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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 20-F

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

OR

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

Commission File Number: 1-13148

Corporación Durango, S.A. de C.V.

(Exact name of Registrant as specified in its charter)


Durango Corporation

(Translation of Registrants name into English)


United Mexican States

(Jurisdiction of incorporation or organization)


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

(Address and telephone number of principal executive offices)



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

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



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

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

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

Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual
report: 91,832,122 Series A Shares, without par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|                 |  | 
|---------------- |  | 
|Yes   x   No   o |  | 

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



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TABLE OF CONTENTS



|                                                  |                                                                                        |                                                              |  |  |  |  |  | 
|------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------------------------------ |  |  |  |  |  | 
|Presentation of Financial Information            
|INTRODUCTION                                     
|Special Note Regarding Forward-Looking Statements
|PART I                                           
|                                                  | Item 1. Identity of Directors, Senior Management and Advisors.                        
|                                                  | Item 2. Offer Statistics and Expected Timetable.                                      
|                                                  | Item 3. Key Information.                                                              
|                                                  |                                                                                        | Selected Combined and Consolidated Financial Data           
|                                                  |                                                                                        | Dividends                                                   
|                                                  |                                                                                        | Exchange Rate Information                                   
|                                                  |                                                                                        | Risk Factors                                                
|                                                  | Item 4. Information on the Company.                                                   
|                                                  |                                                                                        | Organization                                                
|                                                  |                                                                                        | Significant Developments During 2002 and Recent Developments
|                                                  |                                                                                        | Business Overview                                           
|                                                  | Item 5. Operating and Financial Review and Prospects.                                 
|                                                  |                                                                                        | General                                                     
|                                                  |                                                                                        | Liquidity and Capital Resources                             
|                                                  | Item 6. Directors, Senior Management and Employees.                                   
|                                                  | Item 7. Major Shareholders and Related Party Transactions.                            
|                                                  | Item 8. Financial Information.                                                        
|                                                  | Item 9. The Offer and Listing.                                                        
|                                                  | Item 10. Additional Information.                                                      
|                                                  | Item 11. Quantitative and Qualitative Disclosure about Market Risk.                   
|                                                  | Item 12. Description of Securities Other than Equity Securities.                      
|PART II                                          
|                                                  | Item 13. Defaults, Dividend Arrearages and Delinquencies.                             
|                                                  | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
|                                                  | Item 15. Controls and Procedures.                                                     
|                                                  | Item 16. [Reserved].                                                                  
|PART III                                         
|                                                  | Item 17. Financial Statements.                                                        
|                                                  | Item 18. Financial Statements.                                                        
|                                                  | Item 19. Exhibits.                                                                    
|SIGNATURES                                       
|EX-2.4 Second Supplemental Indenture 2006 Notes  
|EX-2.7 Second Supplemental Indenture 2008 Notes  
|EX-2.8 Form of Indenture - JP Morgan Chase       
|EX-2.9 First Supplemental Indenture - 2009 Notes 
|EX-2.17 Instrument of Resignation                
|EX-2.18 Forbearance Agreement                    
|EX-4.1 Securities Purchase Agreement             
|EX-4.2  Asset Purchase Agreement                 
|EX-4.3 Amendment of Asset Purchase Agreement     
|EX-8 List of Subsidiaries                        



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TABLE OF CONTENTS

|         |  |  |  |                                                   |  |                                                                              |   |                                                              |    |      |    | 
|-------- |  |  |  | ------------------------------------------------- |  | ---------------------------------------------------------------------------- | - | ------------------------------------------------------------ | -- | ---- | -- | 
|         |  |  |  |                                                   |  |                                                                              |   |                                                              |    | Page
|         |  |  |  |                                                   |  |                                                                              |   |                                                              |    |     
|         |  |  |  | Introduction                                      |  |                                                                              | 1 |                                                             
|         |  |  |  | Presentation of Financial Information             |  |                                                                              | 1 |                                                             
|         |  |  |  | Special Note Regarding Forward-Looking Statements |  |                                                                              | 2 |                                                             
|PART I  
|         |  |  |  | Item 1.                                           |  | Identity of Directors, Senior Management and Advisers                        |   |                                                              | 2  |     
|         |  |  |  | Item 2.                                           |  | Offer Statistics and Expected Timetable                                      |   |                                                              | 2  |     
|         |  |  |  | Item 3.                                           |  | Key Information                                                              |   |                                                              | 3  |     
|         |  |  |  |                                                   |  |                                                                              |   | Selected Combined and Consolidated Financial Data            |    |      | 3  | 
|         |  |  |  |                                                   |  |                                                                              |   | Dividends                                                    |    |      | 6  | 
|         |  |  |  |                                                   |  |                                                                              |   | Exchange Rate Information                                    |    |      | 6  | 
|         |  |  |  |                                                   |  |                                                                              |   | Risk Factors                                                 |    |      | 7  | 
|         |  |  |  | Item 4.                                           |  | Information on the Company                                                   |   |                                                              | 12 |     
|         |  |  |  |                                                   |  |                                                                              |   | Organization                                                 |    |      | 12 | 
|         |  |  |  |                                                   |  |                                                                              |   | Significant Developments During 2002 and Recent Developments |    |      | 13 | 
|         |  |  |  |                                                   |  |                                                                              |   | Business Overview                                            |    |      | 13 | 
|         |  |  |  | Item 5.                                           |  | Operating and Financial Review and Prospects                                 |   |                                                              | 33 |     
|         |  |  |  |                                                   |  |                                                                              |   | General                                                      |    |      | 33 | 
|         |  |  |  |                                                   |  |                                                                              |   | Overview                                                     |    |      | 33 | 
|         |  |  |  |                                                   |  |                                                                              |   | Results of Operations                                        |    |      | 39 | 
|         |  |  |  |                                                   |  |                                                                              |   | Liquidity and Capital Resources                              |    |      | 44 | 
|         |  |  |  |                                                   |  |                                                                              |   | Capital Expenditures                                         |    |      | 51 | 
|         |  |  |  |                                                   |  |                                                                              |   | Critical Accounting Policies                                 |    |      | 51 | 
|         |  |  |  |                                                   |  |                                                                              |   | Differences Between Mexican GAAP and U.S. GAAP               |    |      | 52 | 
|         |  |  |  | Item 6.                                           |  | Directors, Senior Management and Employees                                   |   |                                                              | 55 |     
|         |  |  |  | Item 7.                                           |  | Major Shareholders and Related Party Transactions                            |   |                                                              | 60 |     
|         |  |  |  | Item 8.                                           |  | Financial Information                                                        |   |                                                              | 60 |     
|         |  |  |  | Item 9.                                           |  | The Offer and Listing                                                        |   |                                                              | 61 |     
|         |  |  |  | Item 10.                                          |  | Additional Information                                                       |   |                                                              | 64 |     
|         |  |  |  | Item 11.                                          |  | Quantitative and Qualitative Disclosure about Market Risk                    |   |                                                              | 74 |     
|         |  |  |  | Item 12.                                          |  | Description of Securities other than Equity Securities                       |   |                                                              | 76 |     
|PART II 
|         |  |  |  | Item 13.                                          |  | Defaults, Dividend Arrearages and Delinquencies                              |   |                                                              | 76 |     
|         |  |  |  | Item 14.                                          |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |   |                                                              | 77 |     
|         |  |  |  | Item 15.                                          |  | Controls and Procedures                                                      |   |                                                              | 77 |     
|         |  |  |  | Item 16.                                          |  | [Reserved]                                                                   |   |                                                              | 77 |     
|PART III
|         |  |  |  | Item 17.                                          |  | Financial Statements                                                         |   |                                                              | 78 |     
|         |  |  |  | Item 18.                                          |  | Financial Statements                                                         |   |                                                              | 78 |     
|         |  |  |  | Item 19.                                          |  | Exhibits                                                                     |   |                                                              | 78 |     





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INTRODUCTION

In this annual report, the Company, we, us and our refer to
Corporación Durango, S.A. de C.V. and its consolidated subsidiaries, as the
context may require. Unless the context otherwise indicates, the terms our
notes and the notes refer collectively to our 12 5/8% Senior Notes due 2003,
our 13 1/8% Senior Notes due 2006, our 13 1/2% Senior Notes due 2008 and our
13 3/4% Senior Notes due 2009 issued under our indentures, and the notes
issued under our Euro Commercial Paper Program. We are a corporation organized
under the laws of the United Mexican States (Mexico).

Presentation of Financial Information

We report our financial statements in Mexican Pesos and prepare our
financial statements in accordance with generally accepted accounting
principles in Mexico, or Mexican GAAP, which differ in significant respects
from generally accepted accounting principles in the United States, or U.S.
GAAP. Note 21 to our audited consolidated financial statements provides a
description of the principal differences between Mexican GAAP and U.S. GAAP as
they relate to us, and a reconciliation to U.S. GAAP of our consolidated net
income and total shareholders equity as of December 31, 2001 and 2002 and for
the three years ended December 31, 2000, 2001 and 2002. We have a fiscal year
end of December 31.

Our Company is the result of the merger on October 8, 2001 of Corporación
Durango, S.A. de C.V., or CODUSA, into Grupo Industrial Durango, S.A. de C.V.,
or GIDUSA. GIDUSA, being the surviving entity, was subsequently renamed
Corporación Durango, S.A. de C.V. Prior to March 2000, CODUSA and GIDUSA were
affiliated companies under the common ownership and control of the Rincón
family. In March 2000, CODUSA acquired the Rincón familys ownership interest
in GIDUSA and as a result, from this date until the date of the GIDUSA merger,
GIDUSA was a majority-owned subsidiary of Corporación Durango S.A. de C.V.

The financial statements included herein reflect the following:



| |  |  | Combined assets and liabilities and results of operations of CODUSA
and GIDUSA as of and for each of the years ended December 31, 1998 and
1999 due to the common ownership and control discussed above. 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Consolidated assets and liabilities and results of operations of
CODUSA, which includes GIDUSA, as of and for each of the years ended
December 31, 2000, 2001 and 2002.                                  
|
| |  |  | Consolidated assets and
liabilities and results of operations of Compañía
Papelera de
Atenquique, S.A. de C.V. and its subsidiary as of and for each of the
years ended December 31, 2000, 2001 and 2002.
|
| |  |  | Assets and
liabilities and results of operations of Industrias Centauro, S.A. de C.V. as of and
for each of the years ended December 31, 2000, 2001 and 2002.                                            

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

Pursuant to Bulletin B-10, Recognition of the Effects of Inflation in
Financial Information, and Bulletin B-12, Statement of Changes in Financial
Position, issued by the Mexican Institute of Public Accountants (Instituto
Mexicano de Contadores Públicos), our audited combined and consolidated
financial statements are reported in period-end Pesos to adjust for the
inter-period effects of inflation. The presentation of financial information
in period-end, or constant, currency units is intended to eliminate the
distorting effect of inflation on the financial statements and to permit
comparisons across comparable periods in comparable monetary units.
Consequently, under Mexican GAAP, non-monetary assets, with the exception of
inventories and fixed assets of non-Mexican origin and those of our foreign
subsidiaries, are restated using the National Consumer Price Index (Indice
Nacional de Precios al Consumidor), or the NCPI. Inventories are restated at
current replacement costs while fixed assets of non-Mexican origin are restated
by the inflation of the country of origin prior to translation to Pesos at the
period-end exchange rate. The effects of inflation accounting under Mexican
GAAP, other than the restatement of fixed assets of non-Mexican origin, have
not been reversed in the reconciliation to U.S. GAAP.

We use Bulletin B-15, Foreign Currency Transactions and Translation of
Financial Statements of Foreign Operations, which prescribes the methodology
for the translation and recognition of inflation of the financial information
of foreign subsidiaries. Therefore, the Peso amounts of our revenues and
expenses of our U.S. based

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subsidiaries may be impacted by the foreign exchange rate fluctuations and
inflation rates in the U.S. For a detailed discussion of Mexican GAAP
inflation methodologies, see Note 3 to our audited consolidated financial
statements.

Except as otherwise indicated, financial data for all periods throughout
this annual report have been restated in constant Pesos as of December 31,
2002. The Peso/U.S. Dollar exchange rate at December 31, 2002 was Ps 10.4393 =
US$1.00. Any discrepancies between the amounts listed and their totals in the
tables included in this annual report are due to rounding.




Special Note Regarding Forward-Looking Statements

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



| |  |  | our current liquidity crisis and the restructuring negotiations with our creditors;                                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our substantial debt and significant debt service obligations;                                                                              
|
| |  |  | developments in, or changes to, the laws, regulations and
governmental policies governing our business, including environmental
liabilities;
|
| |  |  | the competitive nature of the industries in which we are operating;                                                                         
|
| |  |  | changes in the U.S. Dollar-Peso exchange rate, interest rates and
other domestic and international market and industry conditions;          
|
| |  |  | the cyclicality of the paper and packaging industries; and                                                                                  
|
| |  |  | our ability to keep key personnel required to operate our business.                                                                         

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




PART I




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

Not applicable.




Item 2. Offer Statistics and Expected Timetable.

Not applicable.

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Item 3. Key Information.




Selected Combined and Consolidated Financial Data

The following table sets forth our selected combined and consolidated
financial data for each of the periods presented. The data does not represent
all of our financial information. You should read this information together
with the audited annual consolidated financial statements as of December 31,
2001 and 2002 and for the three years ended December 31, 2000, 2001 and 2002
appearing elsewhere in this annual report and the information under
Presentation of Financial Information and Item 5. Operating and Financial
Review and Prospects.

The selected consolidated income statement information for the fiscal
years ended December 31, 2000, 2001 and 2002, and the selected consolidated
balance sheet information as of December 31, 2001 and 2002, have been derived
from the consolidated financial statements that were audited by
PricewaterhouseCoopers, our independent public accountants, as indicated in
their report included elsewhere herein. The selected combined income statement
information for the fiscal years ended December 31, 1998 and 1999, and the
selected combined and consolidated balance sheet information as of December 31,
1998, 1999 and 2000, have been derived from the combined and consolidated
financial statements which are not included in this annual report.

Our audited consolidated financial statements were prepared in accordance
with Mexican GAAP, which differs in significant respects from U.S. GAAP. Note
21 to our audited consolidated financial statements provides a description of
the principal differences between Mexican GAAP and U.S. GAAP as they relate to
such financial statements. In addition, Note 21 to our audited consolidated
financial statements contains a reconciliation to U.S. GAAP of our consolidated
net income and total shareholders equity as of December 31, 2001 and 2002 and
for the years ended December 31, 2000, 2001 and 2002.

Except as otherwise noted, all information presented herein is presented
in constant Pesos as of December 31, 2002. The Peso/U.S. Dollar exchange rate
at December 31, 2002 was Ps 10.4393 = US$1.00.

|                                             |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |          |  
|-------------------------------------------- | ------------------------------------ | -- | ------------------------------------------------------------- | -------- | ---- | -- | ------- | ------- | ---- | -- | -------- | -------- | - | -- | -------- | -------- | - | -- | -------- | -------- | -
|                                             |                                      |    | As of and for the Year Ended December 31,                    
|                                             |                                      |    |                                                              
|                                             |                                      |    | 1998                                                          |          | 1999 |    | 2000    |         | 2001 |    | 2002    
|                                             |                                      |    |                                                               |          |      |    |         |         |      |    |         
|                                             |                                      |    | (millions of constant Pesos restated as of December 31, 2002,
|                                             |                                      |    | except per share amounts and ratios)                         
|Combined and Consolidated                    |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |         
|Statement of Income Data:                    |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |         
|Mexican GAAP:                                |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |         
|Net sales                                    |                                      | Ps | 6,686.3                                                       |          |      | Ps | 8,963.1 |         |      | Ps | 12,921.9 |          |   | Ps | 10,532.4 |          |   | Ps | 8,498.2  |         
|Cost of sales                                |                                      |    | 4,974.4                                                       |          |      |    | 6,775.8 |         |      |    | 10,652.1 |          |   |    | 8,770.7  |          |   |    | 7,243.0  |         
|                                             |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |         
|                                             | Gross profit                         |    |                                                               | 1,711.9  |      |    |         | 2,187.3 |      |    |          | 2,269.7  |   |    |          | 1,761.7  |   |    |          | 1,255.2  |  
|Selling, general and
administrative expenses |                                      |    | 467.2                                                         |          |      |    | 700.2   |         |      |    | 803.3    |          |   |    | 728.1    |          |   |    | 611.3    |         
|                                             |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |         
|Operating income                             |                                      |    | 1,244.8                                                       |          |      |    | 1,487.1 |         |      |    | 1,466.5  |          |   |    | 1,033.6  |          |   |    | 644.0    |         
|Other expense                                |                                      |    | (231.1                                                        | )        |      |    | (90.0   | )       |      |    | (16.4    | )        |   |    | (40.3    | )        |   |    | (46.5    | )       
|Financing cost (result):                     |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |         
|                                             | Interest expense                     |    |                                                               | (937.9   | )    |    |         | (989.9  | )    |    |          | (1,091.7 | ) |    |          | (1,077.7 | ) |    |          | (1,088.7 | )
|                                             | Interest income                      |    |                                                               | 125.5    |      |    |         | 117.1   |      |    |          | 123.6    |   |    |          | 66.9     |   |    |          | 39.2     |  
|                                             | Foreign exchange (gain) loss, net    |    |                                                               | (1,253.1 | )    |    |         | 332.4   |      |    |          | (101.6   | ) |    |          | 313.4    |   |    |          | (1,049.8 | )
|                                             | Gain from monetary position          |    |                                                               | 906.4    |      |    |         | 802.1   |      |    |          | 600.6    |   |    |          | 310.0    |   |    |          | 415.2    |  
|                                             |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |         
|Total financing cost (result)                |                                      |    | (1,159.2                                                      | )        |      |    | 261.7   |         |      |    | (469.1   | )        |   |    | (387.4   | )        |   |    | (1,684.2 | )       
|                                             | Special Items                        |    |                                                               |        |      |    |         |       |      |    |          |        |   |    |          |        |   |    |          | (1,451.4 | )
|                                             | Amortization of negative
goodwill(1) |    |                                                               | 3,737.0  |      |    |         | 99.1    |      |    |          | 1,513.9  |   |    |          | 495.3    |   |    |          |        |  
|                                             |                                      |    |                                                               |          |      |    |         |         |      |    |          |          |   |    |          |          |   |    |          |         

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|                                                                                                                                                                     |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -- | ------------------------------------------------------------- | ----- | ---- | -- | ---------- | ------ | ---- | -- | ---------- | ------ | - | -- | ---------- | ------ | - | -- | ---------- | -------- | -
|                                                                                                                                                                     |                         |    | As of and for the Year Ended December 31,                    
|                                                                                                                                                                     |                         |    |                                                              
|                                                                                                                                                                     |                         |    | 1998                                                          |       | 1999 |    | 2000       |        | 2001 |    | 2002      
|                                                                                                                                                                     |                         |    |                                                               |       |      |    |            |        |      |    |           
|                                                                                                                                                                     |                         |    | (millions of constant Pesos restated as of December 31, 2002,
|                                                                                                                                                                     |                         |    | except per share amounts and ratios)                         
|Income
(loss) before provisions
for income and asset taxes,
employee profit sharing, deferred
income tax, extraordinary items,
impairment loss and minority
interest |                         |    | 3,591.5                                                       |       |      |    | 1,757.9    |        |      |    | 2,494.9    |        |   |    | 1,101.2    |        |   |    | (2,538.2   | )       
|Provisions for:                                                                                                                                                      |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|                                                                                                                                                                     | Income and asset taxes  |    |                                                               | (17.1 | )    |    |            | (177.2 | )    |    |            | (289.9 | ) |    |            | (235.8 | ) |    |            | (114.4   | )
|                                                                                                                                                                     | Employee profit sharing |    |                                                               | (12.8 | )    |    |            | (6.4   | )    |    |            | (7.6   | ) |    |            | (4.7   | ) |    |            | (1.0     | )
|                                                                                                                                                                     | Tax loss carry-forwards |    |                                                               | 7.6   |      |    |            | 7.6    |      |    |            |      |   |    |            |      |   |    |            |        |  
|                                                                                                                                                                     | Deferred income tax     |    |                                                               |     |      |    |            |      |      |    |            | (387.5 | ) |    |            | 267.3  |   |    |            | 667.3    |  
|                                                                                                                                                                     | Impairment loss         |    |                                                               |     |      |    |            |      |      |    |            |      |   |    |            |      |   |    |            | (1,556.5 | )
|                                                                                                                                                                     | Extraordinary items     |    |                                                               |     |      |    |            |      |      |    |            |      |   |    |            | (298.6 | ) |    |            |        |  
|                                                                                                                                                                     |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Net income (loss) before minority
interest                                                                                                                           |                         |    | 3,569.2                                                       |       |      |    | 1,574.3    |        |      |    | 1,809.9    |        |   |    | 829.3      |        |   |    | (3,542.8   | )       
|Minority interest                                                                                                                                                    |                         |    | (12.1                                                         | )     |      |    | 500.7      |        |      |    | 175.3      |        |   |    | 4.0        |        |   |    | 3.1        |         
|                                                                                                                                                                     |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Net income (loss)                                                                                                                                                    |                         | Ps | 3,581.3                                                       |       |      | Ps | 1,073.7    |        |      | Ps | 1,634.6    |        |   | Ps | 825.3      |        |   | Ps | (3,545.9   | )       
|                                                                                                                                                                     |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Basic and diluted earnings
per share                                                                                                                                 |                         | Ps | 38.07                                                         |       |      | Ps | 11.41      |        |      | Ps | 17.38      |        |   | Ps | 8.77       |        |   | Ps | (38.20     | )       
|Weighted-average number of shares
outstanding                                                                                                                        |                         |    | 94,072,122                                                    |       |      |    | 94,072,122 |        |      |    | 94,072,122 |        |   |    | 94,072,122 |        |   |    | 92,828,029 |         
|U.S.
GAAP:(2)(3)                                                                                                                                                     |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Net sales                                                                                                                                                            |                         | Ps | 6,877.3                                                       |       |      | Ps | 8,991.0    |        |      | Ps | 9,141.9    |        |   | Ps | 7,828.7    |        |   |    | 7,075.7    |         
|Operating income                                                                                                                                                     |                         |    | 1,229.5                                                       |       |      |    | 1,836.2    |        |      |    | 1,443.2    |        |   |    | 1,114.1    |        |   |    | 56.9       |         
|Income (loss) before, provisions for income and
asset taxes, minority interest,
special items and discontinued operations                                            |                         |    | (246.7                                                        | )     |      |    | 2,084.7    |        |      |    | 973.1      |        |   |    | 848.0      |        |   |    | (1,487.8   | )       
|Net income (loss)                                                                                                                                                    |                         |    | (91.5                                                         | )     |      |    | 1,430.9    |        |      |    | 10.1       |        |   |    | 239.4      |        |   |    | (2,122.8   | )       
|Basic and diluted earnings
per share (4)                                                                                                                             |                         |    | (0.97                                                         | )     |      |    | 15.21      |        |      |    | 0.11       |        |   |    | 2.54       |        |   |    | (22.86     | )       
|Combined and Consolidated Balance
Sheet Data                                                                                                                         |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Mexican GAAP:                                                                                                                                                        |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Cash and temporary investments                                                                                                                                       |                         | Ps | 1,274.4                                                       |       |      | Ps | 937.6      |        |      | Ps | 811.2      |        |   | Ps | 508.9      |        |   | Ps | 255.7      |         
|Total current assets                                                                                                                                                 |                         |    | 4,243.7                                                       |       |      |    | 5,793.8    |        |      |    | 5,563.3    |        |   |    | 4,255.6    |        |   |    | 3,537.5    |         
|Property, plant & equipment, net                                                                                                                                     |                         |    | 17,065.6                                                      |       |      |    | 17,359.8   |        |      |    | 17,556.3   |        |   |    | 16,489.0   |        |   |    | 13,063.7   |         
|Total assets                                                                                                                                                         |                         |    | 21,734.4                                                      |       |      |    | 23,607.8   |        |      |    | 23,675.5   |        |   |    | 21,277.5   |        |   |    | 17,312.7   |         
|Short-term debt, including current
portion of long-term debt                                                                                                         |                         |    | 673.0                                                         |       |      |    | 1,156.2    |        |      |    | 868.6      |        |   |    | 617.4      |        |   |    | 7,576.3    |         
|Long-term debt                                                                                                                                                       |                         |    | 8,437.1                                                       |       |      |    | 7,438.0    |        |      |    | 7,588.2    |        |   |    | 7,243.7    |        |   |    | 1,083.4    |         
|Capital stock                                                                                                                                                        |                         |    | 4,163.3                                                       |       |      |    | 4,233.3    |        |      |    | 2,321.7    |        |   |    | 4,672.5    |        |   |    | 4,672.5    |         
|Total minority shareholders equity                                                                                                                                  |                         |    | 140.2                                                         |       |      |    | 2,614.9    |        |      |    | 1,504.5    |        |   |    | 41.9       |        |   |    | 68.4       |         
|Total majority shareholders equity                                                                                                                                  |                         |    | 10,238.1                                                      |       |      |    | 7,639.9    |        |      |    | 6,632.0    |        |   |    | 7,834.8    |        |   |    | 4,361.9    |         
|Total shareholders equity
(net assets)                                                                                                                              |                         |    | 10,378.3                                                      |       |      |    | 10,254.9   |        |      |    | 8,083.2    |        |   |    | 7,876.7    |        |   |    | 4,430.3    |         
|U.S. GAAP:(2)(3)                                                                                                                                                     |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Total assets                                                                                                                                                         |                         |    | 18,164.4                                                      |       |      |    | 19,668.1   |        |      |    | 20,159.1   |        |   |    | 18,784.2   |        |   |    | 16,865.3   |         
|Total shareholders equity
(net assets)                                                                                                                              |                         |    | 1,879.3                                                       |       |      |    | 2,860.3    |        |      |    | 2,774.4    |        |   |    | 4,056.7    |        |   |    | 1,048.7    |         
|Other Financial Data:                                                                                                                                                |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Mexican GAAP:                                                                                                                                                        |                         |    |                                                               |       |      |    |            |        |      |    |            |        |   |    |            |        |   |    |            |         
|Adjusted EBITDA (5)                                                                                                                                                  |                         |    | 1,614.7                                                       |       |      |    | 2,002.4    |        |      |    | 2,031.2    |        |   |    | 1,525.9    |        |   |    | 1,119.4    |         

