company with
variable capital (sociedad anónima de capital variable) by certain members and associates of the Almeida
Family.  Although Interceramic conducts business in Mexico under the “Interceramic” trade name, its
charter name is “Internacional de Cerámica, S.A. de C.V.,” which translates roughly as “Ceramics
International.”  The current prescribed duration of Interceramic is to February 28, 2053.  Interceramic
became a publicly traded company in Mexico in 1987 and in 1994 completed an initial public offering of
securities in the United States.  American Depositary Receipts (“ADRs”) evidencing five of Interceramic’s
“Limited Voting Units,” which are securities comprised of one Series D Share and one Series L Share, are
listed on the New York Stock Exchange, Inc. (the “NYSE”).  Both Limited Voting Units and “Common
Units,” which are securities comprised of two Series B Shares, are listed on the Bolsa Mexicana de Valores,
S.A. de C.V. (the “Mexican Stock Exchange”).

Interceramic’s registered office in Mexico, and principal executive office, is located at Ave. Carlos
Pacheco 7200, Chihuahua, Mexico, and its telephone number is 011.52.614.429.1111.  The address for the
corporate offices of the Company’s United States subsidiaries is 2333 South Jupiter Road, Garland, Texas
75041, telephone number 214.503.5500.  The Company’s registered agent in the United States for most
purposes is Mark E. Mendel, Esq., Mendel • Blumenfeld, LLP, 5809 Acacia Circle, El Paso, Texas 79912,
telephone number 915.587.7878.

In its early history, Interceramic manufactured glazed ceramic floor tile from one production
facility located in Chihuahua, Mexico, primarily for sale in the Mexican markets through independent
distribution.  In 1989, it added another production facility in Mexico, which has almost since inception been
owned as a “joint venture,” initially of Interceramic and Armstrong World Industries, Inc. (“Armstrong”),
but currently with Dal-Tile International, Inc. (“Dal-Tile”), as successor to Armstrong’s interest in the
venture.  Also in the late 1980's, Interceramic commenced distribution of selected products in the United
States.  While its initial sales into the United States were through independent distributors, the Company
has been steadily increasing a network of Company-owned distribution in the United States.  The same
holds true in Mexico, where independent distribution gave way in the 1994-1995 period to a mixed network
of Company-owned distribution and an extensive, exclusive “Interceramic” franchise web throughout the
country.  The Company added a new production facility in Chihuahua in 1995, while also opening a
manufacturing facility in the United States, in both cases for the production of glazed ceramic wall tile.
The Company also manufactures for sale in Mexico grouts and certain adhesives for the installation of
ceramic tile products.  For the last several years, the Company has focused its efforts in Mexico and the
United States on maximizing its profitability and market share through innovation, promotion and
marketing.  See the discussions under B, C and D below.

In late 2000, Interceramic concluded a private placement of 3,636,363 Common Units to Kohler
Co. (“Kohler”), a leading international producer of bathroom and kitchen fixtures and related products.
As a result, Kohler acquired a 6.28 percent stake in the then aggregate outstanding capital stock of the
Company and an 11.06 percent ownership of the Series B Shares outstanding at that time, although as a
result of subsequent stock issuances Kohler’s stake in the Series B Shares has decreased to 7.50 percent.
In the 2000 transaction, Kohler paid a price of US $3.30 for each new Common Unit, which was in excess
of twice the then market price for a Common Unit on the Mexican Stock Exchange.

In connection with its investment in Interceramic, Kohler and Interceramic entered into a letter
agreement (as amended, the “Kohler Agreement”) setting forth the terms of the distribution relationship
pursuant to which Interceramic would distribute Kohler products, primarily including sinks, bathtubs,
sanitary fixtures, faucets and related accessories, in Mexico.  Kohler also entered into certain agreements
with the Controlling Group.  See “–B. Business Overview–The Kohler Agreement” below.

As was the case in both 2001 and 2002, during the course of 2003 the Company did not undertake
any material capital projects, and most of its capital expenditures during the year were attributable to
development and implementation of the Oracle supply chain management system, the installation of two
new technologically advanced kilns in substitution of older kilns, the redisign and automation of the
selection and packaging areas in all of the plants and the creation and implementation of a new image for
the Company’s wholly-owned stores in the United States, as well as for the routine upgrades of and
improvements to existing equipment and facilities.

Aggregate capital expenditures during 2003 were Ps 133.9 million, while in 2002, the Company’s
capital expenditures were Ps 181.8 million and in 2001 capital expenditures were Ps 116.2 million.  During
the course of 2004, the Company expects to incur capital expenditures of approximately Ps 480.0 million,
primarily in connection with the recently completed purchase from the Almeida Family of two franchisee
distributors in Mexico and on the construction and equipment of a new state-of-the-art production facility
to be located in the Mexican city of Chihuahua (the “New Plant”).

B.  Business Overview

General

The Company is engaged in the manufacture and distribution of glazed ceramic floor and wall tile
and related products, primarily in Mexico and the United States.  The Company produces a broad selection
of high quality glazed ceramic floor and wall tile for residential and commercial uses.  Products
manufactured in its Mexican facilities are marketed by the Company throughout Mexico under the
“Interceramic” brand name, using a national network of exclusive franchise stores as well as a number of
Company-owned stores in the important Mexico City, Guadalajara, Monterrey and Chihuahua markets.
In the United States, the Company effects sales under its own brand names, using its sales subsidiary,
Interceramic, Inc. (“Interceramic USA”), which sells through independent distributors and a network of
wholesale/retail stores owned and operated by Interceramic USA.  Operated for many years under the name
Ceramic Tile International, during the course of 1993 the Company changed the trade name for these stores
to “Interceramic Tile and Stone Galleries” (“ITS”).  Current ITS locations are in Anaheim, California;
Dallas, San Antonio, Houston, Fort Worth, Plano, Austin and El Paso, Texas; the Atlanta, Georgia, area;
Albuquerque, New Mexico; Las Vegas, Nevada; Phoenix and Scottsdale, Arizona; and Tulsa and Oklahoma
City, Oklahoma.  The Company also sells certain of its Mexican production to Dal-Tile for resale in the
United States under Dal-Tile brand names.  Through Interceramic USA, the Company also manufactures
glazed ceramic wall tile in the United States and distributes the production in the United States using the
independent distributors and the ITS network.  In addition, the Company imports ceramic floor and wall
tile, primarily from Italian and Spanish manufacturers, for distribution and sale in the United States and
Mexico and manufactures and distributes grouts and adhesive materials in Mexico to complement the
Company’s ceramic tile product lines.

Interceramic commenced production in 1978 using the Italian, single-fired (“monocottura”) tile
production process.  The Company was the first tile producer in North America to adopt this technique,
which results in lower firing times and energy usage, allowing the production of high quality products at
relatively low costs.  Since starting operations to the present, the Company’s annual production capacity
has gone from 7.2 million to 264.0 million square feet.

Ceramic tile is currently produced by the Company in four facilities, three of which are located in
the city of Chihuahua, Mexico, and the other of which is located in the Dallas-Fort Worth area suburb of
Garland, Texas.

●        The Company’s first production facility (the“ICSA Plant”) is owned and operated by
Interceramic and with a production capacity of 124.3 million square feet of glazed ceramic
floor tile, currently accounts for 47.08 percent of the Company’s installed capacity.  The
Company manufactures only glazed ceramic floor tile at the ICSA Plant.

●        The Company’s second production facility (the “RISA Plant”) is owned and operated by
Recubrimientos Interceramic, S.A. de C.V. (“RISA”), a company owned 50.01 percent by
the Company and 49.99 percent by Dal-Tile, and accounts for 25.00 percent of the
Company’s current installed capacity.  The RISA Plant was constructed in 1989, and has
a production capacity of 66.0 million square feet.  All production of the RISA Plant is
currently glazed ceramic floor tile.  As successor to Armstrong under contracts entered
into between the Company and Armstrong, Dal-Tile has the right to purchase up to 50
percent of the production of the RISA Plant, all in first quality, for sale in the United
States.

●        The Company’s third production facility (the “Azulejos Plant”), located adjacent to the RISA Plant, is owned and operated by Interceramic, and accounts for 15.00 percent of the
Company’s installed capacity.  The Azulejos Plant is dedicated to the manufacture of large
format wall tile, a popular product in Mexico, and has an annual capacity of 39.6 million
square feet.  Trim pieces, an important component of the ceramic wall tile markets,
particularly in the United States, are also manufactured at the facility, primarily for export.

●        The Company’s fourth production facility (the “Garland Plant”), located in Garland,
Texas, is owned and operated by Interceramic USA, and accounts for 12.92 percent of the
Company’s installed capacity.  At the Garland Plant, Interceramic USA is engaged in the
manufacture and production of small and larger format glazed ceramic wall tile and related
trim pieces, all of which is currently produced for the United States market.  The annual
capacity of the Garland Plant is 34.1 million square feet of 41⁄4” and 6” x 6” wall tile,
together with related trim pieces.

In addition, at a facility (the “First ABISA Plant”), located adjacent to the ICSA Plant and owned
and operated by a subsidiary of the Company, Adhesivos y Boquillas Interceramic, S. de R.L. de C.V.
(“ABISA”), the Company manufactures and develops grouts and adhesive materials used in the installation
of ceramic tile.  In 2001 ABISA opened a second grout and adhesive facility (the “Second ABISA Plant”)
in the central Mexican town of Huichapan.  The Second ABISA Plant more than doubled ABISA’s capacity
and allows the Company to reduce the shipping costs associated with these high-weight but low-cost
products to franchisees in the southern part of Mexico.  Custom Building Products of California, Inc.
(“Custom”), a United States producer of similar products, owns 49.00 percent of ABISA’s equity.

In 1998, the Company organized a wholly-owned subsidiary, Distribución Interceramic, S.A. de
C.V. (“DISA”), to own and operate wholesale/retail locations throughout the Mexico City area.
Additionally, in 1999, the Company organized Interacabados de Occidente, S.A. de C.V.(“Occidente”),
another wholly-owned subsidiary, to acquire the operations of the Company’s franchisee in the Guadalajara
area.  In March 2004, the Company purchased all of the issued and outstanding capital stock ofGrupo
Comercial Interceramic, S.A. de C.V. (“GISA”) andMateriales Arquitectónicos Decorativos, S.A. de C.V.
(“MASA”).  GISA operates the Company’s franchises in the city and state of Chihuahua, while MASA is
the owner of the franchise stores in the Monterrey area.  GISA was purchased from the Almeida Family
and MASA was purchased from the Almeida Family and an associate of the family.

Production Capacity

At
the end of 2003, the Company had a total annual installed capacity of 264.0
million square feet, of which 190.3 million square feet is allocated to the
production of glazed ceramic floor tile and 73.7 million square feet is
dedicated to the production of glazed ceramic wall tile. For the past four
years, all of the Company's plants have been operating at full capacity. The New
Plant is expected to increase the Company's production capacity by approximately
25 percent. The production capacities of the respective facilities, expressed in
millions of square feet per annum, are:

●           ICSA Plant                                               124.3



●           RISA Plant                                                 66.0



●           Azulejos Plant                                            39.6



●           Garland Plant                                             34.1

In addition to its core business of providing tile for the higher end of the market, the Company also
manufactures limited amounts of strategic products for the lower end of the ceramic tile market in Mexico,
primarily as a means of introducing potential customers to the higher-end offerings available in the
franchise stores.  Over the past couple of years, the Company has out-sourced the manufacture of certain
of the more basic, or “commodity-type,” products in order to focus its own manufacturing efforts on higher
end products, and during 2003 sold 6.4 million square meters of third party products compared to sales of
27.9 million square meters of its own products.  The Company has adopted a strategy in Mexico to de-emphasize the distinctions between commodity and other tile products, instead focusing on a broad
“Interceramic” product mix at its franchise stores in order to meet virtually every consumer demand for
glazed ceramic tile products.

The Company also manufactures a variety of glazed ceramic wall tile products to complement its
floor tile.  In Mexico, the Company’s wall tile is directed at the medium- and high-end markets.  The
ceramic wall tile being produced at the Garland Plant is aimed primarily at the United States and Canadian
markets, which favor smaller, 41⁄4” product.  However, although it fluctuates during the course of the year,
up to a third of the production of the Garland Plant may be at any one time dedicated to a larger format,
6” x 6” wall tile.  A material part of the production of wall tile is the manufacture of the related trim pieces
for borders, accents and decorative purposes, and both the Azulejos Plant and the Garland Plant are
engaged in the production of trim pieces.

Ceramic Tile Markets in Mexico and the United States

Ceramic tile has been used for thousands of years as both functional and decorative veneers on
floors and walls.  Ceramic tile is just one of many available floor and wall coverings, competing with others
such as concrete, carpet, wood, stone, laminates and vinyl.  Relative demand for a particular material
depends on various factors, and ceramic tiles generally hold a competitive advantage over other available
wall and floor coverings in terms of aesthetic appeal, durability, ease of maintenance and fire resistance.
Traditionally, their greatest advantage has been their beauty, and their greatest disadvantage has been cost.
However, with recent advances in manufacturing and installation technology, the cost gap between ceramic
tile and other coverings has narrowed, although installation cost for ceramic tile is typically significantly
higher than in the case of alternative floor coverings such as concrete, carpet, laminates and vinyl.

Glazed ceramic tile consumption by product volume increased by a compounded average of 11.31
percent per year in Mexico between 1997 and 2003 and 10.60 percent per year in the United States over
the same period. In Mexico, double-digit growth has been fueled by increased construction spending
associated with economic recovery since the Peso devaluation in 1994 and by rising personal income levels.
Growth in the United States reflects increased consumer preference of ceramic tile vis-à-vis other floor
covering alternatives and economic expansion of the 1990’s.  Furthermore, ceramic tile products have
benefitted from declining prices associated with improvements in manufacturing technology resulting in
a more competitively priced package and narrowing the price gap against other floor covering alternatives.

Mexico consumes considerably less ceramic tile per capita than other countries with similar
climatic, cultural, architectural and income characteristics, such as Brazil.  This disparity represents
substantial potential for market growth in Mexico as the country continues to benefit from increased
political and economic stability, proximity to the United States and NAFTA integration.  Consumption per
capita in the United States is even lower than in Mexico, indicating a large potential for market growth, as
ceramic tile gains consumer preference over other floor covering alternatives.  This is already evidenced
by ceramic tile growth in the United States having outpaced growth of other floor covering formats in
recent years due to decreasing prices and shifting architectural trends, which have increasingly emphasized
ceramic tile products in construction and remodeling.

Markets

General

The Company markets its products throughout Mexico, as well as in the United States and Canada
and in the past, to a very limited extent, Central America.  The vast majority of its sales are in Mexico and
the United States, which over the past five years have combined for 99.85 percent of the Company’s
consolidated sales.  Sales in Mexico are made through an extensive franchise network, which includes
Company-owned points of sale in the major markets of Mexico City, Guadalajara, Chihuahua and
Monterrey, while in the United States, Interceramic USA effects sales through independent dealers and ITS
stores.  In Canada, most sales are made through one distributor located in Toronto who then makes further
distribution throughout the country.  The chart on the following page summarizes the Company’s
consolidated sales by markets.



[Chart on Following Page]



Historical Mix of Company Sales by Market2000
2001
2002
2003MexicoRevenues*
1,729.5
1,880.1
1,842.0
1,920.5Percent of Consolidated Sales
56.91
59.23
56.37
56.07United StatesRevenues*
1,307.6
1,292.8
1,424.4
1,503.4Percent of Consolidated Sales
43.02
40.73
43.60
43.91Other (Primarily Canada and Latin America)Revenues*
2.0
1.3
1.0
1.0Percent of Consolidated Sales
0.07
0.04
0.03
0.02TotalsRevenues*
3,039.1
3,174.2
3,267.4
3,424.9Percent of Consolidated Sales
100.00
100.00
100.00
100.00


*Millions of Pesos

Although the respective percentages of (i) sales in Mexico and (ii) sales comprised of the aggregate
of (A) sales of Company production exported from Mexico, (B) production from the Garland Plant and (C)
products manufactured by non-affiliates sold outside Mexico (collectively, “International Sales”) have
varied from year to year, in order to maintain the presence required in both markets for long term
penetration, the Company does not intend to materially change the mix between Mexican and International
Sales from roughly 50 percent in each of the markets.

Mexico

The Company believes, based on industry sources, that Mexico’s market for glazed ceramic tile
in 2003 was at least 1,514 million square feet, divided into two main sectors: floor and wall tile.  In 2003,
floor tile represented approximately 1,141 million square feet and wall tile represented approximately 373
million square feet of the Mexican market.  Total consumption of glazed ceramic tile products by volume
in Mexico has increased at an estimated compound annual growth rate of 12.23 percent over the last eight
years.  The estimated 1,514 million square feet of sales for 2003 represents a modest increase of 3.92
percent over an estimated market of about 1,457 million square feet during 2002, a year which showed a
much higher consumption increase of 10.00 percent over the preceding year.  However, in 2001 growth
over 2000 was just 3.47 percent.

The chart on the following page indicates growth in ceramic tile consumption, the construction
industry in general and the Mexican gross domestic product, indexed to 1993 as the base year:



[Chart on Following Page]



Index of Ceramic Tile Consumption,
Construction and GDP in Mexico(1)Year
Ceramic Tile Growth
Index(2)
Construction Growth
Index(3)
GDP Growth
Index(3)1993
100.00%
100.00%
100.00%1994
104.64
108.43
104.461995
79.58
82.99
97.961996
91.18
91.10
103.001997
108.32
99.55
109.981998
128.65
103.76
115.371999
138.10
108.94
119.692000
151.48
113.51
127.562001
143.49
107.07
127.402002
144.54
108.41
128.332003
150.69
112.09
130.00CAGR(4)
4.19
1.15
2.66




(1)           Constant Pesos.

(2)           Source: Mexican Association of Ceramic Tile Producers.

(3)           Source:  Instituto Nacional de Estadistica, Geografía e Informática.

(4)           Compounded Annual Growth Rate.

Steady improvement in the Mexican economy since the economic crisis of the mid 1990’s has
resulted in increased spending on construction of residential and infrastructure projects and corresponding
increased demand for construction materials.  Further, recovering personal income levels have enabled
certain consumers to upgrade or remodel their homes, replacing cement or earthen floors with ceramic tile.
Industry studies have indicated that a material percentage of residences in Mexico lack floor coverings of
any kind, and the Company believes that remodeling and improvement of existing structures is an
important growth area for ceramic tile products.  With further improvement in personal income levels and
continued political and economic stability in Mexico generally, the Company believes there is significant
potential for further growth in ceramic tile consumption.

Prices for glazed ceramic tile in Mexico have generally been decreasing over the past several years
for a number of reasons, including increased competition, initially from imports but increasingly from large
capacity additions by domestic producers and the savings generated by technological advances in the
production process.  Despite the industry trend of declining prices, the Company has over the same period
been able to increase its selling prices modestly in the extremely competitive market.

Prior to the last major economic crisis in Mexico, a significant share of the ceramic tile market in
Mexico, estimated by the Company to be approximately 10.37 percent during 1994, was held by imports,
primarily from Spain and Italy.  The Peso devaluation had a significant adverse effect on ceramic tile
imports in Mexico, decreasing import participation in the domestic markets by almost 90 percent.  Since
the Mexican economy stabilized late in the 1990's imports have slowly regained market share and at an
estimated nine percent of the market in 2003 have virtually recovered their pre-devaluation market share.
Prior to the devaluation the Company had imported a substantial amount of product for resale in Mexico,
but for a number of years the Company imported no foreign tile products for sale in Mexico.  Starting late
in 2002, the Company resumed imports of foreign product, substantially all of which is aimed at the lower-end of the markets to enable the Company to focus its limited production capacity on higher-end products
while offering the consumer a broad spectrum of products.

In Mexico, sales are made to contractors, builders and architects for residential and commercial
new construction and renovation.  In addition, a substantial amount of the sales in Mexico are made directly
to the end consumer, with homeowners purchasing tile directly and contracting with an installer to lay the
tile.  Particularly in the home building and renovation markets, in Mexico consumers are much more likely
to be involved in the selection of ceramic tile for their homes than are consumers in the United States.  As
a result of the Company’s strategy to direct most of its product mix among the high and middle ends of the
market, the Company considers its customer base to be increasingly influenced by the middle class
consumer, particularly those involved in the remodeling or improvement of existing properties.

United States

Based on statistics compiled by the United States Department of Commerce (the “Commerce
Department”) and estimates and projections reported in a 2003 study of the United States ceramic tile
industry by Economic Industry Reports, Inc. (the “2003 Study”), the ceramic tile industry in the United
States was relatively flat for a number of year until the last decade.  Consumption in the United States
increased dramatically over the period, increasing by 211.40 percent over 1992 to an estimated market in
2003 of 2,595.5 million square feet compared to 833.4 million square feet in 1992.  Similar to Mexico,
2000 saw substantial growth of 11.66 percent over the preceding year while 2001 saw much slower growth,
with the market increasing by only 3.47 percent over 2000–in the latter case most likely greatly attributable
to the uncertainty sparked by the events of September 11, 2001.  The market rebounded considerably in
2002, increasing by 10.00 percent over 2001, an increase of more than 133 million square feet.  In 2003,
growth slowed again, and ceramic tile consumption increased by only 3.92 percent over 2002.  The
Company believes that the key to growth in ceramic tile consumption in the United States has been and will
continue to be ceramic tile gaining market share over other types of floor and wall coverings.  According
to the publication “Specialists in Business Information,” in the period 1993 through 1998 the market for
ceramic tile grew at a compound annual rate of 10.7 percent while carpet grew at 2.4 percent, hardwood
at 6.2 percent, resilient sheet and tile at 4.1 percent and rubber flooring at 5.8 percent.  While somewhat
dated, and while the study also did not include the figures for “laminate” flooring, a fairly recent and fast
growing entrant into the flooring markets, the Company considers the trends identified in this study to
remain generally sound and confirms the Company’s belief that ceramic tile demand is increasing faster
than demand for most other types of floor products.

Although the overall market for glazed ceramic floor and wall tile in the United States, according
to the 2003 Study, increased during the time period from 1990 to 2003 at an average annual rate of 9.16
percent, during the same period, however, the price obtained per unit has been generally decreasing.  The
average price per unit for glazed ceramic tile products of domestic producers dipped $0.07 per square foot
in 2001 over 2000, and declined further by $0.02 to an estimated $1.10 per square foot in 2002.  The trend
continued in 2003 as prices decreased by $0.05 per square foot over 2002.  Imports continue to lag behind
domestic production in pricing however–having reached a peak of $0.96 per square foot in 1989, the
average price for imported glazed ceramic tile products stood at $0.79 per square foot at the end of 2003.
Imported products in the United States thus trade at an average 28.18 percent discount over domestic
products.  While glazed ceramic tile prices have slipped, other types of ceramic floor and wall tile have
achieved modest price gains over the same periods.  For both domestic and foreign producers, the reduction
in price per unit is primarily due to competition and reduced production costs.  As manufacturers have
realized cost savings through technological advances and as a result of competitive pressures in the
marketplace, the savings have tended to be passed on to the consumers.  Because over half of the United
States market is composed of imports, the Company believes that the United States ceramic tile market is
representative of global ceramic tile markets.  As most of the competitive and technological pressures and
advances have already occurred at global pricing levels, the Company expects that prices of glazed ceramic
tile in the United States will be substantially the same for the foreseeable future.

In the United States, the Company competes with several domestic producers, as well as imports
from Italy, Spain, Mexico and other countries.  However, the Company’s sales in the glazed ceramic floor
and wall tile market in the United States have grown significantly, from approximately US $14.8 million
in 1989 to US $134.6 million in 2003.  Based upon information contained in the 2003 Study, the Company
estimates that its share of the glazed ceramic floor tile market in the United States was 6.33 percent at the
end of 2003, slightly less than an estimated market share of 6.78 percent in 2002.  This reflects not only
the burgeoning growth of the ceramic tile markets in the United States over the years but also a slight
erosion in the Company’s market share from around eight percent in the late 1990's.

Although the Company sells its products in other Central and Latin American countries, as well
as in Canada, 99.93 percent of International Sales are to the United States.  Of the total International Sales
by volume during 2003, 57.58 percent consisted of sales of glazed ceramic floor and wall tile manufactured
by the Company and the remaining 42.42 percent consisted of tile imported by the Company or purchased
by Interceramic USA from United States or foreign producers.  The significant increase in sales of non-Company products–they accounted for only 17.76 percent of sales in 2002–resulted from the Company’s
decision to purchase substantial amounts of product from third-party suppliers in order to allow the
Company to dedicate more of its own production capacity to higher margin products.  Of the total
International Sales for 2003, 25.69 percent consisted of sales through independent distributors and 68.62
percent consisted of sales through ITS stores, with the remainder being sold through Dal-Tile and
customers in Central and Latin America.

In the United States, the Company sells to ITS, as well as to independent distributors, usually one
for each major metropolitan area in the United States other than those in which an ITS store is located.  The
distributors then sell to floor covering dealers, builders, general contractors, floor covering contractors and
the installer trade located in their respective sales areas.  The usual customers for the Company’s products
in the United States are contractors for new residential and commercial construction and, to a lesser degree,
industrial construction.  In addition, a significant percentage of sales is made in connection with home and
office remodeling and renovation, both to the professional contractor, architect and interior decorator, as
well as, to a much more limited extent than in Mexico, to the retail consumer.

Strategy

General

For a variety of reasons, including vastly differing economic conditions and income levels,
differences in consumer and cultural preferences and disparate climatic conditions, the ceramic tile markets
in Mexico and the United States differ from each other in many material respects.  Accordingly, the
Company has developed focused business strategies for each market.  However, with all of the Company’s
production facilities currently running at full capacity, the Company is pursuing a basic strategy in both
markets to increase its gross margins by focusing its product mix on the higher end segments of the market
and gaining market share in these segments.  In order to do so, the Company is concentrating on the
development of new, innovative and first-class products for sale in both Mexico and the United States.  For
example, during 2003 the Company introduced 40 new product lines, including a number of highly-sought
“porcelain” products.  At the same time, the Company believes it extremely important to maintain a full
array of product offerings for the complete range of consumer tastes and budgets.  To avoid erosion of its
market share by producing insufficient quantities of products, during the course of 2002, the Company
established a number of “private label” programs with third party manufacturers in order to be able to meet
product demand as well as to focus its own manufacturing capacity on higher end products.  The products
developed under the private label programs are aimed at the lower, less expensive segments of the market
in order to provide a full-line of ceramic tile product offerings to its customers as well as to enable the
Company to dedicate all of its own production capacity to the more innovative, more expensive products.

The New Plant, a new production facility located in Chihuahua, Mexico, is currently under
construction and slated to open early in the second quarter of 2005.  The New Plant will increase the
Company’s overall capacity by about 25 percent and should reduce need for some of the third party
production.

The Company also continues to pursue strict control over operating expenses and further
efficiencies in the production process in order to increase margins as much as possible within the limits
imposed by current production capacity.

Mexico

Since the substantial recovery of the Mexican economy in the later years of the 1990’s, the
Company’s central strategy has been increasing market share, primarily through the improvement of the
selling prices for its products.  This strategy has continued with the Company concentrating on improving
its product mix to obtain higher margins on virtually the same volume of product by square meter.  The
Company has focused on improving its margins by obtaining a better product mix in its franchise stores
and is directing its efforts towards obtaining real price increases.  This has been achieved to a great extent
over the past few years, and will continue to be the Company’s prime strategy.  The existence of the
exclusive franchise stores makes it easier for the Company to introduce new products into the market,
without having to develop entirely new distribution systems and networks.  Further, with Company-owned
distribution in the two dominant domestic markets of Mexico City and Guadalajara, joined in March 2004
by the acquisition of the Company’s franchisees in Chihuahua and Monterrey, the Company is able to
obtain additional margin on sales–a strategy that has proven valuable through the ITS distribution network
in the United States.

In 1994, the Company terminated its relationships with poorer distributors and converted the
remaining core of its existing distributors into exclusive, franchise distributors.  This conversion resulted
in several benefits for the Company, including increased time and sales efforts of distributor personnel with
respect to the Company’s products, increasing the level of promotions and advertising for the Company’s
products and improving the exhibition of the Company’s products in ceramic tile showrooms.  The
Company believes that presentation of its wide mix of products at exclusive stores prominently bearing the
“Interceramic” name has been a major factor in its  ability to increase market share since the devaluation.
By the end of 1994, all distributors had been either terminated or converted into franchises and at the end
of 1995, the Company had 126 franchise stores operating in 73 different Mexican cities.  Additional
franchises have been opened since then and the entire network consolidated, reviewed and strengthened,
and at December 31, 2003, the Company had 200 franchise stores operating in more than 114 Mexican
cities.

Since 1997, the Company has owned its own distribution in the Mexico City area and has devoted
considerable energies towards establishing its presence in Mexico City through advertising campaigns and
opening of  new, “Interceramic” stores.  At the end of 2003, the Company owned 21 stores in Mexico City.
In keeping with the Company’s desire to own distribution directly in important markets, in 1999 the
Company acquired the operations of its franchisee in the city of Guadalajara, one of the largest markets in
Mexico, and was operating 13 stores in the area at the end of 2003.  In 2002, the Company increased its
presence in both the Mexico City and Guadalajara area markets by purchasing the operations of two
existing franchisees, resulting in the acquisition of four stores in Toluca, near Mexico City, and three more
stores in Morelia, a center on the main route between Mexico City and Guadalajara.  By the end of 2003,
the Company had five stores each in the Toluca and Morelia areas.  By the acquisition of MASA and GISA
at the end of March 2004, the Company further expanded its Company-owned network in Mexico into the
major markets of Chihuahua and Monterrey.  The acquisition resulted in the Company owning 19 stores
throughout the northern Mexican state and city of Chihuahua and nine stores in the Monterrey area, a
heavily industrialized city in northeastern Mexico.

The Company continually supports each of its exclusive franchises with consulting services
covering a variety of operational matters, including inventory maintenance, implementation of inventory
systems, marketing and training of sales and management personnel.  The Company is strongly committed
to the franchise concept in Mexico, and believes that it has reinforced brand recognition with trade
customers, architects and other consumers of ceramic tile products.

In keeping with its position in the Mexican markets as a supplier of a complete line of ceramic tile
products, the Company also manufactures glazed ceramic wall tile in a number of formats.  In Mexico the
Company has focused on the high end wall tile market, which for years had been dominated by European
imports; and the Company has been able to stay largely out of the extremely price-sensitive commodity
wall tile segment.  With its distribution network and its ability to outperform imports in price, product
offering and service, the Company believes it has made a material impact on the Mexican ceramic wall tile
market, estimating that its share of the Mexican glazed ceramic wall tile market has gone from about three
percent in 1992 to approximately 19 percent at the end of 2003.

The Company also markets products complementary to ceramic tile, such as plumbing fixtures and
grouts and adhesives.  Promoting package formats consisting of ceramic floor and wall tile, sanitary
fixtures and grouts and adhesives increases customer convenience and is in keeping with the usual Mexican
practice of providing a complete line of ceramic tile products, sanitary and other bathroom and kitchen
fixtures and related products in the same store.  This strategy is particularly important to the Company in
light of its conversion from independent distributors in Mexico to exclusive franchises.  By entering into
the production of wall tile, expanding its grout and adhesive production, marketing sanitary fixtures, faucets
and kitchen and bathroom accessories and related products the Company provides a full scope of products
in the franchise stores.  Sanitary fixtures and related products directed toward the high-end market are
purchased by the Company from Kohler and resold to the Company’s franchisees throughout Mexico.
Middle and lower end products are purchased by the franchisees directly from Ideal Standard, S.A. de C.V.,
a Mexican affiliate of American Standard, Inc. (collectively, “American Standard”) under the terms of an
agreement between the Company and American Standard (the “American Standard Agreement”).  See
“–The Kohler Agreement” and “–The American Standard Agreement” below.

The Company considers it an important strategic step to develop and market grouts and adhesives
for the installation of ceramic tile products.  The Company’s relationship with Custom was entered into
in order to avail the Company of the technical expertise necessary to produce high quality grouts and
adhesives.  See “–The Custom Agreement” below.  Although its capacity has been expanded over the years,
the production capacity of the First ABISA Plant is well behind the ceramic tile production of the
Company.  In 2001, ABISA placed the Second ABISA Plant into production, not only more than doubling
the production capacity of ABISA, but also allowing the Company to reduce the costs associated with
shipping these products to its franchise locations in the southern part of Mexico.  As grouts and adhesives
are relatively low priced products but heavy and bulky, minimizing  transportation costs is important in
keeping them competitively priced.

United States

The fundamental strategy of the Company in the United States has been to increase its market
share, initially by taking market share from other producers in a relatively flat ceramic floor tile market,
but with the recent growth in ceramic tile consumption in the United States, also by taking advantage of
this growth.  The Company believes that ceramic floor tile continues to gain market share in the United
States against carpeting and vinyl covering in residential and commercial applications, and that the
Company can best exploit this trend by producing innovative, high-design floor and wall tile.  Carpeting
is currently the overwhelming floor covering of choice in the United States, and in recent years easy to
install “laminates”–or synthetic wood or other patterned flooring–has made material gains in the overall
flooring industry.  Although ceramic tile is generally much more expensive, both in cost and installation,
than carpet, laminates and many other alternative floor coverings, the Company believes that as consumer
awareness grows and new and innovative product lines are marketed, ceramic tile should gain further
market share against other floor coverings.

Management believes that there is substantial demand for quality, competitively priced wall tile
in the United States.  The Garland Plant was developed to respond to this perceived demand.  The Garland
Plant was designed as a state-of-the-art wall tile facility, with aggregate annual production capacity of 34.1
million square feet of primarily 41⁄4” wall tile and related trim pieces such as borders, corners and accents,
although the Garland Plant also produces material amounts of 6” x 6”, larger format wall tile.  The
Company’s focus continues to be on marketing and developing a strong, distinctive line of products and
related trim to take advantage of  the sales opportunities it believes to be available in the expanding ceramic
tile markets in the United States.  Further, the Company is focusing on improving prices obtained on
products manufactured in the Garland Plant to enable the Company to achieve better margins.

The Company’s penetration of the United States glazed ceramic floor tile market is attributed by
management to several factors.  Primary among these has been the role of Interceramic USA in
coordinating distribution and sales in the United States and providing an ability to furnish distributors and
consumers with rapid, consistent and excellent service from the Company’s United States employees.
Further, the Company believes that its aggressive introductions of new and innovative products into the
United States market, together with related marketing campaigns, have also been beneficial.

A pillar of the Company’s United States strategy has been to develop and expand its distribution
network, not only through independent distributors, but in particular through the expansion of the ITS store
network.  At the beginning of 1993, Interceramic USA operated a total of three stores, and by the end of
2003, it operated 19.  Focusing on the southern United States, where ceramic tile is more in demand, at
December 31, 2003, ITS stores were located in Dallas, Fort Worth, Plano, Houston, San Antonio, Austin,
Spring and El Paso, Texas; the Atlanta, Georgia area; Las Vegas, Nevada; Phoenix and Scottsdale, Arizona;
Albuquerque, New Mexico; Anaheim, California and Tulsa and Oklahoma City, Oklahoma.  A new store
is to open in the second quarter of 2004 in San Diego, California.  The Company consistently records
higher sales volumes and better profit margins in the United States through ITS sales as opposed to
independent distributors, and will continue to add new ITS stores in the United States when opportunities
present themselves, including the possible acquisition of existing ceramic tile stores owned by other parties.

Under the joint venture arrangement with Dal-Tile, RISA sells glazed ceramic floor tile to Dal-Tile
for resale under the Dal-Tile and American Olean names in its company-owned outlets and through the
American Olean network of independent distributors.  The ability to sell RISA production to the large Dal-Tile/American Olean network in the United States provides the Company with the ability to achieve further
material, if less direct, sales in the United States.

Competition

General

In addition to the competition that the Company faces from other ceramic tile producers, the
Company’s products compete with numerous other floor coverings for residential, commercial and
industrial uses.  Among such coverings are carpet, the popular laminates, vinyl, stone products (such as
marble, granite, slate and limestone tile) and unglazed tile (such as terra cotta and porcelain).  Ceramic tile
products are typically more expensive than carpeting, laminate and vinyl coverings, and are generally
cheaper than stone products.  The cost of installation of tile products, including ceramic tile, is significantly
higher than the cost of laying carpet, laminates or vinyl.  In general, however, glazed ceramic tile products
offer longer wear-time periods and superior resistance to corrosives then do other coverings.

In both Mexico and the United States, it is difficult for the Company to accurately determine its
position in the market compared to other competitors due to the lack of reliable production and sales data
from companies not under reporting requirements such as those imposed on Interceramic under the 1934
Act.  Accordingly, although sufficient information exists both in Mexico and the United States for the
Company to judge its position in the overall market, it is unable to accurately fix the market share of most
of its major competitors.

Mexico

The Company’s production capacity expanded significantly over its first 15 years of operation.
However, the Company has not increased production capacity since 1996, other than a trim line added at
the Garland Plant and periodic increases in production capacity achieved through improved efficiencies
in its existing production processes.  For example, during 2000 the Company’s ability to increase its
percentage of first class production added almost two million square feet of salable production capacity.
The Company estimates its current market share of glazed ceramic floor and wall tile to be approximately
19 percent by Dollar sales volume.  The Company believes that it is the premier cost-efficient producer of
first quality ceramic floor and wall tile in Mexico and that ceramic tile sold under the “Interceramic” name
may be sold at premium prices because of its reputation for quality and high brand-name loyalty.  The
Company believes that its tightly-knit, national network of exclusive Interceramic franchises is a major
competitive advantage.  In addition, the Company believes that its ownership of the stores in the Mexico
City and Guadalajara markets is materially beneficial to the Company’s penetration of and presence in
those important markets.  The recent acquisition of the franchises in Chihuahua and Monterrey should also
prove very beneficial to the Company, as these franchises were among the most successful in the country-wide network.

In Mexico, the Company competes with a limited number domestic manufacturers of ceramic tile,
including Porcelanite, Vitromex, Lamosa and, to a lesser extent, a Mexican affiliate of Dal-Tile.  Although
there are other domestic producers as well as foreign manufacturers which import tile in the Mexican
market, the market is dominated by the four largest producers (including the Company), who collectively
account for almost 80 percent of the market.  The Company believes that the Mexican market for ceramic
tile can be broken down into two broad segments, high quality tile (which comprises approximately one-third of the market) and commodity tile (which comprises approximately two-thirds of the market).  High
quality tile is distinguished from commodity tile on the basis of strength, durability, innovation and
aesthetic design.  Selection is also greater at the higher end, with a wider variety of colors, styles and sizes.
In the high end segments, quality, selection, innovation and customer service are important aspects of a
product’s position in the market.  Historically, the Company has focused on the medium to high end of the
tile market, where initially it faced competition mainly from European imports, and in more recent years,
Vitromex and Porcelanite. While following the Peso devaluation competition from imports decreased
materially, imports have recovered most of their pre-devaluation market share and may prove to be more
of a factor in coming years if the Mexican economy continues to grow and stabilize.

As a result of the Company’s belief that it needs to supply lower-end, strategic products to provide
a complete product offering to effectively compete against other domestic producers and attract all types
of potential consumers to its stores, the Company also manufactures lower-end products.  At the lower-end
market segment, however, profit margins are smaller and competition is almost totally based on price.
Particularly in light of its current capacity constraints, the Company redirected its strategy to out-source
the production of strategic products as well as to present them as part of a comprehensive Interceramic line
available at its exclusive franchise stores, rather than directing sales at specific low-end markets.  This has
assisted the Company in concentrating its production on higher margin products as the Company has
pursued a strategy of developing more innovative, high design products in order to take advantage of the
higher selling prices and margins available to the higher quality products.  This strategy has proven
valuable for several reasons, including helping the Company differentiate its products from the competition
as well as keeping the Company largely out of the price wars that have been waged in the low end market
segments.  The success of the strategy has been demonstrated by the fact that the Company’s prices are on
balance about 20 percent higher than those of the Mexican ceramic tile industry in general.

Although the Company believes it is the only glazed ceramic tile producer in Mexico with 100
percent of its installed capacity being state of the art, certain of its competitors have invested significantly
in modernization and renovation in recent years as well as completing significant capacity expansions.
While the Company is fourth among the domestic producers in production capacity, it possesses the highest
market share in the high end markets.  There are material barriers to entry in the high end markets, and
management believes that its current position in the market and, in particular, its strong domestic franchise
distribution, are significant competitive advantages.

United States

The United States floor covering market in general, and the ceramic tile industry in particular, is
highly competitive in terms of price, service and quality of products.  The Company, through Interceramic
USA, competes with several domestic manufacturers, such as the domestic market leader Dal-Tile, as well
as numerous foreign producers of ceramic tile whose products are sold in the United States at very
competitive prices.  According to the 2003 Study, there were 33 companies manufacturing glazed ceramic
floor and wall tile in the United States at the end of 2003–a dozen more than at the end of 1998–yet 79.4
percent by product volume and 73.7 percent by sales volume of the glazed ceramic floor and wall tile
market in 2003 was held by imports.  Management believes that Interceramic USA has been successful in
penetrating the more mature, highly competitive United States glazed ceramic floor tile market.  Innovative
products, strong distribution, aggressive marketing and competitive pricing have all contributed
significantly to the Company’s market penetration in the United States.  See “–Markets” above.

In the glazed ceramic wall tile industry, the Company faces greater competitive obstacles, due
primarily to the relative simplicity of the small format wall tile and the long-term dominance of a handful
of domestic producers.  The Company continues to work to improve its competitive position in this market
by concentrating on the production and marketing of interesting and innovative trim pieces that will better
distinguish its products from those of competitors.

The Production of Glazed Ceramic Tile

The ceramic tile production process begins with the excavation of clays to be used in the
manufacturing process and the transportation of the clays to the production facilities from mine sites.  Upon
arrival at the facilities, clay is kept in open storage bins while awaiting processing.  Depending on the type
of tile being produced, any number from two to more than six different types and colors of clays may be
blended together.

The selected clays and water are mixed and pumped into large, rotating cylindrical mills, where
the grinding action of thousands of baseball-sized crushing balls made of high density alumina pulverizes
pebbles, granules and clumps of clay into a uniform substrate.  The resultant mixture, or “body slip,” is then
pumped out of the ball mills and pumped into holding tanks, called slip tanks, before being pumped into
a silo-like structure, called a spray-dryer, where the body slip is subjected to blown hot air to evaporate the
water.  The result, after each evaporating cycle of the spray-dryer, is a very fine, uniform, powder-like
substance similar to exceedingly fine sand.  This material is carried by conveyor belt to a separate holding
bin.  The production method to this point is batched, so that loading unit batches and hoses carry computer
programmed amounts of clay and water from slip tanks to the spray drier, to powder storage bins and,
finally, to tile presses in a continuous, automated process adjusted to production targets and timing.
Spray-drying, for example, can be calibrated to adjust for red-bodied tile or white-bodied tile.

The powder is then fed into molds within a hydraulic press, one press for each production line,
where the powder is molded into the selected geometric shape and size for the tile being produced and is
subjected to extreme pressures, producing a molded ceramic tile.  These presses can produce in excess of
10,000 square feet of tile per production line per eight-hour shift during an ordinary production shift.  The
efficiency of the pressing phase is critical to the production process to reduce the presence of gaseous
materials which could weaken the tile body.

At this point the tile, which is hard but brittle, is subject to an initial drying stage, and is fed
automatically along a conveyor belt where glazes and designs are administered through automated washing,
brushing and silk-screening equipment.  The glazed tile is then fed into a long, high temperature kiln,
accommodating four or more lines of tile, depending on the size of the tile being fired and the type of kiln
being used, with ceramic rollers inside the kiln moving the tile along the approximately 260 foot-length
of the kiln, depending on the type of kiln used.  The single-firing lasts from 45 to 50 minutes from the time
the tile is delivered to the kiln door, via continuous feeding conveyor belts, until the tile emerges, fired, at
the opposite end.  The internal temperature rises steadily from the loading aperture through the length of
the enclosed kiln to temperatures as high as 2200° Fahrenheit.  The tile that emerges is extremely hard,
durable and impact resistant.

Finally, the fired tile, automatically stacked in multiple layer loading trays, is moved by robotic
machinery through the quality control inspection points where the tile is magnetically scanned for defects
and visually examined for sorting according to variations in the color of the glaze, chipping or other surface
defects.  Once identified as first, or second quality, the tile is sorted mechanically and then stacked, boxed,
sealed and labeled for shipping, all by specialized equipment.  The major difference between first quality
and second quality tile is in the uniformity of the shading of the products, with some minor surface defects
being permitted for second quality tile.

The Company believes that its manufacturing facilities and state of the art technology have resulted
in increased efficiencies and high quality products at relatively lower costs as compared to older
technology.  The adoption of the Italian developed monocottura technology using single-firing of ceramic
tile through rapid-cycle kilns revolutionized the production of ceramic tile, resulting in dramatic reductions
in the firing times associated with older processes.  In addition, the single-fired process permits a better
integration with other production cycles required for the manufacture of glazed ceramic tile, such as
pressing and glazing, allowing for increased automation and partial robotization.  High quality, extremely
durable ceramic tile, measured by low porosity, low absorption and impact resistance, is economically
achieved by the single-fired process.

The Research and Development Center

Adjacent to the ICSA Plant in Chihuahua, the Company has a specialized Research and
Development Center which serves several purposes.  The Company is continuously engaged in research
and development of harder and more wear-resistant tile, improved combinations of clays, scratch and chip
resistant glazes and enamels, and different combinations of colors, designs and surface textures for glazes.
In addition, the Research and Development Center has instruments to measure specifications of tile and
glaze and to quality control-test production line tile.  The facility includes all the machinery and equipment
necessary to replicate the entire full scale production process, to several different scales, in order to test and
improve production techniques and to subject newly developed products to normal production conditions.
It is particularly well-suited for turning out runs of glazed ceramic floor or wall tile to order.  The Research
and Development Center also enables the Company to develop new products quickly and to be timely in
its response to changes in the market for ceramic tile.

Raw Materials and Supplies

The Company is not dependent on any one outside supplier for any of the raw materials used in
its business, although it may from time to time purchase supplies (for example, alumina grinding balls)
from only one supplier because of price and/or quality considerations.

Generally, making ceramic floor tile requires three types of high quality clay–including green body,
red body and grey body clays.  Substantially all supplies of clay for floor tile production used in the Mexico
operations are obtained from the Company’s own mines, which are estimated to have sufficient reserves
to supply the Company’s projected needs for manufacture of ceramic floor tile for at least the next 60 years.
These mines are located approximately 20 miles from the Company’s production facilities in Chihuahua.

Depending on the specific type of wall tile being manufactured, that process may involve the
mixing of four to six different types of white body clay.  The Company currently owns sources of two types
of the white body clays which are used in the production of the large format wall tile at the Azulejos Plant
as well as in the production of small format wall tile at the Garland Plant.  Although the Company is
investigating the possibility of purchasing sources of other white body clays in both the United States and
Mexico, it currently is purchasing supplies of these other white body clays from unrelated parties in Mexico
and the United States, and has not had nor does it anticipate any difficulties in obtaining and maintaining
supplies of these clays.

Although the Company believes that most of its competitors have access to sufficient sources of
raw materials, the Company believes that its clays are of generally higher quality than that of most
competitors, resulting in the production of a clay body with lower porosity and water absorption than
bodies formed from many other clays.  Further, with the exception of the white clays needed for wall tile
production, the Company owns the full range of clays needed for all types and grades of ceramic tile
produced by it.

Clay in Mexico is delivered to the production facilities by truck, although some white clays are
imported from the United States and delivered by train.  In the United States, clay for production at the
Garland Plant is transported by train to a location in the Dallas area, where it is loaded in trucks and
delivered to the Garland Plant.

Other raw materials, such as enamels, coloring agents, corundum, oxides, various chemicals and
reagents and packaging material are commercially available from Mexican, European or United States
suppliers.  Management believes that adequate quantities of raw materials and supplies required for the
manufacture of ceramic tile are and will continue to be readily available from suppliers in the United States,
Europe and Mexico.

Product Lines

The Company manufactures and sells glazed ceramic and porcelain floor and wall tile, as well as
grouts and adhesives for applying these products.  Additionally, under the Kohler Agreement and the
American Standard Agreement, in Mexico the Company markets various sanitary fixtures, faucets,
bathroom accessories and related products and hardware in its franchise stores.  Kohler products are
directed at the high-end market while the American Standard products are geared more towards the mid-
and low-end markets.  The Company believes that providing a broad product mix is important, particularly
in Mexico where customers traditionally expect it and where some of the Company’s significant
competitors maintain full product lines.  See “–Strategy” above.

The Company’s products are manufactured according to various use specifications and are
marketed accordingly.  Residential Light grade tile covers ceramic tile intended to be used in applications
where the likely incidence of wear and corrosion is low, such as in bathrooms and kitchens, while
Commercial Moderate and Commercial Heavy grade tile is used for different applications in restaurants,
shopping malls and public buildings and is sold for commercial (including exterior) application where wear
and corrosive conditions are likely to be higher.  In between the Residential Light and Commercial
Moderate grades, different types of tile range from Residential Moderate and Heavy to Commercial Light.

The Company currently features over 100 different product lines.  In Mexico, the Company
markets all of its ceramic tile under the “Interceramic” name, with different styles, types, colors and grades
being given distinct style names.  The Company also markets sanitary and bathroom fixtures, faucets and
accessories manufactured by American Standard exclusively in Mexico under the Interceramic brand name
and similar products manufactured by Kohler under the Kohler name.  In the United States, the Company
markets its manufactured products under the Interceramic name only, but American Olean and Dal-Tile
products produced by RISA are sold in the United States by Dal-Tile.  Particularly in Mexico, the
Company’s product mix covers most market segments, encompassing all segments under the
“Interceramic” brand with different product names, depending on the type of product and the market
segment to which it is directed. This provides distributors with a complete line of ceramic tile and related
products, strengthening the exclusive distributorship concept.  Regardless of the segment, however, the
Company’s products are all generally priced higher than competitors’ products and are distinguished by
higher quality and design.  All of the Company’s products meet or exceed American National Standards
Institute minimum specifications for the various tolerances of ceramic tile, such as water absorption,
abrasive hardness, breaking strength, thermal shock, scratch hardness of glaze, frost resistance, warpage
and bonding strength.

Each product line is offered in a variety of colors and sizes, and many products are offered in
square as well as smaller rectangular shapes for contrast.  Each product line features a characteristic surface
glaze, depending on the intended use as well as on the style and appearance sought to be achieved.  Glazes
range from shiny, smooth and vitreous, with uniformity of color, to smooth, matted finishes with the color
variations characteristic of marble or porcelain, to surfaces with a grainy texture and mottled appearance.
Some of the Company’s more popular products have rugged, multi-colored, -shaded or -tinted surfaces with
the appearance of hewn stone.

In 1999, the Company launched new products using a “rectified” technique which produces
ceramic tile with marble- and granite-like patterns and textures.  These relatively expensive products have
been very well received in the markets, particularly in Mexico.  During 2000 the Company launched a
coordinated series of floor and wall tile, manufactured in Mexico and in Garland, which provides wall and
floor tile in larger formats and with similar features giving the appearance of natural stone.  This series is
complemented by trim wall and floor pieces produced to match with the exact same design, making perfect
match coordinates.   Also in 2000, the Company introduced a new line of marbled tile with fine design and
high definition, resulting in a look practically like natural marble.

In 2002, the Company began sales of porcelain tile products manufactured in its Mexican facilities,
initially in the United States but by the end of the year the Company was selling these products in Mexico
as well.  A very strong, innovative and attractive product, porcelain tile currently represents the pinnacle
of the glazed ceramic tile offerings in the market.  By moving into production of these upscale products
the Company has effectively responded to a competitive threat led by primarily European manufacturers.

Interceramic USA also imports, primarily from Spain, Italy and Brazil, and purchases from other
United States manufacturers, other ceramic tile products such as glazed ceramic wall tile in a variety of
styles, shapes, colors and glazes, as well as glazed and unglazed ceramic floor tile, stone and marble
products.  Interceramic USA also distributes marble and granite floor tile produced by third-party
manufacturers, and sells through the ITS network a significant amount of products produced by third
parties.  For example, ITS’s sales for 2003 of US $92.4 million were comprised of 39.20 percent ceramic
tile manufactured by the Company with the balance consisting of products manufactured by other foreign
and domestic companies.

Beginning in 2002, the Company commenced imports of strategic products into both the Mexican
and United States markets, primarily from Italy and Spain, in its “private label” program in order to ensure
sufficient quantities of these lower-end products in its customer offerings as well as to allow the Company
to dedicate its own production capacity to the higher-end products.

Distribution and Marketing

Distribution

The Company believes that its continued strength is highly dependent upon its strong and modern
distribution channel throughout North America that emphasizes its commitment to the final consumer.  In
Mexico, the Company effects sales solely through its system of independent franchise distributors and its
Company owned stores in the Mexico City, Guadalajara, Chihuahua and Monterrey areas.  As of December
31, 2003, this network consisted of 28 distributors with 200 outlets located throughout Mexico, each
prominently displaying the Interceramic name.  Due in part to the prominence of the franchise stores and
a series of eye-catching advertising campaigns, market presence is strong throughout all areas of Mexico.
The Company is continually monitoring its franchise network, dropping poor performing distributors or
store locations and replacing or substituting as necessary.  In late 1997, the Company terminated its
relationship with its then franchisee in Mexico City, resulting in the loss of 31 points of sale.  However,
the Company aggressively pursued a strategy to establish a stronger presence in the Mexican capitol city
through the opening of flagship, Company owned stores.  The first store opened early in 1998, and by the
end of 2003, the Company had 21 stores operating in Mexico City.  With the acquisition and expansion of
the Toluca franchise, the Company has five more stores to add to its Mexico City area presence.

Early in 1999, the Company acquired the business of its franchisee in the Guadalajara, Mexico area
through a negotiated transaction under which the Company’s Occidente subsidiary took possession of the
eight locations in Guadalajara and substantially all of the assets and inventory used at those locations.  At
the end of 2003, the Company had 13 stores in the area.  Three more Guadalajara-area stores were added
to this total in early 2002 with the purchase of the Morelia franchise.  Since the acquisition, the Company
has added two additional stores in the Morelia area.

The Company believes that its relationship with its franchise distributors is one of the most
important factors in its success in the Mexican markets.  Franchisees are selected very carefully, and are
required to carry and market solely products manufactured or otherwise authorized for sale by the
Company, offering consumers a complete package that includes ceramic floor and wall tile, grouts and
adhesives, sanitary fixtures, faucets, kitchen and bathroom accessories and related products.  Additionally,
franchisees must follow guidelines regarding store layout and exhibition techniques, provision of qualified
customer services, pricing and business standards, designed to insure the perception of the Company and
its products in the marketplace as first class in both quality and service.  As part of its commitment to the
franchise system, the Company has implemented a strong training and operational support program in order
to help accelerate and solidify the development of the franchises.  In recent years, the Company has also
assisted franchisees with  store remodeling and construction in order to facilitate the prominent presence
of the “Interceramic” stores in their respective communities. The Company believes that the franchise
system has proven successful, resulting in greater aggregate levels of sales and allowing the Company to
maintain market share despite the poor economic conditions in Mexico in the middle years of the prior
decade, and providing the Company with a strong base throughout Mexico during the recent years of
modest recovery.

Sales to the United States and Canada are effected through Interceramic USA, which sells to a
network of 79 independent distributors with a combined 180 locations, as well as to the 19 ITS locations.
The Company has found that sales through ITS stores of Company products are typically much greater than
through independent distributors, and the Company intends to continue the development of the ITS network
in the United States, particularly in areas where existing distributors are not meeting the market potential.
Additionally, Dal-Tile markets floor tile produced at the RISA Plant through its distribution network in the
United States.  Interceramic USA distributes substantially all Company products sold throughout the United
States from its facilities in the Dallas, Texas area.  Interceramic USA’s facilities in Dallas are
headquartered in the Garland Plant, and also include separately leased distribution warehouses.

Marketing

Advertising and marketing are important to the Company’s business strategies, and the Company
expends significant amounts annually in respect of advertising and marketing.  Because the Mexican and
International markets vary in several material respects, the Company takes a different approach in its
marketing efforts in the two markets.

In Mexico, the Company promotes brand-name recognition and sales by advertising to the general
public in the print and radio media, and has periodically conducted aggressive, nation-wide print and
television media advertising campaigns, designed to heighten name recognition and product visibility.
Advertising strategy has shifted more to the point of sale, with distinctive, high-profile stores and vignette
displays and other materials promoting the Company and its products in the exclusive franchise stores.
This involves working closely with its franchise network in creating product display strategies, by
arranging product seminars to educate distributors as to product lines and new product introductions as well
as by obtaining marketing feedback from distributors as to the success of particular product introductions
and market strategies.  This careful branding strategy has been demonstrably successful.  Interceramic has
for several years conducted an annual survey among female heads of household in Mexico, which has
demonstrated a marked recognition of Company products.  In the 2003 survey, and consistent with recent
years, approximately 52 percent of respondents mentioned Interceramic when asked to recite unaided
brands of ceramic tile–almost four times the mentions of any other tile producer, and 46 percent of all
respondents mentioned the “Interceramic” brand first.

In the United States, marketing and advertising are effected through trade shows and magazines,
showroom displays, catalogues and point of sale displays.  Inasmuch as the United States market is
dominated by company-controlled outlets of the major domestic manufacturers and large distributors of
floor coverings generally, Interceramic USA has adopted an allied products marketing strategy, in which
it promotes sales of a variety of Italian, Spanish and Mexican tile in distinctive styles and colors in order
to increase demand for products similar to those produced by the Company.  By holding itself out as a
specialty distributor these types of products, Interceramic USA aims to create additional demand for tile
of Company manufacture.  Interceramic USA also services its distributors’ needs by ordering directly from
Italian and Spanish producers and arranging for payment, customs clearance and freight forwarding.
Interceramic USA also engages in efforts to educate its distributors and their employees, conducting
seminars in sales skills, the ceramic tile industry in general and the Interceramic product lines in particular,
as well as holding ceramic tile installation and other clinics designed to make the salesmen more effective
advocates of the Company’s products.

Proprietary Tradenames and Trademarks

The Company’s products are marketed in Mexico and the United States solely under the
“Interceramic” trade name, other than the RISA production sold to Dal-Tile for sale under various Dal-Tile
product names.  Trademarked names are used in the sale of a wide range of the Company’s products,
including ceramic floor tile, ceramic wall tile, construction materials, glues, epoxy, adhesives, grouts,
additives, sealants and cleansers.  In Mexico, the Company’s use of the slogan “Simply, the Best” in
connection with its glazed ceramic tile was important in gaining distributor and customer acceptance and
continues today to be the byword of the organization.  In the United States, the Company makes extensive
use of its slogans “The Best the World has to Offer” and “Imagine the Possibilities.”  With respect to the
American Standard and Kohler products marketed through the franchises in Mexico, the Company has
obtained the right to use the related tradenames and trademarks.  The Company has the license to use or
owns all the trademarks and tradenames necessary for its business.

The Dal-Tile Agreement

In October 1990, the Company and RISA, at that time the Company’s wholly-owned subsidiary,
entered into a Master Investment and Cooperation Agreement (the “Dal-Tile Agreement”) with Armstrong
and one of its affiliates, pursuant to which Armstrong acquired 49.99 percent of RISA’s capital stock in
consideration for certain payments by Armstrong.  In connection with the acquisition, the Company
transferred certain real property and equipment, which together constitute the RISA Plant, to RISA.  In a
transaction which was consummated in December of 1995, Dal-Tile acquired Armstrong’s American Olean
ceramic tile business and assumed all of Armstrong’s rights and obligations under this relationship.

Pursuant to a supply arrangement, RISA is obligated to make available up to 50 percent of the
ceramic tile production of the RISA Plant to Dal-Tile, all in first-class product, in accordance with an
annual production program to be established by the parties and reviewed periodically.  Dal-Tile has the
option to cause production pursuant to this arrangement to be under private label and to request new
product offerings.  Product pricing is generally based on RISA’s standard export market quotes and terms
of sale.  The following table summarizes historical RISA sales to Dal-Tile:



RISA Sales to Dal-Tile



Year
Million Square Feet
Percentage of Production1996
25.4
39.21997
21.5
33.21998
24.2
37.21999
14.7
23.32000
13.8
20.92001
16.0
22.92002
24.3
37.12003
19.2
25.4


The increasing share of RISA Plant production purchased by Dal-Tile during the 1996 to 1998 time
frame adversely impacted the Company’s ability to supply RISA product to its franchise stores in Mexico
and for resale in the United States by Interceramic USA.  Further, Dal-Tile has emphasized lower end
products in its RISA orders, which has not only resulted in generally lower margins from RISA production
but has also run counter to the Company’s efforts to concentrate production on high-end products.  If Dal-Tile were to increase its purchases of RISA production to levels approaching its contractual entitlement,
the Company’s efforts to increase market share in both Mexico and the United States could be impaired.

In connection with the Dal-Tile Agreement, certain additional agreements were entered into
relating to, among other things (i) supplies of clay at favored prices to RISA to satisfy its production needs;
(ii) furnishing the Company’s production know-how and technical, production and planning support to
RISA and licensing the Company’s trademarks and tradenames to RISA; and (iii) certain events pursuant
to which Dal-Tile or the Company, as the case may be, would have certain rights of first refusal,
preemptive rights and call rights in certain circumstances including upon certain changes in or dispositions
of Dal-Tile’s or the Company’s ownership of the capital stock of RISA.  The Company terminated the clay
supply agreement during 1998, although it continues to supply clay to RISA at market rates.

The Custom Agreement

In December of 1993, the Company entered into a series of agreements with Custom (collectively,
the “Custom Agreement”), pursuant to which (i) Custom has acquired 49 percent of ABISA’s capital stock;
(ii) the Company agreed to provide certain administrative services to ABISA and to share the cost, by
proportional reimbursement from ABISA, of these and other common expenses; (iii) Custom gave ABISA
the exclusive right to distribute Custom products in Mexico; (iv) Custom agreed not to compete with
ABISA in Mexico; and (v) Custom agreed to furnish certain materials to ABISA at cost and to provide
certain technical assistance.

The Company entered into the Custom Agreement primarily to acquire the technical assistance
necessary to enable it to produce quality grouts and adhesives in greater quantities, and the relationship
with Custom has proven very beneficial to the Company.

The Kohler Agreement

In addition to addressing the terms of its investment in Interceramic, the Kohler Agreement sets
forth the basic terms of the distribution relationship pursuant to which Interceramic distributes Kohler
products, primarily including sinks, bathtubs, sanitary fixtures, faucets and related accessories, in Mexico.
These products are directed almost exclusively at the high-end of the market.  Prior to entering into the
Kohler Agreement, Interceramic had terminated its existing agreement with American Standard–however,
a new agreement was entered into with American Standard in October of 2000 under which Interceramic
is selling mid- and low-end products in Mexico.  See “–The American Standard Agreement” below.  Under
the terms of the Kohler Agreement, Interceramic and Kohler annually set sales objectives for Kohler
products in Mexico which are subject to monthly review and adjustment.  The distribution relationship is
subject to termination by either Kohler or Interceramic for any reason upon certain prior notice.

Kohler has also entered into agreements with the Controlling Group providing, among other things
(i) an agreement by the Controlling Group that they would use their best efforts to cause a Kohler
representative to be appointed to the Board; (ii) Kohler with a right of first refusal to purchase Interceramic
stock owned by the Controlling Group in the event of an unsolicited offer to acquire from the Controlling
Group members five percent or more of the equity securities of Interceramic; (iii) Kohler with a “tag-along” right if the members of the Controlling Group were to enter into any transaction which would result
in the transfer of 50 percent or more of the Common Units to a third party; and (iv) an agreement by the
Almeida Family to buy back from Kohler the Common Units purchased by it in the offering in the event
that Interceramic terminates the distribution agreement contained in the Kohler Agreement.

The Company entered into the Kohler Agreement for a number of reasons in addition to facilitating
the investment of Kohler in Interceramic’s equity securities.  The Company believes that Kohler products
represent the best that the industry has to offer, and the Company’s affiliation with Kohler fits the
Company’s image as an industry leader in its own right.  Further, the ability to distribute these first-class
products in the Company’s franchise stores nationwide enhances the options available to the consumer in
Mexico, who now has a wide range of sanitary fixtures and plumbing products to choose from at all points
on the market in the Interceramic franchise store.

The American Standard Agreement

The Company has distributed American Standard products throughout Mexico for a number of
years under an exclusive distribution agreement.  Prior to entering into the Kohler Agreement in late 2000,
the Company terminated this relationship, and entered into a new agreement with American Standard.
Under the American Standard Agreement, American Standard granted the Company the right to distribute
through its network of franchise distributors certain American Standard products throughout Mexico.
These products, aimed at the middle and lower end markets, are made by American Standard in Mexico
and carry the “Interceramic” brand name.  The Company granted American Standard the right to use the
Interceramic name for the limited purpose of sales of these products to the Company and its franchisees
in Mexico.  Under the American Standard Agreement, certain biannual sales targets are established for the
various products.  The American Standard Agreement has a stated five year term, but it subject to certain
early termination provisions, including 90 days prior notice at the option of either party.

The Company entered into the American Standard Agreement for several reasons, including (i) the
American Standard products covered by the agreement, manufactured in Mexico, are priced competitively;
(ii) the products fit the mid- and low-end niche of the market which the Kohler products generally do not;
(iii) American Standard agreed to manufacture the products using the Interceramic trade name; and (iv)
the Company’s belief that American Standard would be a reliable source of uniform products that can be
effectively marketed in conjunction with the Company’s own products.

C.  Organizational Structure

Interceramic, the reporting company, is not only an operating company, but a holding company
as well.  The following chart describes Interceramic’s subsidiaries:

Name of Company
Jurisdiction of Organization
InterestInterceramic Holding Company, Inc.*
Nevada
100.00%Adhesivos y Boquillas Interceramic, S. de R.L. de C.V.
Mexico
51.00%Interceramic Trading Company
Texas
100.00%Recubrimientos Interceramic, S.A. de C.V.
Mexico
50.01%Materiales en Proceso, S.A. de C.V.
Mexico
100.00%Distribución Interceramic, S.A. de C.V.
Mexico
100.00%Intercabados del Occidente, S.A. de C.V.
Mexico
100.00%Interceramic de Occidente, S.A. de C.V.
Mexico
100.00%Operadora Interceramic de México, S.A. de C.V.
Mexico
100.00%Holding de Franquicias Interceramic, S.A. de C.V.
Mexico
100.00%Servicios Administrativos Interceramic, S.A. de C.V.
Mexico
100.00%Intercabados del Centro, S.A. de C.V.
Mexico
100.00%


*    Interceramic Holding Company, Inc. (“Interceramic Holding”) was organized in 2003 for the sole purpose of
owning all of the issued and outstanding capital stock of Interceramic USA.

D.  Property, Plants and Equipment

Properties

The Company operates four glazed ceramic floor and wall tile plants and two grout and adhesive
production facilities.  All of the Company’s production facilities are operating at 100 percent capacity, and
have been for some time.  See “–B. Business Overview–Production Capacity” above.  The Company also
leases a number of sales locations in Mexico and the United States, as well as several warehouse locations.
All of the Company’s properties in the United States are leased, while in Mexico the Company owns many
of its facilities and leases a number of others.

The following table describes the material properties currently owned or leased by the Company:



Schedule of PropertiesProperty
Size (1)
Location
UsageICSA Plant
960,196
Chihuahua, Mexico
Ceramic Floor Tile Manufacture; R&D
Center; WarehousesRISA Plant
2,567,895
Chihuahua, Mexico
Ceramic Floor Tile ManufactureFirst ABISA Plant
and Central
Warehouse
1,389,826
Chihuahua, Mexico
Manufacture of Grouts and AdhesivesSecond ABISA
Plant
292,027
Huichapan, Mexico
Manufacture of Grouts and AdhesivesGarland Plant
250,000
Garland, Texas
Ceramic Wall Tile ManufactureGarland
Warehouse
270,000
Garland, Texas
Product WarehouseCerro Grande
Mines
71,718,863
Chihuahua, Mexico
Clay MinesAzulejos Plant
2,533,290
Chihuahua, Mexico
Ceramic Wall Tile Manufacture




(1)         Underlying real estate, expressed in square feet.

The ICSA Plant, located on several combined tracts of land located in the Mexican city of
Chihuahua and owned by Interceramic, was subject at December 31, 2003 to a first mortgage lien in favor
of Scotiabank Inverlat, S.A., as Administrative Agent (“Scotia”), securing at December 31, 2003 a principal
loan balance of US $85.0 million under the secured term loan facility (the “Term Loan”) that the Company
consummated in July 2002.  See “Item 5–Operating and Financial Review and Prospects–B. Liquidity and
Capital Resources” below.

The RISA Plant is located on a tract of land, also in Chihuahua, of 2,567,895 square feet, or 59
acres, and is owned by RISA.  The real estate is divided into two parcels, “Lot A” of 743,477 square feet
is subject to a first mortgage lien in favor of Banco Nacional de México, S.A.(“Banamex”) securing a
principal loan balance of US $6.0 million at December 31, 2003.  The current annual production capacity
of the RISA Plant is 66.6 million square feet of glazed ceramic floor tile.

The Azulejos Plant, located adjacent to the RISA Plant, contains 2,533,290 square feet, or
approximately 58 acres, and is owned by Interceramic, subject to a first mortgage lien in favor of Scotia
securing the Term Loan that is also secured by the ICSA Plant, as discussed above.  Production capacity
of the Azulejos Plant is 39.6 million square feet of glazed ceramic wall tile annually.

The First ABISA Plant and the Company’s central warehouse facility are located adjacent to the
ICSA Plant on a parcel of land containing 1,389,826 square feet, which is owned by the Company, and as
of December 31, 2003 is subject to a first mortgage lien in favor of Scotia securing the Term Loan that is
also secured by the ICSA Plant and the Azulejos Plant, as discussed above. The ABISA Plant is used for
the manufacture of grouts, mortars and adhesives for ceramic tile installation.

The Second ABISA Plant is located in the central Mexican town of Huichapan, Hidalgo.  The
Second ABISA Plant is also used for the manufacture of grouts, mortars and adhesives for ceramic tile
installation.

Most of the clay mines owned and operated by the Company are located near the community of
Aldama, Chihuahua.  Other Company owned mines are located near the Chihuahua communities of
Guerrero and Jimenez.  At December 31, 2003 the mining properties were subject a mortgage lien in favor
of Scotia to secure the Term Loan.  These properties cover an aggregate of 75,593,903 square feet, or 1,735
acres.

Interceramic USA has pursued a strategy of leasing all of its manufacturing, warehousing and sales
locations.  Accordingly, Interceramic USA  leases its properties pursuant more than 20 different real estate
leases.  Most of the properties occupied by Interceramic USA are commercial warehouse and retail
facilities leased for terms generally not in excess of ten years.  Although Interceramic USA owns
substantially all of its production machinery and operating assets, the land and building constituting the
Garland Plant is being leased by Interceramic USA from Catellus Development Corporation (“Catellus”)
under a build to suit industrial lease (the “Garland Lease”) entered into in 1993.  The Garland Lease has
an initial term of 15 years, with extensions at the option of Interceramic USA for up to 20 additional years.
Annual base rent under the Garland Lease currently is approximately US $1.0 million, and increases by
approximately US $60,000 in the 14th years of the initial term.  Adjacent to the Garland Plant is a 270,000
square foot facility that Interceramic uses for warehousing and some corporate functions.  This property
is also leased by Interceramic USA from Catellus under a build to suit lease (the “Garland Warehouse
Lease”).  In connection with the execution of the Garland Warehouse Lease, the term of the Garland Lease
was extended by agreement to coincide with the 15 year initial term of the Garland Warehouse Lease.  The
Garland Warehouse Lease is substantially similar to the Garland Lease, providing for rental payments
based upon a yield factor applied against the cost of the facility.  Annual base rent under the Garland
Warehouse Lease is currently US $896,472 and increases to US $941,460 in 2008.

The annual aggregate lease payments made by Interceramic USA during 2003 for its properties in
the United States was US $5.0 million.

Environmental Issues

The Company’s operations in Mexico are subject to various federal, state and local laws and
regulations regarding a number of environmental concerns, including control of non-toxic materials and
residues, emission of toxic gases and particles, usage and discharge of water, emissions of dust and land
usage.  The Company has obtained and maintained all permits required by law and has conducted its
operations in conformity with applicable laws and regulations.

The Garland Plant operates under a permit from the Texas Natural Resources Conservation
Commission which regulates the content and quantity of emissions from the facility under Texas law as
well as by designation from the United States Environmental Protection Agency.  The permit was obtained
in the ordinary course in connection with the development of the facility.  Emissions are subject to periodic
monitoring and spot checking, and there have been no compliance problems since commencement of
operations.  To the Company’s knowledge, there are no environmental issues effecting the use or
enjoyment of any of its other leased properties and assets in the United States.

Expansion Plans

After a number of years with no significant capacity expansion, in March of 2004 Interceramic
completed an offering of equity securities that provided it with substantially all the funds necessary to
construct a new manufacturing facility.  Groundbreaking on the New Plant, also to be located in the city
of Chihuahua, occurred in May of 2004 and the facility is expected to be in production during the second
quarter of 2005.  The cost of the New Plant is estimated to be approximately US $25.0 million and, upon
completion, the facility will increase the Company’s production capacity by about 25 percent.

ITEM 5.           Operating and Financial Review and Prospects

A.  Operating Results

Overview

The Company is engaged in the manufacture and distribution of high-quality glazed ceramic floor
and wall tile for residential and commercial uses, primarily in Mexico and the United States.  In addition,
the Company imports ceramic floor and wall tile, primarily from Italian and Spanish producers, for
distribution and sale in the United States and Mexico.  In Mexico, the Company manufactures and sells
grouts and adhesives and sells bathroom and kitchen fixtures to complement its ceramic tile offerings.

After several years of its production facilities running at full capacity, the Company has been
pursuing a basic strategy in both Mexico and the United States to increase its gross margins by focusing
its product mix on the higher end segments of the market and gaining market share in these segments.  The
Company’s strategy in Mexico is to de-emphasize the distinctions between commodity and other tile
products, and instead focus on a broad “Interceramic” product mix at its franchise stores to meet consumer
demand for all glazed ceramic tile products.  The Company’s fundamental strategy in the United States is
to increase market share in a climate of significant growth in ceramic tile consumption in the United States.

Over the past couple of years, the Company has purchased ceramic tile products from third party
producers under “private label” programs in order to meet consumer demand for all kinds of tile products.
Most of these third party purchases are of lower to middle end products, enabling the Company to
concentrate its own production capacity on higher margin, high-quality products.  The Company has started
construction on a new tile production facility located in Chihuahua, Mexico, which is expected to be in
production in the second quarter of 2005.  This new facility will increase the Company’s total capacity by
almost 25 percent.

The Company’s operations in 2003 were influenced by the general global economic down turn,
lower pricing pressures and a major slip in the value of the Peso against the European and United States
currencies–the latter resulting in a 20 percent devaluation from March 2002 to March 2003.  In response,
the Company focused its efforts on maintaining product sales levels and pricing, and improving operating
efficiencies.  Results of these efforts were generally positive, with the year ending up more or less on par
with results in 2002.  Consolidated sales of Ps 3,424.9 million for the year represented an increase of 4.82
percent compared to 2002 sales of Ps 3,267.4 million.  Sales in Mexico for 2003 were up 4.27 percent from
2002 at Ps 1,920.5 million.  International Sales for 2003 were Ps 1,504.4 million, up 5.54 percent from Ps
1,425.4 million in 2002.  Slightly higher cost of sales and higher selling and administrative expenses
depressed operating income in 2003, decreasing by 26.08 percent to Ps 229.0 million in 2003 compared
to Ps 309.8 million in 2003.

Certain Financial Information

The following discussion should be read in conjunction with the Financial Statements.  The
Financial Statements have been prepared in accordance with Mexican GAAP, which differs in certain
significant respects from US GAAP.  Note 13 to the Financial Statements provides a description of the
principal differences between Mexican GAAP and US GAAP as they relate to the Company, and a
reconciliation to US GAAP of net income and total shareholders’ equity.  In certain parts of the following
discussion, reference is made to Peso amounts translated into “nominal” Dollars.    Unlike the convenience
translations contained in the Financial Statements, which convert Peso amounts into Dollars based upon
the Interbank Rate at December 31, 2003, translations into nominal Dollars are made at the end of each
month during the period, using the Interbank Rate at the end of each applicable month, and adding the
aggregate of such translated amounts for the entire period.  Translations of results for prior periods in
nominal Dollars are not adjusted for subsequent changes in the exchange rate.

US GAAP Reconciliation.

During the years ended December 31, 2003 and 2002, the Company had net income under US
GAAP of Ps 209.6 million and Ps 63.8 million, respectively.  Compared to Mexican GAAP, net income
under US GAAP was 550.6 percent greater in 2003 but 41.80 percent lower  in 2002.

There are several differences between Mexican GAAP and US GAAP that significantly affect the
Company’s net income and stockholders’ equity, including in particular how the carrying value of plant,
property and equipment is restated to reflect effects of inflation.  Under Mexican GAAP, the Company
restates its fixed assets of non-Mexican origin based on the rate of inflation in the country of origin and the
prevailing exchange rate at the balance sheet date, while under US GAAP, the Company uses the Mexican
inflation rate.  The primary differences between Mexican GAAP and US GAAP that affected net income
in 2003 and 2002  relate to interest on assets under construction, and deferred income tax and employee
profit sharing. The differences in stockholders’ equity under Mexican GAAP and US GAAP reflect these
differences as well. For a discussion of the principal differences between Mexican GAAP and US GAAP,
see Note 13 to the Financial Statements.

Use of Estimates in Certain Accounting Policies.

In preparing the Financial Statements, the Company makes estimates concerning a variety of
matters.  Some of these matters are highly uncertain, and the formation of estimates involves the
Company’s best judgments based on the information available to the Company.  In the discussion below,
the Company has identified its estimation of the useful lives of property, plan and equipment as the primary
matter for which the financial presentation would be materially affected if either (i) different estimates
could reasonably have been used or (ii) in the  future, changes might be made to the estimates in response
to circumstances about uncertain matters that are reasonably likely to occur.  There are many other areas
in which the Company uses estimated about uncertain matters, but the reasonably likely effect of a change
of the use of different estimates is not material to the financial presentation.

The Company estimates the useful lives of particular classes of property, plant and equipment in
order to determine the amount of depreciation expense to be recorded in each period.  Depreciation
expenses is a significant element of cost and expenses in the Financial Statements.  SeeNote 4 and Note
13 to the Financial Statements.

The estimates are based on historical experience with similar assets, anticipated technological
changes and other factors.  The Company reviews estimated useful lives each year to determine whether
they should be changed, and at times the estimated useful lives have been changed for particular classes
of assets. The estimated useful life of an asset class may be changed in response to technological changes,
changes in market or other developments.  The shortening of the useful life of an asset results in increased
depreciation expense.

Allowance for Doubtful Accounts

The Company determines its allowance for doubtful accounts based on an evaluation of the aging
of its receivables portfolio and on a qualitative analysis as well.  The amount of the allowance contemplates
the Company’s historical loss rate on receivables and the economic environment on which it operates.  In
Mexico part of the Company’s sales are realized to the Company’s franchise distribution network where
collection is very secure, and the other part of sales realized through Company-owned stores are mainly
realized in cash not giving rise to doubtful accounts.

In the United States operations allowance for doubtful accounts is based on a number of factors,
including an historical loss rate, experience, review of specific account balances and business and economic
conditions.

Reserve for Obsolete and Slow-Moving Inventories

This reserve is determined based on an evaluation of the Company’s inventories, an historical loss
rate and a number of qualitative factors such as aging, discontinued lines of products and slow moving
inventories.

Inflation

Although the annual rate of inflation in Mexico has trended strongly downwards since 1996,
Mexico experienced relatively high inflation in some of the periods covered by the Financial Statements.
The annual rates of inflation in Mexico, as measured by changes in the NCPI were 4.40 percent, 5.70
percent and 3.97 percent for the years 2001, 2002 and 2003, respectively.