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##### Table of Contents



|                                                      |  |  |                                                               |   |      |  |          |   |      |  |          |   |  |  |         |   |  |  |         |   | 
|----------------------------------------------------- |  |  | ------------------------------------------------------------- | - | ---- |  | -------- | - | ---- |  | -------- | - |  |  | ------- | - |  |  | ------- | - | 
|                                                      |  |  | As of and for the Year Ended December 31,                    
|                                                      |  |  |                                                              
|                                                      |  |  | 1998                                                          |   | 1999 |  | 2000     |   | 2001 |  | 2002    
|                                                      |  |  |                                                               |   |      |  |          |   |      |  |         
|                                                      |  |  | (millions of constant Pesos restated as of December 31, 2002,
|                                                      |  |  | except per share amounts and ratios)                         
|Resources generated by operating
activities           |  |  | 1,558.2                                                       |   |      |  | 1,654.3  |   |      |  | 1,356.8  |   |  |  | 906.2   |   |  |  | (137.6  | )
|Resources generated by (used in)
financing activities |  |  | 1,267.5                                                       |   |      |  | (407.1   | ) |      |  | 1,875.0  |   |  |  | (650.5  | ) |  |  | 735.7   |  
|Resources used in investing
activities                |  |  | (2,311.7                                                      | ) |      |  | (1,584.0 | ) |      |  | (3,358.3 | ) |  |  | (558.0  | ) |  |  | (851.3  | )
|Capital expenditures                                  |  |  | (1,064.7                                                      | ) |      |  | (177.4   | ) |      |  | (1,092.1 | ) |  |  | (345.6  | ) |  |  | (305.3  | )
|Adjusted EBITDA to interest expense                   |  |  | 1.7x                                                          |   |      |  | 2.0x     |   |      |  | 1.9x     |   |  |  | 1.4x    |   |  |  | 1.0x    |  
|Total Debt to Adjusted EBITDA                         |  |  | 5.6x                                                          |   |      |  | 4.3x     |   |      |  | 4.2x     |   |  |  | 5.2x    |   |  |  | 7.7x    |  
|Ratio of earnings loss to fixed
charges (6)           |  |  | 4.8x                                                          |   |      |  | 2.7x     |   |      |  | 3.2x     |   |  |  | 1.7x    |   |  |  | (2.7)x  |  
|U.S. GAAP:(2)(3)                                      |  |  |                                                               |   |      |  |          |   |      |  |          |   |  |  |         |   |  |  |        
|Cash flow provided by operating
activities            |  |  | 743.0                                                         |   |      |  | 812.7    |   |      |  | 689.3    |   |  |  | 1,197.4 |   |  |  | 374.6   |  
|Cash flow provided by (used in)
financing activities  |  |  | 2,174.2                                                       |   |      |  | (314.7   | ) |      |  | 325.5    |   |  |  | (988.0  | ) |  |  | 1,320.0 |  
|Cash flow used in investing
activities                |  |  | (2,544.4                                                      | ) |      |  | (1,640.8 | ) |      |  | (1,264.5 | ) |  |  | 505.8   |   |  |  | 1,393.0 |  
|Ratio of earnings (loss) to fixed
charges (6)         |  |  | 0.7x                                                          |   |      |  | 3.1x     |   |      |  | 1.8x     |   |  |  | 1.5x    |   |  |  | (1.0)x  |  



---

|(1) |  | In 1999, the Company recorded negative goodwill in the acquisition of the
Durango Paper Company. Such negative goodwill was fully amortized by
year-end 2001. In 2000, the Company recorded negative goodwill in the
acquisition of 59% of GIDUSA by CODUSA. Such negative goodwill was fully
amortized by year-end 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Amounts of sales and long-term debt under U.S. GAAP do not differ
materially from these amounts under Mexican GAAP. See Note 21 to our
audited consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) |  | The difference between net income under U.S. GAAP and Mexican GAAP
primarily reflects differing accounting treatment for reversal of loss on
fixed assets, capitalized financing costs, debt issuance costs, negative
goodwill, deferred income tax, employees statutory profit sharing and the
effects of inflation on fixed assets. See Item 5. Operating and
Financial Review and Prospects  Differences Between Mexican GAAP and U.S.
GAAP and Note 21 to our audited consolidated financial statements. As of
January 1, 2000, Bulletin D-4 is effective in Mexico. This Bulletin
governs the treatment of deferred taxes, similar to that of Statement of
Financial Accounting Standards Board No. 109, Accounting for Income
Taxes. See Note 3(p) to our audited consolidated financial statements.                                                                                                                                                                                                  
|   
|(4) |  | See Note 21 to our audited consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(5) |  | As used herein, we define Adjusted EBITDA as operating income plus
depreciation and amortization. The Company believes that Adjusted EBITDA
is an additional measure of operating performance, although it should be
noted that Adjusted EBITDA is not a measure of financial condition or
performance under U.S. GAAP or Mexican GAAP and should not be considered
as a substitute for those measures under U.S. GAAP or Mexican GAAP.
Adjusted EBITDA is not a direct measure of the groups liquidity, which is
shown by the groups cash flow statement and needs to be considered in the
context of the groups financial commitments. Companies do not calculate
Adjusted EBITDA in a uniform manner. Our Adjusted EBITDA calculations may
not be comparable to those of other companies. Presented below is a
reconciliation of Adjusted EBITDA to operating income under Mexican GAAP,
which is the most directly comparable financial measure calculated and
presented in accordance with Mexican GAAP.

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|                              |  |                         |         |      |  |      |         |      |  |      |         |  |  |    |         |  |  |    |         | 
|----------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | -- | ------- |  |  | -- | ------- | 
|                              |  | Year Ended December 31,
|                              |  |                        
|                              |  | 1998                    |         | 1999 |  | 2000 |         | 2001 |  | 2002
|                              |  |                         |         |      |  |      |         |      |  |     
|Operating income              |  | Ps                      | 1,244.8 |      |  | Ps   | 1,487.1 |      |  | Ps   | 1,466.5 |  |  | Ps | 1,033.6 |  |  | Ps | 644.0   | 
|Depreciation and amortization |  |                         | 369.9   |      |  |      | 515.3   |      |  |      | 564.7   |  |  |    | 492.3   |  |  |    | 475.4   | 
|Adjusted EBITDA               |  | Ps                      | 1,614.7 |      |  | Ps   | 2,002.4 |      |  | Ps   | 2,031.2 |  |  | Ps | 1,525.9 |  |  | Ps | 1,119.4 | 
|                              |  |                         |         |      |  |      |         |      |  |      |         |  |  |    |         |  |  |    |         | 



---

|(6) |  | Ratio of earnings to fixed charges is calculated as earnings from
continuing operations before income taxes divided by fixed charges.
Earnings for this purpose consist of earnings before provision for income
tax and asset tax plus fixed charges. Fixed charges for this purpose
consist of interest expenses plus the portion of rental expenses deemed to
represent interest expense under operating lease agreements and the
capitalization of deferred costs related to the issuance of bonds during
the period.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Dividends

Please see Dividend Policy in Item 8. Financial Information.




Exchange Rate Information

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

|                        |  |                     |        |     |  |            |       |     |  |    |       |  |  |        |        | 
|----------------------- |  | ------------------- | ------ | --- |  | ---------- | ----- | --- |  | -- | ----- |  |  | ------ | ------ | 
|                        |  | Noon Buying Rate(1)
|                        |  |                    
|                        |  |                     |        |     |  |            |       |     |  |    |       |  |  | Period
|                        |  | High                |        | Low |  | Average(2) |       | End
|                        |  |                     |        |     |  |            |       |    
|Year ended December 31, |  |                     |        |     |  |            |       |     |  |    |       |  |  |        |        | 
|1998                    |  | Ps                  | 10.630 |     |  | Ps         | 8.040 |     |  | Ps | 9.152 |  |  | Ps     | 9.901  | 
|1999                    |  |                     | 10.600 |     |  |            | 9.243 |     |  |    | 9.563 |  |  |        | 9.480  | 
|2000                    |  |                     | 10.087 |     |  |            | 9.188 |     |  |    | 9.475 |  |  |        | 9.618  | 
|2001                    |  |                     | 9.972  |     |  |            | 9.027 |     |  |    | 9.341 |  |  |        | 9.156  | 
|2002                    |  |                     | 10.423 |     |  |            | 9.000 |     |  |    | 9.668 |  |  |        | 10.425 | 

|                  |  |                     |        |     |  |            |        |     |  |    |        |  |  |        |        | 
|----------------- |  | ------------------- | ------ | --- |  | ---------- | ------ | --- |  | -- | ------ |  |  | ------ | ------ | 
|                  |  | Noon Buying Rate(1)
|                  |  |                    
|                  |  |                     |        |     |  |            |        |     |  |    |        |  |  | Period
|                  |  | High                |        | Low |  | Average(3) |        | End
|                  |  |                     |        |     |  |            |        |    
|Month Ended       |  |                     |        |     |  |            |        |     |  |    |        |  |  |        |        | 
|December 31, 2002 |  | Ps                  | 10.423 |     |  | Ps         | 10.103 |     |  | Ps | 10.225 |  |  | Ps     | 10.425 | 
|January 31, 2003  |  |                     | 10.978 |     |  |            | 10.321 |     |  |    | 10.622 |  |  |        | 10.902 | 
|February 28, 2003 |  |                     | 11.064 |     |  |            | 10.774 |     |  |    | 10.946 |  |  |        | 11.029 | 
|March 31, 2003    |  |                     | 11.235 |     |  |            | 10.661 |     |  |    | 10.909 |  |  |        | 10.782 | 
|April 30, 2003    |  |                     | 10.770 |     |  |            | 10.308 |     |  |    | 10.589 |  |  |        | 10.308 | 
|May 31, 2003      |  |                     | 10.424 |     |  |            | 10.113 |     |  |    | 10.253 |  |  |        | 10.340 | 



---

|(1) |  | Source: Federal Reserve Bank of New York.
|--- |  | -----------------------------------------
|   
|(2) |  | Average of month-end rates.              
|   
|(3) |  | Average of daily rates.                  

On June 27, 2003, the noon buying rate was Ps 10.430 per U.S. Dollar.

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Risk Factors

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

Risks Relating to our Business and the Paper and Packaging Industry in General

We have insufficient liquidity to repay our debt obligations. If the debt
restructuring negotiations with our creditors are not successful, we may not be
able to pay all or a portion of the principal or interest on our unsecured debt
and our operations may be adversely affected.

In recent years, we have incurred substantial indebtedness to finance our
Companys growth and operations. As of December 31, 2002, we had consolidated
indebtedness of approximately Ps 8,659.7 million (US$829.5 million) and
shareholders equity, including a minority interest in our consolidated
subsidiaries, of Ps 4,430.3 million (US$424.4 million). Since November 2002,
we have been in default on payments of principal and interest under our
unsecured indebtedness. See Item 13. Defaults, Dividend Arrearages and
Delinquencies.

In December 2002, we retained financial advisors to advise us in
evaluating debt-restructuring alternatives to implement a long-term solution to
our capital structure and debt service requirements. We also began discussions
with our bank creditors and the holders of our notes. In April 2003, we
presented our unsecured creditors with debt restructuring and forbearance
proposals. Holders of approximately 97% of the total outstanding principal
amount of our notes due 2003, 2006, 2008 and 2009 and certain bank creditors
agreed to forbear exercising their rights and remedies in connection with our
existing defaults. Such forbearance terminates on June 30, 2002, and we have
not received any indication that such creditors will extend the period of
forbearance. Our debt restructuring proposal is currently the focus of our
ongoing negotiations with these and our other unsecured creditors. See Item
4. Information on the Company-Significant Developments During 2002 and Recent
Developments.

During this time, Standard & Poors Investment Advisory Services,
(Standard & Poors) has lowered our foreign and local currency corporate
ratings to their lowest rating of D, and Moodys Investors Service
(Moodys) lowered all ratings on our existing notes to their second lowest
rating of Ca. These negative credit ratings and downgrades have further
restricted our sources for short-term financing, thereby impeding our ability
to finance our operations. Furthermore, the negative publicity surrounding
these recent downgrades has adversely affected the terms of our trade payables.
For additional information regarding our credit ratings, see Item 5.
Operating and Financial Review and ProspectsLiquidity and Capital Resources.

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



| |  |  | our ability to adjust to rapidly changing market conditions, thus
making us more vulnerable in the event the downturn in general economic
conditions or our business continues;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to attract and retain key employees;                                                                                                                               
|
| |  |  | our ability to maintain relationships with key suppliers;                                                                                                                      
|
| |  |  | our ability to enter into long-term contracts with customers;                                                                                                                  
|
| |  |  | our ability to undertake capital expenditures;                                                                                                                                 
|
| |  |  | our ability to maintain a positive image to regulators, investors, lenders or credit rating agencies; or                                                                       
|
| |  |  | our ability to maintain and improve our enterprise value.                                                                                                                      

We believe that we are not likely to find outside sources of financing to
fund the payments due on our unsecured debt. Therefore, we will probably not
be able to cure the existing defaults under the agreements governing our debt
obligations unless the negotiations with our creditors are successful. Since we
do not have sufficient liquidity to repay our obligations on our debt
instruments, and given the depressed value of paper production facility assets
generally, it is likely that our unsecured creditors and our shareholders would
incur a

-7-



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##### Table of Contents



significant loss if our restructuring negotiations are unsuccessful. Even
if we successfully consummate a debt restructuring, we will continue to be
highly leveraged and will need to increase our cash flow to meet our payment
obligations under any additional indebtedness.

Our insufficient liquidity could severely impact our ability to continue
as a going concern.

Our consolidated financial statements have been prepared under the
assumption that we will continue as a going concern. However, our independent
auditors have stated in their most recent report that, due to our liquidity
crisis, there is uncertainty about our ability to continue as a going concern.
Our consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty. If we are not successful in
consummating a debt restructuring, in generating sufficient cash from operating
activities to meet our financial obligations and to make essential capital
expenditures, or in obtaining outside sources of funding, we may be forced to
sell assets in addition to the planned divestitures described in this annual
report. Furthermore, our inability to successfully restructure our debt would
materially and adversely affect our financial condition and continuing
operations and would likely cause us to seek bankruptcy court protection. If
we are required to liquidate our operations, the holders of our debt and our
shareholders will likely incur a significant loss.

If the debt restructuring negotiations with our creditors are not
successful, we face a substantial risk of Mexican reorganization-related
proceedings.

If we remain in default on our obligations, including our notes, some or
all of our creditors will have the option of taking legal action against us,
including instituting an involuntary reorganization proceeding in Mexico.
Further, we may choose to institute a voluntary reorganization proceeding under
Mexican law. We cannot predict the duration of any such restructuring under
the new Mexican Law of Commercial Reorganizations (Ley de Concursos
Mercantiles), as the statutory provisions governing such proceedings remain
largely untested. A reorganization proceeding would likely result in
significant changes to our existing obligations that could include the
cancellation or rescheduling of all or part of those obligations. During the
pendency of any such proceeding, our ability to operate or manage our business,
to retain employees, to maintain existing or create new customer relationships,
to continue to collect payments for our products and services or to obtain any
type of funding or financing would likely be materially adversely affected. We
believe that any such adverse effects would be exacerbated if the
reorganization proceeding were protracted.

If we were declared bankrupt, our creditors would find it difficult to
collect payment on our unsecured debt instruments.

If we were declared bankrupt by a Mexican court, or if we were subject to
a reorganization proceeding in a Mexican court, our obligations under our debt
securities:



| |  |  | would be converted into Pesos at the exchange rate prevailing at
the time of a declaration of bankruptcy or reorganization and from
Pesos into inflation indexed units (UDIs) at the conversion rate
prevailing at that time;                 
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | would be dependent upon the outcome of the bankruptcy or
reorganization proceedings and payment, if any, would occur at the same
time as claims of all of our unsecured creditors are satisfied if and
to the extent funds are sufficient; and
|
| |  |  | would cease to accrue interest.                                                                                                                                                                                                               

There can be no assurance that our unsecured creditors would receive any
meaningful recovery from a bankruptcy or reorganization proceeding.

We have been notified by the New York Stock Exchange that the average
trading price of our ADSs and their distribution do not meet the New York Stock
Exchanges continued listing requirements.

On February 13, 2003, we were notified by the New York Stock Exchange that
the average trading price of our ADSs and their distribution did not meet the
New York Stock Exchanges continued listing requirements. We have notified the
New York Stock Exchange of our intention to achieve compliance in a timely
manner and are currently

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evaluating appropriate alternatives. In order to maintain compliance, the
average trading price of our ADSs must equal or exceed U.S.$1.00 for a minimum
of 30 trading days on or before August 13, 2003. Although we are focused on
maintaining our New York Stock Exchange listing, we cannot assure you that we
will be able to achieve compliance by the dates set by the New York Stock
Exchange to avoid delisting. Delisting from the New York Stock Exchange would
have an adverse effect on the liquidity of our ADSs and on our ability to raise
capital through the issuance of ADSs or securities convertible into ADSs.

We may be unable to realize the value of our planned divestitures in time
to repay our creditors.

We are currently in the initial stages of negotiations to divest our
Company of certain assets with the goal of increasing our production
efficiency, improving our liquidity condition and repaying overdue amounts on
our outstanding indebtedness. If we are unable to attract purchasers for these
non-strategic assets, we may be forced to delay the sale of all or a portion of
these assets. We cannot assure you that we will be able to realize the value
of these assets before our creditors exercise their rights to accelerate our
debt obligations.

We are currently involved in litigation that, if decided adversely to us,
could materially adversely affect our financial condition, cash flows and
results of operations.

We are currently involved in a lawsuit relating to our nonpayment of
amounts alleged due under promissory notes issued to HG Estate, LLC in
connection with the acquisition of our former subsidiary, Durango Paper
Company. We have filed a statement of claims in arbitration, among other
things, challenging the validity of these promissory notes. In addition, we
are involved in a lawsuit relating to our failure to pay outstanding
obligations under our Euro Commercial Paper Program. We intend to vigorously
defend against these lawsuits, but the results of these proceedings cannot be
predicted. Adverse outcomes for our Company in either of these matters could
require significant expenditures and could have a material adverse effect on
our financial condition, cash flows and results of operations. See Item 8.
Financial Information-Legal Proceedings.

We are vulnerable to cyclicality and fluctuations in pricing.

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

We are vulnerable to increases in inflation.

Our profitability may be adversely affected by increases in inflation.
Our Peso-based labor costs and raw material costs increase as a result of
inflation in Mexico. If, as in the past four years, we are unable to pass on
the increased costs of our inputs to our customers, the real prices of our
products will not keep pace with inflation. As a result, our operating income
will continue to decline unless we have a comparable increase in our sales
volume to offset the decline in real prices of our products.

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

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

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

We currently face increasing competition from non-Mexican producers due in
part to significantly enhanced market access for imported products. Many of
our competitors are large international paper producers with substan-

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tial resources at their disposal. We try to maintain our prices below
U.S. prices and in the past, this price differential, combined with protective
tariffs, has discouraged imports from the United States. With the gradual
elimination of tariffs and generally low prices for paper and packaging
products in the United States over the last four years, competition from
imports has increased and may increase further. Increased competition from
imports may have a material adverse effect on our Company by driving down our
prices and decreasing our revenues.

Our operations may be restricted by covenants in our debt agreements.

We are, or in connection with our debt restructuring may become, party to
debt agreements which have negative covenants and other restrictions that will
limit our ability and the ability of our subsidiaries to:



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

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

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

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

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

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

Our success largely depends on the continuing contributions of our
management team. Our managers have been with our Company for an average of 18
years and have implemented our past strategic acquisitions. In particular, our
chief executive officer, chief operations officer, and chief financial officer
have been with our Company since the founding of GIDUSA. The loss of key
personnel or our potential inability to attract and retain other qualified
managers could adversely affect us.

Risks Relating to Mexico

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

We are a Mexican company with a substantial part of our operations and
assets in Mexico. As a result, our business may be affected by the general
condition of the Mexican economy, the devaluation of the Peso as compared to
the U.S. Dollar, Mexican inflation, interest rates and political developments
in Mexico.

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

Mexico has experienced adverse economic conditions.

Mexicos gross domestic product, or GDP decreased by 0.3% in 2001. In
2002, GDP increased by an estimated 0.9%. During 2002, GDP growth fell short
of Mexican government estimates due primarily to a decrease in exports to the
U.S. resulting from the recession in the U.S. economy and a 13.8% depreciation
of the Peso against the U.S. Dollar. Inflation in 2000, 2001 and 2002 was
8.9%, 4.4% and 5.7%, respectively.

If the Mexican recession continues or if inflation and interest rates
increase significantly, our business, financial condition and results of
operations may be adversely affected for the following reasons:



| |  |  | our customers may reduce their consumption of our products; and                                          
| | - |  | ---------------------------------------------------------------------------------------------------------
|
| |  |  | our costs may increase because approximately 85% of our cost of
production in Mexico is payable in Pesos.

Our profitability may be adversely affected by currency fluctuations.

The Peso has devalued substantially against the U.S. Dollar in the past
and may devalue significantly in the future. The value of the Peso, based on
the exchange rate, which is calculated and published by the Mexican Central
Bank (Banco de México), declined by 61% against the U.S. Dollar during 1994, by
an additional 54% during 1995 and continued to weaken between 1995 and 1998.
Despite stabilization of the Peso/U.S. Dollar exchange rate between 1999 and
2001, the Peso devalued a further 13.8% during 2002. Any devaluation of the
Peso negatively affects our results of operations by increasing our U.S.
Dollar-based costs, including our cost of borrowing, since the Peso cost of
interest payments on our U.S. Dollar indebtedness would increase.

We may not be able to make payments in U.S. Dollars.

The Mexican government does not currently restrict the ability of Mexican
or foreign persons or entities to convert Pesos into U.S. Dollars or other
currencies, and vice versa. However, in the past, the Mexican economy has
experienced balance of payment deficits and shortages in foreign exchange
reserves, and the Mexican government has responded by restricting the ability
of Mexican or foreign persons or entities to convert Pesos to foreign
currencies generally, and U.S. Dollars in particular. The Mexican government
may institute a restrictive currency exchange control policy in the future.
Any restrictive currency exchange control policy could prevent or restrict our
access to U.S. Dollars to meet our U.S. Dollar obligations, and could also have
a material adverse effect on our

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business, financial condition and results of operations. We cannot
predict the impact of any such measures on the Mexican economy.

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

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

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

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

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

We prepare our financial statements in accordance with Mexican GAAP.
These principles differ in significant respects from U.S. GAAP as further
discussed in Note 21 to our audited consolidated financial statements. In
particular, all Mexican companies must incorporate the effects of inflation
directly in their accounting records and published financial statements. The
effects of inflation accounting under Mexican GAAP are not eliminated in the
reconciliation to U.S. GAAP. For this and other reasons, the presentation of
our financial statements and reported earnings may differ from that of
companies in other countries. In addition, as a foreign registrant, the
preparation of U.S. GAAP information is only performed on an annual basis.

Judgments of Mexican courts enforcing our obligation under our debt
securities would be payable only in Pesos.

If proceedings were brought in Mexico seeking to enforce our obligations
under our debt securities, we would not be required to discharge our
obligations in a currency other than Pesos. Under the Mexican Monetary Law
(Ley Monetaria de los Estados Unidos Mexicanos), an obligation to pay amounts
denominated in a currency other than Mexican currency, which is payable in
Mexico, may be satisfied in Mexican currency at the rate of exchange in effect
on the date of payment. This rate is currently determined daily by the Mexican
Central Bank and published in the Mexican Official Gazette of the Federation
(Diario Oficial de la Federación).




Item 4. Information on the Company.




Organization

Our Company is the result of the merger on October 8, 2001 of Corporación
Durango, S.A. de C.V., or CODUSA, into Grupo Industrial Durango, S.A. de C.V.,
or GIDUSA. GIDUSA, the surviving entity, was subsequently renamed Corporación
Durango, S.A. de C.V.

We were incorporated on January 22, 1982 in Mexico. However, some of our
underlying operating companies have been in existence since 1975. Since our
formation, we have pursued a strategy of forward integration, imple-

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mented by both acquisitions and internal expansion, to attain our present
position as one of Mexicos largest producers, in terms of capacity, of
corrugated containers, containerboard and industrial paper. We are 95.1% owned
by members of the Rincón family, which has been involved in the pulp, paper and
converting industry for over 20 years.

We are a limited liability company (sociedad anónima de capital variable)
operating under the laws of Mexico. Our principal executive offices are
located at Torre Corporativa Durango, Potasio 150, Ciudad Industrial, Durango,
Durango, United Mexican States 34220, and our telephone numbers are +52 (618)
814-1658 and +52 (618) 814-2799.