The IMCP has issued Bulletin B-10, “Recognition of the Effects of Inflation on Financial
Information,” and Bulletin B-12, “Statement of Changes in Financial Position,” which outline the inflation
accounting methodology that is mandatory for all Mexican companies reporting under Mexican GAAP.
Bulletin B-10 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.  The presentation of financial information in constant Pesos is intended to recognize certain
effects of inflation on the financial statements and to permit comparisons between comparable periods in
comparable monetary units.  The result of this adjustment is that growth rates between periods are stated
in “real” terms, eliminating the general effects of inflation.  Except where otherwise indicated, financial
data for all periods in the Financial Statements and throughout this Annual Report have been restated in
constant Pesos with purchasing power as of December 31, 2003.  References in this Annual Report to “real”
amounts are to inflation-adjusted numbers and to “nominal” amounts are to unadjusted numbers.  Unless
otherwise specified, all growth rates in the following discussion are stated in real terms.

In accordance with Bulletin B-10, the Company is required to report, as a gain or loss on its net
monetary position, the effects of inflation on its monetary assets and liabilities.  This net amount, which
is reflected in the statement of income within the “Comprehensive Financing Cost” under the caption “Gain
on Net Monetary Position,” reflects the gain or loss arising from holding a net liability or asset monetary
position in an inflationary period because over time a monetary liability can be settled for units of less
purchasing power whereas a monetary asset decreases in value in real terms.  The Company’s operations
continually generate monetary assets (primarily in the form of cash, cash equivalents and accounts
receivable) while the Company’s trade and accounts payable and borrowings result in monetary liabilities.

Bulletin B-10 also requires that the Company restate nonmonetary liabilities using the NCPI and
restate the components of shareholders’ equity using the changes in the NCPI.  The fifth amendment to
Bulletin B-10 no longer permits restatement of machinery and equipment based on appraisals. Accordingly,
the Company’s imported machinery and equipment are restated on the basis of the devaluation of the Peso
against the currency of origin and applying a factor for inflation in the applicable foreign country.
Domestic machinery and equipment are restated based only on the NCPI.

Because the Company has significant operations in the United States, for the fiscal year which
commenced January 1, 1998 it was required to comply with IMCP Bulletin B-15, “Transactions in Foreign
Currency and Translation of Financial Statements of Foreign Operations.”  Bulletin B-15 requires the
application of a factor to the Financial Statements which reflects a weighing of the Company’s operations
in the United States and Mexico, and applying to each the rate of inflation in the country to which the
operations are attributable as well as the currency exchange rate of the currency applicable to the
operations.  In this respect, Bulletin B-15 is inconsistent with the requirements of Rule 3-20(e) of
Regulation S-X promulgated by the SEC with respect to filings under the 1933 Act and the 1934 Act, and
is treated as a reconciling item in the Financial Statements.  See Note 1(a) and Note 13 to the Financial
Statements.  As applied to the Company, the effect of Bulletin B-15 on the Financial Statements causes
certain results for prior years to be different in certain respects than reported previously.

Results of Operations

The following table sets forth selected results of operations data for the Company for each of the
years ended December 31, 2001, 2002 and 2003, as a percentage of net sales.



Year Ended December 31,2001

2002

2003Net sales

100.00%

100.00%

100.00%Cost of sales

(62.80)

(63.02)

(65.30)Gross profit

37.20

36.98

34.70Selling and administrative expenses:Selling expenses

(16.47)

(18.36)

(19.15)General and administrative expenses

(8.47)

(8.45)

(8.24)Research and development

(0.87)

(0.70)

(0.62)(25.81)

(27.51)

(28.01)Operating income

11.39

9.48

6.69Comprehensive cost of financing:Interest income

0.21

0.24

0.24Interest expense

(4.67)

(3.51)

(2.33)Exchange (loss) gain

1.66

(3.54)

(2.67)Net monetary effect

1.96

1.66

1.49(0.84)

(5.15)

(3.27)Other expenses, net

(1.64)

(0.41)

(0.25)Equity in results of associated companies

0.04

(0.01)

0.01Income before income tax and employee
profit sharing

8.91

3.91

3.18Income and asset tax

(0.57)

(0.64)

(0.62)Deferred income taxes

(1.00)

0.28

(0.75)Employee profit sharing

(0.12)

(0.12)

0.00Consolidated net income

7.22

3.43

1.82Minority net income

0.79

0.60

0.88Majority net  income

6.43

2.83

0.94


Net Sales

2003 v. 2002

Net sales increased 4.82 percent during 2003 to Ps 3,424.9 million from Ps 3,267.4 million in 2002.
Ceramic tile sales represented 80.55 percent of net sales in 2003 compared to 81.37 percent in 2002.
Measured in nominal Dollars, net sales increased by 2.14 percent to US $306.4 million from US $300.0
million in 2002.  Ceramic tile sales by volume of product sold increased in 2003 as well, to 306.4 million
square feet from 285.8 million square feet in 2002, an increase of 7.19 percent.  The increase in both value
and volume of sales is a result of the continued efforts of the Company to refurbish and modernize its
distribution network in both Mexico and the United States, offering the consumer a wide range and variety
of products, focused to meet all demands.

The Company’s volume sold in Mexico during 2003 increased by 17.54 percent over 2002, to 198.2
million square feet from 168.6 million square feet.  The net average selling price for the Company’s
ceramic tile products in Mexico for 2003 decreased by 7.79 percent to Ps 7.71 per square foot from the Ps
8.37 per square foot achieved in 2002.  Much of the decrease was from the introduction by the Company
of lower priced, imported products into the franchise network.

The Company experienced an increase in its average selling prices in the International markets by
14.03 percent in 2003 over 2002,and International Sales of Ps 1,504.4 million for 2003 registered an
increase of 5.54 percent over International Sales of Ps 1,425.4 million in 2002.  Volume sold in these
markets decreased by 7.70 percent to 108.1 million square feet in 2003 from 117.2 million square feet in
2002.  In these markets, the Company focused significant attention on the introduction of higher priced,
natural stone type products, sacrificing some of the volume of middle- to low-end products in the process
and obtaining a better product mix.

2002 v. 2001

Net sales increased 2.94 percent during 2002 to Ps 3,267.4 million from Ps 3,174.2 million in 2001.
Ceramic tile sales represented 81.37 percent of net sales in 2002 compared to 84.35 percent in 2001.
Measured in nominal Dollars, net sales increased by 4.15 percent to US $300.0 million from US $288.0
million in 2001.  Ceramic tile sales by volume of product sold increased in 2002, to 285.8 million square
feet from 282.9 square feet in 2001, an increase of 1.03 percent.

The Company’s volume sold in Mexico during 2002 decreased by 4.58 percent over 2001, to 168.6
million square feet from 176.7 million square feet.  Continuing a trend linked to the events of September
11, 2001, the net average selling price for the Company’s ceramic tile products in Mexico for 2002
decreased by 1.69 percent to Ps 8.62 per square foot from the Ps 8.77 per square foot achieved in 2001.

While the Company experienced a decrease in its average selling prices in the International markets
by 14.59 percent in 2002 over 2001, International Sales of Ps 1,425.4 million for 2002 registered an
important increase of 10.15 percent over International Sales of Ps 1,294.1 million in 2001.  Volume sold
in this markets increased by 10.38 percent to 117.2 million square feet in 2002 from 106.1 million square
feet in 2001.

Cost of Sales

The Company’s cost of sales consists of production costs of products manufactured by the
Company and, to a much lesser extent, costs of products, principally imported ceramic and other types of
floor tile, which the Company buys for resale.  Production costs consist mainly of costs of raw materials,
labor, depreciation, energy and other overhead expenses, the proportionate amounts of which have been
fairly consistent in both Mexico and the United States.  During 2003, 27.75 percent of the production costs
in Mexico was for raw materials, 20.59 percent for labor, 8.08 percent for depreciation, 15.69 percent for
energy and the remaining 27.89 percent attributable to other overhead expenses such as maintenance, spare
parts and water usage fees.  In the United States, the Company’s production costs have been proportionately
somewhat different from those in Mexico.  In 2003, the production costs of the Garland Plant consisted of
23.91 percent for raw materials, 32.23 percent for labor, 14.47 percent for depreciation, 11.53 percent for
energy and the remaining 17.86 percent for other overhead expenses.

2003 v. 2002

Cost of sales increased by 8.62 percent during 2003 to Ps 2,236,4 million from Ps 2,059.0 million
in 2002 resulting from the combined effect of the Company’s increased sales and greater cost of products
sold, the latter mainly attributable to generally unfavorable exchange rates impacting the cost of the
Company’s private-label outsourcing program.  As a percentage of sales, cost of sales represented 65.30
percent in 2003 as compared to 63.02 percent in 2002, an increase of 2.28 percentage points.  As was true
in 2002, the difference is also attributable to a slightly poorer mix of products sold.

2002 v. 2001

Cost of sales increased by 3.29 percent during 2002 to Ps 2,059.0 million from Ps 1,993.3 million
in 2001, and represented 63.02 percent of sales in 2002 as compared to 62.80 percent in 2001.  As a
percentage of sales, cost of sales represented 63.02 percent in 2002 as opposed to 62.80 percent in 2001,
a decrease of 0.22 percentage points, caused mainly by a slightly poorer mix of products sold.

Gross Profit

2003 v. 2002

Gross profit for 2003 was Ps 1,188.6 million as compared to Ps 1,208.4 million in 2002, a decrease
of 1.64 percent, mainly due to a greater increase in the cost of sales as compared to the increase in sales
registered. The Company’s gross margin for the year decreased to 34.70 percent from a gross margin of
36.98 percent in 2002, a 2.28 percentage point reduction.  This arose primarily from a slightly poorer mix
of products sold as well as higher costs of products.

2002 v. 2001

Gross profit for 2002 was Ps 1,208.4 million as compared to Ps 1,180.8 million in 2001, an increase
of 2.33 percent.  The Company’s gross margin for the year decreased however, to 36.98 percent from a
gross margin of 37.20 percent in 2001, a 0.22 point reduction.  While gross profit increased, a greater
increase in the cost of sales compared to the increase in sales for the period led to the decrease in gross
margin.

Operating Expenses

2003 v. 2002

Operating expenses during 2003 increased by 6.77 percent over operating expenses in 2002, to Ps
959.4 million from Ps 898.6 million.  As a percentage of sales, operating expenses represented 28.01
percent in 2003 compared to 27.50 percent in 2002, an increase of 0.51 percentage points.  As was the case
in 2002, most of the increase is attributable to the expansion of its Company-owned stores in Mexico and
the United States and preparations for the movement of greater amounts of product through its distribution
network, which included among other things the implementation of the new Oracle supply chain manager
software and the installation of strategic warehouses for the more efficient distribution of products.

2002 v. 2001

Operating expenses during 2002 increased by 9.68 percent over operating expenses in 2001, to Ps
898.6 million from Ps 819.3 million.  As a percentage of sales, operating expenses represented 27.50
percent in 2002 compared to 25.81 percent in 2001, an increase of 1.69 percentage points.  Most of the
increase is attributable to heavy investment in the expansion of its Company-owned stores in Mexico and
the United States and preparations for the movement of greater amounts of product through its distribution
network as the “private label” program was initiated late in 2002.

Comprehensive Financing Cost

Comprehensive financing cost can significantly impact the financial statements of a company in
periods of high inflation.  Income statements for companies reporting under Mexican GAAP are required
to present all financial effects of operating and financing the business under inflationary conditions.  For
presentation purposes, all effects relating to financing are listed under comprehensive financing cost and
include (i) interest earned on cash and temporary investments and interest paid on borrowed funds;
(ii) foreign exchange gains or losses associated with monetary assets and liabilities denominated in foreign
currencies; and (iii) losses or gains resulting from holding monetary assets exposed to inflation net of gains
or losses resulting from having monetary liabilities adjusted for inflation.  To the extent a company has
monetary liabilities that exceed its monetary assets in a period of inflation, the company will generate a
gain from monetary position, and to the extent a company has monetary assets that exceed its monetary
liabilities in a period of inflation, the company will generate a loss from monetary position.  The
Company’s foreign exchange position is affected by its assets or liabilities denominated in foreign
currencies.  The Company records a foreign exchange gain or loss if the exchange rate of the Peso to the
currency in which the monetary assets or liabilities are denominated fluctuates.

2003 v. 2002

Comprehensive financing cost for 2003 was Ps 111.9 million compared to Ps 168.3 million in
2002.  This decrease was mainly due to a reduced foreign exchange loss of Ps 91.5 million in 2003
compared to losses of Ps 115.8 million in 2002, as the Peso depreciated against the Dollar less over the
course of the year than in 2002.  The monetary gain for 2003 was Ps 51.2 million compared to a monetary
gain of Ps 54.3 million in 2002.  In 2003 the Company reaped the benefit of an entire year of interest
savings as a result of the 2002 Term Loan financing, and interest expense decreased by 30.44 percent over
2002.  Interest income for 2003 also increased over 2002, by 3.76 percent.

2002 v. 2001

Comprehensive financing cost for 2002 was Ps 168.3 million compared to Ps 26.7 million in 2001.
This increase was mainly due to a foreign exchange loss of Ps 115.8 million resulting from exchange rate
changes during the year, as during 2001 the Company recognized foreign exchange gain of Ps 52.8 million.
Monetary gain for 2002 was Ps 54.3 million compared to monetary gain of Ps 62.3 million in 2001.  The
replacement of the Company’s outstanding, relatively high-rate Eurobonds during 2002 with the
significantly lower cost Term Loan resulted in a decrease in interest expense by 22.55 percent over 2001.
Interest income for 2002 also increased over 2001, by 22.26 percent.

Other Income or Expenses

2003 v. 2002

Other expenses in 2003 further decreased over the year, down to Ps 8.2 million compared to the
Ps 13.3 million recorded in 2002.

2002 v. 2001

Other expenses in 2002 were down significantly to Ps 13.3 million compared to Ps 52.1 million
recorded in 2001, in which year the Company wrote-off the value of certain obsolete machinery and
equipment.

Provision for Income and Asset Tax and Deferred Taxes

Effective January 1, 1999, the corporate income tax rate in Mexico was increased from 34 percent
to 35 percent.  However, corporate taxpayers have the option of deferring a portion of the tax so that the
tax payable will represent 30 percent of taxable income (32 percent for 1999).  Starting with the 2003 tax
year, there will be a one percentage point reduction in the income tax rate per year until the rate reaches
32 percent.  The earnings on which there is a deferral of taxes must be identified and maintained on the
Company’s books in a “net reinvested tax profit” account (“CUFINRE”).  This is to ensure that the earnings
on which the taxpayer has chosen to defer taxes remains clearly identified for later periods.  The annual
asset tax rate of 1.8 percent is payable individually by Interceramic and each of its Mexican subsidiaries.
The asset tax is levied on the average value of most assets, net of certain liabilities.

2003 v. 2002

In 2003 the Company’s provision for income and asset tax and deferred income taxes was Ps 46.8
million, an increase of 295.93 percent over the provision of Ps 11.8 million recorded in 2002.  Provision
for income and asset tax and deferred income taxes represented 42.95 percent of income before the
provisions and employee profit sharing in 2003 compared to 9.22 percent in 2002. This increase in the
provision for income and asset tax and deferred income tax is mainly due to an increase in the valuation
allowance for deductible expenses as well as a decrease in the effect of reductions in the Mexican income
tax rate applicable to the Company.

2002 v. 2001

In 2002 the Company’s provision for income and asset tax and deferred taxes was Ps 11.8 million,
a decrease of 76.35 percent over the provision of Ps 50.0 million recorded in 2001.  Provision for current
income and asset tax and deferred taxes represented 9.22 percent of income before these provisions and
employee profit sharing in 2002 compared to 17.68 percent in 2001.

Employee Profit Sharing

The Company is required under Mexican law to pay to employees, in addition to their agreed
compensation and benefits, profit sharing in an amount equal to ten percent of pretax income, determined
for statutory employee profit sharing purposes, on an unconsolidated basis.  These amounts are payable on
a per-company basis, so that subsidiaries calculate and pay the accrued liability separately.  In accordance
with Bulletin D-4, deferred employee profit sharing should be recognized only on temporary differences
determined in the reconciliation of current year net income for financial and tax reporting purposes,
provided there is no indication that the related liability or asset will not be realized in the future.

The Company’s statutory employee profit-sharing obligation, on a consolidated basis, has
historically been lower than ten percent of pretax income as reported on the Company’s financial
statements in accordance with Mexican GAAP.  In 2002 and 2001, this provision was Ps. 3.8 million and
Ps 3.7 million, respectively.  A higher level of deductible expenses for 2003 resulted in a loss for purposes
of computing employee profit sharing, resulting in no employee profit sharing liability for the year.

Minority Net Income

This account relates to the interest of Dal-Tile in RISA and Custom’s interest in ABISA.

2003 v. 2002

Minority net income in 2003 was Ps 30.0 million, compared to Ps 19.7 million in 2002.  For 2003
minority net income represented 0.88 percent of sales while in 2002 it was 0.60 percent of sales.  The
difference was due to increased net income and operating margins for the year at both RISA and ABISA.

2002 v. 2001

Minority net income posted in 2002 was Ps 19.7 million, compared to Ps 24.9 million in 2001.  For
2002 minority net income represented 0.60 percent of sales while in 2001 it was 0.79 percent of sales.

Majority Net Income

This account consists of consolidated net income, less the portion attributable to Dal-Tile’s
ownership interest in RISA and that of Custom in ABISA.

2003 v. 2002

Majority net income for 2003 decreased significantly by 65.36 percent to Ps 32.2 million from a
majority net income of Ps 93.0 million in 2002.  For 2003 majority net income represented 0.94 percent
of sales compared to 2.85 percent in 2002.  The increased provision for income and asset tax registered
during the year adversely impacted the net income of the Company, resulting in the reduction against 2002.

2002 v. 2001

Majority net income for 2002 decreased significantly by 54.45 percent to Ps 93.0 million for a
majority net income of Ps 204.2 million in 2001.  For 2002 majority net income represented 2.83 percent
of sales compared to 6.78 percent in 2001.

B.  Liquidity and Capital Resources

General

With improved financial results and reducing debt levels the Company has generated more
consistent positive cash flows in recent periods than in many preceding years.  However, the Company has
relied to a great extent upon short term borrowings for liquidity in the years covered by the Financial
Statements and while management considers cash generated from operations sufficient for the Company’s
working capital needs in the short term, any material unexpected increase in operating expenses could
result in the need for further borrowing by the Company.  The US $100.0 million in debt incurred by the
Company in connection with the Term Loan has already been amortized to US $80.6 million, and the
balance is to amortize completely over the remaining three years of the term of the Term Loan–unlike the
Eurobonds, which paid interest only until their maturity date of August 1, 2002.  The retirement of US
$80.6 million in debt over a three-year period will require substantial free cash generation by the Company,
and any adverse development with respect to the Company’s cash flow could make it difficult for the
Company to meet its payment obligations with respect to the Term Loan.  See  “–D. Trend Information”
below.

The Company has financed most of its capital improvements and expansions through long-term
borrowing as well as equity and other securities offerings.  Proceeds from securities offerings have also
been used to reduce and to consolidate debt.

Securities Offerings

In December of 1994, Interceramic consummated a capital restructuring and initial public offering
of equity securities in the United States (the “1994 Offering”), pursuant to which its capital structure was
reorganized into the Common Units, each comprised of two Series B Shares, and the Limited Voting Units,
each comprised of one Series D Share and one Series L Share.  In the 1994 Offering, 3,480,000 Limited
Voting Units and 1,044,000 ADRs were sold in Mexico and the United States, respectively, resulting in
net proceeds to the Company of Ps 384.8 million.  The proceeds from the 1994 Offering were used in part
to pay bank debt and trade obligations of the Company, as well as for maintenance of a general working
capital reserve that greatly assisted the Company in the liquidity crisis that followed in the wake of the Peso
devaluation.

In May of 1996, Interceramic had a rights offering in Mexico (the “1996 Offering”) of 331,000
Limited Voting Units for the sole purpose of making Limited Voting Units available upon the exercise of
options which may be granted to certain Mexican and United States employees of the Company pursuant
to an incentive stock option plan which was approved by the Board and the shareholders of Interceramic
on April 30, 1996 (the “SOP”).  Under Mexican law, Interceramic was required to offer the securities
intended for reservation under the SOP to existing securities holders first, before making them available
to a trust organized by Interceramic for the purpose of holding the Limited Voting Units until options were
exercised.  Although Interceramic was not seeking, nor anticipating that existing holders would exercise
any rights in the 1996 Offering, a total of 4,780 Limited Voting Units were subscribed for by existing
holders, leaving 326,220 available for the SOP.  In the 1996 Offering, the Company received Ps 92,864
from securities holders who exercised their preemptive rights.  A similar offering was made in Mexico in
May of 1997, when Interceramic’s capital was increased by 1,100,000 Limited Voting Units in order to
allocate more securities to the SOP.  As was the case in the 1996 Offering, a number of shareholders
exercised their preemptive right, purchasing an aggregate of 126,063 Limited Voting Units.  See “Item
6–Directors, Senior Management and Employees–E. Share Ownership–Stock Option or Other Incentive
Plans,” below.

In April of 1997, Interceramic completed a rights offering (the “1997 Offering”) which was
registered with the SEC under the 1933 Act pursuant to which each holder of record of the Common Units
and Limited Voting Units, including holders of ADRs, each evidencing five Common Units (“CU ADRs”),
and ADRs, each evidencing Limited Voting Units (“LVU ADRs”), was given the right to subscribe for a
certain number of additional Common Units and/or Limited Voting Units or, with respect to holders of
ADRs, additional CU ADRs and/or LVU ADRs.  An aggregate of 3,301,000 Common Units and 6,699,000
Limited Voting Units were available for subscription in the Rights Offering, and all Units were subscribed.
The 1997 Offering resulted in net proceeds to the Company of Ps 148.0 million, substantially all of which
were used to pay certain short-term debt and current maturities of long-term debt.

In November of 2000, Interceramic made a public rights offering registered with the SEC under
the 1933 Act (the “2000 Offering”) of Common Units to holders of record in the United States and in
Mexico, primarily to enable Interceramic to make a private placement of certain of the unsubscribed
Common Units to Kohler.  Despite the price per Unit in the 2000 Offering being in excess of twice the then
market price for a Common Unit on the Mexican Stock Exchange, 6,137 Units were subscribed for
resulting in proceeds to Interceramic of Ps 232,331.  Upon the close of the 2000 Offering and the
deregistration of the unsubscribed Units under the 1933 Act, Interceramic was able to complete a private
placement of 3,636,363 Common Units to Kohler (the “Kohler Placement”), resulting in proceeds to the
Company of US $12.0 million.  The proceeds received by the Company were used to pay down certain
short-term indebtedness of Interceramic USA and to pay certain trade and account creditors of the
Company.

In March of 2004, Interceramic made another public rights offering registered with the SEC under
the 1933 Act (the “2004 Offering”) of Common Units and Limited Voting Units to holders of record in the
United States and Mexico.  In the 2004 Offering, shareholders exercising rights purchased 15,738,245 Units
per Unit, resulting in proceeds to Interceramic of US $21.0 million.  Upon the close of the
2004 Offering and the deregistration of the unsubscribed Units under the 1933 Act, all 16,993,781
unsubscribed Units were sold in transactions exempt from registration under the 1933 Act to citizens and
residents of Mexico resulting in further proceeds to the
Company of US $22.7 million.  Of these proceeds, the Company used US $15.8 million to acquire MASA
and GISA and has allocated US $25.0 million to the construction of the New Plant.  The remaining US $2.9
million was used to pay certain costs of the 2004 Offering and for other general corporate purposes of the
Company.

Outstanding Indebtedness

At December 31, 2003, the Company had Ps 51.0 million of cash equivalents and Ps 1,358.4
million of indebtedness.  Of the Company’s total indebtedness at December 31, 2003, Ps 972.4 million was
long term and Ps 386.0 million was short term.

At December 31, 2003, all of the Company’s indebtedness was denominated in Dollars, comprised
of Ps 960.8 million of accrued interest on and principal amount of the Term Loan; an additional Ps 180.2
million of unsecured indebtedness; Ps 215.5 million of indebtedness secured by machinery, equipment,
buildings and land, accounts receivable and inventory; and Ps 1.9 million represented by promissory notes
due to suppliers and others.

At December 31, 2002, the Company had Ps 93.4 million of cash equivalents and Ps 1,291.6
million of indebtedness.  Of the Company’s total indebtedness at December 31, 2002, Ps 1,012.7 million
was long term and Ps 278.9 million was short term.

At December 31, 2002, all of the Company’s indebtedness was denominated in Dollars, comprised
of Ps 1,117.4 million of accrued interest on and principal amount of the Term Loan; an additional Ps 101.3
million in unsecured indebtedness; Ps 67.7 million of indebtedness secured by machinery, equipment,
buildings and land, accounts receivable and inventory; and Ps 5.2 million of financial instruments due to
suppliers and others.

At December 31, 2001, the Company had Ps 237.5 million of cash equivalents and Ps 1,354.0
million of indebtedness.  Of the Company’s total indebtedness at December 31, 2001, Ps 263.4 million was
long term and Ps 1,090.6 million was short term.

At December 31, 2001, all of the Company’s indebtedness was denominated in Dollars, comprised
of Ps 1,011.7 million of principal and accrued interest on the Eurobonds; an additional Ps 49.7 million of
unsecured indebtedness; Ps 284.3 million of indebtedness secured by machinery, equipment, buildings and
land, accounts receivable and inventory; and Ps 8.3 million of financial instruments due to suppliers and
others.

In 2003 resources provided by operations was Ps 103.8 million compared to Ps 169.3 million in
2002.  Inventories increased by 13.78 percent during 2003 over 2002 to Ps 942.0 million from Ps 827.9
million at the end of 2002.

In 2002 resources provided by operations was Ps 169.3 million compared to Ps 345.3 million in
2001.  Inventories increased by 19.39 percent during the year over 2001 to Ps 827.9 million in 2002 from
Ps 698.4 million at the end of 2001.

In 2001 resources provided by operations was Ps 345.3 million compared to Ps 334.0 million in
2000.  Inventories decreased by 17.31 percent during the year over 2000 to Ps 698.4 million in 2001 from
Ps 844.6 million at the end of 2000.

In 2003, Ps 468.9 million of debt was paid with resources generated by new borrowings of Ps
512.3.  The Company also paid Ps 79.9 million in interest charges during the year from operating cash flow
and from resources provided by borrowings.

In 2002, Ps 1,463.7 million of debt was paid by (i) Ps 102.3 million from cash flow form operations
and (ii) Ps 1,361.4 million in new borrowings.  The Company also paid Ps 114.8 million in interest charges
during the year from operating cash flow.

In 2001, Ps 111.6 million principal amount of debt was paid by (i) Ps 31.4 million from cash flow
from operations and (ii) Ps 80.2 million in new borrowings.  The Company also paid Ps 148.2 million in
interest charges from operating cash flow.

Debt increased during 2003 by 5.17 percent over 2002, primarily because cash flow generated from
operations was absorbed by increases in inventories, including significant third-party products.  Because
all of the Company’s debt is denominated in Dollars, the foreign exchange rate between the Peso and the
Dollar can have a material effect on the Company’s financial reporting.  The effect is recognized on the
Company’s income statements where it was reported for 2003 as a net loss of Ps 91.5 million, for 2002 a
net loss of Ps 115.8 million and for 2001 a net gain of Ps 52.8 million.  The operating effect of any
exchange rate losses is offset to some extent by the fact that the Company generates significant Dollar-denominated revenues.  As all of  the Company’s debt is Dollar denominated, it does not effect inflation
accounting on the Company’s financial statements.

The Company’s primary objective is to reduce its debt levels through application of available cash
generated from operations.  The rapid amortization of the Term Loan will, in the absence of further
borrowings in the interim, reduce the Company’s indebtedness to virtually nothing in the coming three-year
period.  In order to generate the excess cash needed to reduce its debt, the Company has focused on the
reduction of expenses and improvement in selling prices.  The construction of the New Plant with the
proceeds received from the 2004 Offering and the acquisition of the franchise stores in Chihuahua and
Monterrey are expected to assist the Company in the generation of cash in future periods, the franchise
stores immediately and the New Plant when it commences production in the second quarter of 2005.

Financing Arrangements

Prior to the Eurobonds, the Company had financing relationships with more than 13 lenders.  As
a result of the completion of the Eurobond and the prepayment of most of these relationships, the
Company’s debt structure became much more manageable with fewer lending relationships, freeing
management from much of the time that had been spent in monitoring and managing these relationships.
At December 31, 2001, the Company’s outstanding indebtedness consisted of US $90.0 million of the
Eurobonds and an additional US $35.6 million in other indebtedness, while at December 31, 2002, the
Company’s outstanding indebtedness consisted of US $100.0 million of the Term Loan and an additional
US $16.4 million in other indebtedness.  At December 31, 2003, the Company’s outstanding indebtedness
consisted of a US $80.6 million balance of the Term Loan and additional indebtedness of US $40.3 million.

The Eurobonds were replaced in July of 2002 with the Term Loan in an aggregate principal amount
of US $100.0 million.  The Term Loan has two tranches, the “Term A Loan” in the amount of US $40.0
million, which generally bears interest at a LIBOR rate plus between 1.70 and 2.20 percent, depending
upon the Company’s leverage ratio from time to time, and amortizes in quarterly payments which
commenced on July 31, 2003 and continue until July 31, 2005, when the Term A Loan is to be paid in full.
The first two principal installments on the Term A Loan were US $6.25 million each, the next four
installments are US $3.125 million each and the final installments are US $5.0 million each.

The “Term B Loan” tranche of the Term Loan is in the amount of US $60.0 million, and generally
bears interest at a LIBOR rate plus between 2.30 and 2.80 percent, again depending upon the Company’s
leverage ratio.  The Term B Loan amortizes in quarterly payments which commenced on July 31, 2003 and
continue until July 31, 2007, when the Term B Loan is to be paid in full.  The first ten principal
installments on the Term B Loan are US $1.25 million each, the next four installments are US $5.625
million each and the final installments are US $8.333 million each.

The Term Loan is secured by certain of the Company’s assets, including most real property and
equipment as well as accounts receivable and inventory of the Company located in Mexico, the production
machinery and equipment of Interceramic USA located in the United States and Interceramic’s stock in
RISA.  Under the Credit Agreement, the value of collateral pledged to secure the Term Loan must at all
times equal or exceed 1.4 times the principal balance of the Term Loan outstanding from time to time.
Further, the payment of the Term Loan and the performance of the Company’s obligations under the
provisions of the Credit Agreement is guaranteed by Interceramic Holding, Interceramic USA and the
Occidente and DISA subsidiaries in Mexico.

The Company also had five lines of credit available as of December 31, 2003 for short-term cash
flow borrowings.  The first is a US $25.0 million facility provided to Interceramic USA by Wells Fargo
Bank Texas, N. A. (“Wells Fargo”), of which US $19.0 million was drawn down at December 31, 2003.
The second line available to the Company at year end 2003 is a US $6.0 million line of credit from
Banamex to RISA, of which at December 31, 2003 none was drawn down.  The remaining three lines of
credit at December 31, 2003 were provided to Interceramic by Banamex,  BBVA Bancomer, S.A.(“Bancomer”) and Banco Mercantil del Norte, S.A.(“Banorte”) in the respective amounts of US $6.0
million, US $5.0 million and US $5.0 million.  All of these lines were drawn down to the full available
amount at the end of 2003.

In most of its loan documentation, the Company is required to observe standard covenants with
respect to major transactions, mergers and combinations, disposition of assets, information reporting
requirements and other matters, including (i) agreements with respect to the maintenance of the Controlling
Group’s ownership of the Company and its continuing control of the management of the Company and (ii)
limitations on incurring additional indebtedness, creating liens on the Company’s assets, paying dividends
and intercompany indebtedness, making capital expenditures and incurring or permitting certain loans,
investments or guaranties.  Substantially all of the Company’s long term debt loan documentation contains
cross default provisions to other Company debt.

Under the Credit Agreement applicable to the Term Loan, as amended, the Company is required
to observe several financial ratios, requiring a (i) consolidated leverage ratio for the fiscal year 2003 of less
than 3.50; (ii) a fixed charge coverage ratio of at least 1.10; (iii) an interest coverage ratio of at least 3.00
for the fiscal year 2003; and (iv) a current ratio of at least 1.50.  At December 31, 2003 the Company was
in compliance with each of these covenants.  The leverage ratio changes to 3.25 for 2004, 2.75 for 2005
and to 2.50 thereafter, while the interest coverage ratio changes to 4.00 in 2005.

The Wells Fargo loan documentation also has a number of financial covenants applicable to
Interceramic USA, including (i) a fixed charge coverage ratio of at least 1.5; (ii) a tangible net worth of at
least US $29.5 million (increasing by a factor of net income for years after 2003); (iii) a leverage ratio of
no more than 1.75; and (iv) maximum capital expenditures of US $4.0 million on an annual basis.  At
December 31, 2003, Interceramic USA was in compliance with these covenants.

Under the terms of the US $ 6.0 million long term credit agreement with Banamex, RISA is
required to maintain (i) a debt service coverage ratio of greater than 3.00; (ii) a current ratio of at least 1.30;
and (iii) and a leverage ratio of less than 3.00 and, at December 31, 2003, RISA was in compliance with
its financial covenants under  this agreement.

C.  Research and Development

The Company is continually working on new product development in order to provide more
innovative and appealing products for the marketplace.  Particularly in a very competitive industry and with
technological changes and advances commonplace, the Company believes innovation to be critical to its
strategies of increasing its selling prices and focusing on the higher end markets.  The Company’s research
and development efforts are generally directed in designing new textures and finishes as well as “trim” and
other decorative pieces to complement and enhance “field” tile.  These research and development efforts
involve many persons throughout the Company, and are directed by a Vice President of Innovation.  New
design ideas are then developed and tested at the Company’s Research and Development Center in
Chihuahua, Mexico, which contains a complete, small-scale production line.  See “Item 4–Information on
the Company–B. Business Overview–The Research and Development Center” above.

In 2003, the Company had research and development expenditures of Ps 21.2 million, while in
2002 and 2001 the expenditures for research and development were Ps 22.8 million and Ps 27.5 million,
respectively.

D. Trend Information

The following discussion is based primarily upon unaudited financial information for the first
quarter of 2004 provided by the Company.  The actual financial results of the Company for the first quarter
of 2004 could differ significantly from the results discussed below.  Peso amounts provided below may be
converted into Dollars at an exchange rate of Ps 11.197 to US $1.00, the Interbank Rate as of March 31,
2004.

Sales in the first quarter of 2004 at Ps 857.0 million grew by 1.01 percent over sales of Ps 848.4
million in the first quarter of 2003.  Sales for the quarter broke down to Ps 470.2 million in Mexico–down
2.16 percent over the same period last year–and Ps 386.8 million in the International markets, a 5.16
percent increase over the first quarter of 2003.  In both markets the Company sold about five percent more
product than it did during the first quarter of 2003.  Higher cost of sales and operating costs attributable
primarily to investment in selling infrastructure and higher natural gas prices impacted operating income,
and at Ps 48.6 million was 33.69 percent behind operating income of Ps 73.3 million in the same period
of 2003.  The Company’s EBITDA for the period did not lag quite so much, at Ps 96.2 million compared
to Ps 116.0 million in the first quarter of 2003, a decrease of 17.07 percent.  The Company also ended the
period with a debt service coverage ratio of 5.4 and a debt to EBITDA ratio of 2.9.

E.  Off-Balance Sheet Arrangements.

During the year ended December 31, 2003 and at the date of this Annual Report, the Company had
no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on
the Company’s financial condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that could be considered to be material.

F.  Tabular Disclosure of Contractual Obligations.

The following table presents a summary as of December 31, 2003 of the Company’s known
contractual obligations:



Contractual Obligations
Payments Due by Period (1)Total
Less than
One Year
One to
Three
Years
Three to
Five Years
More than
Five YearsLong-term Debt Obligations
1,178,244
205,825
691,450
280,969
0Non-cancellable Operating Leases
723,961
91,516
237,091
229,765
165,589Purchase Obligations
0
0
0
0
0Other Long-term Liabilities (2)
0
0
0
0
0Total
1,902,205
297,341
928,541
510,734
165,589




---

(1)         Thousands of Pesos.

(2)         As reflected on the balance sheet included with the Financial Statements under Mexican GAAP.

ITEM 6.           Directors, Senior Management and Employees

A. Directors and Senior Management

The Board is composed of a minimum of 13 members and a maximum of 20 members, as
determined by the shareholders at Interceramic’s annual general ordinary shareholder’s meeting.  Under
the Estatutos Sociales of Interceramic (the “Bylaws”), the holders of the Series D Shares are entitled to
vote, as a class, on the election of two directors and their corresponding alternates and the holders of the
Series L Shares are entitled to vote, as a class, on the election of two directors and their corresponding
alternates.  The holders of Series B Shares are entitled to elect all remaining directors.  Additionally, the
Bylaws provide that at least 25 percent of the members of the Board must be independent from the
Company, as must be their respective designated alternates.  The 13 current members of the Board were
elected at shareholders’ meetings held on April 20, 2004, and will serve for the remainder of the year or
until their successors are duly elected or qualified.  The Board is responsible for the management of the
business of Interceramic.  Officers of Interceramic serve at the discretion of the Board.  In addition to the
Board and the officers of Interceramic, Interceramic has statutory auditors, who are elected annually at the
general ordinary shareholders’ meeting.  Under Mexican law, the duties of statutory auditors include,
among other things, the examination of the operations, books, records and any other documents of
Interceramic and the presentation at a general ordinary shareholders’ meeting of a report of such
examination.

Board of Directors

The following table sets forth the current directors of the Company, their ages, years of service as
a director and their principal occupation (with the Company, unless otherwise specified):

Name (Age)                                                             Occupation                                             Years
as a Director

Elected by Holders of the Series B Shares:

Oscar Almeida Chabre (77)                 Chairman of the Board                                                               26

Víctor D. Almeida García (45)           Vice Chairman of the Board and Chief Executive Officer               25

Alfredo Harp Calderoni (34)               Director                                                                                       6

David Kohler (37)                                Group President, Kohler Co.                                                      3

Federico Terrazas Torres (71)             Chairman, Grupo Cementos de Chihuahua, S.A. de C.V.            15

Norma A. de Champion (47)               President, Automobile Dealerships                                              20

Diana E. Almeida (41)                         Director                                                                                      10

Carlos Elias Terrazas (46)                   President, Comercial Corporativa del Norte, S.A. de C.V.            1

Humberto Valles Hernandez (68)        Financial Consultant and Retired Partner of Mancera, S.C.             1



Elected by Holders of the Series D Shares:

Sergio Mares Delgado (47)                  President, Grupo Futurama, S.A. de C.V.                                 1

Augusto Champion Chapa (48)           Chairman, Arquitectura Habitacional e Industrial,

S.A. de C.V.                                                                            11

Elected by Holders of the Series L Shares:

Mark M. Blaugrund (62)                     President, RECON Real Estate Consultants, Inc.                     15

Sylvia Almeida (43)                             President, Corporación Administrativa y Técnica,

S.A. de C.V.                                                                             9



Oscar Almeida Chabre, Chairman of the Board.  Mr. Almeida was the founder of the Company
and has been Chairman of the Board since its inception.  He is a graduate of the School of Banking and
Accounting in Mexico City and has been a member of the board of directors of several Mexican banks.
In addition, Mr. Almeida has been a member of the board of directors of banks in the United States and
other industrial and commercial conglomerates in Mexico.  He is also Chairman of Grupo Cencor, S.A. de
C.V. (“Grupo Cencor”).  Mr. Almeida is the father of Víctor D. Almeida García, Diana E. Almeida, Sylvia
Almeida and Norma A. de Champion.  Additionally, one other director, Augusto Champion Chapa, is a
son-in-law of Mr. Almeida.

Víctor D. Almeida García, Vice Chairman of the Board, President and Chief Executive Officer.
Mr. Almeida has been with the Company since its inception.  He graduated from the University of Texas
at Austin with a Bachelors Degree of Business Administration in Accounting.  He serves on the Regional
Board of Directors of Banamex and has been a member of the board of directors of two commercial banks
located in El Paso, Texas.  He has been President of Grupo Cencor since 1984.

Alfredo Harp Calderoni.  Mr. Harp is a private investor, he has served as Chairman of SINCAS,
Banamex-Accival and as a member of the Board of Directors of Banamex.  He is an honors graduate of
Universidad Anahuac in Mexico City.

David Kohler.  Mr. Kohler is Group President of the Kohler Co. Kitchen and Bath Group and a
member of Kohler’s Board of Directors.  He has served in a wide variety of capacities for Kohler since
1988, assuming his present duties in 1999.  Mr. Kohler holds a Masters Degree in Management from the
J.L. Kellog Graduate School of Management at Northwestern University and a Bachelors Degree in
Political Science from Duke University.  He is also a member of the Board of Directors of Menasha
Corporation.  Mr. Kohler was first elected to the Board in 2000 pursuant to an agreement between Kohler
and the Controlling Group, under which the members of the Controlling Group agreed to use their best
efforts to cause a Kohler representative to be elected to the Board.

Federico Terrazas Torres.  Mr. Terrazas is Chairman of the Board of Cementos de Chihuahua, S.A.
de C.V., a cement manufacturer with operations in the State of Chihuahua and in New Mexico and South
Dakota in the United States.

Norma A. de Champion.  Ms. Champion is President of Autocamiones de Chihuahua, S.A. de C.V.,
Autos Internacionales de Chihuahua, S.A. de C.V.and Autos Europeos de Chihuahua, S.A. de C.V.,
affiliates of the Almeida Family which sell Chrysler, Honda and Mercedes Benz automobiles, respectively,
throughout the State of Chihuahua.  She has a Bachelors Degree in Computer Science from the University
of Texas at Austin.

Diana E. Almeida.  Ms. Almeida graduated from the University of Colorado at Boulder with a
Bachelors Degree in Business Administration.  She is Director of Consulting for Corporación
Administrativa y Técnica, S.A. de C.V. (“Coratec”), an affiliate of the Almeida Family.

Carlos Elias Terrazas.  Mr. Elias is newly elected to the Board. He is president of Comercial
Corporativa del Norte, S.A. de C.V.a Investment and Services company located in Chihuahua, Chihuahua.
He graduated from Instituto Teconlogico y de Estudios Superiores de Monterrey in 1981 with a degree in
Business Administration.

Humberto Valles Hernandez.  Mr. Valles is a retired partner of Mancera, S.C., A Member Practice
of Ernst & Young Global.  He practiced accounting for over 30 years in Chihuahua, Chihuahua, Mexico.
He graduated from Instituto Teconologico y de Estudios Superiores de Monterrey.

Sergio Mares Delgado.  Mr. Mares is the President of Grupo Futurama, S.A. de C.V., in Chihuahua,
Chihuahua, a discount and department store chain in the Northern Mexico. He graduated from Instituto
Teconologico y de Estudios Superiores de Monterrey in 1980 with a degree in Mechanical Administration
Engineering.

Augusto Champion Chapa.  Mr. Champion is a graduate of the University of Texas at Austin, and
an architect and commercial builder with operations throughout Mexico.  He serves on the Regional Board
of Directors of Banamex.

Mark M. Blaugrund.  Mr. Blaugrund, a private investor, is the founder and President of RECON
Real Estate Consultants Inc. in El Paso, Texas, a commercial real estate company.

Sylvia Almeida.  Ms. Almeida graduated from the University of Texas at Austin with a Bachelors
Degree in Business Administration, majoring in Accounting and minoring in Data Processing.  She has
been employed at Coratec since 1983, where she is currently President.

Senior Management of Interceramic

The following table sets forth the current executive officers of Interceramic, their ages, current
position with the Company and years of service with the Company:

Name (Age)                                                             Occupation                                                 Years
With Company

Víctor D. Almeida García (45)               President and Chief Executive Officer                                 25

Luis Ferreiro Maiz (46)                         Executive Vice President of Manufacturing                         21

Humberto Maese Cordero (48)             Vice President of Innovation                                                25

Jesús Barney (42)                                   Director of Franchise Subsidiaries                                        5

Alfredo Hernández García (56)               Director of Sales and Marketing, Mexico                            17

Felipe Matán Merino (46)                        Technical Director                                                                21

Jesús Olivas Corral (41)                           Executive Vice President and Chief Financial Officer         19

Norma A. de Champion (47)                   Secretary                                                                               20

Jesús Olivas Corral, Executive Vice President of Finance and Chief Financial Officer.  Mr. Olivas
has served as Vice President of Finance and Chief Financial Officer since 1996.  He has been with the
Company since 1985, starting as an Information System Analyst.  From 1987 to 1991 he was Finance
Manager and from 1991 to 1995 he served as the Director of Finance.  He graduated with a Degree in
Finance from Instituto Tecnológico y de Estudios Superiores de Monterrey in 1985.

Luis Ferreiro Maiz, Executive Vice President of Manufacturing.  Mr. Ferreiro has served as Vice
President of Manufacturing since January 1996.  From 1983 to 1985 he was the Materials Manager of Cerro
Grande.  From 1985 to 1986 he was the Production Manager of the Company and from 1986 through April
1990 he was the Plant Director.  From May 1990 through December 1995 he was the Vice President of
Operations.  He graduated with a Degree in Engineering from the University of Chihuahua in 1980.

Humberto Maese Cordero, Vice President of Innovation.  Mr. Maese served as Vice President of
Marketing and Sales from 1987 to 1996, when his position changed to emphasize the Company’s efforts
in product innovation.  From 1986 through 1987 he was Vice President of Sales and Marketing for the
Grupo Cencor and its subsidiaries and from 1982 through 1986 he was President of Ladrillera Industrial,
S.A. de C.V., a subsidiary of Grupo Cencor.  He received a Bachelors Degree and a Masters Degree in
Business Administration from the University of Texas at Austin and is qualified as a Certified Public
Accountant in the State of Texas.

Jesús Barney, Director of Franchise Subsidiaries.  Mr. Barney was named Director of Franchise
Subsidiaries in March of 1999, when he rejoined the service of Interceramic.  He first started with
Interceramic in 1984 as an analyst, moving later to RISA as Administrative Director of the construction
and start up process of the plant. He graduated with a Degree in Public Accountancy from the Instituto
Tecnológico y de Estudios Superiores de Monterrey in 1984.

Alfredo Hernández García, Director of Customer Service.  Mr. Hernández was named Director of
Sales and Marketing, Mexico in 1997.  He has been with the Company since 1986, starting as an
accountant.  From 1990 to 1994, he was Administrative Director of RISA and from 1995 to 1997, he served
as Interceramic’s Director of Customer Service.  Prior to becoming Director of Customer Service, Mr.
Hernández was responsible for the Company’s DISA subsidiary in Mexico City.  He graduated with a
Degree in Public Accountancy from the University of Chihuahua in 1978.

Felipe Matán Merino, Technical Director.  Mr. Matán has been Technical Director of the Company
since 1998, coming from the position of Director of Research and Development for the Company, a
position he had held since 1987.  He had served the Company in a variety of positions prior to that time,
having started with the Company in 1982 as supervisor of raw materials control.  Mr. Matán graduated with
a Degree in Engineering from the Technological Institute of Chihuahua in 1982.

Senior Management of Interceramic USA

Interceramic USA is governed by a Board of Directors (the “USA Board”), appointed annually by
Interceramic as the sole shareholder of Interceramic USA.  The USA Board is currently comprised of three
members, Oscar Almeida Chabre, Víctor D. Almeida García and Jesús Olivas Corral.  Mr. Olivas was
elected to the USA Board in 1999, while the other members have served on the USA Board for in excess
of ten years each.

The following table sets forth the current officers of Interceramic USA, their ages, current position
and years of service with the Company:

Name (Age)                                            Occupation                                                                     
Years With Company

Víctor D. Almeida García (45)                 President and Chief Executive Officer                                25

Jesús Olivas Corral (41)                           Executive Vice President and Chief Financial Officer         19

Steve Belken (48)                                    Executive Vice President of United States Operations        5

Jim Banks (53)                                         Vice President of Sales, United States                               12

Mark E. Mendel (47)                               Secretary                                                                          16

Steve Belken, Executive Vice President of United States Operations.  Mr. Belken began his service
with Interceramic USA in February of 1999, starting as manager of the accounting department at
Interceramic USA.  Mr. Belken was named to his present position in March of 2001.  Prior to coming to
Interceramic USA, Mr. Belken served 18 years in various positions in finance and operations management
in both the building products and consumer product industries.  He graduated with a Degree in Public
Accountancy from the University of Texas at Arlington.

Jim Banks, Vice President of Sales, United States.  Mr. Banks has been working for the Company
since 1992, when he was named branch manager of an ITS store in Dallas, Texas.  Advancing to the
position of a regional manager for ITS, Mr. Banks oversaw ITS expansions in Fort Worth, Plano and
Austin, Texas as well as supervised ITS locations in San Antonio, Texas.  He became director of sales for
all of ITS and was promoted to his current position in 1999, which gives him responsibility for the
independent distribution throughout the United States and in Canada.

Mark E. Mendel, Secretary.  Mr. Mendel is an attorney and a partner in the El Paso, Texas firm of
Mendel • Blumenfeld, LLP.  Mr. Mendel is general United States counsel to the Company, and commenced
his representation of the Company in 1985.  He is a 1978 graduate of Washington & Lee University and
a 1981 graduate of Texas Tech University School of Law.

B.  Compensation

For the year ended December 31, 2003, the aggregate compensation paid by the Company to its
directors, alternate directors and executive officers for services in all capacities was approximately Ps 34.8
million (approximately US $3.1 million using the Interbank Rate as of December 31, 2003).  Options to
acquire up to 166,000 Limited Voting Units were granted to certain of these individuals during 2003.  See
“–E.  Share Ownership” below.

C.  Board Practices

The Company has no employment agreements with any director, officer or employee, all such
persons serving at the will of their respective superiors.  On July 16, 2001, the Company entered into
agreements with certain officers of Interceramic and Interceramic USA for the provision of benefits in the
event of a change in control of Interceramic.  These agreements, which expire on December 31, 2005,
provide for (i) payment of bonuses to five current officers in an amount aggregating US $1.7 million upon
a change in control of the Company and (ii) payment to the same five officers of certain amounts which,
currently, range from US $230,00 to US $500,000, in the event of a change in control of the Company
followed by the applicable officer either being terminated from the employment of the Company or leaving
the Company with cause.  Interceramic maintains an audit committee of its Board (the “Audit Committee”).
For information on the directors and executive officers of the Company, see “–A.  Directors and Senior
Management” above.

D.  Employees

As part of the Company’s efforts to reduce its cost of production and build a leaner, more efficient
along the model of the premier European tile manufacturers, it has been working on reducing its workforce
across the board.  At the end of 2003, 2002 and 2001, the Company had 3,045, 3,098 and 3,127 employees,
respectively.    The following chart provides a breakdown of location and function of the Company’s
workforce:



2001
2002
2003United StatesManufacturing
268
253
269Sales and Administration
324
362
379Total
592
615
648MexicoManufacturing
1,779
1,602
1,509Sales and Administration
726
844
859Other
30
28
29Total
2,535
2,474
2,397Totals
3,127
3,098
3,045




E.  Share Ownership

Shareholdings of Directors and Senior Management

The chart on the following page describes the shareholdings of members of the Board and senior
management of the Company who own in excess of one percent of the applicable class:

Shareholder
Number of
Common Units
Percent
of Class
Number of
Limited Voting
Units
Percent
of Class
Options
GrantedOscar E. Almeida
23,356,432
48.20
2,946,419
8.96
0Victor D. Almeida
585,737
1.21
0
0.00
0Alfredo Harp Calderoni
2,658,186
5.49
0
0.00
0


The following members of the Board and senior management of the Company own less than one
percent of the equity securities of Interceramic: Mark M. Blaugrund, Humberto Maese Cordero, Jesús
Olivas Corral, Luis Ferreiro Maiz, Felipe Matán and Alfredo Hernández García.

Stock Option or Other Incentive Plans

On April 30, 1996, the SOP was approved, pursuant to which certain employees and executives
of the Company may be granted options from time to time during its term to purchase an amount of Limited
Voting Units per eligible employee as set by a committee of the Board.  During 1996, an aggregate of
326,220 Limited Voting Units were available for purchase by employees under the SOP.  Due to certain
peculiarities of Mexican law, all of the shares allocable under the SOP were issued to and purchased by a
trust established expressly for that purpose (the “ISOP Trust”).  The purchases by the ISOP Trust were
funded by contributions made by the Company, and, upon the exercise of a stock option by an employee,
the employee in effect purchases the applicable shares directly from the ISOP Trust.   In addition to
termination by expiration, under the SOP options may terminate for certain other reasons, including death,
disability or cessation of employment with the Company.

At December 31, 1996, options to purchase all 311,000 Limited Voting Units had been granted and
were outstanding (the “1996 Options”).  The purchase price for Limited Voting Units subject to the 1996
Options is Ps 11.48 per Unit.  The 1996 Options were generally not exercisable until July 3, 1998, and
expired if not exercised by July 3, 2001.  Of the total 1996 Options (i) 53,000 were exercised in June 2001;
(ii) 138,000 lapsed due to the option holders leaving the employment of the Company prior to exercise; and
(iii) 120,000 expired unexercised on July 3, 2001.

At a meeting of the shareholders of Interceramic held on May 20, 1997, an increase in the capital
of Interceramic by 1,100,000 Limited Voting Units was approved.  Interceramic’s intention in connection
with this capital increase was to dedicate the shares authorized by the increase for issuance during 1997,
1998 and 1999 pursuant to the SOP.  However, although Interceramic was neither seeking nor expecting
shareholders to exercise their statutory preemptive right to acquire the shares being made available in
connection with the capital increase, an aggregate of 126,063 new Units were subscribed for and purchased
by shareholders exercising their preemptive rights, resulting in Interceramic receiving proceeds of Ps 1.8
million on June 23, 1997.  The remaining 973,937 Units remain available for purchase under the SOP.  On
June 11, 1997, the Company granted options to acquire a total of 333,000 Limited Voting Units to
participants in the SOP (the “1997 Options”).  The purchase price for Limited Voting Units subject to the
1997 Options is Ps 13.96 per Unit.  Of the total 1997 Options (i) 33,000 were exercised on June 11. 2002;
(ii) 159,000 lapsed due to the option holders leaving the employment of the Company; and (iii) 141,000
expired unexercised on June 11, 2002. are generally not exercisable until June 11, 1999, and expire if not
exercised by June 11, 2002.  On May 20, 1998, the Company granted options to acquire a total of 350,000
Limited Voting Units to participants in the SOP (the “1998 Options”).  The purchase price for Limited
Voting Units subject to the 1998 Options is Ps 12.30 per Unit.  The 1998 Options may not, generally, be
exercised until May 20, 2000, and expire if not exercised by May 20, 2003.  Of the total 1998 Options (i)
10,000 were exercised in May 2003; (ii) 178,000 lapsed due to option holders leaving the employment of
the Company prior to exercise; and (iii) 162,000 expired unexercised on May 20, 2003.

On April 23, 1999, the Company granted options to acquire an aggregate of 360,000 Limited
Voting Units to certain participants in the SOP (the “1999 Options”).  The purchase price for Limited
Voting Units subject to the 1999 Options is Ps 9.40 per Unit.  The 1999 Units may not be exercised until
April 23, 2001 and expire if not exercised by April 23, 2004.

During 2000, the Company decided to cease granting options under the SOP, and terminated it for
all purposes other than to govern options previously granted.  However, in 2001, 2002 and 2003 the Board
decided to reassign certain expired options under the SOP, and in July 2001 options to acquire an additional
570,000 Limited Voting Units (the “July 2001 Options”) were granted to certain officers of the Company
at an exercise price of Ps 17.00 per Unit.  In November 2001, additional options to acquire 77,000 Limited
Voting Units (the “November 2001 Options”) were granted to certain officers of the Company at an
exercise price of Ps 17.00 per Unit.  In August 2002, additional options to acquire 177,000 Limited Voting
Units ( the “August 2002 options”) were granted to certain officers of the Company at an exercise price
of Ps 12.15 per Unit.  In September 2003, additional options to acquire 166,000 Limited Voting Units (the
“September 2003 Options”) were granted to certain officers of the Company at an exercise price of Ps
11.50 per Unit.  Additionally, the Board decided to reduce the exercise price of the July 2001 and
November 2001 options to Ps 12.15 per Unit.  The September 2003, August 2002, July 2001 and the
November 2001 Options represented reassignment of options to acquire Limited Voting Units that had
either previously expired or lapsed.

As of June 1, 2004, officers and directors of the Company, as a group, held options to acquire an
aggregate 1,154,700 Limited Voting Units.

ITEM 7.           Major Shareholders and Related Party Transactions

A. Major Shareholders

The following table sets forth certain information concerning the ownership of the capital stock
of the Company as of May 30, 2004 with respect to each shareholder of the Company known to the
Company to be the beneficial owner of more than ten percent of either the Common Units or the Limited
Voting Units, as well as the holdings of all directors and officers of the Company as a group.

Shares OwnedCommon Units
Limited Voting Units
Aggregate
PercentageIdentity of Owner
Number
% of
Class
Number
% of
Class
Outstanding
SharesAlmeida Family (1)
24,876,009
51.34
2,956,419
8.99
34.22Harp Family (2)
11,482,393
23.70
10,333,511
31.43
26.82Roberto Hernandez
1,745,266
3.60
6,018,534
18.31
9.55JayHawk (3)
0
0.00
3,820,590
11.62
4.70Other Officers and Directors
404,664
0.84
125,379
0.38
0.65Other Shareholders
9,944,984
20.52
9,624,313
29.27
24.06Total
48,453,316
100.00
32,878,746
100.00
100.00


(1)        Owned directly by Oscar Almeida Chabre or members of his immediate family.

(2)        Shares owned beneficially by Alfredo Harp Helu and his three adult children and also shares held
in a trust (the “Banamex Trust”) administered by Banamex.  See “–The Harp Family and the
Banamex Trust” below.

(3)        JayHawk is JayHawk Institutional Partners, an investment group from Kansas City, Missouri.

The Harp Family and the Banamex Trust

Alfredo Harp Helu has owned a substantial number of Common Units for several years.  Over the
course of 2003 and 2004, three adult children of Mr. Harp acquired equal numbers of Common Units.
These three persons are also the beneficiaries of the Banamex Trust.  Although these persons own the same
number of Common Units and acquired their Units at substantially the same time, there is no agreement
or other obligation among them to vote their shares in any particular way or to act in any concerted manner
with respect to the acquisition, ownership or disposition of their respective Common Units.

The Banamex Trust was initially formed in order to provide a controlling position in the Common
Units (or Series B Shares) subsequent to the completion of the Kohler Placement in November of 2000.
The control arrangement was required under certain of Interceramic’s loan documentation which requires
that the Almeida Family retain effective voting control over Interceramic.  However, upon the completion
of the Kohler Placement, the Almeida Family owned only 48.6 percent of the Common Units.   The
Lenders agreed to the use of the Banamex Trust as a method for the Almeida Family to retain voting
control over the Common Units, as pursuant to an agreement between the Almeida Family and the
beneficial owners of the Banamex Trust, the Banamex Trust and the Almeida Family will vote their
respective Common Units coincident with each other.  As the result of some stock repurchases effected by
the Company and purchases by the Almeida Family in the 2004 Offering, the ownership of Common Units
by the Almeida Family currently exceeds 50 percent, and this arrangement is no longer necessary to ensure
the required degree of control.

Holdings in the United States

Given the wide-spread nature of holdings of securities in book-entry form both in the United States
and in Mexico, it is difficult for Interceramic to determine with any accuracy the extent of its holdings in
the United States.  However, at April 30, 2004 (i) 36.4 thousand, or 0.08 percent, of the outstanding
Common Units were trading in the United States as ADRs and (ii) 6.2 million, or 18.79 percent, of the
issued and outstanding Limited Voting Units were trading in the United States as ADRs.  Interceramic does
not believe that a material amount of the Common Units and Limited Voting Units trading on the Mexican
Stock Exchange are beneficially owned by United States residents or citizens.

B.  Related Party Transactions

Until their acquisition by the Company in 2004, GISA and MASA were owned and controlled by
the Almeida Family and they accounted for approximately 15.29 percent of the consolidated unit sales of
the Company in Mexico during 2003, representing 9.89 percent of the Company’s aggregate unit sales.
The largest of these, GISA, accounted for sales of approximately 21.0 million square feet of ceramic tile
(Ps 174.0 million), approximately five percent of consolidated sales, in that period, making it the second
largest customer of the Company by unit volume, while MASA purchased approximately 9.3 million square
feet of ceramic tile (Ps 83.2 million), less than three percent of consolidated sales, from the Company in
that period, making it the fourth largest customer by unit volume.  In 2002 and 2001, GISA and MASA
accounted for Company sales in the respective amounts of (i) with respect to GISA, Ps 185.2 million and
Ps 163.9 million, and (ii) with respect to MASA, Ps 77.7 million and Ps 85.3 million.

The Company believes that sales to these affiliated customers have been on commercially
reasonable terms, no less favorable to the Company than those conducted in comparable arms-length
transactions with customers not affiliated with the Company.

The Company contracts with Coratec for certain internal auditing services and computer
programming for general accounts, accounts payable and receivables and other accounting services
(charged according to program running time).  In 2003, 2002, and 2001 the Company paid Coratec Ps 22.8
million, Ps 23.9 million, and Ps 26.1 million respectively, for their services.

Coratec indirectly owns all of the stock of Corporación Aerea Cencor, S.A. de C.V. (“Coracen”),
which provides air taxi services to the Company in order to accommodate some of the regional business
travel requirements of the Company’s officers and directors as well as current and prospective customers
and clients of the Company.  The total value of the services provided by Coracen to the Company in 2003
of Ps 9.7 million was equal to 1.02 percent of the total operating expenses and equivalent to 0.28 percent
of sales for such period.  In 2002 and 2001, the cost of services provided by Coracen services were Ps 10.1
million and Ps 7.9 million, respectively.

A director of the Company, Augusto Champion Chapa, owns a controlling interest in Arquitectura
Habitacional e Industrial, S.A. de C.V. (“Arquitectura”), an architectural design and construction company
based in the City of Chihuahua.  Arquitectura has provided design and construction services on several of
the Company’s projects in Mexico.  Another director, Mark M. Blaugrund, owns a controlling interest in
RECON Real Estate Consultants, Inc. (“Recon”), an El Paso, Texas based commercial real estate company.
Recon has received real estate commissions from the Company in connection with numerous property
leases for Interceramic USA, including with respect to the Garland Lease and the Garland Warehouse
Lease.

The Company or its subsidiaries have entered into other contracts with members or affiliates of the
Controlling Group but which are, in the aggregate, not believed to be material to the Company on a
consolidated basis.

Certain of the officers and directors of the Company are also equity owners, officers or directors
of various other Controlling Group affiliates.

The Company believes that the various transactions and contracts entered into with these persons
are, in general, upon terms and conditions no more or less favorable to the Company than would be the case
if it were dealing with independent third parties.

At December 31, 2003 and as of the date of this Annual Report, there are no loans outstanding from
the Company to any officer or director of the Company or any member of the Controlling Group.

C.  Interests of Experts and Counsel

Not applicable.

ITEM 8.           Financial Information

A.  Consolidated Statements and Other Financial Information

Financial Statements

See “Item 19–Exhibits” for a list of the Financial Statements filed under Item 18.

Legal Proceedings

In the normal course of its business operations Interceramic and its subsidiaries have either been
plaintiffs or been named as defendants in a variety of legal actions.  The Company believes that all pending
actions or proceedings are covered by insurance or are not material to the financial condition, business and
affairs of the Company, taken as a whole.

Dividend Policies

The Board has no set policy on dividends, Interceramic having paid only one dividend in its
history.  In recent years, all available cash generated from operations has been applied to working capital
and the reduction of indebtedness, and management expects this to continue for the foreseeable future.

B.  Significant Changes

In the opinion of management, there have been no significant changes to the Company on a
consolidated basis since the date of the Financial Statements.  See “Item 5–Operating and Financial Review
and Prospects–D.  Trend Information” above.

ITEM 9.           The Offer and Listing

A.  Offer and Listing Details

Price History

In December of 1994, Interceramic completed the 1994 Offering, at which time the LVU ADRs
commenced trading on the NYSE.  The LVU ADRs are issued under the terms of a Deposit Agreement
dated December 15, 1994, as amended (the “LVU Deposit Agreement”), among Citibank, N.A., as
depositary (the “Depositary”), Interceramic and the registered holders from time to time of the LVU ADRs.
At April 30, 2004, 1,235,758 LVU ADRs were outstanding and trading on the NYSE.  The CU ADRs are
issued under the terms of an Amended and Restated Deposit Agreement dated December 15, 1994, as
amended (the “CU Deposit Agreement” and, collectively with the LVU Deposit Agreement, the “Deposit
Agreement”), among the Depositary, Interceramic and the registered holders from time to time of the CU
ADRs, and trade in the United States in an unrestricted program, but not on any established market.
Historically, there has been extremely limited trading in the CU ADRs in the United States and the volume
of Common Units in the program has decreased over the years.  At April 30, 2004, approximately 7,276
CU ADRs were outstanding.

High and Low Prices for Past Five Fiscal Years on the NYSE

The table below shows the high and low sales prices in Dollars of the LVU ADRs on the NYSE
for the preceding five fiscal years:

Year
High
Low2003
7.80
5.102002
13.00
4.752001
10.13
6.902000
9.63
4.251999
6.68
2.69


High and Low Prices by Quarter for Past Two Fiscal Years on the NYSE

The table below shows the high and low sales prices in Dollars and the average daily trading
volume in the LVU ADRs on the NYSE for the preceding two fiscal year periods:

Dollars per ADR(1)
Average
Daily
Trading
Volume in
ADRs(1)Period
High
Low2002:First Quarter
7.90
7.10
1,050Second Quarter
11.95
7.80
2,334Third Quarter
8.60
4.90
8,163Fourth Quarter
7.00
4.75
3,5502003:First Quarter
7.10
5.75
1,397Second Quarter
5.85
5.35
692Third Quarter
5.65
5.10
356Fourth Quarter
7.80
5.35
1,0192004:First Quarter
10.00
7.00
1,095Second Quarter(2)
7.40
6.62
858


(1)        Source:  NYSE; the Company.

(2)        To June 3, 2004.

High and Low Prices by Quarter for Past Two Fiscal Years on the Mexican Stock Exchange

The table below shows the high and low sales prices in nominal Pesos and the average daily trading
volume in the Common Units and the Limited Voting Units on the Mexican Stock Exchange for the
preceding two fiscal periods:

Nominal Pesos per Common
Unit(1)
Average
Daily Trading
Volume in
Common
Units(1)Period
High
Low2002:First Quarter
16.20
16.20
0Second Quarter
16.20
16.20
0Third Quarter
13.77
11.00
26Fourth Quarter
11.51
11.30
24,2772003:First Quarter
12.00
11.30
42,550Second Quarter
12.00
12.00
0Third Quarter
12.00
12.00
0Fourth Quarter
11.50
11.10
2,1032004:First Quarter
12.01
12.00
377Second Quarter(2)
17.51
16.50
2,067




(1)        Source:  NYSE; the Company.

(2)        To June 3, 2004.



Nominal Pesos per Limited Voting
Unit(1)
Average
Daily Trading
Volume in
Limited
Voting
Units(1)Period
High
Low2002:First Quarter
15.3
12.60
1,132Second Quarter
19.4
14.50
714Third Quarter
16.5
11.00
13,847Fourth Quarter
12.01
12.00
56,1552003:First Quarter
12.51
12.00
8,663Second Quarter
12.80
11.17
25,937Third Quarter
11.50
11.50
783Fourth Quarter
11.75
11.15
84,7902004:First Quarter
11.15
11.15
0Second Quarter(2)
17.00
16.40
3,342




(1)        Source:  Mexican Stock Exchange.

(2)        To June 3, 2004.

High and Low Prices for the Most Recent Six Months on the NYSE

The table below shows the high and low sales prices in Dollars of the LVU ADRs on the NYSE
for the seven preceding months:

Dollars per ADR(1)Period
High
LowDecember, 2003
7.80
7.25January, 2004
7.45
6.95February, 2004
9.40
7.20March, 2004
10.00
7.70April, 2004
8.25
6.60May, 2004
7.40
6.62June, 2004(2)
7.26
7.26




(1)        Source:  NYSE; the Company.

(2)        At June 3, 2004.

B.  Plan of Distribution

Not applicable.

C.  Markets

New York Stock Exchange

The LVU ADRs have been listed and trading on the NYSE since December of 1994 under the
symbol “ICM.”  The NYSE traces its origins back to 1792 and is arguably the best known securities
exchange in the world.  The NYSE registered as a national securities exchange with the SEC on October
1, 1934. The Governing Committee was the primary governing body of the NYSE until 1938, at which time
the NYSE hired its first paid president and created a 33 member Board of Governors. The Board of
Governors included NYSE members, non-member partners from both New York and out-of-town firms,
as well as public representatives.  In 1971 the NYSE was incorporated as a not-for-profit corporation. In
1972 the members voted to replace the Board of Governors with a 25 member Board of Directors,
comprised of a Chairman and Chief Executive Officer, 12 representatives of the public and 12
representatives from the securities industry.

On December 17, 2003, the SEC approved the amended and restated NYSE Constitution.  The
amendments had also been approved by the NYSE members on November 18, 2003.  The changes to the
NYSE Constitution created a new governance architecture, increasing transparency, the independence of
its Board of Directors and strengthening the integrity of the NYSE self-regulatory function.

The new structure created a Board of Directors (the “BoD”) comprised of independent directors
and a Board of Executives (the “BoE”), comprised of approximately 20 constituent representatives,
including public pension funds, institutional investors, listed companies, individual investors, broker-dealers, the trading floor and other members.  The BoE is to engage with NYSE senior management as well
as with the BoD in an ongoing review of NYSE performance, membership issues, listed company issues
and public issues relating to overall market structure.

Another key component in the new governance structure relates to the NYSE’s role as self-regulator. The Chief Regulatory Officer of the NYSE reports directly to an independent BoD committee,
called the “Regulatory Oversight & Regulatory Budget Committee.”  This functional separation of NYSE
regulation from the exchange business is intended to ensure independence while retaining sufficient
proximity to the marketplace to assure the market sensitivity that the NYSE believes is fundamental to
effective regulation of the capital markets.

The largest equities marketplace in the world, at the end of 2003, the NYSE was home to 2,750
companies worth US $17.3 trillion in global market capitalization.  As of year-end 2003, the NYSE had
359.7 billion shares listed and available for trading and during the course of 2003 the NYSE handled US
$9.7 trillion in trades.  Over two-thirds of the roster of NYSE companies have listed within the last 12
years.  These companies include a cross-section of leading United States companies, mid-size and small
capitalization companies.  Non-United States issuers play an increasingly important role on the NYSE.  At
the end of 2003, 467 non-United States companies were listed on the NYSE–more than triple the number
five years ago.

Trading on the NYSE commences on the NYSE at 9:30 a.m. New York, New York time and ends
at 4:00 p.m.  Trading occurs Monday through Friday of each week during the year, other than nine
recognized holidays.  Further information regarding the NYSE may be found on its web page at
www.nyse.com from which substantially all of the foregoing information has been obtained.

The Mexican Stock Exchange

Interceramic securities have traded on the Mexican Stock Exchange since 1987, and since the
restructuring of its capital stock in 1994, the Common Units have traded as “ceramic ub” and the Limited
Voting Units as “ceramic uld.”  The Mexican Stock Exchange, which was founded in 1894 and has
operated continuously since 1907, is located in Mexico City and is Mexico’s only stock exchange.  The
Mexican Stock Exchange is organized as a corporation with its shares being held by approximately 30
brokerage firms.

Equity trading takes place on the Mexican Stock Exchange each weekday other than holidays,
between the hours of 8:30 a.m. and 3:00 p.m., local time, although offers to buy and to sell may be made
starting at 8:00 a.m.  Each trading day is divided into six trading sessions with ten minute periods
separating each session.  Trades in securities listed on the Mexican Stock Exchange can, subject to certain
requirements, also be effected off of the Mexican Stock Exchange.  However, due primarily to Mexican
tax considerations relating to capital gains, most transactions in listed Mexican securities are carried out
on the Mexican Stock Exchange.  The Mexican Stock Exchange and the Comisión Nacional Bancaria y
de Valores, the Mexican national securities commission (the “CNBV”), have implemented an automatic
trading system which has substantially replaced trading on the floor of the Mexican Stock Exchange.

As of December 31, 2003, the shares of 176 Mexican companies, excluding mutual funds, were
listed on the Mexican Stock Exchange.  In 2003, the ten most actively traded equity issues represented
approximately 67.40 percent of the total volume of equity issues traded thereon.  There is no formal
over-the-counter market for securities in Mexico.  Although there is substantial participation by the public
in the trading of securities on the Mexican Stock Exchange, a major part of such activity reflects
transactions by institutional investors.  Further information regarding the Mexican Stock Exchange may
be found on its web page at www.bmv.com.mx.

D.  Selling Shareholders

Not applicable.

E.  Dilution

Not applicable.

F.  Expenses of the Issue

Not applicable.

ITEM 10.         Additional Information

A.  Share Capital

Not applicable.

B.  Memorandum and Articles of Association

Interceramic was organized on February 17, 1978 by the establishment of Public Deed Number
4,347 given at the Office of the Public Notary Number 4 in the City of Chihuahua.  This was followed by
the filing of its Acta Constitutiva, or articles of incorporation (the “Articles”), with the Registro Público
de Comercio del Distrito Morelos en la Ciudad de Chihuahua (the “Public Registry of Property and
Commerce of the Morelos District of the City of Chihuahua” or the “Public Registry”) on March 16, 1978.
The Bylaws contain most of the material provisions regarding the governance of Interceramic, and copies
of the Bylaws have also been filed with, and can be examined at, the Public Registry.  English translations
of the Articles and Bylaws, each as amended to date, were filed as Exhibits to the Company’s Registrations
Statement on Form F-3 filed with the SEC on January 12, 2004.

Corporate Purposes

Pursuant to Article 2 of the Articles, Interceramic’s corporate objectives and purposes include:

•           the manufacture, purchase and sale of all types of tile and stone and related products;

•           the manufacture and purchase of parts and machinery for production purposes;

•           acquisition of all fixed assets necessary to set up or install plants, factories and
warehouses;

•           purchase of lots and easements as is necessary to obtain raw materials;

•           purchase or rent all necessary buildings, machinery, equipment and vehicles necessary for
the purchase and transportation of the above mentioned products;

•           acquisition of lots and homes, as well as construction of homes;

•           obtain mortgages and loans of all types and obtain financing to reach any of the corporate
objectives;

•           enter into distribution, commission and retail contracts;

•           organize, finance and otherwise promote all types of companies and retail establishments;

•           acquisition of stock and shares of other companies;

•           serve as economic and technical consultants to professionals, construction workers,
construction companies and companies in general;

•           serve as technical, economic and administrative consultants to subsidiary companies and
third parties, as well as providing any other services to subsidiaries;

•           provide qualified personnel to subsidiaries that so request;

•           engage in exploration for and in the extraction, processing, production, use and sale of
metals and other natural products;

•           obtain, transfer, convey or otherwise deal in legal title or other interests in and to mining
properties and mineral processing facilities;

•           provide and obtain any services relating to any of the foregoing activities;

•           employ personnel and obtain permits necessary to achieve any of the foregoing objectives;
and

•           realize and enter into any acts and contracts and any other commercial activities and
operations allowed by applicable law.

Certain Matters Regarding Directors

The Bylaws contain no restriction on the ability of a director to vote on any matter in which the
director has a material interest; however the Board has a formally adopted policy pursuant to which if a
director has a material interest in a matter pending before the Board, the director must announce the nature
of the interest and excuse the director from debate, consideration and voting on the issue.  The Bylaws do
not contain any restriction on the ability of the directors to establish their compensation, either in the
aggregate or for any particular director.  Additionally, neither the Bylaws nor Board policy impose an age
limitation on directors nor impose any shareholding requirement.

With respect to borrowing powers, the Board generally delegates the power to exercise a variety
of corporate powers to one or more officers of Interceramic by a power-of-attorney.  Typically, this power
is sufficient to enable the grantee to borrow money and undertake virtually all ordinary corporate powers
on behalf of Interceramic over the course of the year.  In practice, material transactions are brought for
discussion before the Board at regularly called monthly meetings although formal Board votes are rarely
conducted.

Interceramic USA operates somewhat differently, and the borrowing power is in all material
respects exercised only upon express resolution by the Interceramic USA board of directors.

Outstanding Capital Stock

The authorized capital stock of Interceramic consists of 162,800,072, shares, divided into three
classes of stock without par value, the Series B Shares in the amount of96,906,632, the Series D Shares in
the amount of 32,946,720 and the Series L Shares in the amount of 32,946,720, of which on April 30, 2004,
162,664,124 were issued and outstanding, consisting of 96,906,632 Series B Shares and 32,878,746 shares
each of the Series D Shares and the Series L Shares.  Pursuant to the Bylaws, until December 7, 2004 (the
“Separation Date”), the Series B Shares are required to trade in pairs of two as Common Units, and the
Series D Shares and the Series L Shares are required to trade in pairs of one share of each class as Limited
Voting Units.

Units

The Bylaws require that Interceramic’s capital stock trade as either Common Units or Limited
Voting Units until the Separation Date.  Upon later sales, if any, by Interceramic of its capital stock, until
the Separation Date sales will be of the applicable Common Units or Limited Voting Units, and neither the
Series B Shares, the Series D Shares nor the Series L Shares will be sold in any form other than Common
Units and Limited Voting Units.  In connection with each subsequent sale of Common Units or Limited
Voting Units, if any, the applicable Units will separate with all other then outstanding Units on the
Separation Date, regardless of when the Units were first offered and sold, unless, in connection with any
sale, Interceramic requests and the Registro Nacional de Valores e Intermediarios (the “RNVI”) maintained
by the CNBV, approves a longer period for the applicable Units to trade in Unit form.

On the Separation Date, the Series L Shares will convert to Series B Shares, and thereafter, the
Series L Shares will cease to exist as a class of Interceramic’s capital stock, and all voting and other rights
previously applicable to holders of Series L Shares will no longer exist, other than to the extent rights may
be available under the Bylaws to holders of Series B Shares.

Changes in Capital Stock, Preemptive Rights and Redemption

The capital stock of Interceramic may be increased or decreased by a resolution passed at a general
extraordinary meeting of the holders of the Series B Shares–however, the Series B Shares must at all times
exceed 50 percent of Interceramic’s capital stock.

If the capital stock is increased, shareholders will have preemptive rights to subscribe for the new
shares in proportion to their holdings relative to all capital stock then outstanding, except in the case of
shares issued:

•         in connection with mergers;

•         upon the conversion of convertible debentures; or

•         for placement in public offerings, if the shareholders at a general extraordinary
shareholders’ meeting called for that purpose approve the issuance of shares and the
waiver of preemptive rights.

Interceramic may resell shares retained in the treasury as a result of share repurchases conducted
on the Mexican Stock Exchange without triggering the preemptive rights of shareholders.  The subscription
period for the exercise of preemptive rights is determined by the shareholders’ meeting which approved
the increase in the capital stock.  However, the subscription period may not be less than 15 days after
publication in the Periodico Oficial del Estado (the “Official Gazette”) of a notice of the issuance of new
shares.  Holders of ADRs may not be entitled to receive any rights to purchase securities which have not
been registered under the 1933 Act or other applicable law and which are not exempt from the registration
requirements of the 1933 Act.  Except for the waiver of preemptive rights made at a shareholders meeting
for shares to be issued under a public offering program approved by the shareholders and CNBV,
preemptive rights cannot be waived in advance and cannot be represented by an instrument that is
negotiable separately from the corresponding share.

Purchase of Shares by Interceramic

At the direction of the Board, Interceramic may repurchase its shares on the Mexican Stock
Exchange at any time at the prevailing market price.  In accordance with Article 14 Bis 3, I, of the Ley del
Mercado de Valores (the “Mexican Securities Law”), Interceramic may acquire its own stock in
transactions on the Mexican Stock Exchange at the then current market price without violating the
prohibition contained in first paragraph of Article 134 of the Ley General de Sociedades Mercantiles (the
“Mexican Companies Law”), if the repurchased shares are then applied in reduction of the shareholders
equity or, as the case may be, in reduction of paid-in capital, in the event it is resolved to hold them as
treasury shares, in which case shareholder approval of the repurchase shall not be required.

When the acquisition of Interceramic’s own shares is applied against paid-in capital, converting
the shares into treasury shares shall be done by reducing paid-in capital by an amount equivalent to the
“face value” of the shares.  For this purpose, “face value” is equal to the quotient of the paid-in capital
divided by the number of shares of Interceramic stock then issued and outstanding. The remaining balance
of the repurchase cost of the shares shall be charged to a “Reserve for Repurchase of Own Stock” account.
If the purchase price of the shares is less than their face value, paid-in capital must be reduced in an amount
equivalent to the face value of the shares acquired.