Our agent for service of process in the United States is Durango McKinley
Paper Company, 5605 N. MacArthur Blvd., Suite 360, Irving, Texas 75035,
Attention: Prudencio Calderón.




Significant Developments During 2002 and Recent Developments

For the past two years, our Company has been severely affected by a
combination of economic factors, including a slowdown of the U.S. and
international economies, a Peso devaluation of approximately 13.8% during 2002,
a significant drop in the international price of paper during 2002, a drastic
reduction in the demand for manufactured products requiring the goods supplied
by our Company and the entry of imported products into the Mexican market. The
industrys initial stage of recovery did not materialize and the divestiture
initiatives of non-strategic assets previously disclosed in our 2001 annual
report did not occur as anticipated. These negative economic events lead to a
significant reduction in the generation of cash flow by our Company during the
second half of 2002 and our current liquidity crisis. Our independent auditors
have stated in their most recent report that due to our liquidity condition,
there is uncertainty as to our ability to continue to operate as a going
concern.

In October 2002, we sold our subsidiary Durango Paper Company and certain
promissory notes to Operadora Omega Internacional, S.A. de C.V., a related
party, for an aggregate amount of US$100,000. Pursuant to the terms of this
transaction, we have the option to repurchase all of the capital stock of
Durango Paper Company and the promissory notes for US$100,000 plus LIBOR + 4%
at any time prior to October 7, 2012. In November 2002 Durango
Paper Company filed a voluntary reorganization proceeding under Chapter 11 of
the U.S. Bankruptcy Code. This sale gave rise to an aggregate loss of Ps
1,451.4 million, which was considered as a special item in the income statement
(see Note 17 to our audited consolidated financial statements).

In November 2002, we defaulted on payments of principal and interest under
our unsecured indebtedness. In December 2002, we retained financial advisors
to advise us in evaluating debt-restructuring alternatives to implement a
long-term solution to our capital structure and debt service requirements. We
also began discussions with our bank creditors and the holders of our notes.
In April 2003, we presented our unsecured creditors with debt restructuring and
forbearance proposals. Holders of approximately 97% of the total outstanding
principal amount of our notes due 2003, 2006, 2008 and 2009 and certain bank
creditors agreed to forbear exercising their rights and remedies in connection
with our existing defaults. We paid a forbearance fee of approximately US$14
million to such creditors for their forbearance. Such forbearance terminates
on June 30, 2002, and we have not received any indication that such creditors
will extend the period of forbearance. Our debt restructuring proposal is
currently the focus of our ongoing negotiations with these and our other
unsecured creditors.

On
February 27, 2003, our subsidiary, Empaques de Cartón Titán, S.A. de
CV., sold the assets of its molded pulp division for approximately Ps
589.1 million, generating a profit in 2003 of Ps
316.1 million. The assets sold included certain accounts
receivable and the buyer assumed certain trade accounts payable
related to the production and sale of molded products.

In light of our failure to make payments on our existing notes, Standard &
Poors lowered our foreign and local currency corporate ratings to their lowest
rating of D, and Moodys took action to lower all ratings on our existing
notes to their second lowest rating of Ca.




Business Overview

We are a vertically integrated producer with an extensive distribution
network that links our strategically located facilities with our customers.
These factors, as well as our investment in state-of-the-art manufacturing
technology and our access to raw materials as Mexicos only producer of
unbleached virgin kraft pulp and one of the largest paper recyclers, allow us
to be one of the industrys lowest cost producers. In 2002, our total sales
volume was 1.5 million short tons.

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We produce and supply paper to our converting facilities which in turn
manufacture packaging products. Our products include:



| |  |  | paper: containerboard (linerboard, corrugating medium and
multi-wall paper), kraft paper, newsprint and uncoated free sheet;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | packaging: corrugated containers and multi-wall sacks and bags; and                                                         
|
| |  |  | other: plywood and particleboard.                                                                                           

In Mexico, we are the sole domestic producer of newsprint with a 56%
market share in 2002, and we are a leading producer of corrugated containers
with an estimated 35% market share in 2002, based on information published by
the Mexican National Chamber for the Pulp and Paper Industry (Cámara Nacional
de las Industrias de la Celulosa y del Papel).

We are a strategically-focused paper company, supplying companies in the
maquiladora sector, as well as the traditional Mexican export sector. Our
sales have grown at a 9.4% compound annual growth rate during the same period.
We believe we are the leading domestic producer of corrugated containers used
by the traditional Mexican export sector . The remaining needs of the sector
are substantially supplied by other Mexican producers.

We sell our products to a broad range of Mexican and United States
manufacturers of consumable and durable goods, including the maquiladora sector
and Mexicos major exporters. Our customers in the United States and Mexico
include many of the largest industrial, construction, consumer, agricultural,
and media companies such as Nestlé, Pepsico, Chrysler Corporation, Sara Lee,
Kimberly-Clark, Smurfit Stone, Vitro, Cementos Apasco, Paccess-Nike, El
Universal, Reforma, Quik-crete Concrete and Chiquita. In Mexico, we produce
corrugated containers, containerboard and kraft paper, forest products,
multi-wall sacks and bags and newsprint. In the United States, we produce,
linerboard and corrugated containers. Our U.S. operations allow us to fill a
demand for higher quality products to be supplied into Mexico.

Our revenues were Ps 8,498.2 million in 2002. In 2002, approximately 37%
of our sales were made in U.S. Dollars, with the balance primarily U.S. Dollar
linked. In 2002, 69% of our total sales were made in Mexico and 31% were made
in and into the United States. Our adjusted EBITDA was Ps 1,119.4 million in
2002.

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Subsidiaries and Operating Divisions

Corporate Structure

(ORG CHART)



| | (1) 41.97% is controlled through Compañía Papelera de Atenquique.
(2) 27.21% is controlled through Empaques de Cartón Titán.
| | ----------------------------------------------------------------------------------------------------------------------------

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

| |   |  |            |  |                                                    
| | - |  | ---------- |  | ---------------------------------------------------
| |  |  | paper:     |  | Pamex
Grupo Pipsamex
Durango McKinley Paper Company
|
| |  |  | packaging: |  | Titán
Durango McKinley Paper Company               
|
| |  |  | other:     |  | Ponderosa                                          

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



| |  |  | Pamex.Our Pamex division is one of the largest containerboard
manufacturers in Latin America. In 2002, approximately 78% of the
600,000 short tons of linerboard, corrugating medium and unbleached
kraft paper shipped by Pamex was used to supply our Titán division.
The remainder of its production was sold to third party manufacturers
in Mexico and the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Grupo Pipsamex.Grupo Pipsamex is Mexicos sole domestic newsprint
manufacturer and one of Mexicos leading bond paper manufacturers. In
2002, Grupo Pipsamex shipped 197,000 short tons of newsprint and
117,000 short tons of uncoated free sheet. Grupo Pipsamexs sales are
predominantly to the Mexican market with the balance primarily sold to
the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Durango McKinley Paper Company.Durango McKinley Paper Company is
a state-of-the-art recycled linerboard manufacturer strategically
located in the southwestern United States to supply our packaging
operations in the United States and northern Mexico and to serve the
maquiladora region. Durango McKinley Paper Company is a significant
collector of old corrugated container, or OCC, material, which is
processed to create recycled fiber. In 2002, approximately 57% of the
paper needs of our packaging operations in Dallas and Houston, TX were
supplied by Durango McKinley Paper Company.                                                                                                                                                                                                                              
|
| |  |  | Titán.Our Titán division, which includes the Durango McKinley
Paper Company (f/k/a McKinley Container) operations, is a
large integrated paper-based packaging manufacturer. Titáns 2002
shipments of 670,000 short tons consisted of corrugated containers,
multi-wall sacks and bags, and molded pulp egg cartons. On February
27, 2003, Titán sold the assets of its molded carton division,
representing approximately 25% of its total assets. Pamex supplies
approximately 88% of Titáns domestic containerboard requirements, with
the balance, higher grade containerboard, supplied primarily by Durango
McKinley Paper Company. Waste material generated in production of
corrugated containers is sold back to Pamex for recycling and to
produce pulp. Titáns sales are primarily to Mexico and the
maquiladora sector.
|
| |  |  | Ponderosa.Ponderosa, Mexicos largest forest-based building
products manufacturer, markets its products throughout the NAFTA
region. In 2002, Ponderosa produced 82,000 short tons of particleboard
and 10,000 short tons of plywood. In 2002, Ponderosa supplied 80% of
Pamexs wood requirements for the production of virgin pulp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Our operating divisions interact with each other through inter-company
sales as follows. Ponderosa sells wood chips and pine logs to Pamex for the
production of virgin pulp. Pamex sells containerboard to Titán for the
production of corrugated boxes and multi-wall sacks. Durango McKinley Paper
Company sells OCC and ONP to Pamex for the production of recycled fiber and
sells containerboard to Titán for the production of corrugated containers.
Titán sells its waste to Pamex for the production of recycled fiber. Grupo
Pipsamex purchases paper tubes and corrugated containers from Pamex and Titán,
respectively.

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Our Competitive Strengths

We believe our competitive strengths are:



| |  |  | We are a vertically integrated low cost producer of paper and
packaging products with state-of-the-art manufacturing technology. As
the largest forest management company and largest wastepaper collection
company in Mexico, we are able to supply the majority of our raw
material requirements. We have made substantial investments in
technology in each of our product lines. In our paper segment, we have
invested in technologies that allow us to:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | produce higher grades of paper;                                                                                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | produce pulp with a lower volume of lower cost chemicals;                                                                                                                                                  
|
| |  |  | change our raw material mix to include a higher percentage of
recycled fiber and less virgin pulp, and use lower cost and quality
recycled fiber without affecting the quality of the paper we
produce; and
|
| |  |  | increase the yield of recycled fiber per ton of raw material.                                                                                                                                              



| |  |  | In our packaging segment, we have invested in state-of-the-art printing
presses that allow us to:
| |  |  | -------------------------------------------------------------------------------------------------



| |  |  | produce a higher volume of packaging products through the
elimination of bottlenecks in our production processes;
| | - |  | -----------------------------------------------------------------------------------------------------------------
|
| |  |  | offer our customers a wider variety of products; and                                                             
|
| |  |  | reduce our costs for printing ink.                                                                               



| |   |  | In our other products segment, we have invested in the latest technology
at our refurbished particleboard plant in Chihuahua which allows us to
produce wider grades of higher quality particleboard on our continuous
press while reducing the amount of raw materials and chemicals required
for each ton produced. In addition, we have recently expanded our
collection of domestic OCC material in order to reduce our purchases of
higher priced imported OCC material. Finally, we have substantially
reduced headcount through our program of plant rationalization and our
renegotiation of the collective bargaining agreement for our Atenquique
mill.                                                                                                                                                                                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have dominant market positions in the rapidly growing markets we
serve.We are one of the largest paper producers in Mexico, whose GDP
growth in 2003 is estimated to be approximately 1.8% according to the
Mexican government. We expect demand for paper products to grow by 1.5
times domestic GDP growth through 2006. In Mexico, we are the sole
domestic producer of newsprint and the leading producer of corrugated
containers used by the Mexican export sector.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | We have an experienced management team with a proven successful
track record.Our senior management has an average of over 20 years
of experience in the integrated paper industry, the majority of which
is with us. We have grown our business from a small paper manufacturer
with sales of US$2.1 million in 1980 to one of the leading integrated
paper producers in Mexico.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Our strategically located facilities are linked with our customers
by our extensive distribution network.Our production facilities are
strategically located in close proximity to our suppliers and
customers. In creating our vertically integrated manufacturing
process, we have generally located our raw material supply, processing
and production assets near major industrial centers around Mexico to
reduce transportation costs and delivery time of our products. Our
individual facilities are linked with our customers by our extensive
distribution system, which consists of approximately 150 trailer trucks
owned by us and approximately 1,500 additional trailer trucks owned by
independent operators who provide services principally to us. Our
distribution network is highly efficient and the proximity of our
assets to major centers enables our

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| |   |  | truck fleet to haul freight in both directions, thus lowering
transportation costs. The close proximity of our facilities to the
maquiladora sector makes our products attractive to customers due to
their low shipping costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have a diverse product portfolio which mitigates the impact of
the paper industrys cyclicality.Our production, distribution and
sale of different paper grades and paper products gives us the
flexibility to mitigate the impact of cyclicality occurring in the
market such that when one of our products is in a downward cycle, we
can shift production, distribution and sales to focus on other
products, assuming sufficient market demand. For example, in the case
of Grupo Pipsamex, we have switched some production capacity from
newsprint to bond paper due to recent increases in bond paper demand
and prices which have outpaced increases in newsprint demand and
prices.

Our Business Strategy

Our business strategy is to strengthen our position as one of the leading
integrated paper and packaging companies in Latin America, as well as to
continue our growth as a leading integrated paper producer. To implement our
strategy, we expect to:



| |  |  | Restructure our debt obligations and capital structure. We will continue
to engage in debt restructuring negotiations with our creditors in an effort
to create a more efficient capital structure. We will negotiate to lower
our interest payment obligations and extend the maturity dates of a
substantial portion of our indebtedness to more closely align our debt
service obligations with our current and projected cash flows and packaging
products.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Increase our cash flow through enhanced efficiency and shifts to
higher margin products.We intend to continue to improve the
efficiency and productivity of our operations by either upgrading or
replacing our existing machinery, which we believe will result in a
reduction of bottlenecks. Through the use of improved technology, we
intend to increase the yield and quality of pulp that can be produced
from OCC material and old newsprint, or ONP, and increase the
percentage of recycled pulp that can be used in the production of our
finished products while maintaining our existing level of quality. We
also intend to continue expanding our collection of domestic OCC
material to further reduce our reliance on more expensive imported OCC
material. We will continue to shift our marketing efforts toward high
margin products such as niche paper and specialty packaging.
|
| |  |  | Reduce our financial leverage through the application of cash flow
from operations and the proceeds from asset divestitures and reduce our
cost of capital through fiscally sound financing activities. We intend
to continue our practice of maximizing internally generated cash flows
and to use our cash flow from operations and the proceeds from asset
sales to reduce our outstanding indebtedness. We expect to increase
our cash flow from operation through reductions in the level of our
accounts receivables and inventory. We will continue to seek to lower
our cost of capital to ensure the highest possible return on our
strategic investments. We believe that a low cost of capital will
facilitate our internal growth in a cost-effective manner in the
future.                                                                                                              
|
| |  |  | Strengthen our leadership position in regional markets.By
maintaining high capacity utilization and continuing to offer
competitively priced, high quality paper and packaging products,
accompanied by outstanding customer service, we believe we will
solidify our role as a dominant producer in Mexico and the maquiladora
sector.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Our Products

General

Our main product groups are:



| |  |  | Papercontainerboard (linerboard and corrugating medium), kraft
paper (unbleached), newsprint and uncoated free sheet (bond, envelope,
book stock, miscellaneous free sheet),
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Packagingcorrugated containers and multi-wall sacks and bags,
| | - |  | --------------------------------------------------------------
|
| |  |  | Otherplywood and particleboard                               

Our total capacity by product, number of mills and plants, and actual
production and shipments for the periods indicated, is as follows:

Production (in thousands of short tons)

|                                   |                  |          |                |              |              |      |    |      |  |      |       |         |  |  |       |         |  |  |       |         | 
|---------------------------------- | ---------------- | -------- | -------------- | ------------ | ------------ | ---- | -- | ---- |  | ---- | ----- | ------- |  |  | ----- | ------- |  |  | ----- | ------- | 
|                                   |                  |          | Current Annual |              |              |      |    |      |  |      |       |         |  |  |      
|                                   |                  |          | Installed      |              | December 31,
|                                   |                  |          |                |              |             
|Product Type                       |                  | Capacity |                | Mills/Plants |              | 2000 |    | 2001 |  | 2002
|                                   |                  |          |                |              |              |      |    |      |  |     
|Paper:                             |                  |          |                |              |              |      |    |      |  |      |       |         |  |  |       |         |  |  |       |        
|Containerboard                     |                  |          | 815.0          |              |              |      | 6  |      |  |      | 809.4 |         |  |  | 710.8 |         |  |  | 831.4 |        
|Newsprint(1)                       |                  |          | 472.0          |              |              |      | 4  |      |  |      | 382.4 |         |  |  | 333.6 |         |  |  | 273.5 |        
|Uncoated free sheet                |                  |          | 143.0          |              |              |      | 1  |      |  |      | 106.0 |         |  |  | 91.6  |         |  |  | 145.5 |        
|Coated bleached board(1)           |                  |          | 137.5          |              |              |      | 1  |      |  |      | 273.6 |         |  |  | 230.3 |         |  |  | 137.5 |        
|                                   |                  |          |                |              |              |      |    |      |  |      |       |         |  |  |       |         |  |  |       |        
|                                   | Total Paper      |          |                | 1,567.5      |              |      |    | 12   |  |      |       | 1,571.5 |  |  |       | 1,366.3 |  |  |       | 1,387.8 | 
|Packaging:                         |                  |          |                |              |              |      |    |      |  |      |       |         |  |  |       |         |  |  |       |        
|Corrugated containers              |                  |          | 871.0          |              |              |      | 19 |      |  |      | 599.3 |         |  |  | 543.2 |         |  |  | 581.9 |        
|Multi-wall sacks and bags          |                  |          | 66.0           |              |              |      | 3  |      |  |      | 99.8  |         |  |  | 69.7  |         |  |  | 44.6  |        
|Molded pulp products and
others(2) |                  |          | 40.0           |              |              |      | 4  |      |  |      | 73.3  |         |  |  | 55.1  |         |  |  | 41.0  |        
|                                   |                  |          |                |              |              |      |    |      |  |      |       |         |  |  |       |         |  |  |       |        
|                                   | Total Packaging  |          |                | 977.0        |              |      |    | 26   |  |      |       | 772.4   |  |  |       | 668.0   |  |  |       | 667.6   | 
|Other products                     |                  |          | 246.0          |              |              |      | 3  |      |  |      | 165.6 |         |  |  | 41.6  |         |  |  | 97.6  |        
|                                   |                  |          |                |              |              |      |    |      |  |      |       |         |  |  |       |         |  |  |       |        
|                                   | Total Production |          |                | 2,790.5      |              |      |    | 41   |  |      |       | 2,509.5 |  |  |       | 2,075.9 |  |  |       | 2,152.4 | 
|                                   |                  |          |                |              |              |      |    |      |  |      |       |         |  |  |       |         |  |  |       |        



---

|(1) |  | In October 2002, we sold all of our interest in Durango Paper Company,
significantly reducing our production of kraft paper and eliminating our
production of coated bleached board. Newsprint includes kraft paper from
Tuxtepec Mill.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In February 2003, our subsidiary, Empaques de Cartón Titán, S.A. de C.V.,
sold the assets of its molded pulp division, representing substantially
all of our molded pulp production capacity.                                          

Shipments (in thousands of short tons)

|                                   |                 |      |              |         |  |      |       |         |  |  |       |         | 
|---------------------------------- | --------------- | ---- | ------------ | ------- |  | ---- | ----- | ------- |  |  | ----- | ------- | 
|                                   |                 |      | December 31,
|                                   |                 |      |             
|Product Type                       |                 | 2000 |              | 2001    |  | 2002
|                                   |                 |      |              |         |  |     
|Paper:                             |                 |      |              |         |  |      |       |         |  |  |       |        
|Containerboard                     |                 |      | 262.9        |         |  |      | 243.5 |         |  |  | 273.6 |        
|Newsprint(1)(2)                    |                 |      | 377.4        |         |  |      | 328.5 |         |  |  | 254.5 |        
|Uncoated free sheet                |                 |      | 103.4        |         |  |      | 111.0 |         |  |  | 117.0 |        
|Coated bleached board(1)           |                 |      | 249.2        |         |  |      | 228.8 |         |  |  | 136.2 |        
|                                   |                 |      |              |         |  |      |       |         |  |  |       |        
|                                   | Total Paper     |      |              | 993.0   |  |      |       | 911.8   |  |  |       | 781.3   | 
|Packaging:                         |                 |      |              |         |  |      |       |         |  |  |       |        
|Corrugated containers              |                 |      | 594.5        |         |  |      | 545.0 |         |  |  | 586.3 |        
|Multi-wall sacks and bags          |                 |      | 101.4        |         |  |      | 70.4  |         |  |  | 45.5  |        
|Molded pulp products and others(3) |                 |      | 73.1         |         |  |      | 53.9  |         |  |  | 38.2  |        
|                                   |                 |      |              |         |  |      |       |         |  |  |       |        
|                                   | Total Packaging |      |              | 769.0   |  |      |       | 669.3   |  |  |       | 670.0   | 
|Other products                     |                 |      | 158.4        |         |  |      | 49.7  |         |  |  | 91.5  |        
|                                   |                 |      |              |         |  |      |       |         |  |  |       |        
|                                   | Total Shipments |      |              | 1,920.4 |  |      |       | 1,630.8 |  |  |       | 1,542.8 | 
|                                   |                 |      |              |         |  |      |       |         |  |  |       |        



---

|(1) |  | In October 2002, we sold all of our interest in Durango Paper Company,
significantly reducing our production of kraft paper and eliminating our
production of coated bleached board.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | This line item includes kraft paper from our Tuxtepec Mill.                                                                                                                         

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|(3) |  | In February 2003, our subsidiary, Empaques de Cartón Titán, S.A. de C.V.,
sold the assets of its molded pulp division, representing substantially
all of our molded pulp production capacity.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Paper Products

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

|                    |  |                                                                                                                                                                                                                                                       
|------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product Type        |  | Product Description and Usage                                                                                                                                                                                                                         
|                    |  |                                                                                                                                                                                                                                                       
|Containerboard      |  | We produce linerboard and corrugating medium,
white-top and mottled white linerboard and paper,
high-performance linerboard. Our products are used by
corrugated container manufacturers in the production
of a wide variety of corrugated containers.
|                    |  |                                                                                                                                                                                                                                                       
|Kraft paper         |  | We produce unbleached kraft paper. Our products are
used by paper bag converters to produce sacks,
multi-wall sacks and bags, golden envelope grades, wet
strength paper, and fluro-carbon treated board.                                             
|                    |  |                                                                                                                                                                                                                                                       
|Newsprint           |  | We produce standard, peach and improved newsprint.
Our products are used by newspaper and magazine
publishers and advertisers for newspapers, books,
advertisements, and magazines.                                                                   
|                    |  |                                                                                                                                                                                                                                                       
|Uncoated free sheet |  | We produce bond, forms, tablet, envelope, copy, and
book stock and miscellaneous free sheet. Our products
are used by consumer goods and office supplies
producers for printing and writing paper, office
supplies, and educational books.            

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

Packaging Products

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

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

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

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Other Products

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

|              |  |                                                                                                                                                                                                                                                    
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product Type  |  | Product Description and Usage                                                                                                                                                                                                                      
|              |  |                                                                                                                                                                                                                                                    
|Particleboard |  | We produce thermalfused melamine panels. Our products are
used in the construction and furniture industry for raw
particle, shelving, and stepping.                                                                                                
|              |  |                                                                                                                                                                                                                                                    
|Plywood       |  | We produce ponderosa pine plywood, hardwood plywood and
medium density overlay, and specialty plywood. Our products
are used in the construction industry in Mexico and the
United States. Other uses are signs, doors, concrete
pouring, and toys.

Demand in the Mexican forest products industry is driven primarily by the
Mexican construction and furniture industries. Following a decline in
construction activity after the December 1994 devaluation of the Peso, as well
as continuing budget austerity in the public sector, demand for our other
products declined sharply in 1995 and has subsequently remained severely
depressed.

Customers

We primarily sell our products in Mexico and the United States. In 2002,
69% of our total sales were made in Mexico and 31% were made in and into the
United States.

Our major customers in Mexico and the United States include:

|                  |  |                                |  |               
|----------------- |  | ------------------------------ |  | --------------
|Paper             |  | Packaging                      |  | Other Products
|                  |  |                                |  |               
|Mexico:           |  | Mexico:                        |  | Mexico:       
|El Universal      |  | Vitro                          |  | Grupo GEA     
|Excélsior         |  | Cementos Apasco                |  | Grupo Cambel  
|Grupo Multimedios |  | Nestlé                         |  | Durart        
|Novedades         |  | Kimberly-Clark                 |  | Grupo Frid    
|Reforma           |  | Sara Lee                       |  |               
|El Norte          |  | Gamesa and Sabritas (PepsiCo.) |  |               
|                  |  | Chrysler Corporation           |  |               
|                  |  | Chiquita                       |  |               
|                  |  |                                |  |               
|United States:    |  | United States:                 |  | United States:
|Paccess-Nike      |  | Quik-crete Concrete            |  | Sol Building  
|Field Container   |  | CKS Packaging                  |  | Tech. Products
|Smurfit Stone     |  |                                |  |               
|Box USA           |  |                                |  |               

Sales and Marketing

In 2002, sales to our 10 largest customers accounted for approximately
8.1% of our net sales. However, none of our customers accounted for a material
amount of our revenues. We do not believe that the loss of any single customer
would have a material adverse effect on our business.

Our sales and marketing staff are responsible for identifying and
developing markets as well as notifying our research and development staff of
customer product requirements. We sell our products through our direct sales
force at our Mexican offices located in Mexico City, Guadalajara and Monterrey,
Mexico, and our U.S. offices located in Albuquerque, NM and Dallas, TX. As of
December 31, 2002, we had approximately 52 employees involved in direct sales.

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We make substantially all of our sales directly to our clients. We use
brokers only in limited circumstances.

Our sales strategy involves targeting niche markets, such as the
maquiladora sector, growing manufacturing regions in central and southern
Mexico, Mexican export markets and lightweight markets. To date, the limited
competition in Mexico and our competitive pricing policy has resulted in
pricing not becoming a dominant factor while customer service and product
differentiation become the primary elements of our sales effort. A core
element of our sales strategy is to establish long-term customer relationships
by ensuring that we satisfy our customers specific requirements. The
customized service we provide and the strategic relationships we have developed
ensure we retain our existing customers while attracting new ones. Over the
past 2 years, changes in Mexican tax law have reduced the number of
manufacturers in the maquiladora sector of Mexico, reducing the aggregate
productive capacity of the region. To enable us to maintain the advantages of
strategically located facilities, we continue to update our distribution
network to accommodate the trends of our important manufacturing customers.

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

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

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

Raw Materials

We believe we have a flexible raw material mix. The principal raw
materials used in our production processes are recycled fiber and virgin pulp.
Recycled fiber is obtained by processing OCC material, ONP material, magazines
and office waste paper material. We also use virgin pulp, which is made by
processing wood chips, in the production of 100% virgin kraft paper and we mix
virgin pulp with recycled fiber to produce a variety of semi-recycled grades of
other packaging and paper products. In the case of newsprint and printing
grades, we produce a high quality product with a high content of post-consumed
recycled fiber.

Recycled Fiber

Our business is affected by trends in international and domestic prices of
OCC and ONP material. In Mexico, the price differential between domestic and
imported OCC and ONP material fluctuates in Peso terms, due to demand and
currency fluctuations, and at any given time we may supply ourselves from
either market, depending on the then current price differential. Approximately
78% of the fiber we use in our Mexican operations is recycled and approximately
48% of our recycled fiber is imported.

We believe that we are one of the largest collectors of recycled fiber in
Mexico. As part of our strategy in Mexico, we have been increasing the
capacity of our collection centers for OCC and ONP material in order to reduce
the imports of these two important raw materials, and consequently, to reduce
costs. Our initiatives to shift our supply sources for recycled fiber and
strengthen our domestic collection efforts will help to achieve our goal of
maintaining low raw material costs.

In the United States, our McKinley mill uses only recycled fiber. Our
recycling centers in Albuquerque and Phoenix provide approximately 34% of our
fiber requirements in the United States and we obtain the balance of our
recycled fiber requirements in the open market.

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Pulp

We are Mexicos sole producer of unbleached kraft pulp and we are
currently able to produce 220,000 short tons of unbleached pulp per year, which
is more than sufficient to supply our internal requirements for virgin kraft
pulp. We are also able to produce 79,000 short tons per year of chemical
thermo mechanical pulp, 79,000 short tons per year of thermo mechanical pulp,
79,000 short tons per year of sugar cane bagasse pulp, 319,000 short tons per
year of deinked pulp.

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

Water

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

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

Our Pronal Mill has a water treatment system that processes water used in
the papermaking process. The effluent of the Pronal Mill is used to irrigate
500 hectares of agricultural land.

Energy

Our Atenquique mill has the ability to generate its own power from on-site
power plants and does so depending on prices. One of our Pamex mills generates
its own power from an on-site power plant, while the other Pamex mills purchase
all of their power from the Comisión Federal de Electricidad, the Mexican
state-owned electric company. Some of our mills generate a portion of the
power needed in our pulp mills: the Mexpape mill generates 90% of its power,
the Centauro paper mill generates about 40% of its power and the Pronal mill
generates about 30% of its power, while the balance is purchased from the
Mexican state-owned electric company. Our other Mexican plants purchase all
their power from the Mexican state-owned electric company. The contracts for
power supply signed with the Mexican state-owned electric company are the
standard contracts used for all Mexican companies and there is no specific
termination date for the contracts.

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

Distribution and Supply of our Products

Our distribution network is one of the most extensive and most efficient
delivery systems within the Mexican paper and packaging industry. Our
production facilities are strategically located in close proximity to our
suppliers and customers. In creating our vertically integrated manufacturing
process, we have generally located our raw material supply, processing and
production assets near major industrial centers around Mexico to reduce
transportation costs and delivery time for our products. We distribute and
deliver our products from our plants as well as from

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several warehouses strategically located throughout Mexico. In the United
States, we deliver our products from our plants located in Prewitt, New Mexico
and Dallas and Houston, Texas, and from warehouses located throughout the
United States, including Los Angeles, Philadelphia, Baltimore, Cleveland, Las
Vegas and New Jersey. We consider that an effective delivery time ranges from
1 to 5 days from the date of the purchase order to the delivery of the product
to our customer. We are able to adjust deliveries of our products through the
use of a just-in-time system, offering same day deliveries, at the request of
our customers.

We currently own approximately 150 trailer trucks and have access to
approximately 1,500 additional trailer trucks owned by independent operators
who provide services principally to us. We use our trucks to transport wood
from forests to our production facilities. We also use our trucks and trucks
operated by independent operators to ship finished products to our customers in
Mexico and in the United States. The independent operators benefit from their
relationship with us because they can frequently haul our finished goods to
industrial centers and raw material in the form of recycled fiber to our plants
on a single round trip. This also reduces our shipping costs.

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

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

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

Our Competition

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

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

We serve approximately 35% of the containerboard market, 56% of the
newsprint market, and 10% of the uncoated free sheet market in Mexico,
according to the Mexican National Chamber for the Pulp and Paper Industry. In
addition, we serve 35% of the packaging market.

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

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Environmental Matters

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

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

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

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

Insurance

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

Paper and Packaging Industry Overview

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



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

We produce packaging, printing, writing and specialty paper.

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##### Table of Contents



Mexican Paper Industry

Volume.Based on installed capacity, Mexicos paper industry is the
second largest in Latin America. According to the 2002 annual report of the
Mexican National Chamber for the Pulp and Paper Industry, the total size of
Mexicos paper industry in 2002, based on apparent demand, was 6.2 million
short tons including temporary imports. Mexican production is distributed
among 57 plants. Apparent demand consists of domestic production, as reported
by manufacturers, plus imports, minus exports. Mexicos apparent demand in
2002 was broken down as follows:

(PIE CHART)

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

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

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

|     |  |            |       |         |  |         |       |        |  |        |     |          |  |   |       |       |  |  |     |   |  |  |      |   
|---- |  | ---------- | ----- | ------- |  | ------- | ----- | ------ |  | ------ | --- | -------- |  | - | ----- | ----- |  |  | --- | - |  |  | ---- | --
|     |  | Aggregate  |       |         |  |         |       |        |  |        |     | Apparent |  | % |       | % GDP
|Year |  | Production |       | Imports |  | Exports |       | Demand |  | Change |     | Change  
|     |  |            |       |         |  |         |       |        |  |        |     |         
|1998 |  |            | 4,044 |         |  |         | 1,267 |        |  |        | 253 |          |  |   | 5,057 |       |  |  | 6.1 | % |  |  | 4.8  | % 
|1999 |  |            | 4,184 |         |  |         | 1,540 |        |  |        | 254 |          |  |   | 5,471 |       |  |  | 8.2 | % |  |  | 3.7  | % 
|2000 |  |            | 4,296 |         |  |         | 1,785 |        |  |        | 227 |          |  |   | 5,854 |       |  |  | 7.0 | % |  |  | 6.6  | % 
|2001 |  |            | 4,272 |         |  |         | 1,884 |        |  |        | 237 |          |  |   | 5,919 |       |  |  | 0.1 | % |  |  | (0.3 | )%
|2002 |  |            | 4,451 |         |  |         | 1,997 |        |  |        | 227 |          |  |   | 6,221 |       |  |  | 5.1 | % |  |  | 0.9  | % 



---

|Source: 2002 Annual Report, Mexican National Chamber for the Pulp and Paper Industry.
|-------------------------------------------------------------------------------------

From 1998 to 2002, growth in apparent demand for the paper industry has
outpaced gross domestic product growth. Mexican apparent demand increased in
2002 reflecting the expansion of GDP by 0.9%. The tables below show the
resulting individual levels of demand for packaging, newsprint and bond paper
from 1998 to 2002.

-26-



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##### Table of Contents



The dominant portion of the total market for paper products is the market
for packaging paper. The table below shows Mexican apparent demand from 1998
to 2002 for packaging paper in short tons. In 2002, packaging paper accounted
for 60% of Mexicos total paper production and 56% of apparent demand for
paper.

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

|     |  |            |       |         |  |         |     |        |  |          |    |          |  |  |       |  |  |  |     |  
|---- |  | ---------- | ----- | ------- |  | ------- | --- | ------ |  | -------- | -- | -------- |  |  | ----- |  |  |  | --- | -
|     |  | Aggregate  |       |         |  |         |     |        |  |          |    | Apparent |  |  |       | 
|Year |  | Production |       | Imports |  | Exports |     | Demand |  | % Change
|     |  |            |       |         |  |         |     |        |  |         
|1998 |  |            | 2,307 |         |  |         | 557 |        |  |          | 65 |          |  |  | 2,820 |  |  |  | 9.3 | %
|1999 |  |            | 2,389 |         |  |         | 676 |        |  |          | 91 |          |  |  | 2,974 |  |  |  | 5.5 | %
|2000 |  |            | 2,464 |         |  |         | 795 |        |  |          | 67 |          |  |  | 3,192 |  |  |  | 7.3 | %
|2001 |  |            | 2,478 |         |  |         | 878 |        |  |          | 73 |          |  |  | 3,283 |  |  |  | 2.9 | %
|2002 |  |            | 2,622 |         |  |         | 928 |        |  |          | 68 |          |  |  | 3,482 |  |  |  | 6.1 | %



---

|Source: 2002 Annual Report, Mexican National Chamber for the Pulp and Paper Industry.
|-------------------------------------------------------------------------------------

Mexican apparent demand for packaging paper increased 9.3% in 1998, 5.5%
in 1999, 7.3% in 2000 and 2.9% in 2001, reflecting economic growth throughout
North America. During 2002, Mexican apparent demand increased, reflecting the
0.9% expansion of GDP.

The tables below show Mexican apparent demand in short tons from 1998 to
2002 for newsprint and printing and writing paper, which accounted for
approximately 26% of total apparent demand for paper in Mexico in 2002.

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

|     |  |            |     |         |  |         |     |        |  |          |    |          |  |  |     |  |  |  |      |   
|---- |  | ---------- | --- | ------- |  | ------- | --- | ------ |  | -------- | -- | -------- |  |  | --- |  |  |  | ---- | --
|     |  | Aggregate  |     |         |  |         |     |        |  |          |    | Apparent |  |  |     | 
|Year |  | Production |     | Imports |  | Exports |     | Demand |  | % Change
|     |  |            |     |         |  |         |     |        |  |         
|1998 |  |            | 343 |         |  |         | 117 |        |  |          | 70 |          |  |  | 390 |  |  |  | (2.5 | )%
|1999 |  |            | 272 |         |  |         | 190 |        |  |          | 33 |          |  |  | 429 |  |  |  | 10.0 | % 
|2000 |  |            | 281 |         |  |         | 193 |        |  |          | 28 |          |  |  | 446 |  |  |  | 4.0  | % 
|2001 |  |            | 263 |         |  |         | 210 |        |  |          | 23 |          |  |  | 450 |  |  |  | 0.9  | % 
|2002 |  |            | 217 |         |  |         | 214 |        |  |          |   |          |  |  | 431 |  |  |  | (4.3 | )%



---

|Source: 2002 Annual Report, Mexican National Chamber for the Pulp and Paper Industry.
|-------------------------------------------------------------------------------------

Mexican apparent demand for newsprint represents 27% of the total apparent
demand for printing and writing paper. Following a 2.5% decline in 1998,
apparent demand for newsprint increased 10.0% in 1999 and 4.0% in 2000 due to
continued low prices and growth in the Mexican economy. During 2001, Mexican
apparent demand remained flat reflecting the 0.3% contraction of GDP. During
2002, Mexican apparent demand decreased by 4.3% slow down of the Mexican
economy.

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

|     |  |            |     |         |  |         |     |        |  |          |    |          |  |  |       |  |  |  |      |   
|---- |  | ---------- | --- | ------- |  | ------- | --- | ------ |  | -------- | -- | -------- |  |  | ----- |  |  |  | ---- | --
|     |  | Aggregate  |     |         |  |         |     |        |  |          |    | Apparent |  |  |       | 
|Year |  | Production |     | Imports |  | Exports |     | Demand |  | % Change
|     |  |            |     |         |  |         |     |        |  |         
|1998 |  |            | 683 |         |  |         | 266 |        |  |          | 27 |          |  |  | 921   |  |  |  | (4.9 | )%
|1999 |  |            | 770 |         |  |         | 319 |        |  |          | 27 |          |  |  | 1,062 |  |  |  | 15.2 | % 
|2000 |  |            | 759 |         |  |         | 371 |        |  |          | 19 |          |  |  | 1,111 |  |  |  | 4.6  | % 
|2001 |  |            | 726 |         |  |         | 388 |        |  |          | 15 |          |  |  | 1,099 |  |  |  | (1.1 | )%
|2002 |  |            | 769 |         |  |         | 409 |        |  |          | 22 |          |  |  | 1,156 |  |  |  | 5.2  | % 



---

|Source: 2002 Annual Report, Mexican National Chamber for the Pulp and Paper
Industry.
|-------------------------------------------------------------------------------------

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##### Table of Contents



Mexican apparent demand for printing and writing paper is influenced by
economic growth. In 1998, apparent demand decreased by 4.9%, but in 1999 and
2000, the printing and writing paper market experienced a 15.2% and a 4.6%
increase in apparent demand, respectively, due to continued low prices and
growth in the Mexican economy. During 2001, Mexican apparent demand for
printing and writing papers declined by 1.1%, reflecting the 0.3% contraction
of GDP. During 2002, Mexican apparent demand increased by 5.2%, reflecting the
0.9% expansion of GDP.

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



| |  |  | growth of the Mexican economy and demand for packaging;     
| | - |  | ------------------------------------------------------------
|
| |  |  | prevailing inflation rates in Mexico;                       
|
| |  |  | U.S. paper price levels;                                    
|
| |  |  | prevailing international prices for paper and packaging; and
|
| |  |  | fluctuations in the Peso/U.S. Dollar exchange rate.         

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

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



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

Prices for newsprint also tend to follow trends in international markets,
and are affected by factors such as supply and demand. Prevailing
international prices for paper and packaging, as well as U.S. price levels,
declined sharply during late 1995 and remained weak until the first half of
1999. In the second half of 1999, newsprint prices recovered somewhat;
however, in the second half of 2001, newsprint prices began a decline that
continues through to the present. During 2002, prices for newsprint declined
by 19.7%.

Over the last three years, Mexican corrugated container prices have tended
to be approximately 15% lower than U.S. prices, while prices for Mexican
containerboard and industrial paper have tended to be approximately 23% lower
than U.S. prices. We believe that these price differentials provide some
protection against competition from imports of these products. However, there
can be no assurances as to any future price levels for our products or future
price differentials, if any, between Mexican and U.S. paper and packaging
products.

Under NAFTA, tariffs and other barriers will gradually disappear. Since
January 1, 1999, the tariff on newsprint has been 0%. Mexico maintained a
protective tariff on corrugated containers of 5% through the end of 2000, which
was eliminated in 2001. Multi-wall sacks and bags were protected by a 3%
tariff in 2000. This tariff declined to 0% in 2003. Most of Mexicos tariffs
were eliminated in 2003. As a result, the elimination of tariffs has

-28-



---



##### Table of Contents



had the effect of shortening the lag time between price changes in the
U.S. and Mexican packaging and paper industries.

For a description of the impact of prices on our results of operations,
see Item 5. Operating and Financial Review and Prospects.

North American Paper and Packaging Industry

Since mid-1995, the North American paper and packaging industry has
experienced a prolonged down cycle characterized by continued price pressures,
excess capacity and the inability of many industry participants to earn
satisfactory returns on capital. To maintain reasonable capacity utilization,
U.S. paper producers have generally maintained high export levels over the past
three years, including in the exports to Mexico. These exports have increased
supply in the Mexican market and kept pressure on Mexican paper prices during
2002.

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

Capacity expansion plans have been reduced to their lowest levels in over
20 years, with a 0.5% decline in 2002. In addition, large amounts of capacity
have been permanently closed in the years 20012002 in the following major
grades:



| |  |  | Containerboard: 2.2 million short tons 
| | - |  | ---------------------------------------
|
| |  |  | Uncoated Paper: 1.0 million short tons 
|
| |  |  | Newsprint:           538,000 short tons

In 2002, average prices for U.S. linerboard declined by US$18 per short
ton and newsprint prices decreased by US$104 per short ton. Historically,
price changes in Mexico have tended to lag behind price movements in the U.S.
by a few months.

The following graphs show the evolution of the price per short ton of
containerboard, uncoated freesheet and newsprint in the United States from the
1980s through 2002. Historically, U.S. prices have served as the benchmark for
prices in Mexico.

-29-



---



##### Table of Contents



U.S. Prices for Containerboard
(prices per short ton for 42-pound, U.S. Eastern)

(BAR CHART)

U.S. Prices for Uncoated Free Sheet
(prices per short ton for No. 4, 20-pound Cut Size)

(BAR CHART)

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---



##### Table of Contents



U.S. Prices for Newsprint
(prices per short ton for 30-pound, U.S. Eastern)

(BAR CHART)

Property, Plant and Equipment

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

|                                      |       |  |                     |         | 
|------------------------------------- | ----- |  | ------------------- | ------- | 
|                                      |       |  | short tons per year
|                                      |       |  |                    
|Paper:                                |       |  | 1,567,500           |        
|Containerboard                        |       |  |                     |        
|Centauro Mill, (Durango)              |       |  | 264,000             |        
|Atenquique Mill (Jalisco)             |       |  | 132,000             |        
|McKinley Mill, (New Mexico, U.S.) (1) |       |  | 200,000             |        
|Monterrey Mill (Nuevo León)           |       |  | 137,000             |        
|Guadalajara Mill (Jalisco)            |       |  | 55,000              |        
|Texcoco Mill (Edo. de México)         |       |  | 27,000              |        
|                                      |       |  |                     |        
|                                      | Total |  |                     | 815,000 | 
|Newsprint                             |       |  |                     |        
|Pronal Mill (San Luis Potosí)         |       |  | 160,000             |        
|Tuxtepec Mill (Oaxaca)                |       |  | 137,000             |        
|                                      |       |  |                     |        
|                                      | Total |  |                     | 297,000 | 
|Uncoated Free Sheet                   |       |  |                     |        
|Mexpape Mill (Veracruz)               |       |  | 143,000             |        
|                                      |       |  |                     |        
|                                      | Total |  |                     | 143,000 | 
|Coated Bleached Board                 |       |  |                     |        
|St. Marys Mill (Georgia, U.S.) (2)    |       |  | 137,500             |        
|                                      |       |  |                     |        
|                                      | Total |  |                     | 137,500 | 
|Kraft Paper Board                     |       |  |                     |        

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---



##### Table of Contents



|                                                   |       |  |                     |         | 
|-------------------------------------------------- | ----- |  | ------------------- | ------- | 
|                                                   |       |  | short tons per year
|                                                   |       |  |                    
|St. Marys Mill (Georgia, U.S.) (2)                 |       |  | 125,000             |        
|                                                   |       |  |                     |        
|Tuxtepec Mill (Oaxaca)                             |       |  | 50,000              |        
|                                                   |       |  |                     |        
|                                                   | Total |  |                     | 175,000 | 
|                                                   |       |  |                     |        
|Pulp:                                              |       |  | 1,026,000           |        
|Bleached Soft & Hardwood Pulp                      |       |  |                     |        
|St. Marys Mill (Georgia, U.S.) (2)                 |       |  | 250,000             |        
|                                                   |       |  |                     |        
|                                                   | Total |  |                     | 250,000 | 
|Unbleached Softwood Pulp                           |       |  |                     |        
|Centauro Mill, (Durango)                           |       |  | 110,000             |        
|Atenquique Mill (Jalisco)                          |       |  | 110,000             |        
|                                                   |       |  |                     |        
|                                                   | Total |  |                     | 220,000 | 
|Bleached Chemical Thermomecanical Pulp             |       |  |                     |        
|Fidusa Pulp Mill (Durango) (3)                     |       |  | 79,000              |        
|                                                   |       |  |                     |        
|                                                   | Total |  |                     | 79,000  | 
|Thermomecanical Pulp (TMP)                         |       |  |                     |        
|Tuxtepec Pulp Mill (Oaxaca)                        |       |  | 79,000              |        
|                                                   |       |  |                     |        
|                                                   | Total |  |                     | 79,000  | 
|Bleached Bagasse Pulp                              |       |  |                     |        
|Mexpape Pulp Mill (Veracruz)                       |       |  | 79,000              |        
|                                                   |       |  |                     |        
|                                                   | Total |  |                     | 79,000  | 
|Bleached Deinking Pulp                             |       |  |                     |        
|Pronal DIP Mill (San Luis Potosi)                  |       |  | 154,000             |        
|Tuxtepec DIP Mill (Oaxaca)                         |       |  | 79,000              |        
|Mexpape DIPHB Mill (Veracruz)                      |       |  | 86,000              |        
|                                                   |       |  |                     |        
|                                                   | Total |  |                     | 319,000 | 
|                                                   |       |  |                     |        
|Packaging:                                         |       |  | 977,000             |        
|Corrugated containers                              |       |  |                     |        
|Mexicali Plant (Baja California Norte)(1)          |       |  | 39,000              |        
|Chihuahua Plant (Chihuahua)                        |       |  | 37,000              |        
|Monterrey Centro Plant (Nuevo León)                |       |  | 52,000              |        
|CartonPack (Nuevo León)                            |       |  | 59,000              |        
|Monterrey Plant (Nuevo León)                       |       |  | 56,000              |        
|Culiacán Plant (Sinaloa)                           |       |  | 39,000              |        
|Guadalajara Plant (Jalisco)                        |       |  | 52,000              |        
|Guadalajara Ceosa Plant (Jalisco)                  |       |  | 39,000              |        
|Guadalajara San Sebastián Plant (Jalisco)          |       |  | 16,000              |        
|Querétaro Plant (Querétaro)                        |       |  | 47,000              |        
|Atenpack Juárez Plant (DF)                         |       |  | 51,000              |        
|Atenpack Tultitlan Plant (Edo. de México)          |       |  | 52,000              |        
|Titán Tlalnepantla Plant (Edo. de México)          |       |  | 58,000              |        
|Eyemsa Izcalli Plant (Edo. de México)              |       |  | 47,000              |        
|Eyemsa Tlalnepantla Plant (Edo. de México)         |       |  | 46,000              |        
|Eyemsa Tapachula Plant (Chiapas)                   |       |  | 52,000              |        
|Eyemsa Tepatitlán Plant (Jalisco)                  |       |  | 50,000              |        
|Durango McKinley Paper Dallas Plant
(Texas, U.S.)  |       |  | 46,000              |        
|Durango McKinley Paper Houston Plant
(Texas, U.S.) |       |  | 33,000              |        
|                                                   |       |  |                     |        
|                                                   | Total |  |                     | 871,000 | 
|Multi-wall Sacks & Bags                            |       |  |                     |        
|Cd. Guzmán Plant (Jalisco)                         |       |  | 22,000              |        
|Tula Plant (Hidalgo)                               |       |  | 22,000              |        
|Apasco Plant (Edo. de México)                      |       |  | 22,000              |        
|                                                   |       |  |                     |        

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|                                         |       |  |                     |         | 
|---------------------------------------- | ----- |  | ------------------- | ------- | 
|                                         |       |  | short tons per year
|                                         |       |  |                    
|                                         | Total |  |                     | 66,000  | 
|Molded pulp packaging(4)                 |       |  |                     |        
|Titán Apodaca Mill (Nuevo León.)         |       |  | 21,500              |        
|Titán Guadalajara Mill (Jalisco)         |       |  | 7,500               |        
|Titán Hermosillo Mill (Sonora)           |       |  | 7,500               |        
|Titán Monterrey Mill (Nuevo León.)       |       |  | 3,500               |        
|                                         |       |  |                     |        
|                                         | Total |  |                     | 40,000  | 
|                                         |       |  |                     |        
|Other:                                   |       |  | 246,000             |        
|Particleboard Chihuahua Mill (Chihuahua) |       |  | 200,000             |        
|Particleboard Durango Mill (Durango)(3)  |       |  | 17,000              |        
|Plywood Durango Mill (Durango)           |       |  | 29,000              |        
|                                         |       |  |                     |        
|                                         | Total |  |                     | 246,000 | 
|                                         |       |  |                     |        



---

|(1) |  | Leased facility.                                                                                                                   
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | These facilities were sold in October 2002 and their installed capacity
is included herein for the period prior to August 15, 2002.
|   
|(3) |  | These facilities are not currently in operation.                                                                                   
|   
|(4) |  | These facilities were sold in February 2003.                                                                                       

In 2002, we installed a new state-of-the-art converter in Dallas that has
increased the capacity of our Durango McKinley Paper Companys container
division from 79 thousand short tons to 120 thousand short tons in early 2003
to enable Durango McKinley Paper Companys to manufacture specialty packaging
products.

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




Item 5. Operating and Financial Review and Prospects.




General

You should read this discussion in conjunction with our audited
consolidated financial statements and the notes thereto and other financial
information included elsewhere in this annual report.