When an acquisition of shares is not to be applied against paid-in capital, a special account called
“Company’s Own Stock” shall be credited in an amount equivalent to the purchase price of the shares.

At the annual general ordinary shareholders meeting each year, the shareholders shall determine
for the applicable fiscal year by resolution the maximum amount of money that shall be available for use
by Interceramic for the repurchase of its own stock for the year, with the only limitation being that the
amount to be determined for this purpose shall in no event exceed the total balance of the net income of
Interceramic, including retained earnings.  The Board is required to designate the responsible person or
persons within Interceramic with the authority to make repurchases of Interceramic’s own stock in
accordance with this policy.

While its own shares are owned by Interceramic, such shares can not be voted or otherwise
represented at any shareholders meetings of any type for any purpose.

Shares held in the “Company’s Own Stock” account or as treasury shares may, notwithstanding
the provisions established in the Mexican Companies Law, be resold by Interceramic and placed within
the public market, in which event the corresponding increase in paid-in capital will not require the approval
of either the Board or the shareholders.  The amount received by Interceramic from resales of such shares
shall be applied to (i) in the event the repurchase of the shares was applied against paid-in capital and
conversion into treasury shares, increase the paid-in capital in an amount equivalent to the face value of
the shares, restoring the “Reserve for Repurchase of Own Stock” with the remaining balance, if any, or,
(ii) in the event the repurchase of such shares was not applied against paid-in capital, the “Company’s Own
Stock” account shall be reduced in an amount equal to the amount received in respect of such shares,
reducing  the “Reserve for Repurchase of Own Stock” in the event the amount received by Interceramic
was less than the amount paid by it for such shares at the time they were initially purchased.  The amount
of profit, if any, realized upon the resale of any such shares shall be maintained on the books of the
Company in an account called “Stock Premium.”

In no event shall Interceramic be entitled to purchase its own stock if the acquisition of such stock
would result in a reduction of the fixed portion of Interceramic’s paid-in capital.

The repurchase and subsequent resales of Interceramic’s own stock, the reports of repurchases and
resales that must be presented before to the annual general ordinary shareholders meeting, the standards
for the  disclosure of financial information, and also the forms and terms on which these actions must be
disclosed to the CNBV, to the Mexican Stock Exchange and to the public markets shall be governed by the
terms of the circulares (“Regulations”) of the CNBV.

Unless a share repurchase is conducted through a tender offer, Interceramic’s directors, officers,
statutory auditors and the secretary of the Board, and holders of ten percent or more of Interceramic’s
outstanding shares, may not sell shares to, or purchase repurchased shares from Interceramic.  Regulations
under the Mexican Securities Law require that if Interceramic decides to repurchase shares representing
three percent or more of its share capital, the repurchase must be conducted by means of a public tender
offer.

Companies or other entities controlled by Interceramic may not purchase, directly or indirectly,
shares of Interceramic or shares of companies or entities that are shareholders of Interceramic.

Registration and Transfer

All of the shares of Interceramic are evidenced by share certificates in registered form, with
registered dividend coupons attached.  Dividend coupons may only be presented for payment by the
registered holders of the corresponding share.  Shareholders of Interceramic may either hold their shares
directly, in the form of physical certificates, or indirectly, in the form of book entries through institutions
that have accounts with Indeval.  Accounts may be maintained at Indeval by brokers, banks, other financial
entities or other entities approved by the CNBV (“Indeval Participants”).  Interceramic maintains a stock
registry and only those persons listed in the stock registry and those holding physical certificates or
certificates indicating ownership issued by Indeval and any relevant Indeval Participants, will be
recognized as shareholders by Interceramic.

Shareholders’ Meetings and Voting Rights

The holders of Series B Shares, voting at a general ordinary shareholders’ meeting, are entitled to
elect all but four of the members of the Board and the corresponding alternate directors and to vote on any
matter coming before shareholders at any general meeting of Interceramic’s shareholders.

The holders of Series D Shares, voting as a class, are entitled to vote on:

•           the election of two members of the Board and the corresponding alternate directors;

•           any corporate action that would prejudice the rights of the Series D Shares as a class; and

•           the removal of the Series D Shares, the Limited Voting Units or the securities that
represent them from listing on the Mexican Stock Exchange or any foreign stock exchange
and cancellation from registration of those shares with RNVI.

The holders of Series L Shares, voting as a class, are entitled to vote on:

•           the election of two members of the Board and the corresponding alternate directors;

•           any corporate action that would prejudice the rights of the Series L Shares as a class; and

•           the removal of the Series L Shares, the Limited Voting Units or the securities that
represent them from listing on the Mexican Stock Exchange or any foreign stock exchange
and cancellation from registration of those shares with RNVI.

Additionally, voting together as a single class with the holders of the Series B Shares, the holders
of the Series D Shares and the Series L Shares are entitled to vote at an extraordinary general meeting on:

•           transformation of Interceramic from one type of company to another;

•           any merger of Interceramic, even if Interceramic is the surviving entity;

•           extension of Interceramic’s existence beyond its prescribed duration of February 28, 2053;

•           dissolution of Interceramic before February 28, 2053;

•           a change of Interceramic’s corporate purposes; and

•           a change of Interceramic’s nationality.

Under the Bylaws, holders of shares of any series are also entitled to vote as a class in a special
meeting governed by the same rules that apply to extraordinary meetings on any action that would impair
the rights of holders of shares of the effected series, and a holder of shares of the series would be entitled
to judicial relief against any action taken without a vote under those circumstances.

General shareholders’ meetings may be general ordinary meetings or general extraordinary meetings.  General extraordinary meetings are those called to consider certain matters specified in Article 182
of the Mexican Companies Law and the Bylaws including, principally, amendments of the Bylaws,
liquidation, merger and transformation from one form of company to another and increases and reductions
of the fixed portion of the capital.  In addition, the Bylaws require a general extraordinary meeting to
consider the removal of Interceramic’s shares from listing on the Mexican Stock Exchange or any foreign
stock exchange and from registration of the shares with the RNVI.  General ordinary meetings, which are
held at least once a year, are called to consider all other matters including any acquisition representing an
investment of more than 20 percent of Interceramic’s shareholders’ equity as set forth in its most recent
balance sheet filed with the CNBV and any sale of a subsidiary controlled by Interceramic which represents
more then 20 percent of Interceramic’s shareholders’ equity as set forth in its balance sheet.  The Bylaws,
however, provide for certain circumstances in which acquisitions may be approved by the Board alone.

Special meetings of holders of the Series D Shares and the Series L Shares are required to consider
the removal of the Series D Shares or the Series L Shares, as applicable, or the Limited Voting Units from
listing on the Mexican Stock Exchange or any foreign stock exchange and cancellation registration of the
shares with the RNVI.  All other matters on which holders of Series D Shares or Series L Shares are
entitled to vote will be considered at an extraordinary general meeting.  Holders of Series D Shares and
Series L Shares are entitled to attend, but not to address, meetings of shareholders at which they are not
entitled to vote.

A general ordinary meeting of the holders of Series B Shares must be held at least once each year
within the first four months following the end of the preceding fiscal year to consider the approval of the
financial statements of Interceramic and certain of its subsidiaries for the preceding fiscal year, to elect all
of the directors entitled to be elected by the holders of the Series B Shares, to elect statutory auditors and
members of any executive committee of the Board, to determine the compensation of all directors, statutory
auditors or members of an executive committee, and to determine the allocation of the profits of the
preceding year.

The quorum for a general ordinary meeting of the holders of the Series B Shares on first call is at
least 50 percent of the Series B Shares, and action may be taken by a majority of the Series B Shares
present.  If a quorum is not available, a second meeting may be called at which action may be taken by a
majority of the Series B Shares present, regardless of the number of shares represented at the meeting.

The quorum for a general extraordinary meeting at which holders of the Series B Shares, but not
holders of Series D Shares or Series L Shares, are entitled to vote is at least 75 percent and at least 50
percent of all of the outstanding Series B Shares on first and successive calls, respectively, and action may
be taken by a vote of at least 50 percent of the outstanding Series B Shares.  With respect to general
extraordinary meetings at which Series D Shares and/or the Series L Shares are entitled to vote, the quorum
requirement is at least 75 percent and at least 50 percent of all shares entitled to vote on first and successive
calls, respectively, and action may be taken by a vote of at least 50 percent of all of the stock entitled to
vote.

At special meetings of the Series D Shares or the Series L Shares for the removal of Series D
Shares, the Series L Shares, the Limited Voting Units or the securities that represent them, as the case may
be, from listing on the Mexican Stock Exchange or a foreign stock exchange or cancellation of registration
with the RNVI, the quorum requirement is at least 75 percent or at least 50 percent of the shares entitled
to vote on first and successive calls, respectively, and action may be taken by the vote of at least 50 percent
of the outstanding Series D Shares or Series L Shares.  At special meetings of the Series D Shares and/or
the Series L Shares on all other matters, the quorum requirement is at least 75 percent of all the applicable
shares on the first call, and at least 50 percent on successive calls, and action may be taken by the vote of
at least 50 percent of all outstanding Series D Shares or Series L Shares.

For a description of procedures for voting of the Series B Shares comprising the Common Units
underlying the Common Unit ADRs, and for voting of the Series D Shares and the Series L Shares
comprising the Limited Voting Units underlying the Limited Voting Unit ADRs, see “–Voting of American
Depositary Shares” below.

Holders of 15 percent of Interceramic’s outstanding capital stock may have any shareholder action
set aside by filing a complaint with a court of law within 15 days of close of the meeting at which the action
was taken and showing that the challenged action violates Mexican law or the Bylaws.  In addition, any
holder of Interceramic’s capital stock may bring an action at any time within five years challenging any
shareholder action.  Relief under these provisions is only available to holders (i) who were entitled to vote
on, or whose rights as shareholders were adversely affected by the challenged shareholder action and
(ii) whose shares were not represented when the action was taken or, if represented, were voted against it.

Shareholders’ meetings may be called by the Board, the statutory auditors of Interceramic or a
Mexican court.  The Board or the statutory auditors are required to call a meeting of the shareholders at the
written request of the holders of ten percent of the Series B Shares or, in the case of a meeting at which
holders of Series D Shares and/or the Series L Shares would be entitled to vote with the Series B Shares,
at the written request of the holders of ten percent of the outstanding Series B Shares, Series D Shares and
Series L Shares combined.  In the event that a meeting is not called within 15 days following the date of
request, a Mexican court may require the meeting to be called.  Notices of meetings and proposed agendas
must be published in the Official Gazette or a newspaper of general circulation in the City of Chihuahua
at least 15 days prior to the meeting.  Meetings at which holders of Series D Shares and/or Series L Shares
are not entitled to vote may be held without any publication if 100 percent of the Series B Shares are
represented.  To be entitled to vote at a meeting, shareholders must deposit their shares with Interceramic’s
Secretary at its office in the City of Chihuahua or any appointed registrar, or certificates evidencing a
deposit with a Mexican or foreign banking institution or with a Mexican exchange broker.  If entitled to
attend the meeting, a shareholder may be represented by proxy.  All meetings of Interceramic’s
shareholders must be held in the City of Chihuahua.  Holders of Interceramic’s shares do not have
cumulative voting rights.

Dividends

At each annual meeting of the holders of the Series B Shares, the Board submits the financial
statements of Interceramic for the previous fiscal year, together with a financial report by the Board, to the
holders of the Series B Shares for approval.  The holders of the Series B Shares, once they have approved
the financial statements, determine the allocation of Interceramic’s net profits for the preceding year.
Holders of the Series B Shares are required by law to allocate at least five percent of the net profits to a
legal reserve, which is not thereafter available for distribution until the amount of the legal reserve equals
20 percent of Interceramic’s historical capital stock (before effect of restatement).  Thereafter, the
shareholders may determine and allocate a certain percentage of net profits to any special reserve, including
a reserve for open-market purchases of Interceramic’s shares.  The remainder of net profits is available for
distribution in the form of dividends to the shareholders.  The Bylaws currently provide that, except to the
extent of the Fixed Preference (as defined in the following paragraph), all shares outstanding and fully paid
at the time a dividend is declared are entitled to share equally in any dividend.  Shares which are only
partially paid participate in a dividend in the same proportion that the shares have been paid at the time of
the dividend.

Holders of each Series D Share, including Series D Shares comprising the Limited Voting Units
underlying the Limited Voting Unit ADRs, are entitled to receive the Fixed Preference–an annual,
cumulative dividend of five percent of the theoretical per share value of the Series D Shares as set forth
in the Bylaws, or nominal Ps 0.025 per share, before any dividends are payable in respect of the Series B
Shares and the Series L Shares.  Following payment in full of the Fixed Preference, holders of Series B
Shares and the Series L Shares are entitled to receive, if available, an amount per share equal to the Fixed
Preference paid per Series D Share that year.  Following payment in full of an amount equal to the Fixed
Preference per Series D Share, Series B Share and Series L Share, the holders of the Series D Shares, the
Series B Shares and the Series L Shares share equally on a per share basis, in any amounts remaining for
distribution.

Liquidation

Upon liquidation of Interceramic, one or more liquidators will be appointed to wind up its affairs.
The Bylaws provide that, other than the Liquidation Preference payable with respect to the Series D Shares,
all fully paid and outstanding shares of capital stock will be entitled to participate equally in any
distribution upon liquidation.  Shares which are only partially paid participate in a liquidating distribution
in the proportion that they have been paid at the time of liquidation.  Holders of Series D Shares are entitled
to the Liquidation Preference equal to the sum of all accrued but unpaid Fixed Preference dividends and
the theoretical per share value of the Series D Shares as set forth in the Bylaws, or nominal Ps 0.50 per
share, before any distribution is made in respect of Interceramic’s other capital stock.  Following payment
in full of any preferential amounts, holders of Series B Shares and Series L Shares will be entitled to
receive, if available, an amount per share equal to the Liquidation Preference paid per Series D Share.
Following payment in full at an amount equal to the Liquidation Preference per Series D Share, Series B
Share and Series L Share, the holders of the Series D Shares, the Series B Shares and the Series L Shares
will share equally, on a per share basis, in any remaining amounts payable in respect to Interceramic’s
capital stock, regardless of the date of liquidation.

Upon the liquidation of Interceramic, holders of fully paid shares are entitled to receive pro rata
any proceeds remaining after the payment of Interceramic’s debts and taxes and the expenses of the
liquidation in the manner described in the preceding paragraph; holders of shares that have not been paid
in full will only be entitled to liquidation proceeds in proportion to their paid-in amount.

Variable Capital and Withdrawal Rights

Interceramic’s capital stock includes a variable capital portion, which can at a maximum equal ten
times the fixed capital portion. An aggregate of Ps 8.0 million has been allocated on the records of
Interceramic to fixed capital.  The fixed portion of Interceramic’s capital stock cannot be withdrawn.

The outstanding variable portion of Interceramic’s capital stock may be fully or partially withdrawn
by the shareholders.  A shareholder who wishes to effect a total or partial withdrawal of the variable portion
of its shares must notify Interceramic in writing pursuant to the Bylaws.  If notice of withdrawal is received
prior to the first day of the last quarter of the fiscal year, the withdrawal will be effective at the end of the
fiscal year in which the notice is given.  Otherwise, the withdrawal will become effective at the end of the
following fiscal year.  Upon a shareholder’s election to withdraw its variable capital as described above,
the share capital of Interceramic is reduced.

Reimbursement of withdrawn shares is at the lower of 95 percent of the average price per share
quoted on the Mexican Stock Exchange during the 30 days on which the shares were quoted prior to the
date on which the withdrawal becomes effective or the book value per share as calculated from
Interceramic’s financial statements (as approved at the annual ordinary shareholders’ meeting) for the fiscal
year at the end of which the withdrawal becomes effective.  A shareholder that has exercised its withdrawal
rights can request reimbursement by Interceramic on the day following the general ordinary shareholders’
meeting at which the financial statements referred to above are approved.

Because the fixed portion of capital cannot be withdrawn, requests for withdrawals are satisfied
only to the extent of the available variable capital and in the order in which they are received; requests
which are received simultaneously are fulfilled pro rata to the extent of the available variable capital.

Any variable portion of Interceramic’s capital stock may be increased or decreased by resolution
of shareholders at a general ordinary shareholders’ meeting.  Increases and decreases in the capital stock
must be recorded in Interceramic’s book of capital variations.

Notification in the Event of Certain Securities Acquisitions

The Bylaws provide that in the event a shareholder of Interceramic, either acting singly or
collectively with other persons, acquires in excess of 15 percent of the Series B Shares outstanding, whether
as comprising Common Units prior to the Separation Date or trading separately thereafter, the person is
required to make a filing with Interceramic, describing itself and the persons in the applicable group.
Failure to make the filing will result in the inability of the applicable persons to exercise voting rights with
respect to Series B Shares owned by them in excess of 15 percent of the then outstanding Series B Shares.

Stated Duration of Interceramic

The duration of Interceramic is through February 28, 2053.

Appraisal Rights

If and when the shareholders approve a change of corporate purpose, change of nationality of the
corporation or transformation from one type of company to another, any shareholder who has voted against
a change in the corporate purpose has the right to withdraw from Interceramic and receive the book value
(as set forth in the latest balance sheet approved by the general ordinary shareholders’ meeting) attributable
to the shares, as long as the shareholder makes its request during the 15-day period following the
adjournment of the meeting at which the change was approved.

Actions Against Directors

Pursuant to Article 161 of the Mexican Companies Law, civil actions against directors may be
initiated by resolution passed at a general ordinary shareholders’ meeting.  In the event the shareholders
decide to bring an action, the directors against whom the action is to be brought immediately cease to be
directors.  Additionally, shareholders representing not less than 15 percent of the outstanding shares may
directly bring an action against directors as long as the shareholders did not vote against bringing the action
at the relevant shareholders’ meeting and the claim covers all the damages alleged to have been caused to
Interceramic and not only the portion corresponding to those shareholders.  Any recovery of damages with
respect to the action will be for the benefit of Interceramic and not for the shareholders bringing the action.

Shareholders’ Conflicts of Interest

Pursuant to the Mexican Companies Law, any shareholder that has a direct or indirect conflict of
interest with respect to a transaction must abstain from voting with respect to that transaction at the relevant
shareholders’ meeting.  A shareholder that votes on a transaction in which its interest conflicts with that
of Interceramic may be liable for damages in the event the relevant transaction would not have been
approved without the shareholder’s vote.

Restriction on Foreign Investment

Ownership by non-Mexicans of shares of Mexican enterprises is regulated by the Ley de Inversión
Extranjera (as amended, the “Foreign Investment Law”) and the Reglamento de la Ley para Promover la
Inversión Mexicana y Regular la Inversión Extranjera (as amended, the “Foreign Investment
Regulations”).  The Comisión Nacional de Inversiones Extranjeras (the “Foreign Investment Commission”)
is responsible for the administration of the Foreign Investment Law and the Foreign Investment
Regulations.

The Foreign Investment Law reserves certain economic activities exclusively for the Mexican
government, certain other activities exclusively for Mexican individuals or Mexican corporations and limits
the participation of non-Mexican investors to certain percentages in regard to enterprises engaged in certain
activities specified in the Foreign Investment Law.  Foreign investors may freely participate in up to 100
percent of the capital stock of Mexican companies or entities except for existing companies engaged in
specified reserved activities as referred to above.  Although Interceramic is not engaged in an industry in
which foreign ownership is restricted, the Foreign Investment Law requires that Interceramic register any
foreign owner of its shares, or the depositary with respect to ADRs representing its shares, with the
National Registry of Foreign Investment maintained by the Ministry of Commerce and Industrial
Development of Mexico.  A foreign owner of shares that has not been registered is not entitled to vote or
to receive dividends with respect to its unregistered shares.  Interceramic has registered the Depositary for
this purposes with respect to the ADRs.

Neither the Series B Shares, the Series D Shares nor the Series L Shares have restrictions on
ownership by non-Mexican nationals.

In addition, as required by Mexican law, the Bylaws provide that non-Mexican shareholders of
Interceramic formally agree with the Foreign Affairs Ministry to be considered as Mexicans with respect
to the shares that they acquire or hold as well as to the property, rights, concessions, participation or
interests owned by Interceramic or to the rights and obligations derived from any agreements Interceramic
has with the Mexican Government and not to invoke the protection of their own governments.  If a
shareholder should invoke governmental protection in violation of its agreement, its shares would be
forfeited to the Mexican government.  In the opinion of Abogados Mesta y Asociados, S.C., Mexican
counsel to Interceramic, under this provision a non-Mexican shareholder is not deemed to have waived any
other rights it may have, including any rights under the United States securities laws, with respect to its
investment in Interceramic.

Voting of American Depositary Shares

As the holder of the Units underlying the ADRs, the Depositary will receive notice of meetings of
Interceramic’s shareholders.  As soon as practicable after the receipt by the Depositary of notice of any
meeting of holders of the Series B Shares, the Series D Shares or the Series L Shares, the Depositary will
mail or cause to be mailed the information contained in the notice of meeting to all holders of record of the
applicable ADRs on the applicable record date (the “Holders”).  Holders at the close of business a date
specified by the Depositary, which shall be no fewer than eight business days prior to the relevant
shareholders’ meeting, may (unless otherwise restricted by law or the terms of the Deposit Agreement or
the applicable securities) instruct the Depositary as to the exercise of the voting rights, if any, pertaining
to the applicable shares comprising the Units represented by their respective ADRs.  The Depositary will,
if practicable, vote the applicable shares in accordance with the written instructions of Holders.

Although Holders of ADRs are not entitled to attend general meetings of the holders of the Series
B Shares, the Series D Shares or the Series L Shares, all Holders, regardless of nationality, are entitled to
exercise all voting rights applicable to the shares comprising the Units represented by their ADRs.
Interceramic and the Depositary will use their reasonable efforts to implement arrangements to enable
Holders to be able to vote the shares comprising the Units attributable to the ADRs.

If the Depositary does not receive timely instructions from a Holder of ADRs regarding the voting
of the shares comprising their Units on or before the date established by the Depositary for that purpose,
the Depositary shall take action to cause the shares to be counted for the purposes of satisfying applicable
quorum requirements, but shares for which timely instructions to vote are not received will not be voted
by the Depositary.

Further information regarding the Deposit Agreement and the rights and obligations of
Interceramic, the Depositary and the holders of ADRs thereunder may be found in Interceramic’s
Amendment No. 1 to Registration Statement on Form F-3, filed with the SEC on November 2, 2000,
Registration No. 333-12776.

C.  Material Contracts

Other than the American Standard Agreement and the Kohler Agreement, and the Credit
Agreement, the Company has not entered into any contracts that could be considered material to the
Company in the past two fiscal years.  See “Item 4–Information on the Company–B. Business
Overview–The American Standard Agreement” and “–The Kohler Agreement” and “Item 5–Operating and
Financial Review and Prospects–B. Liquidity and Capital Resources” above.

D.  Exchange Controls

Mexico abolished its exchange control system on November 11, 1991.  Banco de México, the
Mexican central bank (“Banco de México”), has in recent years consistently has made foreign currency
available to Mexican private sector entities (such as the Company) to meet their foreign currency
obligations.  Nevertheless, in the event of renewed shortages of foreign currency, there can be no assurance
that Banco de México would continue to make foreign currency available to private sector companies or
that foreign currency needed by the Company to service foreign currency obligations could be purchased
in the open market without substantial additional cost.

Neither the Mexican government directly nor Banco de México impose any restrictions on the
ability of Interceramic to make dividend, interest or other payments to holders of Interceramic’s securities.

E.  Taxation

United States Taxes

General

The following is a summary of the material United States federal income tax consequences of the
ownership and sale of Units and ADRs, in each case, except as otherwise noted, by a US Holder (as defined
below).  The tax treatment of a holder may vary depending upon the particular situation of the holder.  The
following summary of United States federal income tax consequences is limited to holders who hold Units
as “capital assets,” within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the “Code”), and whose “functional currency,” within the meaning of Code Section 985, is the Dollar.
Certain holders (including without limitation insurance companies, tax-exempt organizations, financial
institutions, persons subject to the alternative minimum tax, holders that are not US Holders, broker-dealers
and beneficial holders of five percent or more of the voting power or value of the shares of Interceramic)
may be subject to special rules not discussed below.  The discussion below also does not address the effect
of any United States state or local tax law on a holder.  Additionally, the discussion is based upon United
States federal income tax law as currently in effect, which is subject to change.  As used herein, the term
“US Holder” means any beneficial or record holder who is either an individual who is a citizen or resident
of the United States, a partnership, corporation or other entity organized in or under the laws of the United
States or any state thereof, or an estate or trust that is subject to United States federal income taxation
without regard to the source of its income.

Ownership and Sale of Units and ADRs

For United States federal income tax purposes, US Holders of Units and ADRs will be treated as
the owners of the Common Units or Limited Voting Units and the Series B Shares or the Series D Shares
and the Series L Shares comprising the Common Units and the Limited Voting Units, respectively.

Taxation of Dividends and Stock Distributions

For tax years ending before January 1, 2003, dividends paid out of current or accumulated earnings
and profits with respect to Units will be includible in the gross income of a US Holder as ordinary income
when the dividends are received by the custodian for the Units underlying the ADRs and the CU ADRs in
the United States (the “Custodian”) and will not be eligible for any dividends received deduction otherwise
allowable to corporations under Code Section 243.  Such dividends paid in Pesos will be includible in the
income of a US Holder in a Dollar amount calculated by reference to the exchange rate in effect on the day
the Pesos are received by the Custodian.  US Holders should consult their own tax advisors regarding the
treatment of any foreign currency gain or loss on any Pesos received which are not converted into Dollars
on the day the Pesos are received by the Custodian.  Dividends generally will constitute foreign source
“passive income” (or in the case of certain holders, “financial services income”) for United States foreign
tax credit purposes.  For tax years beginning after December 31, 2002 and ending prior to January 1, 2009,
dividends payable by certain corporations, including the Company, will be taxed at capital gains rates,
generally 15 percent for most US Holders, while US Holders in the ten percent and 15 percent tax brackets
are taxed on capital gains at a rate of five percent.

Amounts withheld in respect of Mexican taxes on dividends will, subject to certain generally
applicable limitations and exceptions, be eligible for the foreign tax credit available under the Code or, at
the election of the US Holder, be deductible in computing taxable income.  Under recent amendments to
the Code, foreign tax credits may not be available for withholding taxes attributable to dividends paid in
respect of securities held for short periods of time or for certain short-term or hedged positions taken in
respect of securities.

Distributions of additional shares to US Holders with respect to the Units (and accompanying
distributions with respect to ADRs) that are made as part of a pro rata distribution to all shareholders of
the Company generally will not be subject to United States federal income tax.

A holder of Units or ADRs that is, with respect to the United States, not a US Holder (a “Non-US
Holder”) will not be subject to United States federal income or withholding tax on dividends paid with
respect to the Units (or with respect to ADRs), unless such income is effectively connected with the
conduct by the holder of a trade or business in the United States.

Taxation of Capital Gains

Gain or loss realized by a US Holder on the sale or other taxable disposition of Units or ADRs will
be subject to US federal income taxation as capital gain or loss in an amount equal to the difference
between such holder’s basis in the Units or ADRs and the amount realized on the sale or other disposition.
Capital gains and losses recognized on a sale or other disposition of Units or ADRs by a US Holder
generally will be treated as United States source income.  Deposits and withdrawals of Units for ADRs by
US Holders will not be subject to United States federal income tax.

A Non-US holder of Units or ADRs will not be subject to United States federal income or
withholding tax on gains realized on the sale of Units or ADRs unless (i) such gain is effectively connected
with the conduct by the holder of a trade or business in the United States or (ii) in the case of gain realized
by an individual holder, the holder is present in the United States for 183 days or more in the taxable year
of the sale and certain other conditions are met.

Mexican Taxes

General

The following is a summary of certain anticipated Mexican tax consequences of the ownership and
disposition of Units and ADRs, in each case, by a person that is not a resident of Mexico, as defined below.

The summary is based upon the tax laws of Mexico as in effect on the date hereof, which are
subject to change.  Holders should consult their own tax advisors as to United States, Mexican or other tax
consequences of the ownership and disposition of Units and ADRs.

An income tax treaty between the United States and Mexico took effect beginning January 1, 1994.
Except as described below under “—Taxation of Capital Gains,” the treaty does not have any material
effect on the Mexican tax consequences described herein.  Holders should consult with their tax advisors
as to their entitlement to benefits afforded by the tax treaty.

For purposes of Mexican taxation, a natural person is a resident of Mexico if it has established its
home in Mexico, unless it has resided in another country for more than 183 calendar days during a year and
can demonstrate that he had become a resident of that country for tax purposes, and a legal entity is a
resident of Mexico if and to the extent that it has business activities in Mexico.  A Mexican citizen or a
legal entity with its corporate domicile in Mexico and established under Mexican law is presumed to be
a resident of Mexico unless such person or entity can demonstrate otherwise.  If a legal entity has a
permanent establishment or fixed base in Mexico, such permanent establishment or fixed base shall be
required to pay taxes in Mexico in accordance with relevant tax provisions.

Taxation of Dividends

Effective January 1, 2000, dividends, either in cash or in any other form, paid with respect to the
Units will be subject to the Mexican corporate tax, which the Company will be required to pay at a rate of
35 percent of 1.5385 times the amount of the dividend, if the dividend is not paid from earnings which have
already been taxed.

Taxation of Capital Gains

The sale or other disposition of ADRs will not be subject to Mexican tax.  Deposits and
withdrawals of ADRs will not give rise to Mexican tax or transfer duties.

Gains realized on the sale or other disposition of Units will not be subject to any Mexican tax if
the sale is carried out through the Mexican Stock Exchange or any other recognized securities market, as
determined by Mexican tax authorities, including the NYSE.  Gains realized on sales or other dispositions
of Units made in other circumstances would be subject to Mexican income tax.  Under the terms of the
United States-Mexico income tax treaty, gains of a (less than 25 percent) US Holder eligible for benefits
under the treaty on disposition of Units will not generally be subject to Mexican tax, provided they are not
attributable to a permanent establishment or fixed base of such US Holder in Mexico.  Gains of a Non-US
Holder eligible for benefits under a treaty to which Mexico is a party may be exempt, in whole or in part,
from Mexican tax under the applicable treaty.  Holders should consult with their tax advisors to determine
their entitlement to benefits accorded under any applicable tax treaty.

Other Mexican Taxes

There are no inheritance or succession taxes applicable to the ownership, transfer or disposition
of Units or ADRs.  There are no Mexican stamp, issuer, registration or similar taxes or duties payable by
holders of Units or ADRs.

F.  Dividends and Paying Agents

Not applicable.

G.  Statement by Experts

Not applicable.

H.  Documents on Display

Copies of documents referenced in this Annual Report may be obtained from Jesús Olivas Corral
at the Company’s office in Mexico at Ave. Carlos Pacheco 7200, Chihuahua, Chihuahua, México,
telephone number  011.52.614.429.1161, or from Mark E. Mendel, Esq., Mendel • Blumenfeld, LLP, 5809
Acacia Circle, El Paso, Texas 79912, telephone number 915.587.7878.

I.  Subsidiary Information

Not applicable.

ITEM 11.         Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from changes in currency exchange rates and interest rates,
in addition to the market risk inherent to material operations in economies of developing countries such
as Mexico.  The Company has identified its major sources of market risk, and in part chose to cause all of
its indebtedness to be denominated in Dollars as a result.  The Company is also exposed to market risk from
changes in the price of natural gas, a material cost of production for the Company that historically has been
subject to significant and rapid swings in price.  In 2001, the Company entered into hedge agreements for
the price of natural gas in order to reduce some of the market risk with respect to natural gas prices, but
these agreements terminated on December 31, 2003, and the Company is currently paying for natural gas
at applicable market prices.

Interest Rate Risk

Interest rate risk exists principally with respect to the Company’s indebtedness that bears interest
at floating rates. At December 31, 2003, the Company had outstanding approximately US $120.9 million
of indebtedness,  approximately 0.14 percent of which bore interest at fixed interest rates and
approximately  99.86 percent of which bore interest at floating rates of interest. The interest rate on all of
the Company’s variable rate debt is determined by reference to LIBOR.  Fundamental to variable rate
obligations is the risk that interest rates will increase, particularly if rates increase without corresponding
economic and price growth in the Company’s operations.

Foreign Currency Risk

The Company’s principal exchange rate risk involves changes in the value of the Peso relative to
the Dollar.  Decreases in the value of the Peso relative to the Dollar will result in foreign exchange losses
as the aggregate amount in Pesos of the Company’s Dollar denominated indebtedness increases.  Further,
decreases in the Peso with respect to the Dollar increase the cost in Pesos of Dollar denominated expenses,
including debt service obligations and amounts due third party vendors and suppliers.

During the course of 2003, the Peso weakened considerably in value against the Dollar, going from
Ps 10.39 to US $1.00 at December 31, 2002 to Ps 11.235 to US $1.00 at December 31, 2003.   During the
course of 2004, the Peso has continued to lose value against the Dollar, standing at Ps 11.423 to US $1.00
at June 4, 2004.

At December 31, 2003 (i) approximately 43.9 percent of the Company’s consolidated revenues
were denominated in Dollars; (ii) approximately 50.3 percent of the Company’s total assets were
denominated in Dollars; (iii) all of the Company’s indebtedness was denominated in Dollars; (iv)
approximately 69.0 percent of the Company’s total liabilities were denominated in Dollars; and (v) roughly
half of the Company’s consolidated costs and operating expenses were denominated in Dollars.  From an
operating perspective, the Company believes that foreign exchange risk is substantially mitigated by the
significant portion of its revenues that are denominated in Dollars, although weakening of the Peso against
the Dollar can result and has in the past resulted in significant foreign exchange losses.

Commodity Price Risk

In the Company’s Mexican operations, the cost of natural gas constituted approximately 8.01
percent of the cost of production in 2003, while in the United States natural gas purchases accounted for
approximately 8.14 of the cost of production.  The price of natural gas is subject to significant variations
during the course of a year.  For example, at January 1, 2000 the average price for natural gas to the
Company was US $9.81 per MMBtu, on June 1, 2001 the same quantity of natural gas cost US $2.35 and
at year end, the price stood at  US $2.35 per MMBtu.  As increases in natural gas prices can rarely be offset
by correspondingly higher prices  for the Company’s products, unusually large increases or decreases in
the price of natural gas can have a significant impact on the Company’s operating profitability.

To protect the Company against some of the market risk related to natural gas prices, in 2001 the
Company entered into a fixed price contract for all of its natural gas requirements in Mexico with Petróleos
Mexicanos (“Pemex”), the Mexican state oil and gas company, locking in the price of US $4.00 per
MMBtu, plus an amount equal to the difference between certain market prices of United States gas
companies.  This arrangement was in effect until December 2003.  The price for natural gas during the first
half of 2004 has varied widely, from US $5.40 per MMBtu in January down to US $4.53 in March,
increasing back up to US $5.32 in May.  Given the rising energy prices and instability in the Middle East,
prices are expected to remain volatile in the near future.

Sensitivity Analysis Disclosure–2003

Interest Rates

A hypothetical, instantaneous and unfavorable change of 250 basis points in the interest rate
applicable to the Company’s variable rate indebtedness at December 31, 2003 would have resulted in
additional interest expense of approximately US $3.0 million.

Exchange Rates

A hypothetical, instantaneous and unfavorable ten percent change in currency exchange rate of the
Peso relative to the Dollar at the beginning of 2003 would have resulted in additional interest expense for
the year of approximately Ps 8.0 million, reflecting the increased cost in Pesos of servicing the Company’s
Dollar denominated indebtedness. Such a change would have also resulted in an estimated additional
foreign exchange loss of approximately Ps 9.2 million, reflecting the increased value in Pesos of the
Company’s Dollar denominated indebtedness.

Natural Gas Prices

A hypothetical, instantaneous and unfavorable ten percent change in the price of natural gas at the
beginning of 2003 would not have resulted in any additional natural gas expense to the Company for the
year given the Company’s fixed price contract with Pemex.  In the event, during the course of 2003, the
price of natural gas actually increased, with the result that for a large part of 2003 the Company was paying
less than the market price under its contract with Pemex.

Sensitivity Analysis Disclosure–2002

Interest Rates

A hypothetical, instantaneous and unfavorable change of 250 basis points in the interest rate
applicable to the Company’s variable rate indebtedness at December 31, 2002 would have resulted in
additional interest expense of approximately US $2.9 million.

Exchange Rates

A hypothetical, instantaneous and unfavorable ten percent change in currency exchange rate of the
Peso relative to the Dollar at the beginning of 2002 would have resulted in additional interest expense for
the year of approximately Ps 11.5 million, reflecting the increased cost in Pesos of servicing the Company’s
Dollar denominated indebtedness. Such a change would have also resulted in an estimated additional
foreign exchange loss of Ps 11.6 million, reflecting the increased value in Pesos of the Company’s Dollar
denominated indebtedness.

Natural Gas Prices

A hypothetical, instantaneous and unfavorable ten percent change in the price of natural gas at the
beginning of 2002 would not have resulted in additional natural gas expense to the Company for the year
given the Company’s fixed price contract with Pemex.  In the event, during the course of 2002 the price
of natural gas actually decreased substantially, with the result that for a large part of 2002 the Company
was paying substantially more than the market price under its contract with Pemex.

ITEM 12.         Description of Securities Other Than Equity Securities

Not applicable.

PART II

ITEM 13.         Defaults, Dividend Arrearages and Delinquencies

There have been no defaults by the Company under any of its financing arrangements, nor has there been any dividend arrearages or any other material delinquency.



ITEM 14.         Modifications to the Rights of Security Holders and Use of Proceeds

There have been no modifications to the rights of any security holders since the date of the
Company’s last Annual Report on Form 20-F.  There are no reports with respect to use of proceeds
applicable to the Company.

ITEM 15.         Controls and Procedures

The Company has established and maintains disclosure controls and procedures that are designed
to ensure that material information relating to Interceramic and its subsidiaries required to be disclosed in
the reports that it files or submits under the 1934 Act is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that
such information is accumulated and communicated to the Company`s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

Within the 90 days prior to the filing date of this Annual Report, the Company carried out an
evaluation, under the supervision and with the participation of management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and operation of disclosure
controls and procedures.  Based on that evaluation of these disclosure controls and procedures, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective as of the date of such evaluation.

The Chief Executive Officer and the Chief Financial Officer have also concluded that there were
no significant changes in the Company’s internal controls or in other factors that could significantly affect
the internal controls subsequent to the date that Interceramic completed its evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.

ITEM 16A.      Audit Committee Financial Expert

The Company has an “audit committee financial expert,” within the meaning of Form 20-F under
the 1934 Act, serving on the Audit Committee.  The person is Humberto Valles Hernandez, who qualifies
as “independent,” within the meaning of Rule 10A-3 under the 1934 Act.

ITEM 16B.      Code of Ethics

The Company has adopted a code of ethics (the “Code”) that applies to all of its officers, a copy
of which is included as an
Exhibitto this Annual Report.

ITEM 16C.      Principal Accountant Fees and Services

Audit Fees

The aggregate fees billed for 2002 and 2003 for professional services rendered by the principal
accountant for the audit of the Company’s annual financial statements or for services that are normally
provided by the accountant in connection with statutory and regulatory filings or engagements for those
fiscal years were Ps 2,472 and Ps 2,830, respectively.

Audit-Related Fees

The aggregate fees billed for 2002 and 2003 for professional services rendered by the principal
accountant for assurance and related services that are reasonably related to the performance of the audit
or review of the Company’s annual financial statements not disclosed above were Ps 310 and Ps 328,
respectively.  The services rendered in this regard included review of the Company’s annual reports on
Form 20-F.

Tax Fees

The aggregate fees billed for 2002 and 2003 for professional services rendered by the principal
accountant for tax compliance, tax advice and tax planning were Ps 27 and Ps 350, respectively.

Audit Committee Pre-Approval Policies

The engagement of the Company’s independent auditors for each fiscal year, as well as the amount
of audit fees, audit-related fees and tax fees of the auditors, are all subject to the prior recommendation of
the Audit Committee to the Board.  Pursuant to this policy, which is designed to assure that such
engagements do not impair the independence of the auditors, the Audit Committee annually
recommends to the Board a catalog of specific audit and non-audit services in the categories of
audit service, audit-related service, tax services and other services that may be performed by the
Company’s independent accountants and the maximum fees that the Audit Committee recommends
be paid as compensation for each service in those categories.  Any proposed services exceeding the
maximum recommended fees require specific analysis and further recommendation by the Audit
Committee.