Overview

Our Company is the result of the merger on October 8, 2001 of Corporación
Durango, S.A. de C.V., or CODUSA, into Grupo Industrial Durango, S.A. de C.V.,
or GIDUSA. GIDUSA, being the surviving entity, was subsequently renamed
Corporación Durango, S.A. de C.V. Prior to March 2000, CODUSA and GIDUSA were
affiliated companies under the common ownership and control of the Rincón
family. In March 2000, CODUSA acquired the Rincón familys ownership interest
in GIDUSA and as a result, from this date until the date of the GIDUSA merger,
GIDUSA was a majority-owned subsidiary of Corporación Durango S.A. de C.V.

The financial statements included herein reflect the following:



| |  |  | Combined assets and liabilities and results of operations of CODUSA
and GIDUSA as of and for each of the years ended December 31, 1998 and
1999 due to the common ownership and control discussed above.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Consolidated assets and liabilities and results of operations of
CODUSA, which includes GIDUSA, as of and for each of the years ended
December 31, 2000, 2001 and 2002.                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Consolidated assets and
liabilities and results of operations of Compañia Papelera de
Atenquique, S.A. de C.V. and its subsidiary as of and for each of the
years ended December 31, 2000, 2001 and 2002.
|
| |  |  | Assets and
liabilities and results of operations of Industrias Centacero, S.A.
de C.V. as of and for each of the years ended December 31, 2000,
2001 and 2002.                                           

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

Except as otherwise indicated, financial data for all periods throughout
this section have been restated in constant Pesos as of December 31, 2002. The
Peso/U.S. Dollar exchange rate at December 31, 2002 was Ps 10.4393=US$1.00.

Effect of Durango Paper Company Acquisition and Disposition

In October 2002, we sold our subsidiary, Durango Paper Company, and
certain promissory notes to Operadora Omega Internacional, S.A. de C.V., a
related party, for an aggregate amount of US$100,000. This sale gave rise to
an aggregate loss of Ps 1,451.4 million, which was considered as a special item
in our income statement. See Item 7. Majority Shareholders and Related Party
Transactions-Related Party Transactions.

Recent Developments

On February 27, 2003, our subsidiary, Empaques de Cartón Titán, S.A. de
C.V., sold the assets of its molded pulp division for approximately Ps 589.1
million, generating a profit in 2003 of Ps 316.1 million. The assets sold
included certain accounts receivable and the buyer assumed certain trade
accounts payable related to the production and sale of molded products.

Sales

We produce paper, packaging and other products in Mexico and the United
States. In 2002, paper and packaging products accounted for approximately
96.9% of our total sales. In 2002, we sold approximately 68.4% of our paper
and packaging products in Mexico and the remaining 31.6% in the United States.
In 2002, approximately 20.0% of our total packaging sales were to companies
in Mexico that primarily export their products, including exporters located in
the border region, maquiladoras located outside of the border region and other
Mexican exporters. Approximately 37.1% of our sales were made in U.S. Dollars
during 2002 with the balance primarily U.S. Dollar-linked.

We expect sales of our products to remain stagnant in the first half of
2003, and expect an improvement in sales in the second half of 2003.

Pricing

From 1998 through 2002, the pricing of our products has been influenced by
a number of factors, including:



| |  |  | international prices for paper and packaging products, which are
significantly influenced by industry capacity utilization rates and by
significant increases in capacity in the industry;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | demand for packaging products as a result of the level of growth of the Mexican and U.S. economies;                                                                                       
|
| |  |  | fluctuations in the exchange rate between the Peso and the U.S. Dollar; and                                                                                                               
|
| |  |  | economic conditions in each of Mexico and the United States including prevailing inflation rates.                                                                                         

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Paper products, excluding newsprint.The paper industry is cyclical,
with demand closely correlated with overall economic activity. Prices for our
paper products primarily reflect international paper prices. From 1997 through
June 1999, international prices for paper products were low compared to the
prior four years. From June 1999 through December 2000, international prices
for paper products recovered, the benefits of which were felt in Mexico. In
2001, prices remained flat and in 2002 prices declined drastically, and the
industry was unable to implement expected price increases, primarily because of
the slowing of the economies in Mexico and the United States.

Prices for paper products in Mexico are lower than prices in the United
States as a result of strong international competition in the form of paper and
packaging imports. We compete with U.S. and Mexican producers in both the
United States and Mexico.

As a result of our production flexibility resulting from our vertical
integration, we have been able to maintain a higher level of operating income
during the down cycle in international paper prices than we could have achieved
without vertical integration. When prices for paper products are low, we use
virtually all of our paper production in our converting operations because
finished products, like packaging, earn higher margins. During down cycles,
our sales and cost of sales are reduced, but the overall impact on our
operating income is small. During periods of higher international paper
prices, we purchase paper for use in our converting operations from small
Mexican paper producers at favorable rates. This allows us to export a
significant portion of our higher-quality paper production and take advantage
of the increased margins available from sales of our paper products outside of
Mexico.

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

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

Cost of Production

Historically, costs of production in Mexico have been incurred in Pesos,
and consist primarily of raw materials, labor, energy and depreciation costs.
Approximately 15% of our costs and operating expenses in Mexico are denominated
in U.S. Dollars, primarily the cost of imported old corrugated containers, or
OCC, and old newsprint, or ONP, which are the primary raw materials used in our
paper making activities.

The table below shows the percentage of our total cost of production
represented by each of the elements of our cost of production for the periods
indicated:

|              |  |                         |     |      |  |      |     |   |  |  |     |  
|------------- |  | ----------------------- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|              |  | Year Ended December 31,
|              |  |                        
|              |  | 2000                    |     | 2001 |  | 2002
|              |  |                         |     |      |  |     
|Raw materials |  |                         | 54  | %    |  |      | 51  | % |  |  | 55  | %
|Labor         |  |                         | 12  |      |  |      | 13  |   |  |  | 12  |  
|Energy        |  |                         | 11  |      |  |      | 12  |   |  |  | 12  |  
|Depreciation  |  |                         | 3   |      |  |      | 4   |   |  |  | 4   |  
|Other         |  |                         | 20  |      |  |      | 20  |   |  |  | 17  |  
|              |  |                         |     |      |  |      |     |   |  |  |     |  
|              |  |                         | 100 | %    |  |      | 100 | % |  |  | 100 | %

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The cost of virgin pulp, OCC and ONP, the primary raw materials used in
the production of our paper products, is significantly affected by
international prices for those products, which vary depending upon the supply
and demand for finished paper. Changes in the Peso/U.S. Dollar exchange rate
also affect our cost of importing OCC and ONP into Mexico. Mexican OCC or ONP
prices tend to follow price movements in the United States, but are generally
lower because Mexican OCC or ONP is lower in quality.

Our energy cost represents approximately 12% of our cost of production.
In particular, our paper mills are run primarily by electricity. We purchase
60% of the electricity needs of our Mexican operations from the Federal
Electricity Commission (Comisión Federal de Electricidad), the Mexican
state-owned electric company, under long-term contracts and we produce the
remainder at our own power plants. These long-term contracts guarantee the
supply of electricity at prices that have historically increased by the Mexican
inflation rate. In the United States, our McKinley mill is supplied 100% by a
rural electric cooperative at formula prices under a long-term contract. Our
U.S. converting facilities purchase power from local utilities. See Raw
Materials-Energy in Item 4. Information on the Company.

Inflation

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

|                            |  |                                                          |     |             |  |             |     |   |  |  |     |  
|--------------------------- |  | -------------------------------------------------------- | --- | ----------- |  | ----------- | --- | - |  |  | --- | -
|                            |  | Year Ended December 31,                                 
|                            |  |                                                         
|                            |  | 2000                                                     |     | 2001        |  | 2002       
|                            |  |                                                          |     |             |  |            
|                            |  | (in thousands of constant Pesos restated at December 31,
|                            |  | 2002, except percentages)                               
|Inflation                   |  |                                                          | 8.9 | %           |  |             | 4.4 | % |  |  | 5.7 | %
|Gain from monetary position |  | Ps 600,596                                               |     | Ps $310,005 |  | Ps $415,172

Generally, these levels of inflation have resulted in lower real prices
for our products since we have not been able to increase prices in line with
increases in inflation. Elevated levels of inflation in 2002 also resulted in
higher Peso-based labor and raw material costs. As a result, during 2002
operating margins and net income were negatively affected.

In addition, a component of our Financing Cost includes our gain or loss
from monetary position which refers to the gains or losses, due to the effects
of inflation, from holding net monetary liabilities or assets. A gain from
monetary position results from holding net monetary liabilities during periods
of inflation as the purchasing power represented by nominal Peso liabilities
declines over time. Accordingly, since our monetary liabilities, including
debt and other payables, exceeded our monetary assets, including cash,
temporary investments and accounts receivable, in 2000, 2001 and 2002 we
recorded a gain from monetary position for those periods. These gains had a
non-cash benefit on our income statement.

Exchange Rates

The table below shows the appreciation and depreciation of the Mexican
Peso against the U.S. Dollar and the period-end exchange rates for the periods
indicated:

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|                                                            |  |                         |     |      |  |      |      |    |  |  |       |   
|----------------------------------------------------------- |  | ----------------------- | --- | ---- |  | ---- | ---- | -- |  |  | ----- | --
|                                                            |  | Year Ended December 31,
|                                                            |  |                        
|                                                            |  | 2000                    |     | 2001 |  | 2002
|                                                            |  |                         |     |      |  |     
|Peso depreciation (appreciation) against the U.S. Dollar(1) |  |                         | 1.2 | %    |  |      | (4.6 | %) |  |  | 13.8  | % 
|Mexican inflation (based on changes in NCPI)(1)             |  |                         | 8.9 | %    |  |      | 4.4  | %  |  |  | 5.7   | % 
|United States inflation (based on changes in CPI)(1)        |  |                         | 3.4 | %    |  |      | 1.6  | %  |  |  | 2.4   | % 
|Inflation differential (Mexican vs. U.S.)(2)                |  |                         | 5.5 | %    |  |      | 2.8  | %  |  |  | 3.2   | % 
|Change in relative value of the Peso to the U.S. Dollar(2)  |  |                         | 3.9 | %    |  |      | 7.2  | %  |  |  | (10.3 | %)



---

|(1) |  | The relevant rates and their indices used to calculate the percentages in
the table were as follows:
|--- |  | ----------------------------------------------------------------------------------------------------

|                  |  |      |       |     |  |               |       |  |  |  |         | 
|----------------- |  | ---- | ----- | --- |  | ------------- | ----- |  |  |  | ------- | 
|                  |  | NCPI |       | CPI |  | Exchange Rate
|                  |  |      |       |     |  |              
|December 31, 2000 |  |      | 93.2  |     |  |               | 174.0 |  |  |  | 9.6098  | 
|December 31, 2001 |  |      | 97.4  |     |  |               | 176.7 |  |  |  | 9.1695  | 
|December 31, 2002 |  |      | 102.9 |     |  |               | 180.9 |  |  |  | 10.4393 | 



---

|(2) |  | Compounded.
|--- |  | -----------

In 2000, the Peso fluctuated, primarily appreciating throughout the year.
However, in November and December, the Peso depreciated against the U.S. Dollar
resulting in a depreciation of 1.2% for the year. In 2001, the Peso
appreciated by 4.6% against the U.S. Dollar. In 2002, the Peso depreciated
13.8% against the U.S. Dollar. Depreciation of the Peso against the U.S.
Dollar generally results in our receiving more Pesos for our U.S. Dollar sales
but our U.S. Dollar-based costs increase. Depreciation of the Peso affects our
results of operations by increasing our cost of borrowing since the Peso cost
of interest payments on our U.S. Dollar indebtedness increases and a foreign
exchange loss is recognized on the outstanding U.S. Dollar denominated
indebtedness. However, depreciation generally benefits Mexican traditional
exports and maquiladora exports.

The impact of exchange rate and inflation fluctuations on our interest
expense and interest income are reflected in the Interest Expense and
Interest Income components of Financing Cost. In addition, we record a
foreign exchange gain or loss with respect to U.S. Dollar-denominated monetary
assets or liabilities of our Mexican subsidiaries when the Peso appreciates or
depreciates in relation to the U.S. Dollar. Our U.S. Dollar-denominated
monetary liabilities, which consist mainly of our U.S. Dollar-denominated
indebtedness for borrowed money, exceed our U.S. Dollar-denominated monetary
assets, which principally consist of U.S. Dollar bank deposits. As a result,
we have recorded a foreign exchange loss during each period in which the Peso
depreciated in relation to the U.S. Dollar and a foreign exchange gain for each
period in which the Peso appreciated in relation to the U.S. Dollar. Foreign
exchange gains have a non-cash benefit on our income statement; however,
because these gains are pre-tax items on our income statement, these gains
increase our taxable income under Mexican tax regulations. Foreign exchange
losses are recorded as non-cash losses on our income statement; however,
because these losses are pre-tax items on our income statement, these losses
reduce our taxable income under Mexican tax regulations.

Capacity Utilization

Our operations have high fixed costs. Accordingly, to obtain low unit
production costs and maintain adequate operating margins, we seek to maintain a
high capacity utilization rate. We operated at an average capacity utilization
of approximately 91.0% in 2000, 75.0% in 2001 and 77.0% in 2002. The increase
in our capacity utilization rate in 2002 was due to an increase in production
of paper and other products.

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Segment Reporting

We manage our business on a product basis. Our reportable segments are:



| |  |  | Packaging:this segment includes the manufacturing and selling of
corrugated containers, molded pulp and multi-wall sacks and bags. This
segment includes the operating results of Titán in Mexico and Durango
McKinley Paper Companys packaging operations in the U.S. We sold our
molded pulp operations in February 2003.                                                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Paper:this segment includes the manufacturing and selling of
kraft paper, containerboard (linerboard, corrugating medium and
multi-wall paper), newsprint, uncoated free sheet and paper, made from
natural and recycled fibers. This segment includes the operating
results of Pamex and Grupo Pipsamex in Mexico and Durango Paper Company
and Durango McKinley Paper Companys paper operations in the United
States. We sold Durango Paper Company in October 2002.
|
| |  |  | Other products:this segment includes the manufacturing and
selling of particleboard and plywood. This segment includes the
operating results of Ponderosa.                                                                                                                                                                                                                                                                                                             

The following table shows our total sales, intersegment sales, sales to
third parties, operating income and operating income before depreciation and
amortization by segment:

|             |                    |    |                                                                   |           |       |    |               |   |          |    |           |           |          |    |         |         |  |    |         |           | 
|------------ | ------------------ | -- | ----------------------------------------------------------------- | --------- | ----- | -- | ------------- | - | -------- | -- | --------- | --------- | -------- | -- | ------- | ------- |  | -- | ------- | --------- | 
|             |                    |    | As of December 31, 2002                                          
|             |                    |    |                                                                  
|             |                    |    | (in thousands of constant Pesos restated as of December 31, 2002)
|             |                    |    |                                                                   |           |       |    | Intersegment  |   | Sales to |    | Operating |           | Adjusted
|             |                    |    | Total sales                                                       |           | Sales |    | third parties |   | income   |    | EBITDA(1)
|             |                    |    |                                                                   |           |       |    |               |   |          |    |          
|Packaging    |                    | Ps | 4,144,022                                                         |           |       | Ps | 89,934        |   |          | Ps | 4,054,088 |           |          | Ps | 584,497 |         |  | Ps | 699,030 |          
|Paper        |                    |    | 6,858,581                                                         |           |       |    | 2,680,473     |   |          |    | 4,178,108 |           |          |    | 23,257  |         |  |    | 366,164 |          
|Other        |                    |    | 309,834                                                           |           |       |    | 43,825        |   |          |    | 266,009   |           |          |    | 36,223  |         |  |    | 54,212  |          
|Eliminations |                    |    | (2,814,232                                                        | )         |       |    | (2,814,232    | ) |          |    |          |           |          |    |        |         |  |    |        |          
|             |                    |    |                                                                   |           |       |    |               |   |          |    |           |           |          |    |         |         |  |    |         |          
|             | Consolidated Total |    | Ps                                                                | 8,498,205 |       |    | Ps            |  |          |    | Ps        | 8,498,205 |          |    | Ps      | 643,977 |  |    | Ps      | 1,119,406 | 
|             |                    |    |                                                                   |           |       |    |               |   |          |    |           |           |          |    |         |         |  |    |         |          

|             |                    |    |                                                                   |            |       |    |               |   |          |    |           |            |          |    |         |           |  |    |         |           | 
|------------ | ------------------ | -- | ----------------------------------------------------------------- | ---------- | ----- | -- | ------------- | - | -------- | -- | --------- | ---------- | -------- | -- | ------- | --------- |  | -- | ------- | --------- | 
|             |                    |    | As of December 31, 2001                                          
|             |                    |    |                                                                  
|             |                    |    | (in thousands of constant Pesos restated as of December 31, 2002)
|             |                    |    |                                                                   |            |       |    | Intersegment  |   | Sales to |    | Operating |            | Adjusted
|             |                    |    | Total sales                                                       |            | Sales |    | third parties |   | income   |    | EBITDA(1)
|             |                    |    |                                                                   |            |       |    |               |   |          |    |          
|Packaging    |                    | Ps | 4,737,008                                                         |            |       | Ps | 90,645        |   |          | Ps | 4,646,363 |            |          | Ps | 564,441 |           |  | Ps | 674,132 |          
|Paper        |                    |    | 9,544,829                                                         |            |       |    | 3,892,285     |   |          |    | 5,652,544 |            |          |    | 428,539 |           |  |    | 794,524 |          
|Other        |                    |    | 277,823                                                           |            |       |    | 44,335        |   |          |    | 233,488   |            |          |    | 40,625  |           |  |    | 57,237  |          
|Eliminations |                    |    | (4,027,265                                                        | )          |       |    | (4,027,265    | ) |          |    |          |            |          |    |        |           |  |    |        |          
|             |                    |    |                                                                   |            |       |    |               |   |          |    |           |            |          |    |         |           |  |    |         |          
|             | Consolidated Total |    | Ps                                                                | 10,532,395 |       |    | Ps            |  |          |    | Ps        | 10,532,395 |          |    | Ps      | 1,033,605 |  |    | Ps      | 1,525,893 | 
|             |                    |    |                                                                   |            |       |    |               |   |          |    |           |            |          |    |         |           |  |    |         |          

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|             |                    |    |                                                                   |            |       |    |               |   |          |    |           |            |          |    |         |           |  |    |           |           | 
|------------ | ------------------ | -- | ----------------------------------------------------------------- | ---------- | ----- | -- | ------------- | - | -------- | -- | --------- | ---------- | -------- | -- | ------- | --------- |  | -- | --------- | --------- | 
|             |                    |    | As of December 31, 2000                                          
|             |                    |    |                                                                  
|             |                    |    | (in thousands of constant Pesos restated as of December 31, 2002)
|             |                    |    |                                                                   |            |       |    | Intersegment  |   | Sales to |    | Operating |            | Adjusted
|             |                    |    | Total sales                                                       |            | Sales |    | third parties |   | Income   |    | EBITDA(1)
|             |                    |    |                                                                   |            |       |    |               |   |          |    |          
|Packaging    |                    | Ps | 6,051,728                                                         |            |       | Ps | 93,821        |   |          | Ps | 5,957,907 |            |          | Ps | 749,955 |           |  | Ps | 870,556   |          
|Paper        |                    |    | 11,358,633                                                        |            |       |    | 4,950,502     |   |          |    | 6,408,131 |            |          |    | 667,249 |           |  |    | 1,077,350 |          
|Other        |                    |    | 613,626                                                           |            |       |    | 57,793        |   |          |    | 555,833   |            |          |    | 49,270  |           |  |    | 83,251    |          
|Eliminations |                    |    | (5,102,116                                                        | )          |       |    | (5,102,116    | ) |          |    |          |            |          |    |        |           |  |    |          |          
|             |                    |    |                                                                   |            |       |    |               |   |          |    |           |            |          |    |         |           |  |    |           |          
|             | Consolidated Total |    | Ps                                                                | 12,921,871 |       |    | Ps            |  |          |    | Ps        | 12,921,871 |          |    | Ps      | 1,466,474 |  |    | Ps        | 2,031,157 | 
|             |                    |    |                                                                   |            |       |    |               |   |          |    |           |            |          |    |         |           |  |    |           |          



---

|(1) |  | As used herein, we define Adjusted EBITDA as operating income plus
depreciation and amortization. The Company believes that Adjusted EBITDA
is an additional measure of operating performance, although it should be
noted that Adjusted EBITDA is not a measure of financial condition or
performance under U.S. and Mexican GAAP and should not be considered as a
substitute for those measures under U.S. and Mexican GAAP. Adjusted
EBITDA is not a direct measure of the groups liquidity, which is shown by
the groups cash flow statement and needs to be considered in the context
of the groups financial commitments. Companies do not calculate Adjusted
EBITDA in a uniform manner. Our Adjusted EBITDA calculations may not be
comparable to those of other companies. Presented below is a
reconciliation of Adjusted EBITDA to operating income under Mexican GAAP,
which is the most directly comparable financial measure calculated and
presented in accordance with Mexican GAAP.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              |  |                         |         |      |  |      |         |      |  |      |         |  |  |    |         |  |  |    |         | 
|----------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | -- | ------- |  |  | -- | ------- | 
|                              |  | Year Ended December 31,
|                              |  |                        
|                              |  | 1998                    |         | 1999 |  | 2000 |         | 2001 |  | 2002
|                              |  |                         |         |      |  |      |         |      |  |     
|Operating income              |  | Ps                      | 1,244.8 |      |  | Ps   | 1,487.1 |      |  | Ps   | 1,466.5 |  |  | Ps | 1,033.6 |  |  | Ps | 644.0   | 
|Depreciation and amortization |  |                         | 369.9   |      |  |      | 515.3   |      |  |      | 564.7   |  |  |    | 492.3   |  |  |    | 475.4   | 
|EBITDA                        |  | Ps                      | 1,614.7 |      |  | Ps   | 2,002.4 |      |  | Ps   | 2,031.2 |  |  | Ps | 1,525.9 |  |  | Ps | 1,119.4 | 
|                              |  |                         |         |      |  |      |         |      |  |      |         |  |  |    |         |  |  |    |         | 

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

|              |                    |    |                                                                   |            |      |    |            |            |  |    |            |           | 
|------------- | ------------------ | -- | ----------------------------------------------------------------- | ---------- | ---- | -- | ---------- | ---------- |  | -- | ---------- | --------- | 
|              |                    |    | As of December 31, 2002                                          
|              |                    |    |                                                                  
|              |                    |    | 2000                                                              |            | 2001 |    | 2002      
|              |                    |    |                                                                   |            |      |    |           
|              |                    |    | (in thousands of constant Pesos restated as of December 31, 2002)
|Mexico        |                    | Ps | 12,161,342                                                        |            |      | Ps | 10,411,858 |            |  | Ps | 8,257,034  |          
|United States |                    |    | 5,862,645                                                         |            |      |    | 4,147,802  |            |  |    | 3,055,403  |          
|Eliminations  |                    |    | (5,102,116                                                        | )          |      |    | (4,027,265 | )          |  |    | (2,814,232 | )        
|              |                    |    |                                                                   |            |      |    |            |            |  |    |            |          
|              | Consolidated Total |    | Ps                                                                | 12,921,871 |      |    | Ps         | 10,532,395 |  |    | Ps         | 8,498,205
|              |                    |    |                                                                   |            |      |    |            |            |  |    |            |          

Results of Operations

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

Net Sales

Net sales decreased by 19.3% from Ps 10,532.4 million in 2001 to Ps
8,498.2 million in 2002. This decrease was due to a 14.7% decrease in the
average pricing of our finished product, when compared to 2001. The decrease
in net sales is also due to the sale of our former subsidiary, Durango Paper
Company in October 2002 and a 5.4% decrease in shipments in 2002 as compared to
2001.

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##### Table of Contents



Net sales from our paper segment decreased by 26.1% from Ps 5,652.5
million in 2001 to Ps 4,178.1 million in 2002. Approximately 54.9% of this
decrease was due to a 14.3% decrease in paper shipments from 911.8 thousand
short tons in 2001 to 781.3 thousand short tons in 2002. Our lower shipments
were due primarily to the market downturn in Mexico and the United States and
to the sale of our former subsidiary, Durango Paper Company in October 2002.
Excluding Durango Paper Company which was sold in 2002, paper shipments
decreased by 5.3% from 636.5 thousand short tons in 2001 to 670.0 thousand
short tons in 2002. In addition, the decrease in net sales was due to a
decline of 13.7% in average unit paper prices.

Net sales from our packaging segment decreased by 12.7% from Ps 4,646.4 in
2001 to Ps 4,054.1 million in 2002. This decrease was due mainly to a decrease
in the average unit packaging prices, which declined by 12.9%. Packaging
shipments increased from 669.3 thousand short tons in 2001 to 670.0
thousand short tons in 2002.

Net sales from our other segment increased by 13.9% from Ps 233.5 million
in 2001 to Ps 266.0 million in 2002. This increase was due to a 84.2% increase
in shipments from 49.7 thousand short tons in 2001 to 91.5 thousand short tons
in 2002, offset by a 38.1% decrease in average unit prices for our other
products. Our increase in shipments was due mainly to the commencement of
operations at our refurbished particleboard production facilities in Chihuahua
in January 2002.

Cost of Sales

Cost of sales decreased by 17.4% from Ps 8,770.7 million in 2001 to Ps
7,243.0 million in 2002. This decrease was due primarily to lower shipments of
paper products and improved use of raw materials, which offset the higher unit
costs we paid for the principal inputs in our production process. Average
prices for recycled fiber, consisting of OCC and ONP, which accounted for
approximately 22% of our cost of sales in 2002, increased in nominal U.S.
Dollar terms from US$115 per short ton to US$120 per short ton. Our energy
cost, which represents approximately 12% of our cost of production, decreased
by 8%, despite the higher unit costs we paid for energy, primarily as a result
of greater efficiency in our operations. Our labor cost, which represents
approximately 12% of our cost of production, decreased by 14% on a unit cost
basis, attributable to the savings achieved by the sale of our former
subsidiary, Durango Paper Company in October 2002.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by 16.1% from Ps
728.1 million in 2001 to Ps 611.3 million in 2002 due primarily to the sale of
our former subsidiary, Durango Paper Company in October 2002. In addition,
this decrease was a result of our cost cutting initiatives, which consist of,
among other things, simplifying our management structure, capturing synergies
in the operation of our subsidiaries in the same segments and combining the
sales forces of our subsidiaries.

Operating Income

Operating income decreased by 37.7% from Ps 1,033.6 million in 2001 to Ps
644.0 million in 2002. This decrease was due primarily to lower prices for our
finished products.

Operating income in our paper segment decreased by 94.6% from Ps 428.5
million in 2001 to Ps 23.3 million in 2002 primarily as a result of lower net
sales and our reduced operating margin in the paper segment.

Operating income in our packaging segment increased by 3.6% from Ps 564.4
million in 2001 to Ps 584.5 million in 2002 primarily as a result of lower raw
materials costs in packaging production.

Operating income in our other segment decreased by 10.8% from Ps 40.6
million in 2001 to Ps 36.2 million in 2002 primarily as a result of lower
average prices for our other products.

Operating margin decreased from 9.8% in 2001 to 7.6% in 2002. This
decline was a result of a decrease in shipments and lower average unit prices
during the period. The operating margin of our paper segment decreased

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from 7.6% in 2001 to 0.6% in 2002 and the operating margin of our
packaging segment increased from 12.1% in 2001 to 14.4% in 2002.

Other Expense

Other expense increased by 15.4% from Ps 40.3 million in 2001 to Ps 46.5
million in 2002, due primarily to losses in certain fixed asset sales.

Financing Cost

Financing cost increased by 334.8% from Ps 387.4 million in 2001 to Ps
1,684.2 million in 2002 due mainly to foreign exchange results. Interest
expense increased by 1.0% from Ps 1,077.7 million in 2001 to Ps 1,088.7 million
in 2002. This increase resulted primarily from a higher average interest rate
paid by the Company. Interest income decreased by 41.5% from Ps 66.9 million
in 2001 to Ps 39.2 million in 2002. Interest income decreased because of lower
average cash balances and lower interest rates available on the Companys
deposits in 2002. Foreign exchange results experienced a loss of Ps 1,049.8
million in 2002 as compared to a gain of Ps 313.4 million in 2001. This
foreign exchange loss resulted from a 13.8% depreciation of the Peso in 2002 as
compared to a 4.6% appreciation of the Peso in 2001. Gain from monetary
position increased by 33.9% from Ps 310.0 million in 2001 to Ps 415.2 million
in 2002. This increase reflected an increase in the inflation rate from 13.7%
in 2001 to 5.7% in 2002.

Special Items

We recorded a special items loss of Ps 1,451.4 million in 2002 relating to
the sale of our former subsidiary, Durango Paper Company.

Impairment Loss

We recorded an impairment loss of Ps 1,556.5 million for the fixed assets
of certain of our subsidiaries, which are not recoverable with the cash
generated during the useful lives of the assets evaluated.

Amortization of Negative Goodwill

In 2002, we did not have any amortization of negative goodwill. In 2001,
we recorded amortization of negative goodwill of Ps 495.3 million, all of which
related to the acquisition of Durango Paper Company.

Provisions for Employee Profit Sharing and Income and Asset Taxes

Provisions for employee profit sharing and income and asset taxes, net of
tax loss carry forwards, increased from a benefit of Ps 26.8 million in 2001 to
a benefit of Ps 551.9 million in 2002. This increase is attributable primarily
to provisions for deferred income taxes, which rose from a benefit of Ps 267.3
million in 2001 to a benefit of Ps 667.3 million in 2002 as a result of a
reduction of temporary differences in inventories and property, plant and
equipment, a reduction in the tax rate and the increase in tax loss carry
forwards. Provisions for deferred income taxes were recorded in accordance
with Bulletin D-4 issued by the Mexican Institute of Public Accountants, which
was adopted effective January 1, 2000. The adopted Bulletin D-4 requires the
recognition of deferred taxes under the full liability method that does not
represent any cash charges. In the past, we used a partial liability method.
Consequently, our historical effective income tax rates may not be indicative
of future effective tax rates.

Net Income Before Minority Interest

Net income before minority interest was a loss of Ps 3,542.8 million in
2002 as compared to a gain of Ps 829.3 million in 2001.

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Minority Interest

Minority interest decreased to an expense of Ps 3.1 million in 2002 from
an expense of Ps 4.0 million in 2001.

Net Income (Loss)

Net loss was Ps 3,545.9 million in 2002 as compared to a net income of Ps
825.3 million in 2001.

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

Net Sales

Net sales decreased by 18.5% from Ps 12,921.9 million in 2000 to Ps
10,532.4 million in 2001. Approximately 77.5% of this decrease was due to a
15.1% decrease in shipments to 1,630.8 thousand short tons in 2001 from 1,920.5
thousand short tons in 2000.

Net sales from our paper segment decreased by 11.8% from Ps 6,408.1
million in 2000 to Ps 5,652.5 million in 2001. Approximately 71.1% of this
decrease was due to an 8.2% decrease in paper shipments from 993.0 thousand
short tons in 2000 to 911.8 thousand short tons in 2001. Our lower shipments
were due primarily to the market downturn in Mexico and in the United States
and the appreciation of the Peso, which resulted in lower shipments for all our
paper products, other than uncoated free sheet. In addition, the decrease in
net sales was due to a decline in average unit paper prices of 3.9%.

Net sales from our packaging segment decreased by 22.0% from Ps 5,957.9
million in 2000 to Ps 4,646.4 million in 2001. Approximately 60.5% of this
decrease was due to a 13% decrease in packaging shipments, primarily of
corrugated containers from 769.0 thousand short tons in 2000 to 669.3 thousand
short tons in 2001. Excluding the Sky and Eastman divisions of Durango Paper
Company which were disposed of in 2001, packaging shipments decreased by 6.9%
from 683.6 thousand short tons in 2000 to 636.5 thousand short tons in 2001.
This decrease was due mainly to lower demand from the Mexican export and
maquiladora sectors, and the Peso appreciation relative to the U.S. dollar. In
addition, the decrease in net sales was due to a decline of 10.4% in average
unit packaging prices.

Net sales from our other segment decreased by 58.0% from Ps 555.8 million
in 2000 to Ps 233.5 million in 2001. This decrease was due to a 68.6% decrease
in shipments from 158.4 thousand short tons in 2000 to 49.7 thousand short tons
in 2001, offset by a 34% increase in average unit prices for our other
products. Our lower shipments were due mainly to the temporary closure of one
of our mills to upgrade the mill to produce higher quality and higher priced
products.

Cost of Sales

Cost of sales decreased by 17.7% from Ps 10,652.1 million in 2000 to Ps
8,770.7 million in 2001. This decrease was due primarily to lower shipments
and lower costs in raw materials. Average prices for recycled fiber,
consisting of OCC and ONP, which accounted for approximately 18% of our raw
material costs in 2001, decreased by 21% in nominal U.S. Dollar terms from
US$145 per short ton to US$115 per short ton. Lower raw material prices were
partially offset by increases in our energy and labor costs. Our energy cost,
which represents approximately 12% of our cost of production, increased 2.9%
primarily as a result of higher oil prices in Mexico. Our labor cost, which
represents approximately 13% of our cost of production, increased 10.4% on a
unit cost basis as a result of the reduction in our shipments.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by 9.4% from Ps
803.3 million in 2000 to Ps 728.1 million in 2001 due to our cost cutting
initiatives, which consist of, among other things, simplifying our management
structure, capturing synergies in the operation of our subsidiaries in the same
segments and combining the

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sales forces of our subsidiaries. The implementation of our cost cutting
initiatives was aided by the GIDUSA merger.

Operating Income

Operating income decreased by 29.5% from Ps 1,466.5 million in 2000 to Ps
1,033.6 million in 2001. This decrease was due primarily to lower sales during
the period.

Operating income in our paper segment decreased by 35.8% from Ps 667.2
million in 2000 to Ps 428.5 million in 2001 primarily as a result of lower net
sales and our reduced operating margin in the paper segment.

Operating income in our packaging segment decreased by 24.7% from Ps 750.0
million in 2000 to Ps 564.4 million in 2001 primarily as a result of lower net
sales, particularly of corrugated containers.

Operating income in our other segment decreased by 17.5% from Ps 69.3
million in 2001 to Ps 40.6 million in 2002 primarily as a result of the
temporary closure of one of our mills, partially offset by increased average
prices for our other products.

Operating income as a percentage of net sales decreased from 11.3% in 2000
to 9.8% in 2001. This decline was a result of a decrease in shipments and
higher energy and labor costs during the period, which were partially offset by
a decrease in OCC and ONP prices. The operating margin of our paper segment
decreased from 10.4% in 2000 to 7.6% in 2001 and the operating margin in our
packaging segment declined from 12.6% in 2000 to 12.1% in 2001.

Other Expense

Other expense increased by 146.0% from Ps 16.4 million in 2000 to Ps 40.3
million in 2001, due primarily to the write-off in 2001 of an intangible
pension asset of Grupo Pipsamex as a result of the reduction of the number of
its employees in 1999 and 2000.

Financing Cost

Financing cost decreased by 17.4% from Ps 469.1 million in 2000 to Ps
387.4 million in 2001. Interest expense decreased by 1.3% from Ps 1,091.7
million in 2000 to Ps 1,077.7 million in 2001. This decrease resulted
primarily from a lower average interest rate. Interest income decreased by
45.9% from Ps 123.6 million in 2000 to Ps 66.9 million in 2001. Interest
income decreased because of lower average cash balances and lower interest
rates in 2001. Foreign exchange results experienced a gain of Ps 313.4 million
in 2001 as compared to a loss of Ps 101.6 million in 2000. This foreign
exchange gain resulted from a 4.6% appreciation of the Peso in 2001 as compared
to a 1.2% depreciation of the Peso in 2000. Gain from monetary position
decreased by 48.4% from Ps 600.6 million in 2000 to Ps 310.0 million in 2001.
This decrease reflected a decline in the inflation rate between 2000 and 2001.

Extraordinary Items

We recorded a extraordinary items loss of Ps 298.6 million in 2001
primarily consisting of an expense of Ps 157.1 million relating to severance
costs at our Atenquique Mill resulting from our decision to hire fewer
employees at this mill following its temporary closure in 2001 and a loss of Ps
130.4 million on our sale of the Sky and Eastman divisions of Durango Paper
Company.

Amortization of Negative Goodwill

The amortization of negative goodwill was Ps 495.3 million in 2001 and Ps
1,513.9 million in 2000. In 2001, the amortization of negative goodwill
related to the acquisition of Durango Paper Company. In 2000, Ps 1,188.7
million of amortization of negative goodwill was related to the acquisition of
Durango Paper Company and the remaining Ps 325.3 million of amortization of
negative goodwill was related to our acquisition of 59% of GIDUSA.

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Provisions for Employee Profit Sharing and Income and Asset Taxes

Provisions for employee profit sharing and income and asset taxes, net of
tax loss carry forwards, increased from an expense of Ps 685.0 million in 2000
to a benefit of Ps 26.8 million in 2001. This increase is attributable
primarily to provisions for deferred income taxes, which rose from an expense
of Ps 387.5 million in 2000 to a benefit of Ps 267.3 million in 2001 as a
result of a reduction of temporary differences in inventories and property,
plant and equipment. Provisions for deferred income taxes were recorded in
accordance with Bulletin D-4 issued by the Mexican Institute of Public
Accountants, which was adopted effective January 1, 2000. The adopted Bulletin
D-4 requires the recognition of deferred taxes under the full liability method
that does not represent any cash charges. In the past, we used a partial
liability method. Consequently, our historical effective income tax rates may
not be indicative of future effective tax rates.

Net Income Before Minority Interest

Net income before minority interest decreased by 54.2% from Ps 1,809.9
million in 2000 to Ps 829.3 million in 2001. This decrease was a result of the
decreases in operating income and amortization of negative goodwill, partially
offset by the decrease in financing costs and the gain in deferred income tax.

Minority Interest

Minority interest decreased from an expense of Ps 175.3 million in 2000 to
an expense of Ps 4.0 million in 2001. This decrease resulted primarily from
the extinguishment of the minority interest in GIDUSA as a result of the GIDUSA
merger.

Net Income

Net income decreased by 49.5% from Ps 1,634.6 million in 2000 to Ps 825.3
million in 2001. This decrease resulted from the factors described above.




Liquidity and Capital Resources

Sources and Uses of Cash

Our principal sources of liquidity have historically consisted of net cash
generated by our operating activities, corporate borrowings under working
capital facilities and issuances of debt. As a result of the factors described
below, we have not generated sufficient cash flows from these sources to
satisfy our debt service requirements:



| |  |  | the economic slow-down in the U.S. and Mexico, which has resulted in lower than forecasted sales
volume;
| | - |  | --------------------------------------------------------------------------------------------------------
|
| |  |  | a drastic reduction in the demand for manufactured products requiring the goods supplied by the
Company;
|
| |  |  | a significant drop in international paper prices over the year; and                                     
|
| |  |  | the global downturn in the paper industry, which has restricted our access to the capital markets.      

In addition, our liquidity has been materially and adversely affected in
2002 by the devaluation of the Peso and a significant delay in the
implementation of our planned divestiture of certain non-strategic assets.

Since we have not made the required payments on our notes within the
payment grace period, as of June 30, 2003, the trustee or the holders of at
least 25% of the principal amount of each series of our notes due 2003, 2006,
2008 and 2009 have the right to accelerate the outstanding principal and
interest on our notes due 2003, 2006, 2008 and 2009, thereby requiring the
immediate repayment of the entire principal amount. If our notes due 2003,
2006, 2008 and 2009 are accelerated, we will not be able to pay the accelerated
amount of US$505.3 million, and our noteholders may have the option to take
legal action against us, including instituting a concurso mercantilin Mexico.
Additionally, we may choose to institute a voluntary reorganization proceeding
under Mexican law. In these circumstances, accounting principles generally
accepted in Mexico require that these liabilities be classified as current
liabilities. We have classified our notes due 2003, 2006, 2008 and 2009 as
current liabilities as of December 31, 2002.

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Our management believes that the funding available to us from our existing
sources will not be sufficient to satisfy our working capital and debt service
requirements for the foreseeable future, unless we are successful in
implementing a debt restructuring plan to lower our debt service obligations to
more closely align the payments with our cash flow and extend the maturities of
our notes due 2003, 2006, 2008 and 2009. See Item 4. Information on the
Company-Significant Developments During 2002 and Recent Developments for a
discussion of our proposed restructuring.

As of December 31, 2002 and December 31, 2001, we had cash and temporary
investments totaling Ps 255.7 million and Ps 508.9 million, respectively, which
represents a decrease of 49.8% during the period, primarily due to a reduction
in operating income. We invest our cash balances primarily in short-term
Peso-denominated and in U.S. Dollar instruments issued by major U.S. and
Mexican banks.

Net resources used by operating activities was Ps 137.6 million in 2002.
In 2002, we had an increase in inventories of Ps 372.9 million because our
shipments were lower than our production during the period, and an increase in
accounts receivable of Ps 40.2 million as a result of a decrease of 19.3% in
net sales. We had an increase in other accounts payable and accrued expenses
of Ps 870.2 million, which corresponded to an increase in inventory, accrued
interest and an increase in other assets of Ps 5.9 million, due mainly to an
increase in refundable taxes and prepaid expenses.

Net resources generated by operating activities was Ps 906.1 million in
2001. In 2001, we had a decrease in inventories of Ps 965.5 million because
our shipments were higher than our production during the period, and a decrease
in accounts receivable of Ps 62.3 million as a result of a decrease of 15.1% in
net sales. We had a decrease in other accounts payable and accrued expenses of
Ps 696.2 million, which corresponded to our decrease in inventory, and an
increase in other assets of Ps 62.9 million, due mainly to an increase in
refundable taxes and prepaid expenses and restructuring costs.

Net resources used in investing activities was Ps 851.3 million in 2002.
For the year ended December 31, 2002, our net additions to property, plant and
equipment were Ps 305.3 million, primarily attributable to our capital
expenditures for 2002. In addition, we recorded an increase in other assets of
Ps 364.7 million, primarily consisting of debt issuance cost and a loss of Ps
204.8 million in the investment in our subsidiaries, due to our sale of Durango
Paper Company.

Net resources used in investing activities was Ps 558.0 million in 2001.
For the year ended December 31, 2001, our net additions to property, plant and
equipment were Ps 345.6 million primarily attributable to our capital
expenditures for 2001. In addition, we recorded an increase in other assets of
Ps 205.7 million, primarily consisting of debt issuance costs, and our minority
interest decreased by Ps 6.7 million.

Net resources generated in financing activities was Ps 735.7 million in
2002. For the year ended December 31, 2002, we incurred bank loans of Ps
3,157.6 million and paid bank loans of Ps 2,358.9 million. In addition, our
net long-term debt decreased by Ps 62.9 million as a result of the effect of
the initial amount restatement.

Net resources used in financing activities was Ps 650.5 million in 2001.
For the year ended December 31, 2001, we incurred bank loans of Ps 2,571.7
million and paid bank loans of Ps 3,107.1 million. In addition, our net
long-term debt decreased by Ps 115.1 million as a result of the effect of the
initial amount restatement.

The overall interest rates on our indebtedness were 10.9% in 2002 and
10.4% in 2001.

Because a proportion of our sales are priced in U.S. Dollars, or are
priced in a manner linked to the value of the U.S. Dollar, we generally do not
hedge our exposure to movements in foreign currency.

Indebtedness

As of December 31, 2002, our total debt was Ps 8,659.7 million (US$829.5
million), consisting of Ps 7,576.3 million (US$725.7 million) in short-term
debt, including the current portion of long-term debt, and Ps 1,083.4 million
(US$103.8 million) in long-term debt.

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The following table sets forth the maturity profile of our indebtedness as
of December 31, 2002:

|                    |  |      |         |      |  |      |       |      |  |      |       |            |  |       |       |  |  |    |       |  |  |    |       |  |  |    |         | 
|------------------- |  | ---- | ------- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  | ----- | ----- |  |  | -- | ----- |  |  | -- | ----- |  |  | -- | ------- | 
|                    |  | 2003 |         | 2004 |  | 2005 |       | 2006 |  | 2007 |       | Thereafter |  | Total
|                    |  |      |         |      |  |      |       |      |  |      |       |            |  |      
|Ps million          |  |      |         |      |  |      |       |      |  |      |       |            |  |       |       |  |  |    |       |  |  |    |       |  |  |    |         | 
|Bank debt and notes |  | Ps   | 7,451.8 |      |  | Ps   | 158.9 |      |  | Ps   | 158.4 |            |  | Ps    | 158.4 |  |  | Ps | 157.8 |  |  | Ps | 263.7 |  |  | Ps | 8,349.1 | 
|Capital leases      |  |      | 124.5   |      |  |      | 73.2  |      |  |      | 57.8  |            |  |       | 16.6  |  |  |    | 16.6  |  |  |    | 22    |  |  |    | 310.6   | 
|                    |  |      |         |      |  |      |       |      |  |      |       |            |  |       |       |  |  |    |       |  |  |    |       |  |  |    |         | 
|Total               |  | Ps   | 7,576.3 |      |  | Ps   | 232.1 |      |  | Ps   | 216.2 |            |  | Ps    | 175.0 |  |  | Ps | 174.4 |  |  | Ps | 285.7 |  |  | Ps | 8,659.7 | 
|                    |  |      |         |      |  |      |       |      |  |      |       |            |  |       |       |  |  |    |       |  |  |    |       |  |  |    |         | 

As a result of the acceleration rights arising out of our failure to make
timely payments on scheduled principal and interest, US$487.1 million of our
outstanding notes has been reclassified as short-term debt.

Our Notes.As of December 31, 2002, we had one series of notes
outstanding under our Euro Commercial Paper Program in an aggregate amount of
US$5.0 million. On February 12, 2003, we failed to make the principal payment due. The overdue
amounts are currently the subject of a litigation action with the holders of
these notes. (See Item 8. Financial InformationLegal Proceedings.) Notes
under our Euro Commercial Paper Program are issued under an Issuing and Paying
Agency Agreement, dated as of October 4, 2001, among us and JPMorgan Chase Bank
(f/k/a Chase Manhattan Bank) and JPMorgan Chase Bank, London Branch (f/k/a
Chase Manhattan Bank, London Branch). As of June 30, 2003, the total amount in
default on these notes is US$5.0 million.

As of December 31, 2002, we had outstanding US$18.2 million aggregate
principal amount of our 12 5/8% Senior Notes due 2003. The 2003 notes were
issued under an indenture dated as of July 25, 1996, between us, Wells Fargo
Bank Minnesota, National Association and JPMorgan Chase Bank (f/k/a Chase
Manhattan Bank). The 2003 notes mature on August 1, 2003 and pay interest
semiannually. In August 2001, we exchanged US$128.3 million of our 2003 notes
for US$121.7 million of our 13 1/8% Senior Notes due 2006 and US$10.4 million of
our 13 1/2% Senior Notes due 2008. In connection with this exchange, we
obtained the consent of the holders of our 2003 notes to the elimination of the
restrictive covenants contained in the indenture governing the 2003 notes. As
of June 30, 2003, the total amount in default on these notes is US$2.2 million.

As of December 31, 2002, we had outstanding US$301.7 million aggregate
principal amount of our 13 1/8% Senior Notes due 2006. The 2006 notes were
issued under an indenture dated as of February 5, 2001, between us, Wells Fargo
Bank Minnesota, National Association and JPMorgan Chase Bank (f/k/a Chase
Manhattan Bank), as amended and supplemented. The 2006 notes mature on August
1, 2006 and pay interest semiannually. Payments due on the 2006 notes are
guaranteed, jointly and severally on an unsecured basis, by our subsidiaries,
Empaques de Cartón Titán, S.A. de C.V., Compañía Papelera de Atenquique, S.A.
de C.V., Ponderosa Industrial de México, S.A. de C.V. and Industrias Centauro,
S.A. de C.V. We issued US$180 million aggregate principal amount of our 2006
notes in February 2001 and used the proceeds thereof to, among other things,
repurchase all of our outstanding 12% Senior Notes due 2001. In August 2001,
we issued an additional US$121.7 million aggregate principal amount of our 2006
notes in exchange for US$118.2 million of our 2003 notes as described above.
As of June 30, 2003, the total amount in default on these notes is US$38.2
million.

As of December 31, 2002, we had outstanding US$10.4 million aggregate
principal amount of our 13 1/2% Senior Notes due 2008. The 2008 notes were
issued under an indenture dated as of September 13, 2001, between us, Wells
Fargo Bank Minnesota, National Association and JPMorgan Chase Bank (f/k/a Chase
Manhattan Bank), as amended and supplemented. The 2008 notes mature on August
1, 2008 and pay interest semiannually. Payments due on the 2008 notes are
guaranteed, jointly and severally on an unsecured basis, by our subsidiaries,
Empaques de Cartón Titán, S.A. de C.V., Compañía Papelera de Atenquique, S.A.
de C.V., Ponderosa Industrial de México, S.A. de C.V. and Industrias Centauro,
S.A. de C.V. We issued US$10.4 million aggregate principal amount of our 2008
notes in August 2001 in exchange for US$10.1 million of our 2003 notes as
described above. As of June 30, 2003, the total amount in default on these
notes is US$1.3 million.

As of December 31, 2002, we had outstanding US$175.0 million aggregate
principal amount of our 13 3/4% Senior Notes due 2009. The 2009 notes were
issued under an indenture dated as of June 24, 2002, between us,

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Wells Fargo Bank Minnesota, National Association and JPMorgan Chase Bank,
as amended and supplemented. The 2009 notes mature on July 15, 2009 and pay
interest semiannually. Payments due on the 2009 notes are guaranteed, jointly
and severally on an unsecured basis, by our subsidiaries, Empaques de Cartón
Titán, S.A. de C.V., Compañía Papelera de Atenquique, S.A. de C.V., Ponderosa
Industrial de México, S.A. de C.V. and Industrias Centauro, S.A. de C.V. We
issued US$175.0 million aggregate principal amount of our 2009 notes in July
2002 and used the proceeds thereof to, among other things, repurchase US$103.5
million of our outstanding 12 5/8% Senior Notes due 2003. As of June 30, 2003,
the total amount in default on these notes is US$26.3 million.