PART III

ITEM 17.         Financial Statements

The Company has responded to Item 18 in lieu of responding to this Item.

ITEM 18.         Financial Statements

See Item 19(a) for a list of the Financial Statements filed under this Item.

ITEM 19.         Exhibits

Page

(a)List of Financial Statements:

Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . F-2

Consolidated Balance Sheets at December 31, 2002 and 2003. . . . . . . . . . . . . .. F-3

Consolidated Statements of Income of the Company and subsidiaries for each of

the three years in the periods ended December 31, 2001, 2002 and 2003. . . . . .. F-5



Consolidated Statements of Changes in Stockholders’ Equity of the Company

and subsidiaries for each of the three years ended

December 31, 2001, 2002 and 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6



Consolidated Statements of Changes in Financial Position of the Company

and subsidiaries for each of the three years ended

December 31, 2001, 2002 and 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

Notes to Consolidated Financial Statements of the Company and subsidiaries. . .. .F-10

(b)Financial Statement Schedules:

Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1

Schedule I Condensed Financial Information of Registrant. . . . . . . . . . . . . . . . . . . . .S-2

Schedule II Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-15

(c)        Consent of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1

(d)        Code of Ethics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . .D-1



SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, as amended,
the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused
this Annual Report on Form 20-F to be signed on its behalf by the undersigned, thereunto duly authorized.

June     30, 2004.



INTERNACIONAL DE CERAMICA, S.A. de C.V.



By:Jesús Olivas Corral

Jesús Olivas Corral

Chief Financial Officer



---



CERTIFICATIONS



I, Víctor D. Almeida García, certify that:

1.           I have reviewed this Annual Report on Form 20-F of the Registrant;

2.           Based on my knowledge, this Annual Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered
by this Annual Report;

3.           Based on my knowledge, the financial statements, and other financial information included
in this Annual Report, fairly present in all material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in this Annual Report;

4.           The Registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in 1934 Act Rules 13a-14 and 15d-14) for the
Registrant and have:

a.  designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this Annual Report is being
prepared;

b.  evaluated the effectiveness of the Registrant’s disclosure controls and procedures
as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”);
and

c.  presented in this Annual Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.           The Registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation, to the Registrant’ auditors and the audit committee of Registrant’s board of directors (or persons
performing the equivalent function):

a.  all significant deficiencies in the design or operation of internal controls which
could adversely affect the Registrant’s ability to record, process, summarize and report financial
data and have identified for the Registrant’s auditors any material weaknesses in internal controls;
and

b.  any fraud, whether or not material, that involves management or other employees
who have a significant role in the Registrant’s internal controls; and

6.           The Registrant’s other certifying officer and I have indicated in this Annual Report whether
or not there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

DATED: June
30, 2004.

__Víctor D. Almeida García_______________



Víctor D. Almeida García,
President, Chief

Executive
Officer and Director





---



I, Jesús Olivas Corral, certify that:

1.           I have reviewed this Annual Report on Form 20-F of the Registrant;

2.           Based on my knowledge, this Annual Report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period covered
by this Annual Report;

3.           Based on my knowledge, the financial statements, and other financial information included
in this Annual Report, fairly present in all material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in this Annual Report;

4.           The Registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in 1934 Act Rules 13a-14 and 15d-14) for the
Registrant and have:

a.  designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this Annual Report is being
prepared;

b.  evaluated the effectiveness of the Registrant’s disclosure controls and procedures
as of a date within 90 days prior to the filing date of this Annual Report (the “Evaluation Date”);
and

c.  presented in this Annual Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.           The Registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation, to the Registrant’ auditors and the audit committee of Registrant’s board of directors (or persons
performing the equivalent function):

a.  all significant deficiencies in the design or operation of internal controls which
could adversely affect the Registrant’s ability to record, process, summarize and report financial
data and have identified for the Registrant’s auditors any material weaknesses in internal controls;
and

b.  any fraud, whether or not material, that involves management or other employees
who have a significant role in the Registrant’s internal controls; and

6.           The Registrant’s other certifying officer and I have indicated in this Annual Report whether
or not there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

DATED: June
30, 2004.



Jesús Olivas Corral

Jesús Olivas Corral, Executive Vice President

and
Chief Financial Officer



---



Certification Pursuant to 18.U.S.C. Section 1350

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



In connection with the Annual Report of Internacional de Cerámica, S.A. de C.V. (the “Company”)
on Form 20-F for the periods ending December 31, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the “Annual Report”), I the undersigned, being the President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.          The Annual Report fully complies with the requirements of sections 13(a) or 15(d) of the
1934 Act; and

2.          The information contained in the Annual Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

DATED: June 30, 2004.

__Víctor D. Almeida García_______________



Víctor D. Almeida García,
President, Chief

Executive
Officer and Director



---



Certification Pursuant to 18.U.S.C. Section 1350

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



In connection with the Annual Report of Internacional de Cerámica, S.A. de C.V. (the “Company”)
on Form 20-F for the periods ending December 31, 2003 as filed with the Securities and Exchange
Commission on the date hereof (the “Annual Report”), I the undersigned, being the Executive Vice
President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.          The Annual Report fully complies with the requirements of sections 13(a) or 15(d) of the
1934 Act; and

2.          The information contained in the Annual Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

DATED: June
30, 2004.





Jesús Olivas Corral

Jesús Olivas Corral, Executive Vice President

and
Chief Financial Officer



---





EXHIBITS





---



|INTERNACIONAL DE
    CERAMICA, S.A. DE C.V.
    AND SUBSIDIARIES
    CONSOLIDATED
    FINANCIAL STATEMENTS
    
    
    
    
    
    AS OF DECEMBER 31,
    2002 AND 2003
    AND
    FOR THE YEARS
    ENDED
    DECEMBER 31, 2001,
    2002 AND 2003
    WITH REPORT OF
    INDEPENDENT AUDITORS
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Consolidated Financial
Statements



Contents



Report of Independent
Auditors.........................................................................................................................................................................1

Consolidated Financial Statements

Consolidated Balance Sheets as of
December 31, 2002 and
2003...................................................................................................................2

Consolidated Statements of Income for
the years ended December 31,

2001, 2002 and
2003................................................................................................................................................................................................4

Consolidated Statements of Changes in
Stockholders' Equity for the years ended
December 31, 2001, 2002 and
2003........................................................................................................................................................................5

Consolidated Statements of Changes in
Financial Position for the years ended
December 31, 2001, 2002 and
2003........................................................................................................................................................................6

Notes to Consolidated Financial
Statements......................................................................................................................................................7

---

REPORT OF INDEPENDENT AUDITORS

To the Stockholders of

Internacional de Ceramica, S.A. de
C.V.





We have audited the
accompanying consolidated balance sheets of Internacional de Ceramica, S.A. de
C.V. and Subsidiaries as of December 31, 2002 and 2003, and the related
consolidated statements of income, changes in stockholders' equity and changes
in financial position for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





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





In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Internacional de
Ceramica, S.A. de C.V. and subsidiaries at December 31, 2002 and 2003, and the
consolidated results of operations, and changes in financial position for each
of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in Mexico, which differ in certain
respects with United States generally accepted accounting principals (see Note
13 to the accompanying consolidated financial statements).





|C.P.C. José
    Antonio Reyes Cedeño
    Mancera, S.C.
    A Member Practice
    of Ernst & Young Global
|--------------------------------------------------------------------------------------------------------







Chihuahua, Chih., Mexico

February 9, 2004

[Except for Note 12, which is as of
March 31, 2004]

F-1

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Consolidated Balance
Sheets



(Thousands of Constant Mexican Pesos as of December 31, 2003)

|                                        
|----------------------------------------
|                                        
|                                        
|Assets                                  
|Current
    assets:                     
|Cash
    and cash equivalents           
|                                        
|Accounts receivable:                    
|Trade                                   
|Related
    parties                     
|Other
    accounts receivable           
|Less
    allowance for doubtful accounts
|                                        
|                                        
|Inventories, net                        
|Prepaid
    expenses                    
|Total
    current assets                
|                                        
|Investment in affiliated companies      
|                                        
|Property, plant and equipment           
|Accumulated depreciation                
|                                        
|                                        
|Other assets                            
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Total assets                            







See accompanying notes to consolidated financial statements.



F-2

---







|                                           | 2002                          | December 31,
    2003 | 2003      
|------------------------------------------ | ----------------------------- | --------------------- | ----------
|                                           | Thousands of
    U.S. dollars
|Liabilities                               
|                                          
|Current liabilities:                       |                               |                       |           
|Notes payable to banks                     | Ps. 77,688                    | Ps. 180,144           | $ 16,034  
|Current portion of long-term debt          | 201,248                       | 205,825               | 18,320    
|Accounts payable to suppliers              | 303,113                       | 257,476               | 22,917    
|Due to related parties                     | 19,584                        | 8,214                 | 731       
|Accrued expenses                           | 135,743                       | 130,236               | 11,592    
|Income tax and employee profit
    sharing | 7,260                         | 4,706                 | 419       
|Total current liabilities                  | 744,636                       | 786,601               | 70,013    
|                                          
|Long-term debt                             | 1,012,667                     | 972,419               | 86,552    
|Labor obligations                          | 4,698                         | 5,627                 | 501       
|Deferred income taxes                      | 346,174                       | 442,623               | 39,397    
|Total liabilities                          | 2,108,175                     | 2,207,270             | 196,463   
|                                          
|Stockholders' equity                       |                               |                       |           
|                                          
|Common stock                               | 724,810                       | 720,190               | 64,102    
|Premium on common stock                    | 1,259,883                     | 1,259,883             | 112,139   
|Stock repurchase reserve                   | 182,426                       | 133,753               | 11,905    
|Retained earnings                          | 293,229                       | 325,446               | 28,967    
|Cumulative comprehensive income (loss)     | ( 1,511,488)                  | ( 1,441,512)          | ( 128,305)
|Majority stockholders' equity              | 948,860                       | 997,760               | 88,808    
|Minority stockholders' equity              | 214,408                       | 243,638               | 21,686    
|Total stockholders' equity                 | 1,163,268                     | 1,241,398             | 110,494   
|                                           |                               |                       |           
|                                           |                               |                       |           
|                                           |                               |                       |           
|                                           |                               |                       |           
|                                           |                               |                       |           
|Total liabilities and stockholders' equity | Ps. 3,271,443                 | Ps. 3,448,668         | $ 306,957 



F-3

---





INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Consolidated
Statements of Income



(Thousands of Constant
Mexican Pesos as of December 31, 2003,

except for per Unit
amounts)



|                                                                                                                             | Years ended December 31,
|---------------------------------------------------------------------------------------------------------------------------- | ------------------------
|                                                                                                                             | 2001                    
|Thousands of                                                                                                                
|U.S. dollars                                                                                                                
|                                                                                                                            
|Net sales                                                                                                                    | Ps. 3,174,154           
|Cost of sales                                                                                                                | ( 1,993,310)            
|                                                                                                                            
|Gross profit                                                                                                                 | 1,180,844               
|Selling and administrative
    expenses                                                                                      | ( 819,259)              
|Operating income                                                                                                             | 361,585                 
|                                                                                                                            
|Comprehensive financing cost:                                                                                                |                         
|Interest income                                                                                                              | 6,532                   
|Interest expense                                                                                                             | ( 148,246)              
|Foreign exchange (loss) gain, net                                                                                            | 52,760                  
|Gain on net monetary position                                                                                                | 62,288                  
|                                                                                                                             | ( 26,666)               
|                                                                                                                            
|Other expense, net                                                                                                           | ( 3,932)                
|Write-off of assets                                                                                                          | ( 48,152)               
|Income before provision for
    income
    tax and employee profit
    sharing                                               | 282,835                 
|                                                                                                                            
|Income and asset tax                                                                                                         | ( 50,014)               
|Employee profit sharing                                                                                                      | ( 3,701)                
|Net income                                                                                                                   | 229,120                 
|Minority net income                                                                                                          | 24,940                  
|Net income of majority
    stockholders                                                                                      | Ps. 204,180             
|                                                                                                                            
|Weighted average number of Units
    outstanding ("Ceramic UB"
    and
    "Ceramic ULD" outstanding)
    (in
    thousands) | 57,928                  
|Net income per Unit                                                                                                          | Ps. 3.52                



See accompanying notes to consolidated financial statements.

F-4

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Consolidated
Statements of Changes in Stockholders' Equity

(Thousands of Constant
Mexican pesos as of December 31, 2003)



|                                                    | Common Stock    | Premium on common
    stock | Stock Repurchase
    Reserve | Retained Earnings | Cumulative
    comprehensive
    income (loss)
    ( Note 8 ) | Comprehensive
    Income | Majority
    stockholders' equity | Minority
    stockholders' equity | Total
    stockholders' equity
|--------------------------------------------------- | --------------- | --------------------------- | ---------------------------- | ----------------- | ------------------------------------------------------------- | ------------------------ | --------------------------------- | --------------------------------- | ------------------------------
|Balance at
    December 31, 2000                    | Ps.
    730,103 | Ps.
    1,259,883           | Ps.
    28,001               | Ps.
    207,911   | Ps.
    (1,455,971)                                           |                          | Ps.
    769,927                   | Ps.
    219,110                   | Ps.
    989,037               
|Minority reduction of
    capital                   | -               | -                           | -                            | -                 | -                                                             | -                        | -                                 | (16,365)                          | (16,365)                      
|Minority cash
    dividend                          | -               | -                           | -                            | -                 | -                                                             | -                        | -                                 | (7,402)                           | (7,402)                       
|Comprehensive income
    (loss):                    | -               | -                           | -                            | -                 | -                                                             | -                        | -                                 | -                                 | -                             
|Net income                                          | -               | -                           | -                            | 204,180           | -                                                             | 204,180                  | 204,180                           | 24,940                            | 229,120                       
|Result from holding
    nonmonetary assets          | -               | -                           | -                            | -                 | (62,946)                                                      | (62,946)                 | (62,946)                          | (7,847)                           | (70,793)                      
|Result from translation of
    foreign subsidiaries | -               | -                           | -                            | -                 | (27,876)                                                      | (27,876)                 | (27,876)                          | -                                 | (27,876)                      
|Comprehensive income                                | -               | -                           | -                            | -                 | -                                                             | Ps.
    113,358          | -                                 | -                                 | -                             
|Balance at
    December 31, 2001                    | Ps. 730,103     | Ps. 1,259,883               | Ps. 28,001                   | Ps. 412,091       | Ps. ( 1,546,793)                                              |                          | Ps. 883,285                       | Ps. 212,436                       | Ps. 1,095,721                 
|Increase of stock repurchase
    reserve            | -               | -                           | 211,869                      | (211,869)         | -                                                             | -                        | -                                 | -                                 | -                             
|Repurchase of common
    stock                      | (5,293)         | -                           | (57,444)                     | -                 | -                                                             | -                        | (62,737)                          | -                                 | (62,737)                      
|Minority cash
    dividend                          | -               | -                           | -                            | -                 | -                                                             | -                        | -                                 | (16,021)                          | (16,021)                      
|Comprehensive income
    (loss):                    | -               | -                           | -                            | -                 | -                                                             | -                        | -                                 | -                                 | -                             
|Net income                                          | -               | -                           | -                            | 93,007            | -                                                             | 93,007                   | 93,007                            | 19,659                            | 112,666                       
|Result from holding
    nonmonetary assets          | -               | -                           | -                            | -                 | 8,977                                                         | 8,977                    | 8,977                             | (1,666)                           | 7,311                         
|Result from translation of
    foreign subsidiaries | -               | -                           | -                            | -                 | 26,328                                                        | 26,328                   | 26,328                            | -                                 | 26,328                        
|Comprehensive income                                | -               | -                           | -                            | -                 | -                                                             | Ps.
    128,312          | -                                 | -                                 | -                             
|Balance at
    December 31, 2002                    | Ps. 724,810     | Ps. 1,259,883               | Ps. 182,426                  | Ps. 293,229       | Ps. ( 1,511,488)                                              |                          | Ps. 948,860                       | Ps. 214,408                       | Ps. 1,163,268                 
|Repurchase of common
    stock                      | (4,620)         | -                           | (48,673)                     | -                 | -                                                             | -                        | (53,293)                          | -                                 | (53,293)                      
|Minority cash
    dividend                          | -               | -                           | -                            | -                 | -                                                             | -                        | -                                 | (16,151)                          | (16,151)                      
|Comprehensive income
    ( loss):                   | -               | -                           | -                            | -                 | -                                                             | -                        | -                                 | -                                 | -                             
|Net income                                          | -               | -                           | -                            | 32,217            | -                                                             | 32,217                   | 32,217                            | 29,989                            | 62,206                        
|Minimum pension
    liability                       | -               | -                           | -                            | -                 | (1,024)                                                       | (1,024)                  | (1,024)                           | -                                 | (1,024)                       
|Result from holding
    nonmonetary assets          | -               | -                           | -                            | -                 | 52,206                                                        | 52,206                   | 52,206                            | 15,392                            | 67,598                        
|Result from translation of
    foreign subsidiaries | -               | -                           | -                            | -                 | 18,794                                                        | 18,794                   | 18,794                            | -                                 | 18,794                        
|Comprehensive income                                | -               | -                           | -                            | -                 | -                                                             | Ps.
    102,193          | -                                 | -                                 | -                             
|Balance at
    December 31, 2003                    | Ps. 720,190     | Ps. 1,259,883               | Ps. 133,753                  | Ps. 325,446       | Ps. ( 1,441,512)                                              |                          | Ps. 997,760                       | Ps. 243,638                       | Ps. 1,241,398                 
|Thousands of U.S.
    dollars                       | $
    64,102    | $
    112,139               | $
    11,905                 | $
    28,967      | $
    (128,305)                                               |                          | $
    88,808                      | $
    21,686                      | $
    110,494                 





See accompanying notes to consolidated financial statements.

F-5.

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Consolidated
Statements of Changes in Financial Position

(Thousands of Constant
Mexican Pesos as of December 31, 2003)



|                                                                                                       | Years ended
    December 31,
|------------------------------------------------------------------------------------------------------ | ----------------------------
|                                                                                                       | 2001                        
|Thousands of
    U.S. dollars                                                                         
|Operating activities:                                                                                  |                             
|Net income of majority
    stockholders                                                                | Ps. 204,180                 
|Adjustments to reconcile net
    income
    to net resources provided
    by operating
    activities: |                             
|Depreciation                                                                                           | 152,430                     
|Write-off of assets                                                                                    | 48,152                      
|Deferred income tax                                                                                    | 31,770                      
|Minority net income                                                                                    | 24,940                      
|                                                                                                       | 461,472                     
|Variations in operating assets
    and liabilities:                                                    |                             
|Accounts receivable                                                                                    | ( 51,115)                   
|Inventories                                                                                            | 67,117                      
|Other assets                                                                                           | ( 8,633)                    
|Accounts payable to suppliers                                                                          | ( 50,509)                   
|Other accounts payable                                                                                 | ( 73,069)                   
|Resources provided by operating
    activities                                                         | . 345,263                   
|                                                                                                       |                             
|Financing activities:                                                                                  |                             
|Repurchase of capital stock                                                                            | -                           
|Minority stockholders' refund                                                                          | ( 16,365)                   
|Minority stockholders' dividends                                                                       | ( 7,402)                    
|Proceeds from long-term debt and
    bank loans                                                        | 80,217                      
|Repayment of long-term debt
    and bank loans                                                         | ( 111,585)                  
|Monetary gain from financing
    activities                                                            | ( 25,442)                   
|Exchange (gains) losses generated
    by financing activities                                          | ( 60,235)                   
|Resources used in
    financing activities                                                             | ( 140,812)                  
|                                                                                                       |                             
|Investing activities                                                                                   |                             
|Increase of property, plant and
    equipment, net                                                     | ( 116,226)                  
|Resources used in investing
    activities                                                             | ( 116,226)                  
|Net increase (decrease) in cash
    and cash
    equivalents                                           | 88,225                      
|Cash and cash equivalents at
    beginning
    of year                                                 | 149,231                     
|Cash and cash equivalents at end
    of year                                                           | Ps. 237,456                 

See accompanying notes to consolidated financial statements.



F-6

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of
Constant Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per
Unit and exchange rates, which are stated in Pesos)

1. Description of the business and significant accounting policies

Description of the business

Internacional de Ceramica, S.A. de C.V. ("Interceramic") and
its subsidiaries Recubrimientos Interceramic, S.A. de C.V. ("Recubrimientos"),
and Interceramic, Inc., which is located in Garland, Texas, are all engaged in
the manufacture and marketing of ceramic floor and wall tile, the extraction of
clay for use in the manufacture of ceramic tile and the marketing of bathroom
fixtures. Interceramic's other subsidiaries, which are listed below under "Basis
of consolidation," are engaged primarily in the marketing of ceramic tile in the
Mexico City and Guadalajara metropolitan areas and in the United States and in
the manufacture and marketing of adhesives and grouts in Mexico. Interceramic
and its subsidiaries are hereinafter referred to collectively as the "Company."

Significant accounting policies

The consolidated financial statements of the Company have
been prepared in Mexican Pesos ("Ps.") in accordance with accounting principles
generally accepted in Mexico ("Mexican GAAP").



The significant accounting policies and practices followed in the preparation
of the consolidated financial statements are described below:

a. Basis of consolidation

The consolidated financial statements include the accounts of Interceramic
and all of its subsidiaries. All material intercompany balances and transactions
have been eliminated in consolidation. The subsidiaries included in the
consolidated financial statements are as follows, along with corresponding
ownership:

|                                                           | Ownership interest
    at
    December 31,
|---------------------------------------------------------- | ------------------------------------------
|                                                           | 2002                                      
|Interceramic Holding Company,
    Inc.                     | -                                         
|Interceramic, Inc.                                         | 100.00                                    
|Recubrimientos Interceramic, S.A.
    de C.V.              | 50.01                                     
|Adhesivos y Boquillas
    Interceramic, S. de R.L. de C.V. | 51.00                                     
|Distribución Interceramic, S.A.
    de C.V.                | 100.00                                    
|Interacabados del Occidente, S.A.
    de C.V.              | 100.00                                    
|Interceramic Trading Co.                                   | 100.00                                    
|Materiales en Proceso, S.A. de
    C.V.                    | 100.00                                    
|Interacabados del Centro, S.A. de
    C.V.                 | 100.00                                    
|Interceramic de Occidente, S.A.
    de C.V.                | 100.00                                    
|Operadora Interceramic de México,
    S.A. de C.V.         | 100.00                                    
|Servicios Administrativos
    Interceramic, S.A. de C.V.   | -                                         

In April 2002, Procesadora de Materiales Cerro Grande, S.A.
de C.V. and Interacabados del Noroeste, S.A. de C.V., wholly-owned subsidiaries
of Interceramic, were merged into Interceramic.



(*)In October 2003, Interceramic Holding Company,
Inc. was created and currently owns all the common stock of Interceramic, Inc.



F-7

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements



(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

1. Description of the business and significant accounting policies
(continued)



a. Basis of consolidation (continued)

The caption "Minority interest" refers to the interest of the
minority stockholders in the Company's subsidiaries.

In conformity with Mexican Accounting Principles Bulletin
B-15, "Transactions in Foreign Currency and Translation of Financial Statements
of Foreign Operations," the Company translated the financial statements of its
foreign subsidiaries as follows:

- The financial information reported by the foreign
subsidiaries was first adjusted to conform with Mexican GAAP.

- The financial statements were restated at December 31,
2003, based on the Consumer Price Index (the "CPI") of the United States. The
monetary effects for the years ended December 31, 2001, 2002 and 2003 were
determined based on the annual inflation factor derived from the CPI for the
respective year.

- Balance sheets were translated into Pesos at the prevailing
exchange rate at the end of the year and income statement accounts were
translated at the weighted average exchange rate for the year. Translation
adjustments are reflected in a separate component of stockholders' equity
entitled "Effect of translation of foreign subsidiaries."

Consolidated financial statements as of December 31, 2003 and
for the years ended December 31, 2002 and 2001 are presented in constant
currency at December 31, 2003, using a common restatement factor determined
based on the weighted average net sales in currencies included in the
consolidated financial statements, taking into consideration the inflation rate
of the foreign country and the exchange rates for those years. Such factors were
1.0983 and 1.0682 for 2001 and 2002, respectively.

b. Estimates in financial statements

The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the amounts of revenues and expenses
during the reporting periods. Actual results could differ from these estimates.

c. Concentration of risk

The Company distributes its products through Company-owned
and independent franchise locations in Mexico. The Company distributes its
products in the United States and Canada mainly through its network of
wholly-owned Interceramic Tile and Stone Galleries ("ITS") stores and a network
of 79 independent distributors with a combined total of 180 locations. On a
regular basis, the Company assesses the credit worthiness of its customers and
distributors and typically obtains personal guarantees or liens to secure
amounts due from its customers and distributors. No single customer accounted
for more than 5% of the Company's consolidated net sales for the years ended
December 31, 2001, 2002 or 2003.



F-8

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements



(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

1. Description of the business and significant accounting policies
(continued)



d. Recognition of the effects of inflation



The Company recognizes the effects of inflation on financial
information as required by Mexican Accounting Principles Bulletin B-10,
"Accounting Recognition of the Effects of Inflation on Financial Information."
Consequently, the amounts shown in the accompanying financial statements and in
these notes are expressed in thousands of constant Pesos as of December 31,
2003.

Certain concepts and procedures required by the application
of Bulletin B-10 are explained below:



- The Company follows the specific-cost method to restate its
inventories.



- Imported machinery and equipment was restated based on the
rate of inflation in the country of origin and the prevailing exchange rate at
the balance sheet date. Machinery and equipment of domestic origin was restated
based on the Mexican National Consumer Price Index (the "NCPI").



- At December 31, 2002 and 2003, Common stock , Premium on
common stock, stock repurchase reserve, retained earnings, cumulative effect of
deferred taxes, effect of translation of foreign subsidiaries, and net income
were restated by using a common restatement factor, which was determinated based
on the weighted average net sales in each currency.



The gain or loss on net monetary position represents the
effects of inflation, as measured by the NCPI, on the Company's monetary assets
and liabilities. During inflationary periods, losses are incurred by holding
monetary assets, whereas gains are realized by holding monetary liabilities. The
net monetary effect is included in the consolidated statements of income as part
of the "comprehensive financing cost."



The deficit from restatement of stockholders' equity consists
principally of the initial cumulative monetary position result and the
cumulative deficit from holding non-monetary assets. The (loss) gain from
holding non-monetary assets represents the amount by which the (decrease)
increase in the specific value of assets was (lower) higher than the rate of
inflation.



e. Cash equivalents



Cash equivalents are shown at cost plus accrued interest
through the balance sheet date. The stated value approximates fair value.



All highly liquid investments with maturities of three months
or less at the time of purchase are considered cash equivalents and are carried
at cost that approximates their fair market value.



f. Inventories and cost of sales



Inventories are recorded initially at acquisition or
production cost and then restated to reflect replacement cost, which is not in
excess of market value.



Cost of sales represents the estimated replacement cost at
the time sales were realized, expressed in constant Pesos at the end of the
year.



F-9

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements



(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

1. Description of the business and significant accounting policies
(continued)



g. Investment in shares of affiliated companies



Investments in companies in which the Company has an
ownership interest of between 10% and 50% and over which the Company exercises
significant influence, are accounted for using the equity method. Investments in
companies in which the Company has an ownership interest of less than 10% are
recorded at cost and restated for changes in the NCPI.



h. Property, plant and equipment



Through December 31, 1996, the values of property, plant and
equipment were determined by an independent appraiser registered with the
Mexican National Banking and Securities Commission ("NBSC").



Effective January 1, 1997, Bulletin B-10 eliminated the use
of appraisals to value the Company's property, plant and equipment.



At December 31, 2002 and 2003, this component was restated as
follows:



- The appraised value of imported machinery and equipment as
of December 31, 1996, as well as the cost of subsequent additions to such
machinery, were restated based on the rate of inflation in the respective
country of origin and then translated using the prevailing exchange rate at the
balance sheet date (specific inflation factors).



- The appraised value of land, buildings and other fixed
assets of domestic origin at December 31, 1996, and the cost of subsequent
additions to such assets were restated based on the NCPI.



- At December 31, 2002 and 2003, approximately 93% and 93% of
machinery and equipment were restated based on specific factors and 7% and 7%
were restated based on the NCPI.



- Depreciation is computed on the restated values, using the
straight-line method based on the estimated useful lives of the assets as
determined periodically by management based on technical studies.



i. Exchange differences



Transactions in foreign currency are recorded at the exchange
rate at the time of the transactions. Exchange differences are determined from
the date of the transactions to the time of settlement or valuation at the
balance sheet date and are charged or credited to income.



j. Labor obligations



Under Mexican labor law, employees are entitled to a special
compensation payment ("seniority premium") upon death, dismissal or at
retirement after 15 or more years of service. Seniority premium costs are
recognized periodically during the years of service rendered by employees, based
on actuarial computations performed by an independent actuary, using the
projected unit credit method and financial assumptions, net of the effects of
inflation, as required by Mexican Accounting Principles Bulletin D-3 ("Labor
Obligations"). Termination payments are charged to income in the year in which
the decision to dismiss an employee is made.



F-10

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements



(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

1. Description of the business and significant accounting policies
(continued)



k. Income taxes and employee profit sharing



Deferred income taxes are recognized for all temporary
differences between balance sheet components for financial and tax reporting
purposes, using enacted income tax rates.



The Company periodically evaluates the possibility of
recovering deferred tax assets and if necessary, adjusts the related valuation
reserve.



Employee profit sharing is a statutory obligation payable to
employees that is determined in accordance with the provisions of both Mexican
labor and income tax laws.



In conformity with Bulletin D-4, deferred employee profit
sharing is recognized only on temporary differences determined in the
reconciliation of current year net income for financial and tax reporting
purposes, provided there is no indication that the related liability or asset
will not be realized in the future.



Current year employee profit sharing is charged to results of
operations and represents a current liability due and payable in a period of
less than one year.



Asset tax, which is a minimum income tax, is payable based on
the average value of most assets net of certain liabilities. Because income tax
may be credited against asset tax, the latter is actually payable only to the
extent that it exceeds current year income tax.



Current year income tax is charged to results of operations
and represents the tax liability due and payable in less than one year.



l. Long-lived assets



The Company periodically evaluates potential impairment loss
relating to long-lived assets by assessing whether the unamortized carrying
amount can be recovered over the remaining life of the assets through
undiscounted future expected cash flows generated by the assets. If the sum of
the expected future undiscounted cash flows is less than the carrying value of
the assets, a loss is recognized for the difference between the carrying value
of the assets and the expected future undiscounted cash flows. Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Due to ongoing profitable
operations, no impairments of long-lived assets were recognized during 2001,
2002 or 2003.



F-11

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

1. Description of the business and significant accounting policies
(continued)



Effective January 1, 2004, the Company will be required to
adopt Bulletin C-15 - "Impairment of Long-lived Assets"



m. Revenue recognition



The Company recognizes revenue when goods are shipped and
invoiced. Revenue from retail operations is recognized, generally, at the point
of sale. Returns and allowances are estimated and accrued based on historical
results.



n. Net income per Unit



Net income per Unit is determined on the basis of the
weighted average number of Units issued and outstanding. Units are comprised of
two shares that are traded together as one Unit. A "UB" Unit is comprised of two
Series "B" Shares and a "ULD" Unit is comprised of one Series "L" Share and one
Series "D" Share.



o. Comprehensive income (loss)



Comprehensive income consists of net income or loss for the
year plus those items that are reflected directly in stockholders' equity and
that do not constitute capital contributions, reductions or distributions such
as deficit from restatement of stockholders' equity, effect of translation of
foreign subsidiaries and deferred taxes allocated to stockholders' equity.

p. Convenience translation



Solely for the convenience of the reader, the consolidated
financial statements as of and for the year ended December 31, 2003 have been
translated into United States Dollars ("US $" or "Dollars") at the exchange rate
of Ps. 11.235 per US $1.00, the rate of exchange at December 31, 2003. The
translation should not be construed as a representation that the Peso amounts
have been or could be converted into Dollars at this or any other rate.



q. Reclassifications



Certain amounts in the 2001 and 2002 consolidated financial
statements have been reclassified to conform to the 2003 presentation.



F-12

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

2. Related parties



In the normal course of business, the Company has
transactions with related parties and affiliated companies. Affiliated companies
are those in which the Company's principal stockholders have significant equity
interests or control of management. The main transactions with these companies
consist of ceramic tile purchases for resale in Mexico and in the United States.
Such transactions are negotiated on terms and prices that management believes
are comparable to similar transactions with non-related customers.

During the years ended December 31, 2001, 2002 and 2003, the
Company had the following transactions with related parties:

|                                                           | 2001        | 2002        | 2003       
|---------------------------------------------------------- | ----------- | ----------- | -----------
|Sales of ceramic tile:                                     |             |             |            
|Affiliated companies                                       |             |             |            
|Grupo
    Comercial Interceramic,
    S.A. de
    C.V.     | Ps. 163,828 | Ps. 185,263 | Ps. 174,029
|Materiales Arquitectónicos y
    Decorativos, S.A. de C.V. | 85,355      | 77,706      | 83,243     
|                                                          
|Joint venture                                              |             |             |            
|Dal-Tile International, Inc.                               | 76,556      | 103,533     | 84,818     
|                                                           | Ps. 325,739 | Ps. 366,502 | Ps. 342,090

|Inventory purchases:                                           |             |            |            
|-------------------------------------------------------------- | ----------- | ---------- | -----------
|Stockholders                                                   |             |            |            
|Kohler, Co.                                                    | Ps. 90,830  | Ps. 87,711 | Ps. 96,912 
|                                                              
|Joint venture                                                  |             |            |            
|Custom Building Products, Inc.                                 | 11,178      | 7,192      | 16,594     
|                                                               | Ps. 102,008 | Ps. 94,903 | Ps. 113,506
|                                                              
|Fees paid for administrative
    services
    and other items: |             |            |            
|Affiliated companies:                                          |             |            |            
|Corporación Administrativa y
    Técnica,
    S.A. de C.V.     | Ps. 26,122  | Ps. 23,875 | Ps. 22,804 
|Corporación Aérea Cencor, S.A. de
    C.V.                     | 7,875       | 10,076     | 9,743      
|                                                               | Ps. 33,997  | Ps. 33,951 | Ps. 32,547 

Sales to joint venture partners consist of ceramic tile sold
in the United States.



Purchases from stockholders and joint ventures consist of
bathroom fixtures and adhesives, grouts and related products for resale in
Mexico.

Fees paid for administrative services relate to management
consulting, use of computer systems, maintenance of equipment and air-taxi
services provided by related companies.

F-13

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

2. Related parties (continued)

An analysis of amounts due to and from related parties at
December 31, 2002 and 2003 is as follows:

|                                                           | 2002       | 2003      
|---------------------------------------------------------- | ---------- | ----------
|Trade receivables:                                         |            |           
|Grupo Comercial Interceramic,
    S.A. de C.V.             | Ps. 30,658 | Ps. 20,954
|Materiales Arquitectónicos y
    Decorativos, S.A. de C.V. | 10,187     | 9,042     
|Dal-Tile International, Inc.                               | 21,901     | 17,519    
|Others                                                     | 485        | 191       
|                                                           | Ps. 63,231 | Ps. 47,706
|Accounts payable:                                          |            |           
|Custom Building Products, Inc                              | Ps. 10,589 | Ps. 404   
|Kohler, Co.                                                | 8,786      | 7,075     
|Others                                                     | 209        | 735       
|                                                           | Ps. 19,584 | Ps. 8,214 

3. Inventories

Inventories at December 31, 2002 and 2003 consisted of the following:

|                           | 2002        | 2003       
|-------------------------- | ----------- | -----------
|Finished goods             | Ps. 659,337 | Ps. 788,454
|Work in process            | 28,483      | 33,085     
|Raw materials and supplies | 78,896      | 89,489     
|Merchandise in transit     | 61,169      | 30,961     
|                           | Ps. 827,885 | Ps. 941,989

The reserve for obsolete and slow-moving inventories is Ps. 69,583 and Ps.
65,389 at December 31, 2002 and 2003, respectively, and has been deducted from
finished goods and raw materials and supplies.



F-14

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

4. Property, plant and equipment

Details of property, plant and equipment at December 31, 2002 and 2003 were
as follows:

|                            | 2002              | 2003                        
|--------------------------- | ----------------- | ----------------------------
|                            | Investment        | Accumulated
    depreciation
|Buildings                   | Ps. 775,337       | Ps. 249,415                 
|Machinery and
    equipment | 1,989,150         | 998,397                     
|Furniture and
    fixtures  | 217,141           | 143,807                     
|Automotive
    equipment    | 59,173            | 46,660                      
|                            | 3,040,801         | Ps. 1,438,279               
|Land                        | 144,354           |                             
|Projects in progress        | 101,099           |                             
|Total investment            | Ps.
    3,286,254 |                             





Depreciation expense for the years ended December 31, 2001,
2002 and 2003 was Ps. 152,430,
Ps. 160,054 and Ps. 175,645, respectively.

Estimated useful lives at December 31, 2003 were as follows:

|Buildings               | 25 years
|----------------------- | --------
|Machinery and equipment | 10 years
|Furniture and fixtures  | 4 years 
|Automotive equipment    | 2 years 





F-15

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)



5. Bank loans and notes payable

Notes payable to banks and outstanding long-term debt at
December 31, 2002 and 2003 were as follows:

|                      | 2002
    M a t u r i t i e
    s
|--------------------- | --------------------------------
|Type of loan          | Total                           
|Unsecured             | Ps. 23,637                      
|Secured               | 67,688                          
|Syndicated loan       | 1,117,386                       
|Total bank loans      | 1,208,711                       
|Notes due to supplier | 5,204                           
|                      | Ps. 1,213,915                   
|                      | 2003
    M a t u r i t i e
    s
|Type of loan          | Total                           
|Secured               | Ps. 215,542                     
|Syndicated loan       | 960,761                         
|Total bank loans      | 1,176,303                       
|Notes due to supplier | 1,941                           
|                      | Ps. 1,178,244                   

At December 31, 2002 and 2003, all bank loans were
denominated in Dollars. All secured and syndicated bank loans are collateralized
by property, plant and equipment, accounts receivable and inventory amounting to
Ps. 1,908,806and Ps. 1,993,901 at December 31, 2002 and
2003, respectively.



During 2003, the Company entered into a US $25,000 (Ps.
280,875) secured revolving line of credit with Wells Fargo available through May
2006. At December 31, 2003, the Company had US $19,014 (Ps. 213,632) outstanding
under this agreement.



In August 2001, the Company obtained long term supplier
financing from Oracle to purchase software in the amount of US $888 (Ps. 8,722).
The agreement requires monthly payments of principal and interest through July
2004.



In June 2002, the Company entered into a syndicated loan
agreement with several financial institutions and Scotiabank Inverlat, S.A., as
administrative agent, for US $100,000 which was used to repay the US $90,000
Eurobond and the balance used for working capital purposes. The loan is divided
into two tranches: "Term A Loans" for US $40,000 with a three-year maturity and
interest at LIBOR plus from 1.70% to 2.20%, respectively, based upon certain
ratios, and "Term B Loans" for US $60,000 with a five-year maturity and interest
at LIBOR plus from 2.30% to 2.80%, based upon certain ratios. This loan is
collateralized by land, buildings and equipment, accounts receivable, inventory
and shares owned by the Company in a joint venture. The Company's subsidiaries
Distribucion Interceramic, S.A. de C.V., Interacabados del Occidente, S.A.de
C.V., and Interceramic, Inc., also provided certain guarantees.



F-16

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements



(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

5. Bank loans and notes payable (continued)



In March 2002, the Company entered into a US $6,000 revolving
line of credit agreement with Banamex. The term of the agreement is through
March 2005. At December 31, 2003 no amount was outstanding under this facility.