As of December 31, 2002, we had outstanding US$48.1 million aggregate
principal amount under three promissory notes issued in exchange for
subordinated promissory notes issued by Durango Paper Company in connection
with our acquisition of Gilman Paper Company. These notes were issued in the
same principal amounts as the notes refinanced and are on identical terms,
except that they are not guaranteed or subordinated. The first of these notes,
which has a principal amount of US$30.0 million, was issued to HG Estate, LLC
and St. Marys Railroad Corporation, matures on December 17, 2004 and bears
interest at a rate of 10% per annum payable semiannually. The second of these
notes, which has a principal amount of US$6.0 million, was issued to HG Estate,
LLC, and was due in April 2003 and bears interest at a rate of 13.0% per annum
payable semiannually. The interest rate on this note increased by 0.5% on each
interest payment date until maturity. The principal of this note was not paid
on maturity. The last of these notes has a principal amount of US$12.1
million, was issued to HG Estate LLC, was due in December 2002 and bore
interest at a rate of 10% per annum payable semiannually. The principal of
this note was not paid on maturity. As of June 30, 2003, the total amount in
default on these notes is US$27.3 million. We are currently engaged in
arbitration challenging the validity of these three promissory notes.

For a description of the payment defaults on our notes, see Item 13.
Defaults, Dividend Arrearages and Delinquencies.

Our Bank Debt.As of December 31, 2002, we had outstanding Ps 2,519.4
million (US$241.3 million) of bank debt. As a result of the acceleration
rights arising out of our failure to make timely payments on scheduled
principal and interest, Ps 719.2 million (US$68.9 million) of our
outstanding bank debt has been reclassified as short-term debt. Our material
bank loans are described below.

We have a bank loan with Banco Nacional de México, S.A. (Banamex), in
the aggregate principal amount of Ps 981.3 million (US$94 million). This loan
is payable in 10 quarterly installments beginning in June 2002, bears interest
at a rate of LIBOR + 2.8% payable quarterly and is guaranteed by certain of our
subsidiaries. As of December 31, 2002, Ps 786.4 million (US$75.3 million) of
this loan was outstanding. As of June 30, 2003, the total amount
in default is Ps 223.4 million (US$21.4 million). Banamex has agreed to a forbearance
until June 30, 2003.

We have a Ps 522.0 million (US$50.0 million) loan with JPMorgan Chase Bank
(f/k/a Chase Manhattan Bank), payable in five semiannual installments beginning
on December 5, 2000, bearing interest at a rate of LIBOR + 1.5%. As of
December 31, 2002, Ps 104.4 million (US$10.0 million) of this loan was
outstanding. Payments due on this bank loan are guaranteed, jointly and
severally, on an unsecured basis by our subsidiaries, Empaques de Cartón Titán,
S.A. de C.V., Compañía Papelera de Atenquique, S.A. de C.V., Ponderosa
Industrial de México, S.A. de C.V. and Industrias Centauro, S.A.
de C.V. As of June 30, 2003 the total amount in default is
Ps 112.2 million (US$10.0 million).

We have Ps 252.4 million (US$24.2 million) of indebtedness owed to
California Commerce Bank under two loan agreements. Both loans are guaranteed
by our subsidiary, Industrias Centauro, S.A. de C.V. The first of these loans
in the amount of Ps 130.5 million (US$12.5 million) is payable in eight
quarterly installments beginning in August 2002 and bears interest at a rate of
LIBOR + 3.25%. The second of these loans in the principal amount of Ps 121.9
million (US$11.7 million) bears interest at a rate of LIBOR + 2.75% and matured
in January 2003. As of June 30, 2003, the total amount in default
is Ps 162.5 million (US$15.6 million). California Commerce Bank has agreed to
a forbearance until June 30, 2003.

We guaranteed a bank loan from Bank of America, N.A. to our former
subsidiary, Durango Georgia Receivables Company, in an aggregate principal
amount of Ps 177.5 million (US$17.0 million), as of December 31, 2002. This
loan is payable in monthly installments beginning in August 2002, and bears
interest at a rate of LIBOR

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+ 3.0%. Payments due on this bank loan are also guaranteed, jointly and
severally, by our subsidiaries, Empaques de Cartón Titán, S.A. de C.V.,
Compañía Papelera de Atenquique, S.A. de C.V., Ponderosa Industrial de México,
S.A. de C.V. and Industrias Centauro, S.A. de C.V. As of June 30, 2003, the
total amount in default is Ps 187.9 million (US$18.0 million).

We guaranteed a bank loan from Commerze Bank to our subsidiary, Ponderosa
Industrial de México, S.A. de C.V., in the amount of US$11.2 million,
denominated in Euros. This loan is payable in semi-annual installments
beginning in January 2003 and bears interest at a rate of EUROLIBOR + 1.15%

Our subsidiary, Durango McKinley Paper Company has a US$22 million term
loan and a US$10.5 million letter of credit with the Bank of Albuquerque. This
was used to refinance a facility which our former subsidiary, Durango Paper
Company, had with the Bank of America. The principal on the new term loan is
payable in 24 quarterly installments beginning August 2002 and bears interest
at a rate of LIBOR + 2.75%. The obligations of Durango McKinley Paper Company
under the Bank of Albuquerque credit agreement are secured by the accounts,
inventory and equipment of Durango McKinley Paper Company and its real property
located in Houston, Texas, Mesquite, Texas and Prewitt, New Mexico. In
addition, the obligations are guaranteed by Durango International, Inc.

Our subsidiary, Grupo Pipsamex, S.A. de C.V., has a bank loan from Banco
Nacional de Comercio Exterior, S.N.C.(Bancomext), in an aggregate principal
amount of Ps 775.5 million (US$74.3 million). This loan is payable in 14
semiannual installments beginning in July 2002 and bears interest at a rate of
LIBOR + 7% payable semiannually. This loan is secured by a first priority
security interest in all of the assets of Grupo Pipsamex and its subsidiaries.
Bancomext has agreed to extend the maturity of any pending installments for a
period of 180 days from April 28, 2003.

Our subsidiary, Fabrica Mexicana de Papel, S.A. de C.V., has a bank loan
from Bancomext in the amount of Ps 160.8 million (US$15.4 million). This loan
is payable in 14 semiannual installments beginning in March 2003 and bears
interest at a rate of LIBOR + 6.5% payable semiannually (plus such additional
amounts as are necessary for Bancomext to receive interest at such rate after
the payment of its income taxes). This loan is secured by a second priority
security interest in all of the assets of Fabrica Mexicana de Papel, S.A. de
C.V. and is guaranteed by us. In addition, Fabrica Mexicana de Papel has a
mortgage loan from Bancomext in an aggregate principal amount of Ps 31.3
million (US$3.0 million) that bears interest at a rate of LIBOR + 3.53%. The
mortgage loan matures in October 2003 and is secured by a third priority
security interest in certain assets of Fabrica Mexicana de Papel and is
guaranteed by us. Bancomext has agreed to extend the maturity of any pending
installments on both facilities for a period of 180 days from April 28, 2003.

Our subsidiary, Compañía Papelera de Atenquique, S.A. de C.V., has a bank
loan from Nacional Financiera, S.N.C. in the amount of Ps 3.5 million (US$0.3
million). This loan is payable in 96 quarterly installments beginning in
August 1981 and bears interest at a rate of LIBOR + 0.8125% This loan is
secured by a first priority security interest in certain equipment and
fixtures.

Our subsidiary, Grupo Pipsamex, S.A. de C.V., guaranteed a letter of
credit issued by Bank of America, N.A., in the aggregate principal amount of Ps
26.1 million (US$2.5 million). This letter of credit was issued on August 17,
2001 to Durango Georgia Paper Company for the benefit of Lumbermans
Underwriting Alliance and was drawn on December 13, 2002. As of December 31,
2002, Ps 26.1 million (US$2.5 million) of this indebtedness was outstanding.

We guaranteed a letter of credit issued by JPMorgan Chase Bank (f/k/a
Chase Manhattan Bank), in the aggregate principal amount of Ps 32.5 million
(US$3.1 million). This letter of credit was issued to Durango Georgia Paper
Company (f/k/a Gilman Paper Company) for the benefit of Pitney Bowes Credit
Corporation and was drawn on April 19, 2000. As of December 31, 2002, Ps 25.0
million (US$2.4 million) of this indebtedness was outstanding.

We guaranteed a letter of credit with JPMorgan Chase Bank (f/k/a Chase
Manhattan Bank), in the aggregate principal amount of Ps 27.3 million (US$2.6
million). This letter of credit was issued to Durango Georgia Paper Company
(f/k/a Gilman Paper Company) for the benefit of SunTrust Leasing Corporation
and was drawn on April 19, 2000. As of December 31, 2002, Ps 27.3 million
(US$2.6 million) of this indebtedness was outstanding.

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For a description of the payment defaults on our bank debt, see Item 13.
Defaults, Dividend Arrearages and Delinquencies.

Our Capital Leases.As of December 31, 2002, our aggregate future minimum
lease payments under our capital leases was Ps 310.6 million (US$29.8 million).
Our material capital leases are described below:

We have entered into financial lease agreements with Arrendadora Bank of
America, S.A. for the acquisition of certain machinery. We have issued
promissory notes in respect of the future minimum lease payments under these
financial lease agreements in an aggregate principal amount of Ps 213.4 million
(US$20.4 million) which mature between February and August 2005. The
promissory notes bear interest at rates ranging from LIBOR + 3.0% to LIBOR +
3.5% payable quarterly and are secured by the leased machinery. We have
sub-leased the machinery to certain of our subsidiaries.

Empaques de Cartón Titán, S.A. de C.V., one of our subsidiaries, has
entered into financial lease agreements with GE Capital Leasing for the
acquisition of machinery. Empaques de Cartón Titán has issued two promissory
notes in respect of the future minimum lease payments under these financial
lease agreements in an aggregate principal amount of Ps 97.2 million (US$9.3
million) which are payable in 28 quarterly installments with the final payments
due in October 2008 and April 2009, respectively. The promissory notes bear
interest at a rate of LIBOR + 3.25%. The loan is secured by a pledge on the
leased machinery and is guaranteed by our Company.

Restrictive Covenants and Available Credit.The instruments governing our
indebtedness contain financial and other covenants that restrict, among other
things, the ability of the Company and its subsidiaries to:



| |  |  | incur additional indebtedness;                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | incur liens;                                                                                                      
|
| |  |  | issue guarantees;                                                                                                 
|
| |  |  | issue or sell capital stock of subsidiaries;                                                                      
|
| |  |  | pay dividends or make certain other restricted payments;                                                          
|
| |  |  | consummate certain asset sales;                                                                                   
|
| |  |  | enter into certain transactions with affiliates, or                                                               
|
| |  |  | merge or consolidate with any other person or sell or otherwise
dispose of all or substantially all of our assets.

We must maintain minimum debt service, minimum net worth and maximum
leverage ratios under the Banamex credit agreement, the JPMorgan Chase Bank
credit agreement and the Bank of Albuquerque credit agreement. Our failure to
comply with the restrictions contained in these credit agreements constitutes
an event of default, which could result in an acceleration of such
indebtedness. Such acceleration may also constitute an additional event of
default under the indentures governing our 2003 notes, 2006 notes, 2008 notes
and 2009 notes.

The indentures governing our 2006 notes, 2008 notes and 2009 notes also
require prepayments of the indebtedness from the proceeds from certain asset
sales, insurance, and incurrence of certain indebtedness. The above covenants,
together with our highly leveraged position, could restrict corporate
activities, including our ability to respond to market conditions, to provide
for unanticipated capital expenditures or to take advantage of business
opportunities.

On October 31, 2002, December 23, 2002 and January 16, 2003, Standard &
Poors lowered our foreign and local currency corporate ratings to B, CC
and SD, respectively. On February 4, 2003, Standard & Poors

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lowered our foreign and local currency corporate ratings to D. D is
Standard & Poors lowest rating category out of 22 and signifies a payment
default.

On June 3, 2002 and December 23, 2002, Moodys Investors Service lowered
all ratings on our existing notes to a rating of B3 and Caa3, respectively.
On January 21, 2003, Moodys again lowered all ratings on existing notes to a
rating of Ca. Ca is the 2nd-lowest rating category out of 22 and describes
obligations which Moodys believes are speculative to a high degree and which
are often in default or have other marked shortcomings. In light of our
continued failure to make the payments on the existing notes, we expect Moodys
to further downgrade its ratings of our existing notes in the near future.

As a result of these negative credit ratings and downgrades, our access to
sources for short-term financing has been further restricted, thus impeding our
ability to finance our operations. Furthermore, the negative publicity
surrounding these recent downgrades has adversely affected the terms of our
trade payables and ability to obtain new customers.

Assuming we are able to restructure our debt obligations with our bank
creditors and bondholders, we believe that cash generated by our operating
activities together with the proceeds of refinancing transactions will be
adequate to meet our anticipated debt service requirements, capital
expenditures and working capital needs for the foreseeable future. In the
event that we are unsuccessful in restructuring our indebtedness, the cash
generated by our operating activities may not be adequate to meet our
anticipated debt service requirements, capital expenditures and working capital
needs during the next twelve months or thereafter. Our future operating
performance and our ability to service or refinance our 2003 notes, 2006 notes,
2008 notes and 2009 notes and to service, extend or refinance our credit
facilities will be subject to future economic conditions and to financial,
business and other factors, many of which are beyond our control.

Tax-Loss Carryforwards

At December 31, 2002, the Mexican subsidiaries of the Company had recorded
tax-loss carryforwards of Ps 4,999.4 million (US$478.9) and Durango
International, Inc. had recorded tax-loss carryforwards of Ps 47.0 million
(US$4.5 million). The tax-loss carryforwards of the Mexican subsidiaries can
be used for tax purposes to offset the future income of the Mexican
subsidiaries generating such tax-loss carryforwards. The tax-loss
carryforwards of the Mexican subsidiaries expire as set forth in the table
below:

|                    |  |                                            |         | 
|------------------- |  | ------------------------------------------ | ------- | 
|Year of expiration  |  | Amount                                    
|                    |  |                                           
|                    |  | (millions of constant Pesos restated as of
|                    |  | December 31, 2002)                        
|2004                |  | Ps                                         | 235.8   | 
|2005                |  |                                            | 604.8   | 
|2006                |  |                                            | 221.4   | 
|2007                |  |                                            | 158.2   | 
|2008                |  |                                            | 129.5   | 
|2009 and thereafter |  |                                            | 3,649.7 | 
|                    |  |                                            |         | 
|                    |  | Ps                                         | 4,999.4 | 
|                    |  |                                            |         | 

Capital Commitments

The following table sets forth our capital commitments, other than our
indebtedness, as of December 31, 2002:

|                 |  |      |      |      |  |      |      |      |  |      |      |            |  |       |     |  |  |    |     |  |  |    |      |  |  |    |       | 
|---------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---------- |  | ----- | --- |  |  | -- | --- |  |  | -- | ---- |  |  | -- | ----- | 
|                 |  | 2003 |      | 2004 |  | 2005 |      | 2006 |  | 2007 |      | Thereafter |  | Total
|                 |  |      |      |      |  |      |      |      |  |      |      |            |  |      
|Ps million       |  |      |      |      |  |      |      |      |  |      |      |            |  |       |     |  |  |    |     |  |  |    |      |  |  |    |       | 
|Operating leases |  | Ps   | 36.8 |      |  | Ps   | 15.3 |      |  | Ps   | 12.0 |            |  | Ps    | 8.8 |  |  | Ps | 8.7 |  |  | Ps | 26.7 |  |  | Ps | 108.3 | 
|                 |  |      |      |      |  |      |      |      |  |      |      |            |  |       |     |  |  |    |     |  |  |    |      |  |  |    |       | 
|Total            |  | Ps   | 36.8 |      |  | Ps   | 15.3 |      |  | Ps   | 12.0 |            |  | Ps    | 8.8 |  |  | Ps | 8.7 |  |  | Ps | 26.7 |  |  | Ps | 108.3 | 
|                 |  |      |      |      |  |      |      |      |  |      |      |            |  |       |     |  |  |    |     |  |  |    |      |  |  |    |       | 

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Our subsidiaries lease certain equipment under noncancelable operating
leases. Estimated future minimum lease payments under noncancelable operating
leases as of December 31, 2003 are included in operating leases the table
above.

Capital Expenditures

We have instituted a capital investment program to help our overall
operations and have implemented a series of measures to improve efficiency and
to increase capacity at our paper mills. In addition, we have made capital
expenditures to bring our plants into proper compliance with environmental
regulations with the latest technology.

The following table sets forth our capital expenditures for the periods
indicated and sets forth our capital expenditures and capital commitments for
environmental matters:

|                                                |  |                         |         |      |  |      |       |           |  |           |       |  |  |      |       |      |  |    |       | 
|----------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ----- | --------- |  | --------- | ----- |  |  | ---- | ----- | ---- |  | -- | ----- | 
|                                                |  | Years Ended December 31
|                                                |  |                        
|                                                |  |                         |         |      |  |      |       |           |  |           |       |  |  | 2003 |       | 2004
|                                                |  | 2000                    |         | 2001 |  | 2002 |       | Estimated |  | Estimated
|                                                |  |                         |         |      |  |      |       |           |  |          
|                                                |  | (in millions of Pesos) 
|Capital
Expenditures (other
than environmental) |  | Ps                      | 675.5   |      |  | Ps   | 325.3 |           |  | Ps        | 296.9 |  |  | Ps   | 116.9 |      |  | Ps | 116.9 | 
|Environmental                                   |  |                         | 445.6   |      |  |      | 20.3  |           |  |           | 8.4   |  |  |      | 8.4   |      |  |    | 8.4   | 
|                                                |  |                         |         |      |  |      |       |           |  |           |       |  |  |      |       |      |  |    |       | 
|Total                                           |  | Ps                      | 1,121.1 |      |  | Ps   | 345.6 |           |  | Ps        | 305.3 |  |  | Ps   | 125.3 |      |  | Ps | 125.3 | 
|                                                |  |                         |         |      |  |      |       |           |  |           |       |  |  |      |       |      |  |    |       | 

In 2003, we anticipate that our capital expenditures will concentrate on
technology upgrades in our paper segment, de-bottlenecking projects and cost
reduction projects.

We expect to finance our capital expenditure plan with internally
generated cash and supplier financing. No assurance can be given that we will
be able to meet our capital expenditure budget.

Critical Accounting Policies

In response to the SECs Release No. 33-8040, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we identified the most critical
accounting principles that involve a higher degree of judgment and complexity
and that management believes are important to a more complete understanding of
our financial position and results of operations. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Item 5. Operating and Financial Review and Prospects.
where such policies affect our reported and expected financial results. For a
detailed discussion of the application of these and other accounting policies,
see Note 3 to the consolidated financial statements. Note that our preparation
of consolidated financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not
differ from those estimates.

Allowance for doubtful accounts

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

Deferred taxes

As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes. This process involves our
estimating our actual current tax exposure together with assessing

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

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

Property, plant and equipment

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

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

Pension plans, seniority premiums and indemnities

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

Negative goodwill

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

Differences between Mexican GAAP and U.S. GAAP

Our consolidated financial statements are prepared in accordance with
Mexican GAAP, which differ in respects from U.S. GAAP. The principal
differences between Mexican GAAP and U.S. GAAP as they relate to us are
reversal of loss on fixed assets and sale of subsidiaries, capitalized
financing costs, debt issuance costs, negative goodwill, deferred income tax,
employees statutory profit sharing, the effects of inflation on fixed assets.
Each of

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these differences affects both net income and shareholders equity. Net
income (loss) under U.S. GAAP was Ps 10.1 million, Ps 239.4 million and Ps
2,122.8 million for the years ended December 31, 2000, 2001 and 2002,
respectively. See Note 21 to our consolidated financial statements for a
further discussion of the adjustments under U.S. GAAP.

Mexican GAAP financial statements recognize the effects of inflation,
whereas financial statements prepared under U.S. GAAP are presented on a
historical cost basis. We are not required to reverse many of the Mexican
inflation accounting adjustments when reconciling Mexican GAAP to U.S. GAAP, as
these adjustments provide a means of measuring the effects of price-level
changes in the inflationary Mexican economy. Accordingly, these
inflation-adjusted figures are considered a more meaningful presentation than
historical cost-based financial reporting for both Mexican and U.S. accounting
purpose.

New Accounting Pronouncements under Mexican GAAP

In November 2001, the MIPA issued revised Bulletin C-9, Liabilities,
Provisions, Contingent Assets and Liabilities and Commitments (Bulletin
C-9), which supersedes existing Bulleting C-9, Liabilites and Bulletin C-12,
Contingencies and Commitments. Bulletin C-9 establishes a methodology for
valuation, presentation and disclosure of liabilities and provisions, as well
as for valuation and disclosure of contingent assets and liabilities, and for
disclosure of commitments.

Among other things, Bulletin C-9 establishes guidelines for the
recognition of liabilities and non-recognition of liabilities in the event of
extinguishments, restructurings or conversion to equity. In addition, in the
case of provisions, it introduces the concept of discounting long-term
provisions. With respect to contingent liabilities, Bulletin C-9 states that
all contingent liabilities that have a probable realization must be accounted
for and disclosed in the financial statements, contingent liabilities that have
a possible realization cannot be accounted for in the financial statement, but
must be disclosed, and contingent liabilities that have a remote realization
cannot be accounted in the financial statements and are not required to be
disclosed. Bulletin C-9 requires disclosure of committed amounts when they
represent significant fixed asset additions, contract services and goods that
exceed the Companys immediate needs or if the commitment is considered a
contracted obligation. The provisions of Bulletin C-9 are required to be
applied beginning on January 1, 2003, although early adoption is recommended.
Management is currently evaluating the impact that the adoption of Bulletin C-9
will have on its consolidated financial statements.

In addition, in December 2001, the MIPA issued Bulletin C-8, Intangible
Assets (Bulletin C-8), which defines intangible assets as costs incurred and
rights or privileges acquired that will generate a future economic benefit
Bulletin C-8 provides a clear definition of research and development costs,
requiring that only development costs may be deferred to a future period.
Furthermore Bulletin C-8 states that preoperating costs should be expensed as a
period cost, unless they could be classified as development costs. Bulletin C-8
requires that intangible assets with indefinite useful lives should not be
amortized, but should be evaluated for impairment annually. Goodwill and
intangible assets with finite useful lives should be amortized over their
useful lives. The provisions of Bulletin C-8 are required to be applied
beginning on January 1, 2003, although early adoption is recommended.
Management is currently evaluating the impact that the adoption of Bulletin C-8
will have on its consolidated financial statements.

New Accounting Pronouncements under U.S. GAAP

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 requires the recognition of a liability for
the legal obligations associated with the retirement of a tangible long-lived
asset that results from the acquisition, construction and (or) normal operation
of the asset. The liability is recognized at fair value in the period in which
it is incurred if a reasonable estimate of fair value can be made. A
corresponding asset retirement cost is added to the carrying value of the
long-lived asset and is depreciated to expense using a systematic and rational
method over its useful life. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. Upon initial adoption, a liability is recognized for
existing asset retirement obligations and the associated asset retirement cost
is capitalized as an increase to the carrying value of the asset. The
recognized liability and asset are adjusted for cumulative accretion and
accumulated depreciation, respectively, from the time period when the asset
retirement obligation would have originally been recognized had this statement
been in effect

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to the date of initial adoption. The cumulative effect of initial
adoption of SFAS 143 is recorded as a change in accounting principle.
Management is currently evaluating the impact that the adoption of SFAS 143
will have on the consolidated financial statements.

In July 2002, FASB issued Statement No. 146, Accounting for
Cost Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses
financial accounting and reporting for cost associated with exit or disposal
activities and nullifies Emerging Issues Tax Force Issue
No. 94-3 Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including of Certain Cost Incurred in a
Restructuring) (EITF
94-3),. The principal difference between SFAS 146 and EITF 94-3 is
that SFAS 146 requires that a liability for cost associated with an exit or
disposal activity be recognized when the liability is incurred rather than at
the date of an entitys commitment to exit plan. SFAS 146 also revises the
definition of exit costs and establishes that fair value is the objective for
initial measurement of the liability. The provisions of SFAS 146 are effective
for exit or disposal activities that are initiated after December 31, 2002,
with early application encouraged. Management is currently evaluating the
impact that the adoption of SFAS 146 will have on the financial statements.

In July 2002, the FASB issues SFAS No. 147, Acquisitions of Certain
Financial Institutions (SFAS 147). This Statement amends SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution is Acquired in a Business
Combination Accounted for by the Purchase Method, by removing acquisitions of
financial institutions from the scope of both Statement 72 and Interpretation
9. SFAS 147 requires that such transactions be accounted for in accordance
with FASB Statements No. 141, Business Combinations,
and SFAS No. 142, Goodwill
and Other Intangible Assets. As such, acquisitions within the scope of this
statement are no longer required to recognize any excess of the fair value of
liabilities assumed over the fair value of intangible and identifiable
intangible assets acquired as an un identifiable intangible asset. This
statement also amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lives Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions.
Accordingly, such intangible assets are subject to the same recoverability test
and impairment loss recognition required for other long-lived assets that are
held and used. This statement is effective for transactions entered into on or
after October 1, 2002. Management is currently evaluating the impact that the
adoption of SFAS 147 will have on the consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transaction and Disclosure-an amendment to FAS 123
(SFAS 148). SFAS 148 continues to permit entities to apply the intrinsic
method of APB 25, Accounting for Stock Issued to Employees, however, SFAS 148
is intended to encourage companies to adopt the accounting provisions of SFAS
123, Accounting for Stock-Based Compensation. SFAS 148 provides three
transition methods for companies who chose to adopt the provisions of SFAS 123,
the prospective method, the modified prospective method and the retroactive
restatement method. In addition, SFAS 148 mandates certain new disclosures.
SFAS 148 is effective for fiscal years ending after December 15, 2002, with
early adoption permitted. Management is currently evaluating the impact that
the adoption of SFAS 148 will have on the consolidated financial statement.