At December 31, 2003, future maturities of long-term debt
were as follows:

|Maturities |            
|---------- | -----------
|2005       | Ps. 224,882
|2006       | 466,568    
|2007       | 280,969    
|           | Ps. 972,419

The syndicated loan and outstanding bank loan agreements
establish certain financial ratios to be observed and impose obligations and
restrictive covenants with respect to certain transactions including the payment
of cash dividends, mergers and combinations, the disposal of fixed assets,
information reporting requirements and others. Prior to September 30, 2003, the
Company reached an agreement with the syndicated loan lenders on a series of
amendments to the credit agreement which were completed as of October 31, 2003.
These amendments consist basically of new covenant ratios and increased rates of
interest payable on the loan, depending on the Company's ability to meet certain
ratios.



At December 31, 2003, the Company was in compliance with all
of its obligations and restrictions established by these agreements.



6. Foreign currency position



The Company had the following Dollar denominated assets and
liabilities at December 31, 2001 and 2003:

|                          | 2002           | 2003          
|------------------------- | -------------- | --------------
|Current assets            | US $ 52,980    | US $ 50,464   
|Current liabilities       | 48,755         | 48,734        
|Long-term liabilities     | 91,245         | 86,553        
|Total liabilities         | US $ 140,000   | US $ 135,287  
|Net (short) long position | US $ ( 87,020) | US $ ( 84,823)

Dollar denominated assets and liabilities were translated to
Pesos using the interbank rates at December 31, 2002 and 2003 of Ps. 10.390 and
Ps. 11.235 per Dollar, respectively. The exchange rate at February 9, 2004 was
Ps. 11.120 per Dollar.



Foreign currency denominated sales during the years ended
December 31, 2001, 2002 and 2003 were Ps. 1,294,053 (US $117,420), Ps. 1,425,425
(US $130,871) and Ps. 1,504,400 (US $134,647), respectively (calculated using
the interbank rate at the end of each month), and represented 40.8%, 43.6% and
43.9% of total net sales, respectively.

F-17

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

6. Foreign currency position (continued)



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



During the years ended December 31, 2001, 2002 and 2003, the
Company imported inventory and machinery and equipment into Mexico totaling US
$21,153, US $29,690 and US $47,788, respectively.



7. Labor obligations



The Company recognizes its liability for seniority premiums
as services are rendered based on actuarial computations, using the projected
unit-credit method. The following is a summary of consolidated financial data
based on actuarial studies as of December 31, 2002 and 2003:



|                                        | 2002      | 2003     
|--------------------------------------- | --------- | ---------
|Accumulated benefit obligation          | Ps. 4,698 | Ps. 5,216
|Projected benefit obligation            | 5,291     | 5,216    
|Unrecognized transition
    obligations | ( 1,674)  | ( 1,554) 
|Unrecognized net gain ( loss )          | ( 165)    | ( 509)   
|Net projected liability                 | 3,452     | 3,153    
|Additional liability                    | 1,246     | 2,474    
|Accrued liability                       | Ps. 4,698 | Ps. 5,627
|Intangible asset                        | Ps. 1,246 | Ps. 1,450
|Minimum pension liability               | Ps. -     | Ps. 1,024

The components of the net periodic pension cost during the years ended
December 31, 2001, 2002 and 2003 were follows:

|                                          | 2001      | 2002      | 2003     
|----------------------------------------- | --------- | --------- | ---------
|Change in benefit obligation:             |           |           |          
|Benefit obligation at January 1           | Ps. 3,413 | Ps. 3,526 | Ps. 3,452
|Pension cost:                             |           |           |          
|Service cost                              | 752       | 693       | 698      
|Interest cost                             | 254       | 251       | 280      
|Amortization of transition
    liability  | 94        | 76        | 93       
|Amortization of actuarial losses          | ( 14)     | ( 10)     | ( 9)     
|Curtailment losses                        | -         | 317       | -        
|Inflation effects                         | 360       | ( 45)     | ( 127)   
|Net Periodic Pension Cost                 | 1,446     | [,282     | 935      
|Benefits paid by Company                  | ( 2,266)  | ( 1,356)  | ( 1,264) 
|Adjustment for Actual Amount
    Expensed | 933       | -         | 30       
|Benefit obligation at December
    31,    | Ps. 3,526 | Ps. 3,452 | Ps. 3,153

The transition liability is being amortized over a period of 21 years.

During the year ended December 31, 2002, the Company adjusted
its labor obligations liabilities due to employee terminations that occurred as
a result of restructuring plans in prior years.



F-18

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

7. Labor obligations (continued)



The significant assumptions considered in determining the net
periodic pension cost during the years ended December 2001, 2002 and 2003 were:

|                      | 2001  | 2002  | 2003 
|--------------------- | ----- | ----- | -----
|Discount rate         | 5.50% | 5.50% | 5.50%
|Rate of pay increases | 2.50% | 2.50% | 1.50%
|Effect of inflation   | 5.00% | 5.00% | 4.00%

The Company's subsidiary located in the United States has a
defined contribution savings plan covering substantially all its employees.
Total contributions for the years ended December 31, 2001, 2002 and 2003 were
approximately Ps. 2,683 (US $292), Ps. 2,899 (US $279) and Ps. 2,797 (US $249),
respectively.



8. Stockholders' equity



Interceramic's capital stock is variable with a fixed minimum
of Ps. 216,831 (Ps. 7,000 nominal).



The capital stock consists of three different series of
shares. Series "B" Shares are common, registered shares with no par value and
full voting rights. They may be freely subscribed and for a period of ten years,
ending on December 7, 2004, they are to be represented by Common Units, each
consisting of two Series "B" Shares (traded as "Ceramic UB").



Series "L" Shares have limited voting rights, are registered
shares with no par value and may be freely subscribed. Until December 7, 2004
they are represented by and may only be traded as Limited Voting Units, each
consisting of one Series "L" Share and one Series "D" Share (traded as "Ceramic
ULD").



Series "D" Shares are preferred, registered shares withlimited voting rights, without par value and until December 31, 2004 they
are represented by and may only be traded with the Series "L" Shares as Limited
Voting Units. The Series "D" Shares are entitled to a minimum annual preferred
dividend of Ps. 0.025 per share. In any given period in which no minimum
preferred dividend is declared or is paid only partially, such dividend or
unpaid amount shall accumulate for future periods. The accumulated minimum
preferred dividends at December 31, 2002 and 2003 is Ps. 5,863 and Ps. 6,354.



On December 7, 2004, the Series "L" Shares will convert into
Series "B" Shares, and thereafter the Series "L" Shares will cease to exist as a
class of Interceramic's capital stock. At such time, all voting and other rights
previously applicable to holders of Series "L" Shares will no longer exist,
other than to the extent rights may be available under the Bylaws to holders of
Series "B" Shares. After December 7, 2004 the Series "D" Shares will retain
their minimum preferred dividend and limited voting rights.



In addition, after December 7, 2004, the pairing of
Interceramic's shares into Units will cease, and each series of stock will trade
separately.



F-19

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

Stockholders' equity (continued)



An analysis of the authorized and outstanding capital stock
as of December 31, 2002 and 2003 is as follows:



|                             | 2002
    Number of | 2003
    Number of
|---------------------------- | ------------------ | ------------------
|Series                       | Units              | Shares            
|"B"                          | "Ceramic UB"       | 63,179,030        
|"L"                          | "Ceramic ULD"      | 21,431,860        
|"D"                          |                    | 21,431,860        
|Number of outstanding shares | 106,042,750        | 53,021,375        
|Number of authorized shares  | 124,571,150        | 62,285,575        

In 1996, the Company established a Stock Option Plan (the
"Plan"), pursuant to which certain employees and executives of the Company may
be granted options from time to time during its term to purchase an amount of
Limited Voting Units per eligible employee as set by a committee of the Board of
Directors (the "Board"). An aggregate of 1,297,000 Limited Voting Units have
been made available for purchase by employees under the Plan. Due to certain
peculiarities of Mexican law, all of the shares allocable under the Plan were
issued to and purchased by a Trust established expressly for that purpose. The
purchases by the Trust were funded by contributions made by the Company, and,
upon the exercise of a stock option by an employee, the employee in effect
purchased the applicable shares directly from the Trust. In addition to
termination by expiration, the Plan options may terminate for other reasons,
including death, disability or termination of employment with the Company. At
December 31, 2002 and 2003, the Trust held 1,211,000 and 1,203,000 Limited
Voting Units, respectively. Amounts contributed to the Trust by the Company are
included in the component entitled "other accounts receivable." At December 31,
2002 and 2003, the amount due from the Trust amounted to Ps. 16,261 and Ps.
13,933, respectively, and is net of proceeds received from employees who
exercised their options during 2002 and 2003.



During 2000, the Company decided to cease granting options
under the Plan, and terminated it for all purposes other than to govern options
previously granted. However, in 2002 and 2003 the Board decided to reassign
certain expired options under the Plan, and in July 2001 options to acquire an
additional 570,000 Limited Voting Units (the "July 2001 Options") were granted
to certain officers of the Company at an exercise price of Ps. 17.00 per Unit.
In November 2001, additional options to acquire 77,000 Limited Voting Units (the
"November 2001 Options") were granted to certain officers of the Company at an
exercise price of Ps. 17.00 per Unit. In August 2002, additional options to
acquire 177,000 Limited Voting Units (the "August 2002 Options") were granted to
certain officers of the Company at an exercise price of Ps. 12.15 per Unit. In
September 2003, additional options to acquire 166,000 Limited Voting Units (the
"September 2003 Options") were granted to certain officers of the Company at an
exercise price of Ps. 11.50 per Unit. Additionally, the Board decided to reduce
the exercise price of the July 2001 and November 2001 Options to Ps. 12.15 per
Unit. The September 2003, August 2002, July 2001 and November 2001 Options
represented reassignment of options to acquire Limited Voting Units that had
either previously expired or lapsed.



F-20

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

8. Stockholders' equity (continued)

A summary of the changes in the outstanding options granted
under the Plan during the years ended December 31, 2001, 2002 and 2003 is
presented below:

|                                                                      | 2001            | 2002       | 2003      
|--------------------------------------------------------------------- | --------------- | ---------- | ----------
|                                                                      | Number of Units
|Options outstanding at beginning
    of year:                         | 1,297,000       | 1,244,000  | 1,211,000 
|                                                                      |                 |            |           
|Exercised                                                             | ( 53,000)       | ( 33,000)  | ( 8,000)  
|Expired                                                               | ( 647,000)      | ( 177,000) | ( 171,000)
|Granted                                                               | 647,000         | 177,000    | 166,000   
|Options outstanding at end of
    year                                | 1,244,000       | 1,211,000  | 1,198,000 
|Options available for future
    grants                               | -               | -          | 5,000     
|Weighted average price of
    outstanding options at
    December 31, | Ps. 14.43       | Ps. 11.68  | Ps. 11.58 
|                                                                     
|Options exercisable at December
    31,                               | 597,000         | 387,000    | 208,000   
|Weighted average exercise price
    of exercisable options            | Ps. 11.62       | Ps. 10.69  | Ps. 9.40  

During the years ended December 31, 2001, 2002 and 2003,
options to purchase 53,000, 33,000 and 8,000 Limited Voting Units were
exercised, at an average price of Ps. 11.48, Ps. 13.96 and Ps. 12.30 per Unit,
respectively.



The weighted exercise price of options that expired in 2001,
2002 and 2003, were Ps. 11.87, Ps.13.33 and 
Ps. 12.27, respectively.



During 2002, the Company increased the reserve for repurchase
of shares by Ps. 211,869 and repurchased the following numbers of shares during
the years ended December 31, 2002 and 2003:



|       | 2002
    Number of | 2003
    Number of
|------ | ------------------ | ------------------
|Series | Units              | Shares            
|"B"    | "Ceramic UB"       | 2,561,400         
|"L"    | "Ceramic ULD"      | 3,626,000         
|"D"    |                    | 3,626,000         
|       |                    | 9,813,400         



In conformity with the Mexican Corporations Act, at least 5%
of net income of each year must be allocated to increase the legal reserve. This
practice must be continued until the legal reserve reaches 20% of capital stock
issued and outstanding. As of December 31, 2003, the Company had a legal reserve
of Ps. 34,520 included in retained earnings. At December 31, 2002, the Company
had not allocated any of its retained earnings to the legal reserve.

F-21

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements



(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)



8. Stockholders' equity (continued)



An analysis of cumulative comprehensive income (loss) at
December 31, 2001, 2002 and 2003 is as follows:



|                                                     | 2001                          | 2002             | 2003             | 2003        
|---------------------------------------------------- | ----------------------------- | ---------------- | ---------------- | ------------
|                                                     | Thousands of
    U.S. dollars
|Cumulative effect of deferred
    income taxes       | Ps. ( 319,986)                | Ps. ( ; 319,986) | Ps. ( 319,986)   | $ ( 28,481) 
|Minimum pension liability                            | -                             | -                | ( 1,024)         | ( 91)       
|Deficit from restatement of
    stockholders' equity | ( 1,278,021)                  | ( 1,269,044)     | ( 1,216,838)     | ( 108,308)  
|Effect of translation of foreign
    subsidiaries    | 51,214                        | 77,542           | 96,336           | 8,575       
|Cumulative comprehensive
    income (loss)           | Ps. ( 1,546,793)              | Ps. ( 1,511,488) | Ps. ( 1,441,512) | $ ( 128,305)



9. Income taxes, asset tax and employee profit sharing



Interceramic and its subsidiaries in Mexico are each subject
to the payment of income and asset tax. The Company's United States subsidiaries
are subject to state and federal income taxes. These taxes are computed by
Interceramic and each subsidiary separately and each files its own tax return.



An analysis of income and asset tax expense for the years
ended December 31, 2001, 2002 and 2003 is as follows:

|                                          | 2001       | 2002       | 2003      
|----------------------------------------- | ---------- | ---------- | ----------
|Current income tax and asset tax          | Ps. 18,244 | Ps. 20,852 | Ps. 21,105
|Deferred income tax expense
    (benefit) | 31,770     | ( 9,024)   | 25,726    
|                                          | Ps. 50,014 | Ps. 11,828 | Ps. 46,831



An analysis of the deferred tax liabilities (assets) at
December 31, 2002 and 2003 is as follows:



|                                                                                | 2002        | 2003       
|------------------------------------------------------------------------------- | ----------- | -----------
|Deferred tax liabilities                                                        |             |            
|Inventories                                                                     | Ps. 125,636 | Ps. 175,429
|Fixed assets                                                                    | 312,605     | 351,246    
|Foreign subsidiaries deferred tax
    liabilities and
    effect of translation | 52,607      | 41,643     
|                                                                                | 490,848     | 568,318    
|Deferred tax assets                                                             |             |            
|Allowance for doubtful accounts                                                 | 2,047       | 856        
|Provisions                                                                      | 14,084      | 10,094     
|Tax loss carryforwards                                                          | 195,376     | 183,540    
|Asset tax paid in prior years                                                   | 46,514      | 50,124     
|                                                                                | ( 258,021)  | ( 244,614) 
|Less: valuation allowance                                                       | 113,347     | 118,919    
|Net deferred income tax
    liabilities                                         | Ps. 346,174 | Ps. 442,623

A valuation allowance has been recorded due to the
uncertainly of realizing a portion of the Company's tax loss and assets
carryforwards, primarily from its operations in the United States.



F-22

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements



(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)



9. Income taxes, asset tax and employee profit sharing
(continued)



The portion of deferred income taxes attributable to the
excess of indexed costs over replacement cost and the effect of translation of
foreign subsidiaries have an effect on deferred income taxes charged to income
for the years ended December 31, 2001, 2002 and 2003 as analyzed below:

|                                                                                                          | 2001         | 2002        | 2003      
|--------------------------------------------------------------------------------------------------------- | ------------ | ----------- | ----------
|Change in deferred income tax
    liabilities                                                             | Ps. (37,555) | Ps. 10,816  | Ps. 96,449
|Less:                                                                                                     |              |             |           
|Effect of inflation, net monetary
    effect (1)                                                          | 6,852        | 20,223      | 18,006    
|Change in deferred income taxes
    recorded in deficit from
    restatement
    of stockholders' equity  | 42,893       | ( 26,336)   | ( 56,084) 
|Change
    in deferred income taxes
    recorded in effect of translation
    of foreign
    subsidiaries | 9,756        | ( 10,510)   | ( 21,952) 
|Change in deferred income taxes
    recorded in minority
    stockholders' equity                         | 9,824        | ( 3,217)    | ( 10,693) 
|Deferred income tax expense
    (benefit) included in
    statements of income                            | Ps. 31,770   | Ps ( 9,024) | Ps. 25,726



(1) Because current tax legislation recognizes partially the effects of
inflation on certain items that give rise to deferred taxes, the current year
net monetary effect on such items has been reclassified in the statement of
income from result from the monetary position result to deferred income tax
expense of the year.

The Company incurred tax losses in prior years, which, in
conformity with the current Mexican income tax law, may be carried forward,
restated for inflation following the procedures defined in the law, and applied
against taxable earnings generated in the next ten years.



The Company also has recoverable asset tax paid in prior
years in excess of income tax. In conformity with current tax legislation, asset
tax actually paid in a given year may be recovered, restated for inflation
following the procedure defined in the law, by means of a refund mechanism in
any of the succeeding ten years in which income tax exceeds asset tax. During
the years ended December 31, 2001, 2002 and 2003, Interceramic was not required
to pay any asset tax because it exercised the option of taking immediate
deduction of its investments in fixed assets. Certain subsidiaries paid asset
tax of Ps. 5,955, Ps. 5,244 and Ps. 4,847 in 2001, 2002 and 2003, respectively.





F-23

---



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

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

9. Income taxes, asset tax and employee profit sharing
(continued)



An analysis of the available tax loss carryforwards and
recoverable asset tax for the Company's Mexican subsidiaries at December 31,
2003, restated for inflation, is as follows:



|Year of tax
    loss or payment of
    asset tax | Year of
    expiration | Tax loss
    carryforwards | Recoverable
    asset tax
|------------------------------------------------ | ---------------------- | -------------------------- | -------------------------
|1995                                             | 2005                   | Ps. 9,362                  | Ps. -                    
|1996                                             | 2006                   | -                          | 5,476                    
|1997                                             | 2007                   | -                          | 13,959                   
|1998                                             | 2008                   | 35,720                     | 3,751                    
|1999                                             | 2009                   | 33,059                     | 5,507                    
|2000                                             | 2010                   | 223                        | 5,385                    
|2001                                             | 2011                   | 201                        | 5,955                    
|2002                                             | 2012                   | 16,291                     | 5,244                    
|2003                                             | 2013                   | 95,559                     | 4,847                    
|                                                 |                        | Ps. 190,415                | Ps. 50,124               



Interceramic, Inc., the Company's United States subsidiary,
has net operating loss carryforwards for federal income tax purposes, which if
not utilized to offset future taxable income, will expire at various dates as
summarized below:



|Year of tax loss | Year of
    expiration | Tax loss
    carryforwards
|---------------- | ---------------------- | --------------------------
|1996             | 2011                   | Ps. 73,073                
|1997             | 2017                   | 140,281                   
|1998             | 2018                   | 25,259                    
|1999             | 2019                   | 17,457                    
|2000             | 2020                   | 67,925                    
|2001             | 2021                   | 31,013                    
|                 |                        | Ps. 355,008               





A reconciliation of the difference between income taxes
computed at the statutory income tax rate and the Company's effective income tax
rate for the years ended December 31, 2001, 2002 and 2003 is as follows:



|                                                                                                             | 2001       | 2002       | 2003      
|------------------------------------------------------------------------------------------------------------ | ---------- | ---------- | ----------
|Income tax expense at the
    statutory
    rate on income before income tax
    and employee profit sharing | Ps. 98,995 | Ps. 44,904 | Ps. 37,073
|Inflationary effects                                                                                         | ( 18,824)  | ( 177)     | ( 569)    
|Non-deductible expenses                                                                                      | 1,128      | 13,400     | 3,639     
|Other                                                                                                        | ( 2,884)   | 40         | 1,634     
|Change in valuation allowance                                                                                | ( 28,401)  | ( 31,519)  | 5,615     
|Effect of change in income tax
    rates                                                                     | -          | ( 14,820)  | ( 561)    
|Net income tax expense                                                                                       | Ps. 50,014 | Ps. 11,828 | Ps. 46,831





F-24

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

9. Income taxes, asset tax and employee profit sharing
(continued)



In 2001, the income tax law was changed to reduce the
statutory income tax rate for 35% in 2002 to 32% in 2005 through an annual one
percentage point reduction in the statutory rate beginning in 2003.

At December 31, 2001, 2002 and 2003, the Company had the
following equity account balances for income tax purposes:



|     | Balance of
    Restated Contribute | Balance of Net Tax       | Reinvested Net
    Fiscal
|---- | ---------------------------------- | ------------------------ | -------------------------
|     | Capital Account ("CUCA")           | Profit Account ("CUFIN") | Account ("CUFINRE")      
|2001 | Ps. 2,128,285                      | Ps. 58,069               | Ps. 34,125               
|2002 | Ps. 1,954,491                      | Ps. 96,335               | Ps. 19,861               
|2003 | Ps. 1,767,223                      | Ps. 115,073              | Ps. 1,743                





Beginning in 1999 and through 2001, the income tax law
allowed the option of deferring payments of part of income taxes due during
those years. Deferral of said tax and related income is controlled through the
Reinvested Net Fiscal Account ("CUFINRE"). Earnings distributed in excess of
fiscal balances from CUFINRE and CUFIN, will be subject to enacted corporative
income tax rate. Effective January 1, 2002, the above-mentioned option of
deferring a portion of income tax was eliminated.



10. Industry segment information

Financial information by geographical area as of and for the years ended
December 31, 2001, 2002 and 2003 is as follows:

|                                             | 2001         
|-------------------------------------------- | -------------
|                                             | Mexico       
|Net sales:                                   |              
|General customers                            | Ps. 1,957,931
|Inter-area transfers                         | 788,958      
|                                             | Ps. 2,746,889
|Interest expense, net of monetary
    effect | Ps. ( 86,775)
|Net income                                   | Ps. 198,756  
|                                            
|Depreciation                                 | Ps. 110,298  
|Write off of assets                          | Ps. 48,152   
|Capital expenditures                         | Ps. 102,478  
|Total assets                                 | Ps. 3,632,736
|Long-lived assets:                           |              
|Property, plant and
    equipment            | Ps. 1,448,679
|Other assets                                 | 738,361      
|                                             | Ps. 2,187,040





F-25

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

10. Industry segment information (continued)

|                                             | 2002         
|-------------------------------------------- | -------------
|Mexico                                       | United States
|Net sales:                                   |              
|General customers                            | Ps. 1,946,460
|Inter-area transfers                         | 879,319      
|                                             | Ps. 2,825,779
|Interest expense, net of monetary
    effect | Ps. ( 65,588)
|Net income                                   | Ps. 21,530   
|                                            
|Depreciation                                 | Ps. 112,299  
|Capital expenditures                         | Ps. 152,487  
|Total assets                                 | Ps. 3,976,021
|Long-lived assets:                           |              
|Property, plant and
    equipment            | Ps. 1,543,929
|Other assets                                 | 689,750      
|                                             | Ps. 2,233,679



|                                             | 2003           
|-------------------------------------------- | ---------------
|Mexico                                       | United States  
|Net sales:                                   |                
|General customers                            | Ps. 2,006,162  
|Inter-area transfers                         | 812,989        
|                                             | Ps. 2,819,151  
|Interest expense, net of monetary
    effect | Ps. ; ( 25,829)
|Net income                                   | Ps. 22,834     
|Depreciation                                 | Ps. 127,857    
|Capital expenditures                         | Ps. 116,784    
|Total assets                                 | Ps. 4,060,780  
|Long-lived assets:                           |                
|Property, plant and equipment                | Ps. 1,676,361  
|Other assets                                 | 734,226        
|                                             | Ps. 2,410,587  



F-26

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)



10. Industry segment information (continued)

Geographical sales by customer location are as follows:

|                         | Mexico                        | Unites States               
|------------------------ | ----------------------------- | ----------------------------
|Total
    Domestic sales | Wholly owned
    distributors | Independent
    distributors
|Net sales 2001           | Ps. 1,880,102                 | Ps 781,647                  
|                        
|Net sales 2002           | Ps. 1,841,960                 | Ps. 921,360                 
|                        
|Net sales 2003           | Ps. 1,920,526                 | Ps. 1,032,256               

(*) A small part of these sales did not occur in the United States.

11. Commitments and contingencies

The Company has entered into rental agreements for office
space, manufacturing facilities and equipment used in its operations under
non-cancelable operating leases. A summary of future minimum lease payments
under these agreements at December 31, 2003 is as follows:

|2004                                     | Ps. 91,516 
|---------------------------------------- | -----------
|2005                                     | 81,652     
|2006                                     | 80,708     
|2007                                     | 74,731     
|2008                                     | 64,177     
|Thereafter                               | 331,177    
|Total future minimum rental
    payments | Ps. 723,961

Rental expense incurred under operating leases for the years
ended December 31, 2001, 2002 and 2003 was Ps. 57,374, Ps. 54,973 and Ps.
93,634, respectively.



Under certain lease agreements the respective monthly lease
payments will increase annually in accordance with the NCPI.



The Company is party to various claims, legal actions, and
complaints arising in the ordinary course of business. In the opinion of
management and the Company's independent lawyers, all such matters are without
merit or are of such nature, or involve such amounts, that an unfavorable
disposition would not have a material effect on the financial position or
results of operations of the Company.





F-27

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

12. Subsequent events



On January 14, 2004, at a general stockholders meeting,
Interceramic authorized a capital increase of 32,800,000 Units and it was
thereafter determined by the Board to offer 32,732,026 of these Units for sale
to its shareholders pursuant to statutory preemptive rights granted under
Mexican law. Accordingly, Interceramic offered holders of record of Common Units
the right to acquire 0. 0.6734980 new Common Units and holders of record of
Limited Voting Units the right to acquire 0.6734980 new Limited Voting Units at
the subscription price of US $1.3636 per Unit. The subscription period for this
rights offering expires on March 30th 2004. Unsubscribed shares at the end of
the offering period were offered to certain current shareholders in an extended
offering.



At the same meeting, Interceramic approved a plan to acquire
directly or indirectly, the companies Grupo Comercial Interceramic, S.A. de .C.V
and Materiales Arquitectonicos Decorativos, S.A. de C.V. These companies are
currently owned by the controlling stockholders of the Company.  The
aggregate purchase price for these companies is US $15,800.  The purchase
was completed on March 31, 2004.



At the completion of the rights offering and the extended
offering, all of the offered shares were fully subscribed, resulting in net
proceeds of US $44.7 million. Of this amount, US $15.8 million were used for the
purchase of the two franchises mentioned above, US $25.0 million was reserved
for the construction and equipment of a new manufacturing facility in Chihuahua,
Mexico, and the remaining US $3.8 million reserved for other general corporate
purposes.

13. Differences between Mexican and United States generally
accepted accounting principles



The Company's consolidated financial statements are prepared
in conformity with Mexican GAAP, which differs in certain significant respects
from accounting principles generally accepted in the United States ("US GAAP").



The Mexican GAAP consolidated financial statements reflect
certain effects of inflation provided under Bulletin B-10, as amended, whereas
financial statements prepared under US GAAP are presented on a historical-cost
basis. The following reconciliation to US GAAP does not include the reversal of
the adjustments required under Bulletin B-10, as its application represents a
comprehensive measure of the effects of price-level changes as a result of
inflation in the Mexican economy and is considered a more meaningful
presentation than historical-cost based financial reporting for both Mexican and
United States accounting purposes.



F-28

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)

The other principal differences between Mexican GAAP and US
GAAP applicable to the Company's consolidated financial statements are discussed
below and include a presentation of the effect on the Company's consolidated
stockholders' equity and consolidated net income provided below.



Consolidated stockholders' equity and consolidated net
income, adjusted for the effect of certain material differences between Mexican
GAAP and US GAAP, are as follows:

|                                                                |          | December 31,
|--------------------------------------------------------------- | -------- | ------------
|                                                                | Sub note | 2001        
|Majority Stockholders' equity
    under Mexican GAAP            |          | Ps. 883,287 
|                                                                |          |             
|US GAAP adjustments:                                            |          |             
|Translation of foreign
    subsidiaries                         | a)       | ( 55,792)   
|Capitalization of interest, net
    of accumulated depreciation | b)       | 13,878      
|Valuation of fixed assets based
    on the NCPI                 | c)       | 298,492     
|Depreciation of fixed assets
    based on NCPI                  | c)       | ( 80,597)   
|Deferred income taxes (1)                                       | d)       | ( 109,330)  
|Deferred employee profit sharing
    (1)                        | e)       | ( 140,536)  
|Variable capital shares                                         | f)       | ( 493,345)  
|Employee stock purchase trust                                   | g)       | ( 15,861)   
|Minority interest of reconciling
    items                      | h)       | 51,453      
|Tax benefit of stock issuance
    cost                          | i)       | 9,519       
|Stockholders' equity under US
    GAAP                          |          | Ps. 361,168 

|                                                   |          | Year ended
    December 31,
|-------------------------------------------------- | -------- | ---------------------------
|                                                   | Sub note | 2001                       
|Net income under Mexican GAAP                      |          | Ps. 204,180                
|US GAAP adjustments:                               |          |                            
|Translation of foreign
    subsidiaries            | a)       | ( 12,895)                  
|Capitalized interest, net of
    depreciation      | b)       | ( 2,868)                   
|Depreciation of fixed assets
    based on
    NCPI | c)       | ( 26,052)                  
|Deferred income taxes (1)                          | d)       | 36,502                     
|Deferred employee profit sharing
    (1)           | e)       | 23,226                     
|Minority interest in reconciling
    items         | h)       | ( 15,127)                  
|Net income under US GAAP                           |          | Ps. 206,996                

F-29

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)

(1) Deferred income taxes and employee profit sharing are
reflected net of the effect on net monetary position.

Consolidated statements of changes in stockholders' equity

Consolidated statements of changes in stockholders' equity, adjusted for the
effect of certain material differences between Mexican GAAP and US GAAP, are as
follows:

|                                                                                   | 2001        | 2002        | 2003       
|---------------------------------------------------------------------------------- | ----------- | ----------- | -----------
|Stockholder's equity beginning of
    year
    under US GAAP                       | Ps. 260,780 | Ps. 361,169 | Ps. 434,491
|Employee stock purchase trust                                                      | 1,365       | 1,334       | 520        
|Repurchase of Common stock, net
    of variable
    capital                        | -           | ( 55,935)   | ( 48,739)  
|Comprehensive income:                                                              |             |             |            
|Net income                                                                         | 206,966     | 63,848      | 209,588    
|Result of holding non-monetary
    assets                                          | ( 84,610)   | 21,174      | ( 106,044) 
|Minimum pension liability                                                          | -           | -           | ( 1,024)   
|Deferred income taxes resulting
    from the effect of holding non-monetary assets | 43,188      | ( 15,025)   | 29,238     
|Effect of translation of foreign
    subsidiaries                                  | ( 66,521)   | 57,926      | 44,029     
|Stockholder's equity at end of
    year
    under US GAAP                          | Ps. 361,168 | Ps. 434,491 | Ps. 562,059



a) Translation of foreign subsidiaries

As explained in Note 1a, in conformity with Bulletin B-15,
"Transactions in Foreign Currency and Translation of Financial Statements of
Foreign Operations," the Company restated the financial statements at December
31, 2001 and 2002, using a common restatement factor determined based on the
weighted average selling rate for each currency, taking into consideration the
inflation rate of the foreign (non-Mexican) country and the exchange rates for
those years. For US GAAP purposes, those financial statements would have been
restated based on the NCPI. Factors derived from the NCPI, published by the
Banco de Mexico, were 1.0570 and 1.0398 for 2001 and 2002, respectively.

b) Capitalized interest

The Company capitalizes the comprehensive financing cost
related to specific borrowings on assets under construction in conformity with
Mexican GAAP. Under US GAAP, interest must be considered an additional cost of
constructed assets and capitalized and depreciated over the lives of the related
assets. The amount of interest capitalized for US GAAP purposes totaled Ps.
1,382, Ps. 3,552 and Ps. 0, for the years ended December 31, 2001, 2002 and
2003, respectively. The depreciation of amounts previously capitalized under
USGAAP amounted to Ps. 4,250, Ps. 4,483 and Ps. 4,437, for the years ended
December 31, 2001, 2002 and 2003, respectively.



F-30

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)

c) Valuation and depreciation of fixed assets based on the
NCPI



As explained in Notes 1d and 1h, in conformity with the
Bulletin B-10, the Company restated the imported machinery using the alternative
method (i.e., the rate of inflation in the country of origin and prevailing
exchange rate at the balance sheet date) under Mexican GAAP. For US GAAP
purposes, those assets would have been restated based on the NCPI.



At December 31, 2001, 2002 and 2003, net plant, property and
equipment under US GAAP would be Ps. 1,869,313, Ps. 1,896,689 and Ps. 1,995,742,
respectively.

Rates used to adjust prior year balances under Mexican GAAP
were 1.1731 and 1.0682, compared to the rates of inflation in Mexico that were
used to determine the above balances under US GAAP of 1.0990 and 1.0398 in 2001
and 2002, respectively.



d) Income taxes and employee profit sharing



For purposes of the reconciliation to US GAAP, the Company
has applied Statement of Financial Accounting Standards No. 109, which requires
that deferred income taxes be determined using the liability method for all
temporary differences between financial reporting amounts and the tax basis of
assets and liabilities, and that deferred taxes on such differences be measured
at the enacted income tax rates for the year in which such taxes are expected to
be payable or refundable.



Mexican Accounting Bulletin D-4, "Deferred Income Tax,"
became effective on January 1, 2000. Under Bulletin D-4, all deferred income
taxes, including those arising from recurring temporary differences between book
and taxable income, and the tax effects of tax loss carryforwards, have been
recognized in the financial statements for the years ended December 31, 2001,
2002 and 2003. Such deferred income taxes have been calculated under the assets
and liability method that compares the book and tax values of the Company's
assets and liabilities. From this comparison temporary differences are
determined based on enacted tax rates.



Deferred employee profit sharing expense or benefit is
calculated in a manner similar to deferred income taxes under US GAAP, however,
employee profit sharing expense would be considered as a component of operating
expenses.



F-31

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)



The portion of deferred taxes attributable to the excess of
indexed costs over replacement cost and the effect of translation of foreign
subsidiaries have been reflected as an adjustment to the deficit from
restatement of stockholders' equity. As a result, under US GAAP deferred income
taxes (benefit) charged directly to the deficit from restatement of
stockholders' equity was Ps. 43,242, Ps. (15,025) and Ps. (29,238) for the years
ended December 31, 2001, 2002 and 2003, respectively.



Income before income taxes under US GAAP for the Company's
domestic and foreign operations was as follows:



|                                                      | 2001        | 2002         | 2003        
|----------------------------------------------------- | ----------- | ------------ | ------------
|Income before income taxes:                           |             |              |             
|Domestic                                              | Ps. 186,933 | Ps. 50,074   | Ps. 51,575  
|Foreign                                               | 7,191       | 27,009       | 7,278       
|                                                      | Ps. 194,124 | Ps. 77,083   | Ps. 58,853  
|Current provision for income and
    asset
    taxes: |             |              |             
|Domestic                                              | Ps. 16,654  | Ps. 19,265   | Ps. 21,105  
|Foreign                                               | 439         | 1,032        | -           
|                                                      | Ps. 17,093  | Ps. 20,297   | Ps. 21,105  
|Deferred income tax expense
    (benefit):            |             |              |             
|Domestic                                              | Ps.(6,739)  | Ps.(36,403)  | Ps. ( 1,963)
|Foreign                                               | -           | -            | -           
|                                                      | Ps.( 6,739) | Ps.( 36,403) | Ps. ( 1,963)
|                                                     
|Total income tax expense
    (benefit)                | Ps. 10,354  | Ps. (16,106) | Ps.  19,142 



F-32

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)



The material components of the net deferred income tax liabilities at
December 31, 2001, 2002 and 2003 under US GAAP consisted of the following:

|                                                                                                                  | 2001         | 2002         | 2003         
|----------------------------------------------------------------------------------------------------------------- | ------------ | ------------ | -------------
|Deferred income tax liabilities:                                                                                  |              |              |              
|Inventories                                                                                                       | Ps. 128,766  | Ps. 122,295  | Ps. 175,429  
|Property, plant and equipment                                                                                     | 397,933      | 370,979      | 361,005      
|Foreign subsidiaries deferred tax
    liabilities and
    effect of translation                                   | 24,530       | 51,207       | 41,643       
|Total deferred income tax
    liabilities                                                                         | 551,229      | 544,481      | 578,077      
|Deferred income tax assets:                                                                                       |              |              |              
|Tax loss carryforwards                                                                                            | 214,268      | 190,180      | 183,540      
|Asset tax paid                                                                                                    | 40,589       | 45,277       | 50,124       
|Other                                                                                                             | 20,959       | 15,701       | 10,950       
|Total deferred income tax assets                                                                                  | 275,816      | 251,158      | 244,614      
|Valuation allowance                                                                                               | ( 149,049)   | ( 110,333)   | ( 118,919)   
|Total deferred income tax assets                                                                                  | 126,767      | 140,827      | 125,695      
|Net deferred income tax
    liabilities under US
    GAAP                                                         | 424,462      | F,656        | 452,382      
|Less:                                                                                                             |              |              |              
|Net deferred income tax
    liabilities under Mexican GAAP                                                        | ( 335,357)   | ( 346,174)   | ( 442,623)   
|Effect of translation of foreign
    Subsidiaries (1)                                                             | 20,225       | 9,204        | -            
|Adjustment to net deferred tax
    liabilities                                                                    | Ps. 109,330  | Ps. 66,686   | Ps. 9,759    
|Current year adjustment to net
    deferred income tax liabilities to reconcile to US GAAP                        | Ps. 6,740    | Ps.( 42,644) | Ps. ( 56,927)
|Less change in deferred income
    taxes recorded
    in deficit from restatement of
    stockholders'
    equity | ( 43,242)    | 15,025       | 29,238       
|Adjustment to deferred income tax
    expense
    (benefit) under US GAAP                                         | Ps.( 36,502) | Ps.( 27,619) | Ps. ( 27,689)

(1) Represents the difference associated with the net
deferred tax liabilities under Mexican (see sub note a)



F-33

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)



e) Employee profit sharing



Subsidiaries in Mexico with employees have a statutory
obligation to pay their employees a share of their profits that is determined
based on 10% of earnings determined in accordance with Mexican labor and income
tax laws. Deferred employee profit sharing expense or benefit is calculated,
under US GAAP, in a manner similar to deferred income taxes, however, employee
profit sharing expense is considered a component of operating expenses. At
December 31, 2001 and 2002, the net deferred employee profit sharing liabilities
determined under US GAAP were Ps. 140,536 and Ps. 169,877, respectively.



In December 2003, Interceramic and its Mexican subsidiaries
implemented a workforce restructuring plan that transferred all of their
respective employees to service companies. There was no cost to the subsidiaries
associated with the transfer of the employees to these service companies. As a
result of this restructuring the Mexican companies that had previously recorded
deferred employee profit sharing liabilities were able to reverse these
liabilities because they no longer have any obligation to these formers
employees with respect to employee profit sharing.



f) Variable capital shares

Under Mexican GAAP, the variable portion of Interceramic's
common stock is classified as a component of stockholders' equity. Under US
GAAP, the variable portion of the common stock is considered temporary equity
and has been deducted from stockholders' equity to reflect the optional
redemption available to the holders of these shares.



g) Employee stock purchase trust



Under Mexican GAAP, the amount contributed to the Trust
established in connection with the Plan is carried as an asset in anticipation
of repayment upon the exercise of the stock options by employees. Under US GAAP,
this amount is deducted from stockholders' equity to reflect the subscription
receivable due to the Company upon exercise of the options.



For purposes of Mexican GAAP, no compensation expense has
been recorded by the Company with respect to these share transactions or with
respect to the dividends on stock held by the trust. Under US GAAP, compensation
expense is recognized for the difference, if any, between the exercise price of
the shares and their market value, on the respective dates the options were
granted and shares held by the trust were allocated to employees. The exercise
price of each option is equal to the market prices of the Interceramic stock on
the date of grant.

F-34

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)

In August 2002, the Company repriced options to acquire
647,000 Units from Ps. 17.00 to Ps. 12.15 per Unit. Under US GAAP, as a result
of reducing the exercise price, the options are subject to variable accounting
from the date of modification to the date the options are exercised, are
forfeited or expire unexercised. Under variable accounting estimates of
compensation expense are recorded based on the quoted market price of the stock
at intervening dates and the vesting periods associated with the options. The
estimated compensation expense may fluctuate because of changes in quoted market
price of the stock. Therefore, the accounting for a variable plan requires the
recomputation of estimated compensation expense until the measurement date. No
additional compensation expense, however, would be recorded by the Company
during the years ended December 31, 2002 because the market price of the Units
at December 31, 2002 was less than the repriced exercise price.



SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires presentation of pro forma information as if the Company had accounted
for its employee stock options granted, under the fair value method of that
statement. For purposes of pro forma disclosure, the estimated fair value of the
options at the date of the grant is amortized to expense over the vesting
period. Under the fair value method, the Company's US GAAP net income and net
income per Unit would have been as follows:

|                    | Years ended
    December 31,
|------------------- | ----------------------------
|                    | 2001                        
|Net income          | Ps. 204,245                 
|Net income per Unit | Ps. 3.53                    

The fair values of the options granted were determined using
a Black-Scholes option-pricing method with the following assumptions:

|                        | 2001  | 2002  | 2003 
|----------------------- | ----- | ----- | -----
|Dividend yield          | 2.5%  | 2.5%  | 2.5% 
|Volatility              | 47%   | 32%   | 47%  
|Risk-free interest rate | 7.44% | 7.18% | 7.44%
|Expected life in years  | 3     | 5     | 5    
|Fair value per Unit     | 5.02  | 3.54  | 3.61 

h) Minority Interest

Under Mexican GAAP, the minority interest in consolidated
subsidiaries is presented as a separate component within the stockholders'
equity section in the consolidated balance sheet. For US GAAP purposes, the
minority interest is not included in stockholders' equity.



i) Tax benefit of stock issuance cost



In 1994, the Company charged costs relating to an issuance of
equity directly to equity. The tax benefit of such costs would also be charged
to equity under US GAAP.

F-35

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)

j) Earnings per share



Earnings per share ("EPS") are computed according to
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
EPS is computed by dividing net earnings by the weighted average number of
common shares outstanding, excluding stock option plan shares. Diluted EPS is
computed by dividing net earnings by the sum of the weighted average number of
common shares outstanding, including stock-option shares that are potentially
dilutive. Under Mexican GAAP Units subscribed and issued to the stock option
Trust are considered outstanding for purposes of calculating earnings per Unit.
For US GAAP purposes the basic weighted average number of Units outstanding
excludes the average number of Units held by the Trust while the diluted
weighted average number of Units outstanding includes the dilutive Units held by
the Trust. Units held by the Trust have a dilutive effect only when the average
market price of the Units during the year exceeds the exercise price of the
options.



The computation of basic and diluted earnings per share for the years ended
December 31, 2001, 2002 and 2003 is as follows:

|                                                              | 2001        | 2002       | 2003       
|------------------------------------------------------------- | ----------- | ---------- | -----------
|Numerator:                                                    |             |            |            
|Net income under US GAAP                                      | Ps. 206,966 | Ps. 63,848 | Ps. 209,588
|Preferred stock dividends                                     | ( 688)      | ( 557)     | ( 491)     
|Numerator for basic earnings per
    share                    | Ps. 206,278 | Ps. 63,291 | Ps. 209,097
|Preferred stock dividends                                     | 688         | 557        | 491        
|Numerator for diluted earnings
    per share                  | Ps. 206,966 | Ps. 63,848 | Ps. 209,588
|Denominator:                                                  |             |            |            
|Basic weighted average Units
    outstanding (in thousands)   | 56,684      | 55,973     | 48,352     
|Employee stock options                                        | 1,144       | 32         | -          
|Diluted weighted average Units
    outstanding (in thousands) | 57,828      | 55,941     | 48,352     
|Basic net income per Unit                                     | Ps. 3.65    | Ps. 1.14   | Ps. 4.31   
|Diluted net income per Unit                                   | Ps. 3.65    | Ps. 1.14   | Ps. 4.31   



Disclosure about fair value of financial instruments



In accordance with Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
under US GAAP, information is provided about the fair value of certain financial
instruments. The estimated fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing
parties.

F-36

---

INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)



The following methods and assumptions are used to estimate
the fair value of financial instruments including:



Cash and cash equivalents carrying amounts approximate fair
value because of the short maturity of such instruments.



The fair value of notes payable to banks and long-term debt
is based on current rates offered for similar debt. At December 31, 2002 and
2003, the fair value of notes payable to banks and long-term debt was Ps
1,257,250 (US $116,378) and Ps. 1,178,244 (US $104,873), respectively.



Restrictions from debt obligations



The Company has certain restrictions from debt obligations on
its capital stock and retained earnings such as limitations on its ability to
declare or pay dividends or make distribution on or with respect to its capital
stock, limitations on purchase, redemption or other wise retire or acquire for
value capital stock, maintenance of certain financial ratios and restrictions on
encumbrances of assets and creation indebtedness. At December 31, 2002 and 2003,
the retained earnings not available for distribution amounted to Ps. 293,229 and

Ps. 325,446, respectively



Advertising



The Company expenses advertising costs as they are incurred.
Total advertising expenses charged to operations were approximately Ps. 55,636,
Ps. 56,983 and Ps. 49,867 in 2001, 2002 and 2003, respectively.



Research and development expenditures



The Company had research and development expenditures of Ps 21,248 in 2003,
while in 2002 and 2001 the expenditures for research and development were Ps.
22,193 and Ps. 25,689, respectively.



Write-off of assets and other expenses



In accordance with Mexican GAAP, the following costs and
expenses were recorded in the components entitled "other expenses" or "write-off
of assets" after operating income:

|                            | For the years
    ended December 31,
|--------------------------- | ------------------------------------
|                            | 2001                                
|Severance paid to employees | Ps. 7,385                           
|Write off of assets         | 44,010                              
|                            | Ps. 51,395                          

Under US GAAP, these costs and expenses would be included in operating
expenses.

F-37

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements



(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)



13. Differences between Mexican and United States generally
accepted accounting principles (continued)

Asset impairment

Long-lived assets to be held and used are recorded at cost.
Management reviews long-lived assets and related intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of such assets may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted, undiscounted net cash flows of the
operation to which the assets relate to the carrying amount including associated
long-lived assets of such operation. If the operation is determined to be unable
to recover the carrying amount of its assets, an impairment loss shall be reduce
the carrying amount of long-lived assets on a pro-rata basis using the relative
carrying amounts of those assets. For 2001, 2002 and 2003, due to ongoing
profitable operations, no long-lived asset impairment evaluation was considered
necessary.



Selected financial data under US GAAP



Summarized consolidated financial information, on a US GAAP
basis, as of and for the years ended December

31, 2000 and 2001 after restatement to present all amounts in
thousands of constant Pesos of equivalent purchasing power based upon the NCPI (
see sub note c ) as of December 31, 2003:



|                        | 2001          | 2002          | 2003         
|----------------------- | ------------- | ------------- | -------------
|At December 31,         |               |               |              
|Current assets          | Ps. 1,224,655 | Ps. 1,299,072 | Ps. 1,371,913
|Non-current assets      | 1,931,740     | 2,074,935     | 2,101,836    
|Current liabilities     | 1,506,056     | 883,468       | 959,556      
|Non-current liabilities | 1,142,643     | 1,892,114     | 1,741,109    
|Minority interest       | 147,569       | 163,956       | 211,025      
|Year ended December 31, |               |               |              
|Sales                   | 2,973,741     | 3,180,489     | 3,424,926    
|Cost of sales           | 1,947,772     | 2,032,695     | 2,252,430    
|Operating Income        | 258,438       | 273,120       | 213,108      
|Net income              | 206,996       | 63,848        | 209,588      



F-38

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)

Cash flow information



Under US GAAP, a statement of cash flows is prepared based on
the provisions of Statement of Financial Accounting Standards No. 95 "Statement
of Cash Flows" ("SFAS No. 95") in lieu of a statement of changes in financial
position required by Mexican GAAP. SFAS No. 95 establishes specific presentation
requirements and requires additional disclosures, such as the amount of interest
and income taxes paid and other non-cash items. This statement does not provide
specific guidance for the preparation of cash flows for price level adjusted
financial statements.



Cash flows from operating, investing and financing activities
have been adjusted for the effects of inflation or monetary items.



Below are the consolidated statements of cash flow prepared
in accordance with US GAAP:



|                                                                                                  | Year ended
    December 31
|------------------------------------------------------------------------------------------------- | --------------------------
|2001                                                                                              | 2002                      
|Net income                                                                                        | Ps. 206,964               
|Adjustments to
    reconcile net income to
    net cash provided
    by operating
    activities: |                           
|Depreciation                                                                                      | 142,802                   
|Depreciation per NCPI                                                                             | 26,052                    
|Write off of assets                                                                               | 45,113                    
|Deferred income tax US GAAP
    Deferred Income Tax                                               | (36,502)
    29,763       
|Deferred employee profit sharing                                                                  | ( 23,226)                 
|Minority net income (loss)                                                                        | ( 4,750)                  
|Exchange (loss) gain                                                                              | ( 56,434)                 
|Allowance for doubtful accounts                                                                   | 3,366                     
|Inflation effect on financing activities                                                          | ( 58,354)                 
|                                                                                                  | 274,794                   
|Changes in:                                                                                       |                           
|Accounts
    receivable                                                                           | Ps.( 52,492)              
|Inventories                                                                                       | 9; 116,550                
|Other assets                                                                                      | ( 14,425)                 
|Accounts payable
    to suppliers                                                                 | ( 44,884)                 
|Other accounts
    payable                                                                        | ( 84,172)                 
|Other                                                                                             | 2,687                     
|Total adjustments                                                                                 | (76,556)                  
|Net cash provided
    by operating activities                                                     | 198,239                   
|                                                                                                 
|Investing
    activities                                                                          |                           
|Increase of
    property, plant and equipment                                                     | ( 108,884)                
|Net cash used in
    investing activities                                                         | ( 108,884)                



F-39

---



INTERNACIONAL DE
CERAMICA, S.A. DE C.V.

AND SUBSIDIARIES

Notes to Consolidated
Financial Statements





(Thousands of Constant
Mexican Pesos as of December 31, 2003 and thousands

of United States
Dollars, except for number of shares and Units, minimum dividend per share,

market value per Unit
and exchange rates, which are stated in Pesos)

13. Differences between Mexican and United States generally
accepted accounting principles (continued)



|                                                         | Year ended
    December 31
|-------------------------------------------------------- | --------------------------
|2001                                                     | 2002                      
|Financing
    activities                                 |                           
|Repurchase of
    capital stock                          | Ps. -                     
|Minority
    stockholders' refund                        | ( 15,331)                 
|Minority
    stockholders' dividends                     | ( 6,935)                  
|Proceeds from
    long-term debt and bank
    loans      | 68,120                    
|Repayment of
    long-term debt and bank
    loans       | ( 102,209)                
|Net cash (used)
    provided by financing
    activities | ( 56,355)                 
|Effect of
    inflation accounting                       | 46,020                    
|(Decrease)
    increase in cash and cash
    equivalents | 79,019                    
|Cash and cash
    equivalents at beginning
    of year   | 143,439                   
|Cash and cash
    equivalents at end of year (1)         | Ps 222,458                
|Supplemental cash
    flow disclosures:                  |                           
|Interest paid                                            | Ps. 123,350               
|Income taxes paid                                        | Ps. 9,551                 



(1) Cash and cash equivalents at December 31, 2001 and 2002
do not agree with amounts under Mexican GAAP due to the effect of translation of
foreign subsidiaries as discussed in Note 1a.

F-40

---



Report of Independent Auditors

on

Financial Statement
Schedules



The Board of
Directors

Internacional de
Ceramica, S.A. de C.V. and Subsidiaries



We have audited the consolidated financial statements of Internacional de
Ceramica, S.A. de C.V. and Subsidiaries (collectively, the "Company") as of
December 31, 2002 and 2003, and for each of the three years in the period ended
December 31, 2003. and have issued our report thereon dated February 9, 2004
included in the Company's Annual Report on Form 20-F for the year ended December
31, 2003 (the "Form 20-F'). Our audit also included the financial statement
schedules listed in Item 19(b) of the Form 20-F. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit of the Company.

In our opinion, the financial statement schedules referred to
above, when considered in relation to the Financial Statements taken as whole,
present fairly in all material respects the information set forth therein.

Mancera, S.C.
                                                                                                                                                                                    
Mancera, S.C.

Member of Ernst & Young International

Chihuahua, Chih., Mexico

June 30, 2004







---







Schedule 1 -
Condensed Financial Information of Registrant

Internacional de
Cerámica, S.A. de C.V.

Condensed statements
of income

(Thousands of
Constant Mexican Pesos as of December 31, 2003)





_____________________________________________

Years ended December 31,

2001                            
2002                                
2003

____________          ____________         
____________





Net sales                                                               
Ps 1,434,115                
Ps  1,450,469                
Ps 1,415,016





Cost of sales                                                               
(967,439)                   
(1,002,264)                   
(1,044,494)

9;

____________          ____________         
____________

9;



Gross profit                                                                   
466,676                         
448,205                        
370,522

Selling and
administrative expenses                        
(228,626)                      
(266,011)                     
(223,074)

____________          ____________         
____________





Operating income                                                         
238,050                         
182,194                        
147,448



Comprehensive
financing cost:

Interest income                                                           
11,834                           
11,434                            
7,870

Interest expense                                                       
(119,011)                        
(96,769)                       
(71,259)

Exchange gain (loss), net                                           
51,930                        
(157,155)                      
(88,873)

Net monetary effect                                                    
46,677                            
33,733                        
36,582

____________          ____________         
____________

(8,570)                       
(208,757)                    
(115,680)





Write-off of assets                                                         
(17,938)                                   
-                                  
-

Other expenses, net                                                           
1,548                           
(7,698)                        
(3,190)

____________          ____________         
____________

213,090                         
(34,261)                        
28,578

Equity in earnings of
subsidiaries                                 
36,759                        
122,586                         
24,110

____________          ____________         
____________

Income before income tax and

employee profit sharing                                             
249,849                         
88,325                          
52,688





Income tax Benefit (expense)                                      
(41,943)                         
8,370                         
(20,471)

Employee profit sharing                                                
(3,726)                       
(3,688)                                   
-

____________          ____________         
____________

Net
income                                                            Ps       
204,180          Ps       
93,007           Ps       
32,217





S-1

---

Schedule 1 -
Condensed Financial Information of Registrant

Internacional de
Cerámica, S.A. de C.V.

Condensed Statements
of Changes in Financial Position

(Thousands of
Constant Mexican Pesos as of December 31, 2003)







_____________________________________________

Years ended December 31,

2001                          
2002                            
2003

____________          ____________         
____________







Total resources
provided

by operating
activities                                       
Ps         308,721           
Ps        (113,548)         
Ps         230,166





Financing activities:

Repurchase of capital stock                                                   
-                          
(62,735)                       
(53,293)

Increase
in short and long-term debt                            
9,538                      
1,187,520                        
154,640

Payment
of short and long-term debt                        
(81,018)                   
(1,115,765)                     
(245,724)

Inflation effects on financing

activities                                                                      
(21,797)                      
(100,040)                       
(78,036)

Exchange
gain (loss) generated by

debt payments                                                           
(49,174)                        
132,933                          
89,237

____________          ____________         
____________





Resources used in

financing activities                                                  
(142,451)                          
41,913                      
(133,176)



Investing activities:





Purchases of
property, plant

and equipment, net                                                   
(80,836)                         
(81,421)                       
(98,160)

____________          ____________         
____________





Resources used in
investing activities                       
(80,836)                          
(81,421)                       
(98,160)

____________          ____________         
____________





Net increase
(decrease) in cash and

cash equivalents                                                        
85,434                        
(153,056)                          
(1,170)





Cash and cash
equivalents at

beginning of year                                                       
86,219                         
171,653                           
18,597





Cash and cash
equivalents at

end of year                                                     
Ps       171,653              
Ps         18,597              
Ps         17,427









S-2

---



Schedule 1 -
Condensed Financial Information of Registrant

Internacional de
Cerámica, S.A. de C.V.

Condensed Balance
Sheets

(Thousands of
Constant Mexican Pesos as of December 31, 2003)









December 31,

2002                             
2003

____________          ____________



Assets



Current assets:



Cash and cash equivalents                                    
Ps            18,597          
Ps           17,427



Accounts receivable:



Trade - Net                                                                            
109,969                      
115,193

Related parties                                                                     
584,988                      
360,878

Other accounts
receivable                                                   
82,688                        
39,443

Inventories - Net                                                                    
310,640                      
414,780

____________          ____________



Total current assets                                                            
1,106,882                      
947,721

____________          ____________



Investment in subsidiaries                                                    
558,943                      
599,442

Property, plant and equipment, net                                  
1,021,161                   
1,124,273

Long term related parties                                                        
69,470                        
56,175

Other assets                                                                             
53,034                         
68,655

____________          ____________



















Total assets                                                              
Ps       2,809,490          
Ps     2,796,266





S-3

---

Schedule 1 -
Condensed Financial Information of Registrant

Internacional de
Cerámica, S.A. de C.V.

Condensed Balance
Sheets

(Thousands of
Constant Mexican Pesos as of December 31, 2003)









December 31,

2002                             
2003

____________          ____________



Liabilities and Stockholder's equity



Current liabilities:



Notes payable to banks                                          
Ps           77,688           
Ps         180,145

Current portion of long-term debt                                      
199,768                         
204,339

Related parties                                                                         
18,489                          
55,407

Other accounts payable                                                       
319,342                        
231,030

____________          ____________



Total current liabilities                                                          
615,287                        
670,921



Long-term debt                                                                      
945,274                        
758,363

Labor obligations                                                                      
3,731                                   
-

Deferred income tax                                                              
296,338                        
369,222

____________          ____________



Total liabilities                                                                    
1,860,630                     
1,798,506

____________          ____________



Stockholders' equity



Capital stock                                                                          
724,810                        
720,190

Premium common stock                                                    
1,259,883                      
1,259,883

Stock repurchase reserve                                                    
182,426                         
133,753

Retained earnings                                                                 
293,229                         
325,446

Other comprehensive income (loss)                              
(1,511,488)                   
(1,441,512)

____________          ____________



Total stockholders equity                                                   
948,860                         
997,760

____________          ____________



Total liabilities and stockholders

equity                                                                   
Ps     2,809,490            
Ps      2,796,266





S-4

---

Schedule 1 -
Condensed Financial Information of Registrant

Internacional de
Ceramica, S.A. de C.V.

Statements of
Operations

(Thousands of
constant Mexican pesos as of December 31, 2003)





|                                                    | Common Stock | Premium on common
    stock | Stock Repurchase
    Reserve | Retained Earnings | Other
    comprehensive
    income (loss) | Comprehensive
    Income | Total stockholder'
    equity
|--------------------------------------------------- | ------------ | --------------------------- | ---------------------------- | ----------------- | ----------------------------------------- | ------------------------ | -----------------------------
|Balance at December 31, 2001                        | Ps. 730,103  | Ps. 1,259,883               | Ps. 28,001                   | Ps. 412,091       | Ps. ( 1,546,793)                          |                          | Ps. 883,285                  
|Increase of stock repurchase
    reserve            | -            | -                           | 211,869                      | (211,869)         | -                                         | -                        | -                            
|Repurchase of common stock                          | (5,293)      | -                           | (57,444)                     | -                 | -                                         | -                        | (62,737)                     
|Comprehensive income (loss):                        | -            | -                           | -                            | -                 | -                                         | -                        | -                            
|Net income                                          | -            | -                           | -                            | 93,007            | -                                         | 93,007                   | 93,007                       
|Result from holding
    nonmonetary assets          | -            | -                           | -                            | -                 | 8,977                                     | 8,977                    | 8,977                        
|Result from translation of
    foreign subsidiaries | -            | -                           | -                            | -                 | 26,328                                    | 26,328                   | 26,328                       
|Comprehensive income                                | -            | -                           | -                            | -                 | -                                         | Ps.         
    128,312 | -                            
|Balance at December 31, 2002                        | Ps. 724,810  | Ps. 1,259,883               | Ps. 182,426                  | Ps. 293,229       | Ps. (1,511,488)                           |                          | Ps. 948,860                  
|Repurchase of common stock                          | (4,620)      | -                           | (48,673)                     | -                 | -                                         | -                        | (53,293)                     
|Comprehensive income ( loss):                       | -            | -                           | -                            | -                 | -                                         | -                        | -                            
|Net income                                          | -            | -                           | -                            | 32,217            | -                                         | 32,217                   | 32,217                       
|Minimum pension liability                           | -            | -                           | -                            | -                 | (1,024)                                   | (1,024)                  | (1,024)                      
|Result from holding
    nonmonetary assets          | -            | -                           | -                            | -                 | 52,206                                    | 52,206                   | 52,206                       
|Result from translation of
    foreign subsidiaries | -            | -                           | -                            | -                 | 18,794                                    | 18,794                   | 18,794                       
|Comprehensive income                                | -            | -                           | -                            | -                 | -                                         | Ps.         
    102,193 | -                            
|Balance at December 31, 2003                        | Ps. 720,190  | Ps. 1,259,883               | Ps. 133,753                  | Ps. 325,446       | Ps. ( 1,441,512)                          |                          | Ps. 997,760                  



S-5

---

Schedule 1 -
Condensed Financial Information of Registrant

Internacional de
Cerámica, S.A. de C.V.

Notes to Condensed
Financial Statements

(Thousands Constant
Mexican pesos as of December 31, 2003)



1. Basis of presentation



The Company's investments in subsidiaries are valued using
the equity method since the date of acquisition. These condensed financial
statements should be read in conjunction with the Company's consolidated
financial statements.



2. Related Parties

In the normal course of business, the Company has
transactions with affiliated companies. Affiliated companies are those in which
the Company's stockholders have significant equity interest or control of
management. The main transactions with these companies consist of ceramic tile
sales for resale in Mexico and in the United States. Such transactions are
negotiated on terms and prices comparable to similar transactions with other
non-related customers.



In the years ended December 31, 2001, 2002 and 2003, the
Company had the following transactions with related parties:

____________________________________________



2001                            
2002                             
2003 9;

____________          ____________         
____________



Sales of ceramic tile:



Affiliated companies:



Grupo Comercial Interceramic,

S.A. de C.V.                                                     
Ps.      142,493             
Ps.        172,179           
Ps.        152,034



Materiales Arquitectónicos y

Decorativos, S.A. de C.V.                                          
70,934                             
69,099                           
73,218 9;



Subsidiary companies:



Distribución Interceramic,

S.A. de C.V.                                                                
233,664                           
313,277                         
311,499 9; 9;



Interacabados del Occidente,

S.A. de C.V.                                                                  
88,578                          
117,656                         
118,404



Interceramic, Inc.                                                       
186,105                          
165,036                         
123,514



Joint venture partner:



Dal-Tile International, Inc.                            
8,722               5,996              
6,414

Ps.      730,496              
Ps.       843,243              
Ps.      785,083











____________________________________________



9; 9; 2001                              
2002                             
2003 9;

____________          ____________         
____________





Services provided                                           
Ps.         72,145            
Ps.         75,476            
Ps.          68,655



Inventory purchases                                      
Ps.       113,816            
Ps.         87,711            
Ps.          96,912

Fees paid for administrative services

and other items                                           
Ps.         23,742            
Ps.         24,767            
Ps.           24,012



Under agreements with its subsidiaries Recubrimientos
Interceramic, S.A. de C.V. and Adhesivos y Boquillas Interceramic, S. de R.L. de
C.V., the Company provides certain favorable terms and services regarding the
sale of these subsidiaries' products through the Company's franchise
distribution network in Mexico. In addition, the Company apportions certain
sales, administrative and research and development expenses among these
companies based upon comparative sales expressed in Pesos.



Fees paid relate to management consulting, the use of
computer systems, maintenance of equipment and air-taxi service provided by
related companies.

An analysis of accounts due
to and from related parties as of December 31, 2002 and 2003 is as follows:

____________________________



2002                              
2003 9;

____________          ____________



Trade:



Grupo Comercial Interceramic,

S. A. de C.V.                                               
Ps          30,854             
Ps          20,951 9;

Materiales Arquitectónicos y

Decorativos, S. A. de C. V.                                     
10,187                             
9,042 9;

Dal-Tile International, Inc.                                             
1,219                             
1,423

Interceramic, Inc.                                                         
260,191                           
31,203

Distribución Interceramic,

S.A. de C.V.                                                             
213,502                         
205,123

Interacabados del Occidente, S.A. de C.V.               
73,745                           
70,647

Recubrimientos Interceramic, S.A. de C.V.                 
1,633                             
9,999

Adhesivos y Boquillas Interceramic,

S. de R.L. de C.V.                                                      
(8,550)                        
(21,278)

Servicios Administrativos Interceramic,

S.A. de C.V                                                                        
-                            
31,195





Others :



Interceramic, Inc                                                                    
-                              
1,939

Materiales en Proceso, S.A. de C.V.                            
2,181                                
443

Others                                                                                   
26                                 
191

____________          ____________

Ps       584,988          
Ps        360,878







____________________________



2002                             
2003 9;

____________          ____________



Long term related parties:



Interceramic, Inc.                                             
Ps        69,470             
Ps          56,175



Accounts payable:



Interceramic, Inc.                                                            
4,989                            
6,181

Recubrimientos Interceramic,

S.A. de C.V.                                                                     
10                                 
55

Adhesivos y Boquillas Interceramic,

S. de R.L. de C.V.                                                            
26                                 
70

Distribución Interceramic,

S.A. de C.V.                                                                     
49                                   
-

Kohler Co.                                                                       
8,786                            
7,075

Materiales en Proceso, S.A. de C.V.                            
3,821                              
417

Servicios Administrativos Interceramic.

S.A. de C:V.                                                                            
-                          
39,911

Others                                                                                 
808                            
1,698

____________          ____________

Ps.        18,489         
Ps.       55,407





3. Long term debt





Long term debt
consisted of the following at December 31, 2002 and 2003:





____________________________________________________________________________________

2002

Type of loan                            
Amount            
Current portion of               
Long-term             
Interest rates

long-term debt

____________________________________________________________________________________



Unsecured                                    
Ps.          22,452          
Ps.         22,452             
Ps.                 
-                        
4.50%

Secured                                                   
1,117,386                       
174,029                         
943,357                      
3.87 %

____________          ____________         
____________



Total bank loans                                   
1,139,838                        
196,481                        
943,357



Notes due to suppliers                               
5,204                            
3,287                            
1,917                       
9; 5.00 %

____________          ____________         
____________



Ps.    1,145,042            
Ps.      199,768             
Ps.      945,274











_____________________________________________________________________________________



2003

Type of loan                            
Amount            
Current portion of               
Long-term             
Interest rates

long-term debt

_____________________________________________________________________________________





Syndicated                                   
Ps.        960,761           
Ps.       202,398            
Ps.        758,363                       
3.43%

____________          ____________         
____________

Total bank loans                                       
960,761                       
202,398                         
758,363



Notes due to suppliers              
1,941         1,941            -                     
5.00%



Ps.         962,702          
Ps.        204,339            
Ps.        758,363





At December 31, 2002 and 2003, all bank loans are denominated
in United States Dollars. The syndicated loan and all secured loans are
collateralized by property, plant and equipment with a value of Ps 1,158,352 and
Ps 1,288,803 at December 31, 2002 and 2003, respectively.

In August 2001, the Company obtained long term supplier
financing from Oracle to purchase software in the amount of Ps 8,165 (US $888).
The agreement requires monthly payments of principal and interest through June
2004.

In June 2002, the Company entered into a syndicated loan
agreement (the "Credit Agreement") with several financial institutions and
Scotiabank Inverlat, S.A., as administrative agent, for US $100,000, US $90,000
of which was used to repay the Company's then-outstanding US $90,000 Eurobond
and the remainder applied for working capital purposes. The loan is divided into
two tranches: "Term A Loans" for US $40,000 with a three-year maturity and
interest at LIBOR plus from 1.70% to 2.20%, based upon the level of certain
financial ratios, and "Term B Loans" for US $60,000 with a five-year maturity
and interest at LIBOR plus from 2.30% to 2.80%, also based upon certain ratios.
This loan is collateralized by land, buildings and equipment, accounts
receivable, inventory and shares owned by the Company in a joint venture. The
Company's subsidiaries Distribucion Interceramic, S.A. de C.V., Interacabados
del Occidente, S.A.de C.V., and Interceramic, Inc., also provided guarantees for
this loan.

At December 31, 2003, future maturities of long-term
liabilities were as follows:





Years Ended

December 31

____________          ____________



2005                   
Ps        224,700

2006                               
252,788

2007                               
280,875

____________

Ps        758,363







The syndicated loan
and outstanding bank loan agreements establish certain obligations and
restrictive covenants with respect to certain transactions including the payment
of cash dividends, mergers and combinations, the disposal of fixed assets,
information reporting requirements and others. In addition, the Company is
required to maintain certain financial ratios. Prior to September 30, 2003, the
Company reached agreement with its lenders on a series of amendments to the
Credit Agreement which were completed as of October 31, 2003. These amendments
consist basically in new covenant ratios and additional interest depending on
the Company's ability to meet certain financial ratios.





At December 31, 2003,
the Company was in compliance with all obligations and restrictions established
by these agreements.



4. Stockholders'
equity





During the years
ended December 31, 2002 and 2003, options to purchase 33,000 and 8,000 Limited
Voting Units were exercised, at an average price of Ps. 13.96 and Ps. 12.30 per
Unit, respectively.





The weighted exercise
price of options that expired in 2002 and 2003, was Ps.13.33 and Ps. 12.27,
respectively.



5. Income taxes and
employee profit sharing



The Company
periodically evaluates the possibility of recovering deferred tax assets and if
necessary, adjusts the related valuation reserve.





In conformity with
Bulletin D-4, deferred employee profit sharing is recognized only on temporary
differences determined in the reconciliation of current year net income for
financial and tax reporting purposes, provided there is no indication that the
related liability or asset will not be realized in the future.





Current year employee
profit sharing is charged to results of operations and represents a current
liability due and payable in a period of less than one year.





Asset tax, which is a
minimum income tax, is payable based on the average value of most assets net of
certain liabilities. Because income tax may be credited against asset tax, the
latter is actually payable only to the extent that it exceeds current year
income tax.





Current year income
tax is charged to results of operations and represents the tax liability due and
payable in less than one year.





Employee profit
sharing is a statutory obligation payable to employees which is determined in
accordance with the provisions of both Mexican labor law and the Mexican income
tax law









2001                    
2002                      
2003



Current year income tax expense                                              
Ps               
-          Ps              
-          Ps              
-

Deferred income tax expense (benefit)                               
41,943                   
(8,370)                  
20,471

Ps       41,943        
Ps      (8,370)       
Ps       20,471









An analysis of the effects of temporary differences on
deferred tax liabilities (assets) at December 31, 2002 and 2003 is as follows:





2002                             
2003

____________          ____________

Deferred income tax liabilities









Inventories                                                  
Ps           63,236           
Ps         110,144

Foreign subsidiaries deferred

tax liabilities                                                           
9; 9; 10,510                           
31,791

Fixed assets                                                              
243,123                         
269,519

____________          ____________



316,869                        
#9; #9; 411,454

____________          ____________



Deferred income tax assets





Reserve for doubtful accounts                                   
1,236                              
369

Liability provisions                                                      
8,673                           
5,812

Tax losses from prior years                                       
11,870                         
42,121

____________          ____________

(21,779)                     
( 48,302)

____________          ____________

Less: valuation allowance for

tax loss carryforwards                          
1,248          6,070





Net Deferred income tax liabilities           
Ps          296,338          
Ps         369,222



The portion of deferred taxes attributable to the excess of
indexed costs over replacement cost and the effect of translation of foreign
subsidiaries on deferred income tax charged to the statement of income is as
follows:





2002          2003





Deferred income
    tax                                                         
    Ps            
    14,933            Ps          
    72,884

Less:

Prior year restatement                                                                 
    25,199                          
    13,122

Deferred income taxes in Procesadora

de Materiales Cerro Grande before merger                           
    (2,745)                                  
    -

Deferred income taxes recorded in deficit from

restatement of stockholders' equity                                    
    (45,757)                       
    (65,535)

Total deferred
    income taxes included in                     
    ______________        ____________

statements of income                                            
    Ps            
    (8,370)        Ps          
    20,471



6. Contingencies



The Company negotiated supply agreements to obtain a portion
of its natural gas supply from PEMEX at a fixed price. The supply agreements
were for the period from January 1, 2001 through December 31, 2003.

The Company is party to various claims, legal actions, and
complaints arising in the ordinary course of business. In the opinion of
independent lawyers, all such matters are without merit or are of such nature,
or involve such amounts, that an unfavorable disposition would not have a
material effect on the financial position or results of operations of the
Company.



7. Subsequent events



On January 14, 2004, the shareholders approved a plan to
acquire directly or indirectly, all of the issued and outstanding capital stock
of Grupo Comercial Interceramic, S.A. de .C.V and Materiales Arquitectonicos
Decorativos, S.A. de C.V. These companies were owned by certain controlling
stockholders of the Company. The aggregate purchase price for these companies is
US $15,800. The purchase of the companies was completed in March 2004.



---

Schedule II

Internacional de Cerámica, S.A. de
C.V.

Valuation and Qualifying Accounts

(Thousands of Constant Mexican Pesos
as of December 31, 2003)



Additions

|Description                      | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period
|-------------------------------- | ------------------------------ | ----------------------------- | ------------------------- | ---------- | ------------------------
|Allowance for doubtful accounts: |                                |                               |                           |            |                         
|Year ended December 31,          |                                |                               |                           |            |                         
|2001                             | 37,223                         | 5,451                         | (1,392)                   | 13,492*    | 27,790                  
|2002                             | 27,790                         | 9,118                         | 262                       | 9,525*     | 27,646                  
|2003                             | 27,646                         | 5,173                         | (218)                     | 10,990*    | 21,611                  
|                                
|Obsolete inventory:              |                                |                               |                           |            |                         
|Year ended December 31,          |                                |                               |                           |            |                         
|2001                             | 59,478                         | 20,404                        | (1,872)                   | 6,666*     | 71,343                  
|2002                             | 71,343                         | 13,134                        | (6,421)                   | 8,472*     | 69,583                  
|2003                             | 69,583                         | 16,062                        | (5,060)                   | 15,197*    | 65,389                  

*Write-off of accounts receivable and inventories.





---

Consent of Independent Auditors





We consent to the incorporation by reference of in (i) the Company's
Registration Statement on Form S-8 (Registration No. 333-05162) and (ii) the
Company's Registration Statement on Form S-8 (Registration No. 333-07030)
pertaining to the Employee's Stock Option Plans of our report dated February 9, 2004 with respect to the consolidated financial statements of
Internacional de Ceramica, S.A. de C.V. (the "Company") included in the Company's Annual Report on Form 20-F for the year ended December 31,
2003.

Mancera, S.C.

Mancera, S.C.

A Member Practice

Member of Ernst & Young Global



Chihuahua, Chih., Mexico

June 30, 2004





---



CODE OF BUSINESS
CONDUCT AND ETHICS



The Board of Directors (the "Board") of Internacional de
Cerámica, S.A. de C.V. (the "Company"), hereby resolves to adopt this "Code of
Business Conduct and Ethics" (the "Code"), the purpose of which is to establish
those fundamental principles which govern the professional and ethical conduct
of each and every Director, Officer and Employee of the Company, each one of
them adhering to these principles and conducting themselves at all times with
honesty, integrity, diligence, impartiality, and good faith. Accordingly, the
Board adopts the following principles:



1.    CONFLICTS OF INTEREST.- Each of
    the Members of the Board and the Executives of the Company must fully
    disclose to the President, Secretary or Chief Executive Officer, any real or
    apparent conflict of interest, and if the real or apparent conflict of
    interest concerns the disclosing party, such party must abstain from any
    related decision making process. Similarly, any Employee who for any reason
    perceives a potential conflict of interest between any personal duties and
    any duties owed to the Company, must report any such potential conflict of
    interest to an immediate supervisor or Officer. While any conflict of
    interest will be resolved in an honest and impartial manner, the Company's
    well being will be of the upmost importance.

2.    USE OF COMPANY ASSETS.- The
    Company's assets, properties, services and proprietary information (the
    "Assets"), shall be utilized only in the furtherance of the stated Company
    objectives, and may only be used for the benefit of an individual if such
    personal use of the Assets is justified and approved of by the Board or by
    the Officer directly responsible for the use and allocation of the Assets in
    questions. Any use of the Assets in furtherance of personal business
    transactions or personal gains shall be avoided. It is the responsibility of
    each of the Members of the Board, the Officers and the Employees to
    supervise the Assets and ensure the correct use of the Assets, as it is
    their duty to report any abuse or incorrect use of the Assets to the
    applicable person so that the appropriate corrective action may be taken.

3.    CORPORATE OPPORTUNITIES.- Each
    of the Members of the Board, Officers and Employees of the Company may not
    attempt to capitalize on or obtain any personal gain or profit from any
    favorable business opportunities which may be available to the Company, and
    none of them will use any of the information available to them through their
    employment or position with the Company for their own personal gain.
    Furthermore, each of the Members of the Board, Officers and Employees of the
    Company will avoid any participation whatsoever in any activity that would
    result in any direct or indirect commercial competition with the Company.

CODE OF BUSINESS CONDUCT AND ETHICS



4.    TIME AND EFFORT.- Each of the
    Members of the Board, Officers and Employees will dedicate the necessary
    time and effort to enable them to fulfill their duties and responsibilities
    to the Company, and each of them will actively collaborate with the
    Company's Management and its various divisions.

5.    CONFIDENTIALITY.- Each of the
    Members of the Board, Officers and Employees of the Company must maintain
    complete confidentiality as to any and all information which could have an
    impact on the operations of the Company and as to any and all information
    generated as a result of the day to day activities of the Company.

6.    DUTY TO REMAIN INFORMED.- Each
    of the Members of the Board, and their respective Alternates, must be
    knowledgeable and informed as to any matter which is brought before the
    Board at any Board Meeting.

7.    PROFESSIONAL CONTRIBUTIONS.- 
    Each of the Members of the Board will contribute to the Management of the
    Company through their opinions, recommendations, insight and analysis,
    ensuring that any decisions made or actions taken on behalf of the Company
    are based on the criteria of qualified and professional personnel whose
    broad range of knowledge, both as it relates to the Company and independent
    of the Company, will be beneficial to the Company.

8.    PUBLICATIONS AND DISCLOSURES.-
    Each of the Members of the Board, Officers and Employees of the Company are
    responsible for full, fair, accurate, timely, and understandable
    publications, disclosures and information releases of the Company, whether
    created for or distributed to each other, to the Board, or to any applicable
    regulatory agency, clients, suppliers, investors, or shareholders.

9.    FAIR DEALING.- Each of the
    Members of the Board and the Officers of the Company shall espouse in
    themselves and in all of the Employees a spirit of fair dealing and shall
    act in good faith with all of the Company's clients, suppliers, competitors
    and any interested parties, avoiding the misuse of confidential information,
    self dealing, misrepresentations and any disloyal or unjust business
    practice.



CODE OF BUSINESS CONDUCT AND ETHICS

10.    COMPLIANCE WITH THE LAW.- Each
    of the Members of the Board and the Officers of the Company must endeavor to
    conduct the daily operations of the Company in a manner which is in full
    compliance with all applicable laws, rules and regulations. Any illegal act
    will be severely sanctioned, whether the illegal act be committed by an
    Employee, an Officer, the Board or any Member of the Board. Similarly, any
    unethical act or moral violation of this Code will be severely sanctioned.
    The Board will instill in each Employee the duty and responsibility to
    report any illegal or unethical acts.

11.    VIOLATIONS OF THE CODE.-

12.    WAIVER OR DEVIATIONS FROM THE
    CODE.- The Company recognizesthat, on rare occasions, the need
    to approve a deviation or waiver from the provisions of this Code may arise.
    The Board must approve any act or action which does not comply with, or
    violates the, requirements and principles of this Code. In the event that
    said act or action concerns a majority of the Members of the Board, a
    separate Committee comprised of Members of the Board who are not affected by
    the act or action in question will be formed, and said Committee will be
    responsible for determining whether or not to approve said act or action.

13.    AMENDMENTS TO THE CODE.- Any
    amendment, modification or deviation to or from this Code must be approved
    by the Board and any such amendment, modification or deviation must be
    disclosed to the shareholders and to any interested parties through the
    appropriate medium and as required by the applicable rules and regulations.