In May 2003, the FASB issues SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS No.
149) SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB
Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities. The
provisions of SFAS No. 149 that relate to SFAS No. 133 implementation
issues that
have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs that relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist should be
applied to both existing contracts and new contracts entered into after June
30, 2003. The Company is presently evaluating the impact, if any, that these
new standards will have on its consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation of FASB No. 5, 57, and 107 and rescission of Interpretation No. 34). FIN
45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to a guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees. FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a

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liability for the fair value of the obligation it assumes under that
guarantee. FIN 45s provisions for initial recognition and measurement should
be applied on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors fiscal year-end. The
guarantors previous accounting for guarantees that were issued before the date
of FIN 45s initial application may not be revised or restated to reflect the
effect of the recognition and measurement provisions of FIN 45.
The disclosure requirements are effective for financial statements of both
interim and annual periods that end after December 15, 2002. Management is
currently evaluating the impact that the adoption of FIN 45 will have on the
consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB 51.
The primary objectives of FIN 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights (variable interest entities or VIEs) and how to determine
when and which business enterprise should consolidate the VIE (the primary
beneficiary). This new model for consolidation applies to an
entity in which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entitys activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003 to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. FIN 46 applies to public
enterprises as of the beginning of the applicable interim or annual period and
it applies to nonpublic enterprises as of the end of the applicable annual
period. Management is currently evaluating the impact that the adoption of FIN
46 will have on the consolidated financial statements.




Item 6. Directors, Senior Management and Employees.

Board of Directors and Executive Officers

Our board of directors is responsible for the management of our business.
Our by-laws (estatutos sociales) provide that the board of directors will
consist of the number of directors and alternate directors elected by our
shareholders at the annual ordinary general meeting, each of whom is elected
for a term of one year.

Pursuant to our by-laws, alternate directors may be appointed by our
shareholders to serve on the board of directors in place of directors who are
unable to attend meetings. If a member of our board is absent from a meeting,
one of our alternate directors is called to serve as a director for such
meeting in the order provided by the shareholders. If the shareholders do not
provide an order, the alternate director is chosen by the board. Even when
alternate directors are not substituting for a director, they are invited to
attend all board meetings.

Our board of directors includes 11 directors, of whom four are independent
directors. No alternate directors were elected by our shareholders at the most
recent ordinary general meeting.

Our executive officers are appointed by the board of directors and serve
until their successors have been appointed and take office.

The table below sets forth the members of our board of directors and our
executive officers:

|                         |  |                                                   |  |      
|------------------------ |  | ------------------------------------------------- |  | -----
|Name                     |  | Current Title                                     |  | Since
|                         |  |                                                   |  |      
|Directors:               |  |                                                   |  |      
|                         |  |                                                   |  |      
|Miguel Rincón            |  | Chairman of the Board and Chief Executive Officer |  | 1982 
|José Antonio Rincón      |  | Vice-Chairman and Chief Operating Officer         |  | 1982 
|Mayela Rincón de Velasco |  | Vice-President and Chief Financial Officer        |  | 1982 
|Jesús Rincón             |  | Director                                          |  | 1987 
|Wilfrido Rincón          |  | Director                                          |  | 1987 

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|                             |  |                                            |  |      
|---------------------------- |  | ------------------------------------------ |  | -----
|Name                         |  | Current Title                              |  | Since
|                             |  |                                            |  |      
|Ignacio Rincón               |  | Director                                   |  | 1987 
|Angel Del Palacio*           |  | Director                                   |  | 2001 
|Alfonso Fernández De Castro* |  | Director                                   |  | 2001 
|Buenaventura G. Saravia*     |  | Director                                   |  | 2001 
|Roberto Isaac Hernández*     |  | Director                                   |  | 2001 
|Martín Rincón Arredondo      |  | Director                                   |  | 2003 
|                             |  |                                            |  |      
|Other Officers:              |  |                                            |  |      
|                             |  |                                            |  |      
|Prudencio Calderón           |  | U.S. Managing Director                     |  | 1997 
|Jesús Romo Carrasco          |  | Controller                                 |  | 1988 
|Arturo Díaz Medina           |  | Financial Manager                          |  | 1998 
|Gustavo Peyro Medina         |  | Audit and IT Manager                       |  | 1996 
|Raúl Cataño A                |  | General Manager-Titán Central Division     |  | 1993 
|Victor Manuel Sánchez        |  | Financial Manager-Titán Group              |  | 1993 
|Juan Montufar C              |  | General Manager-Industrias Centauro        |  | 1995 
|Javier Bermea G              |  | General Manager-Titán North Division       |  | 1993 
|Ignacio Parra Rivera         |  | General Manager-Titán West Division        |  | 2001 
|                             |  |                                            |  |      
|Executive Officers:          |  |                                            |  |      
|                             |  |                                            |  |      
|Gustavo Peyro Medina         |  | Audit and IT Manager                       |  | 1996 
|Arturo Díaz Medina           |  | Financial Manager                          |  | 1998 
|Jesús Romo Carrasco          |  | Controller                                 |  | 1988 
|Gabriel Villegas             |  | Secretary of the Board and General Counsel |  | 1987 

Miguel Rincón, José A. Rincón, Jesús Rincón, Ignacio Rincón, Wilfrido
Rincón, Mayela Rincón de Velasco and Martín Rincón are siblings.

Miguel Rincónhas been Chairman of the Board and Chief Executive Officer
of our Company since 1982. He has been an active member of a number of
organizations in Mexico related to our industry, such as the Mexican National
Chamber for the Pulp and Paper Industry, the Por México Group, an association
of business leaders from all sectors, and the National Commission on Commercial
Agriculture (Comisión Nacional Agropecuaria y Comercial). He currently serves
on a number of corporate boards in the United States and Mexico, including
Banamex, one of the largest Mexican banks, and Banco JPMorgan Chase, S.A.

José Antonio Rincónhas been Vice-Chairman and Chief Operating Officer of
our Company since 1982. Since 1988, he has been a member of the Mexican
National Chamber for the Pulp and Paper Industry and is currently the
President. From 1990 to 1998, he served as director of Banco Santander, S.A.

Mayela Rincón de Velascohas been Vice-President and Chief Financial
Officer of our Company since 1982. From 1987 to 1994, she worked as a
professor of international finance in the Durango State University (Universidad
Juárez del Estado de Durango). She is a member of the Association of Public
Accountants (Colegio de Contadores Públicos). She is also a member of the
philanthropic board of the General Hospital of Durango (Hospital General de
Durango).

Jesús Rincónhas been a Director of our Company since 1987. Since 1997,
he has worked as the general manager of Porteadores de Durango as well as the
general manager of Ponderosa. From 1995 to 1997, he served as the development
manager of our Company. He is an active member of the National Association of
Particleboard Manufacturers and the Forest Industry Association.



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|* |  | Independent Directors
|- |  | ---------------------

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Wilfrido Rincónhas been a Director of our Company since 1987. Since
1998, he has been the general manager of the paper division of Pamex. From
1997 to 1998, he served as general manager of Ponderosa. From 1994 to 1996 he
worked as development manager of our Company. He also serves as president of
the Mexican National Chamber of the Forestry Industry (Consejo Consultivo
Forestal Nacional) and vice-president of Mexican National Chamber for the Pulp
and Paper Industry. He is an active member of the National Council for
Forestry.

Ignacio Rincónhas been a Director of our Company since 1987. Since 1999,
he has been the general manager of Empresas Titán. From 1998 to 1999, he
worked as the marketing manager of Empresas Titán. From 1994 to 1997, he
worked as the planning manager of our Company. He is currently an active
member of the Association of Technicians in Pulp and Paper (Asociación de
Técnicos de la Celulosa y del Papel).

Gustavo Peyro Medinawas Manager of the Controller and Audit Department of
our Company from 1992 to 1999. He has also been Audit and IT Manager of our
Company since 1996. From 1985 to 1989 he was professor at Durango State
University (Universidad Juarez del Estado de Durango). Since 1983 he has been
an active member of the Mexican Institute of Public Accountants (Instituto
Mexicano de Contadores Públicos) and also of the Association of Public
Accountants (Colegio de Contadores Públicos). He is an active member of the
Institute of Internal Auditors, Inc.

Arturo Díaz Medinahas been the Finance and Planning Managing Director of
our Company since 1998. He had been involved in other finance and operation
positions from 1994 to 1998 in two of our paper mills. Prior to joining our
Company he was head of the finance and commercial areas of an auto parts
Company based in Durango, Mexico. Since 1990 he has been an active member of
the Association of Public Accountants (Colegio de Contadores Públicos).

Jesús Romohas been the Controller of our Company since 1998. He is a
professor of accounting and statistics at Durango State University (Universidad
Juarez del Estado de Durango).Since 1978 he has been an active member of the
Association of Public Accountants (Colegio de Contadores Públicos). He has an
MBA from the Monterrey Institute of Technology (ITESM). He is currently a
professor of accounting and statistics at Durango State University (Universidad
Juárez del Estado de Durango).

Gabriel Villegashas been Secretary of the Board and Legal Counsel of our
Company since 1987. As Legal Counsel he was involved in corporate and labor
matters of our Company. In 1993 he was appointed General Counsel and has
participated in every share or asset acquisition made by us, in the issuance of
shares and debt both in Mexico and in the United States, and in the preparation
and execution of financial and other material agreements. He served as member
of the Legal Committee of the Mexican National Chamber for the Pulp and Paper
Industry.

Independent Members of the Board

Alfonso Fernández de Castrois one of the most experienced entrepreneurs
in the Mexican forest industry. He is the founder and general manager of Grupo
Forestal Alfa, one of the principal companies in the Mexican forest industry.

Buenaventura G. Saraviais an entrepreneur in the cattle breeding industry
and the general manager of Empresas la Punta, one of the principal exporters of
cattle from Mexico to the United States. He has a bachelors degree in business
from the Monterrey Institute of Technology (ITESM).

Ángel Del Palaciois an entrepreneur in the services sector and the
general manager of several automobile dealerships in the north of Mexico. He
has a bachelors degree in business and an MBA from the Monterrey Institute of
Technology (ITESM).

Roberto Isaac Hernándezis an entrepreneur in the services sector and the
general manager of a chain of gas stations and supermarkets in the north of
Mexico. He has a bachelors degree in economics from the Monterrey Institute of
Technology (ITESM) and an MBA from the Notre Dame University in France.

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Statutory Auditor

Under our by-laws in accordance with Mexican law, our annual shareholders
meeting has to elect at least one statutory auditor (comisario) and a
corresponding alternate statutory auditor. The primary role of a statutory
auditor is to report to our shareholders at the annual ordinary general meeting
of shareholders regarding the accuracy of the financial information presented
to our shareholders by our board of directors. Subject to terms and
conditions, a statutory auditor is also authorized (i) to call ordinary or
extraordinary general meetings, (ii) to place items on the agenda for meetings
of shareholders or our board of directors, (iii) to attend meetings of
shareholders and of our board of directors and (iv) generally to inspect the
affairs of the Company. Since 2000, the statutory auditor has been Raúl Guerra
Rodríguez and the alternate statutory auditor is Carlos Orozco Rentería.

Compensation of Directors and Officers

Directors receive no compensation in their capacity as directors and there
are no service contracts providing for benefits upon termination of employment
of any of our directors. The aggregate amount of compensation paid by us to
our officers during 2002 was Ps 18.2 million. In 2003, we expect that the
aggregate amount of compensation paid to this group will total approximately Ps
19.0 million.

Each subsidiary pays performance-based cash bonuses to its management.
The amount of the bonus is determined by a formula which weighs various
factors, including the performance of the operating subsidiary measured in
terms of earnings, market share and sales volume targets and the individual
performance of the manager. The bonus varies for each manager depending on the
above factors.

We have established a bonus plan for the key management of the Company and
its subsidiaries. For this purpose, a trust controlled by members of the
Rincón family was established in 1994 to purchase 100,000 of our Series A
shares, representing approximately 0.1% of the total number of our Series A
shares outstanding. In 1995 and 1997, some individuals received a share-based
bonus of our Series A shares pursuant to this plan. After five years, each
individual can elect to retain the shares or can exercise the option to sell
the shares in the open market. The holders of our 1995 assignment of shares
under this plan elected to retain 8,775 shares and to sell 41,216 shares. The
holders of the 15,572 shares that we assigned in 1997 under this plan will make
their election this year. The exercise price will be the higher of the book
value of the shares or the market price of the shares at the time the options
are exercised. The other terms of the options will be established by the
controlling committee of the trust at the time the options are exercised.

Audit Committee

The audit committee recommends the external auditors of the Company to our
board of directors, suggests the terms and conditions of the auditors service,
supervises the auditors work, acts as intermediate between our board of
directors and the auditors, guaranties the independence of the auditors,
reviews the working plan, communications and audit reports and informs our
board of directors of its results, submits to our board of directors the
financial information basis, reviews such financial information and its
issuance process, contributes in the determination of the general outline of
the internal control system and evaluates its effectiveness, supports our board
of directors in the evaluation and coordination of the annual internal audit
programs, coordinates the internal, external and statutory auditing work, and
verifies the compliance with such statutes and regulations as are applicable to
the Company.

The audit committee acts and adopts any resolution by majority vote. In
case of conflict of interest, the members with conflicts do not participate.
The committee has such powers specifically granted by the shareholders and
participates in such studies, advisement, and additional matters submitted to
it by our board of directors.

The audit committee informs the board of directors of its activities at
least twice a year or at any other time that the audit committee deems
appropriate or becomes aware of any acts or facts material to the Company.

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The audit committee does not delegate any of its powers to anyone, but may
request advice from experts to adequately resolve such matters submitted to it
and, additionally, the president of the audit committee may invite such experts
and officers involved with the audit committees activities.

The audit committee members are Alfonso Fernández de Castro, Roberto Isaac
H. and Mayela Rincón de Velasco.

Remuneration Committee

The remuneration committee recommends designations of our director general
and principal officers, suggests evaluation criteria in accordance with the
general outlines of our board of directors and analyzes and submits to our
board of directors the structures and remuneration of our principal officers.

The remuneration committee acts and adopts any resolution by majority
vote. In case of conflict of interest, the members with conflicts do not
participate. The committee has such powers specifically granted by the
shareholders and participates in such studies, advisement, and additional
matters submitted to it by our board of directors.

The remuneration committee informs the board of directors of its
activities at least twice a year or at any other time that the remuneration
committee deems appropriate or becomes aware of any acts or facts material to
the Company.

The remuneration committee does not delegate any of its powers to anyone,
but may request advice from experts to resolve adequately such matters
submitted to the remuneration committee and, additionally, the president of the
remuneration committee may invite such experts and officers involved with the
remuneration committees activities.

The remuneration committee members are Ángel del Palacio E., Buenaventura
G. Saravia and Mayela Rincón de Velasco.

Our Employees

At December 31, 2002, we had approximately 8,835 employees (8,493 in
Mexico and 342 in the United States) and approximately 66% our work force was
unionized. We have not experienced any work stoppages in our facilities or
those of our subsidiaries, other than a strike at our Atenquique mill which
lasted nine days in July 1998 and which was resolved by contract
renegotiations. We currently have good relations with our employees at all our
facilities.

The table below shows the number of our employees in Mexico and the United
States in each of the past three years:

|              |  |                         |        |      |  |      |       |  |  |  |       | 
|------------- |  | ----------------------- | ------ | ---- |  | ---- | ----- |  |  |  | ----- | 
|              |  | Year Ended December 31,
|              |  |                        
|              |  | 2000                    |        | 2001 |  | 2002
|              |  |                         |        |      |  |     
|Mexico (1)    |  |                         | 9,526  |      |  |      | 8,478 |  |  |  | 8,493 | 
|United States |  |                         | 1,894  |      |  |      | 1,237 |  |  |  | 342   | 
|              |  |                         |        |      |  |      |       |  |  |  |       | 
|Total         |  |                         | 11,420 |      |  |      | 9,715 |  |  |  | 8,835 | 
|              |  |                         |        |      |  |      |       |  |  |  |       | 



---

|(1) |  | Includes 1,106, 1,580 and 1,124 temporary employees in the years ended
December 31, 2000, 2001 and 2002, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

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Item 7. Major Shareholders and Related Party Transactions.

General

We have a single class of common stock, represented by the Series A
Shares. The shareholders who are presently part of our management (the
Management Shareholders) currently own, directly, and indirectly through
their ownership in Administradora Corporativa y Mercantil, approximately 95.1%
of the issued and outstanding Series A Shares and have the power to elect
substantially all directors and control the Company. In April 2003, the
Management Shareholders voted to elect eleven directors, of which four are
independent directors.

Our total authorized and issued share capital as of December 31, 2002
consisted of Ps 1,412.2 million. On June 30, 2003, our capital was reduced to
Ps 1,378.6 million as a result of the repurchase of 2,240,000 shares as
treasury shares. Currently, we have authorized and issued 91,832,122 Series A
shares, with no par value and having one vote per share.

The following table sets forth current information with respect to the
beneficial ownership of our common stock as of June 15, 2003 by:



| |  |  | each person known by us to beneficially own more than 5%, in the
aggregate, of the outstanding shares of our common stock; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | all board members and executive officers as a group.                                                                          

|                                                                         |  |                      |            |                      |  |  |      |  
|------------------------------------------------------------------------ |  | -------------------- | ---------- | -------------------- |  |  | ---- | -
|                                                                         |  | Amount and           |            |                      |  | 
|                                                                         |  | Nature of            |            | Percentage          
|Beneficial Owner                                                         |  | Beneficial Ownership |            | of Outstanding Stock
|                                                                         |  |                      |            |                     
|Miguel Rincón                                                            |  |                      | 25,291,559 |                      |  |  | 27.5 | %
|José Antonio Rincón                                                      |  |                      | 14,453,225 |                      |  |  | 15.7 | %
|Jesús Rincón                                                             |  |                      | 14,451,406 |                      |  |  | 15.7 | %
|Wilfrido Rincón                                                          |  |                      | 6,503,597  |                      |  |  | 7.1  | %
|Ignacio Rincón                                                           |  |                      | 6,503,553  |                      |  |  | 7.1  | %
|Martin Rincón                                                            |  |                      | 5,058,538  |                      |  |  | 5.5  | %
|Administradora Corporativa y Mercantil, S.A. de C.V. (ACM) (1)           |  |                      | 15,068,000 |                      |  |  | 16.4 | %
|Total of members of board of directors and executive officers
as a group |  |                      | 87,329,878 |                      |  |  | 95.1 | %



---

|(1) |  | ACM is owned 100% by the Rincón family.
|--- |  | ---------------------------------------

Related Party Transactions

For reasons described in detail in this annual report, on October 7, 2002,
we sold our subsidiary, Durango Paper Company, and certain promissory notes to
Operadora Omega Internacional, S.A. de C.V., a related party, for an aggregate
amount of US$100,000. This sale gave rise to an aggregate loss of Ps 1,451.4
million (US$139.0 million). Pursuant to the terms of this transaction, we have
the option to repurchase all of the capital stock of Durango Paper Company and
the promissory notes for US$100,000 plus LIBOR + 4% at any time on or prior to
October 7, 2012.

From time to time, we enter into arms length transactions with Líneas
Aéreas Ejecutivas de Durango, S.A. de C.V. and Administradora Corporativa y
Mercantil, S.A. de C.V., both owned and controlled by the Rincón family, which
are not considered as material transactions.




Item 8. Financial Information.

See Item 18. Financial Statements.

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Legal Proceedings

We are party to various legal proceedings in the ordinary course of our
business. We do not expect any of these proceedings, if determined adversely
to us, individually or in the aggregate, to have a material adverse effect on
the results of our operations or on our financial condition.

In addition, we are party to the following recent and significant
lawsuits:



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | HG Estate, LLC v. Corporación Durango, Case No. 02 Civ. 10059 (CSH),
Southern District of New York

On December 19, 2002, HG Estate, LLC filed a complaint against our Company
seeking to enforce payment on certain promissory notes issued by our Company on
May 28, 2002. Such promissory notes replaced certain promissory notes issued
by our former subsidiary, Durango Paper Company, (and guaranteed by our
Company) in connection with the Stock Purchase Agreement dated December 9,
1999, by and among Durango Paper Company, W.O. Corporation, HG Estate, LLC and
St. Marys Railroad Corporation. As part of the complaint, HG Estate, LLC
asserted a claim for indemnification in respect of certain lease payments under
an indemnification agreement entered into by our Company and HG Estate, LLC in
connection with the Stock Purchase Agreement. The complaint seeks damages of
approximately US$53 million. We have submitted a statement of claims in
arbitration against HG Estate, LLC challenging the validity of the promissory
notes. In January 2003, we filed a motion to stay the litigation pending
resolution of the arbitration. This motion is pending before the court.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Compass Income Master Fund, Inc. et al. v. Corporación Durango, S.A. de
C.V., Index No.: 600621/03, Supreme Court of the State of New York, County
of New York.

On February 25, 2003, Compass Income Master Fund, Inc., Compass Renta Fija
America Latina F.I.I. and Interbank Overseas, Ltd. filed a complaint against
our Company seeking to enforce payment on certain promissory notes issued under
the Companys Euro Commercial Paper Program, in an aggregate principal amount
of US$3.5 million plus statutory interest at a rate of 9% from February 13, 2003. If the motion to stay
is denied, our Company will vigorously defend these claims.

Dividend Policy

We do not intend to pay dividends on our capital stock, including the
Series A Shares. We have not paid any dividends in the past five years. The
declaration, amount and payment of dividends are determined by a majority vote
of the shareholders, including holders of the Series A Shares, at our annual
ordinary shareholders meeting, generally on the recommendation of the board of
directors, and will depend on our results of operations, financial condition,
cash requirements, the ability of our subsidiaries to pay cash dividends to us,
future prospects and other factors deemed relevant by our shareholders. Our
ability to declare and pay dividends is presently restricted under the terms of
our 2006, 2008 and 2009 notes.

Significant Changes

Except as disclosed elsewhere in this annual report, no significant change
has occurred since the date of the audited consolidated financial statements
included in the annual report.




Item 9. The Offer and Listing.

The Series A Shares are listed on the Mexican Stock Exchange. Since July
21, 1994, our American Depositary Shares (ADSs) have been listed on the New
York Stock Exchange. The ADSs are issued by The Bank of New York, as
depositary (the Depositary). Each ADS represents two CPOs issued by NAFIN as
trustee (the CPO Trustee) for a Mexican trust (the CPO Trust). Each CPO
represents a financial interest in one Series A Share held in the CPO Trust.

It is not practicable for us to determine the proportion of ADSs
beneficially owned by U.S. persons.

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On February 13, 2003, we were notified by the New York Stock Exchange that
the average trading price of our ADSs and their distribution did not meet the
New York Stock Exchanges continued listing requirements. We have notified the
New York Stock Exchange of our intention to achieve compliance in a timely
manner and are currently evaluating appropriate alternatives. In order to
maintain compliance, the average trading price of our ADSs must equal or exceed
U.S.$1.00 for a minimum of 30 trading days on or before August 13, 2003. The
minimum distribution requirements must be met on or before February 13, 2004.

Trading on the Mexican Stock Exchange

The Mexican Stock Exchange, located in Mexico City, is the only stock
exchange in Mexico. Founded in 1894, it ceased operation in the early 1900s
and was reestablished in 1907. The Mexican Stock Exchange is organized as a
corporation, the shares of which are held by 27 brokerage firms. The firms are
exclusively authorized to trade on the floor of the Mexican Stock Exchange.
Trading on the Mexican Stock Exchange takes place principally through an
automated system known as the Electronic Exchange System for Registered or
Assigned Transactions (Sistema Electrónico de Negociación de Transacciones,
Registro y Asignación, or SENTRA), between the hours of 8:30 a.m. and 3:00
p.m., Mexico City time. Trades in securities listed on the Mexican Stock
Exchange may, subject to certain requirements, also be effected off the Mexican
Stock Exchange. Due primarily to tax considerations, however, most
transactions in listed Mexican securities are effected through the Mexican
Stock Exchange. The Mexican Stock Exchange operates a system of automatic
suspension of trading in shares of a particular issuer as a means of
controlling excessive price volatility. Under current regulations, such
suspension procedures do not apply to securities, such as the Series A Shares,
that are directly or indirectly (for example, through ADSs) quoted on a stock
exchange or market quotation system outside Mexico.

Settlement takes place two business days after a transaction involving the
purchase or sale of shares is completed on the Mexican Stock Exchange.
Deferred settlement, even if by mutual agreement, is not permitted without the
approval of the National Banking and Securities Commission of Mexico (Comisión
Nacional Bancaria y de Valores, or CNBV). Most securities traded on the
Mexican Stock Exchange are on deposit with S.D. Indeval, S.A. de C.V.,
Institución para el Depósito de Valores(Indeval), a privately-owned central
securities depositary that acts as a clearinghouse, depositary, custodian,
settlement, transfer and registration institution for Mexican Stock Exchange
transactions, thereby eliminating the need for physical transfer of securities.

The Mexican Stock Exchange is one of Latin Americas two largest exchanges
by market capitalization, but it remains relatively small and illiquid compared
to major world markets. In December 2002, the five largest traded equity
issues (measured by market capitalization) represented approximately 38% of the
total value of equity issues traded on the Mexican Stock Exchange. Although
there is substantial participation by the public in the trading of securities,
a major part of the activity of the Mexican Stock Exchange reflects
transactions by approximately 46 institutional investors. There is no formal
over-the-counter market for securities in Mexico.

The following table sets forth the annual high and low market prices (in
nominal Pesos) for the Series A Shares as reported by the Mexican Stock
Exchange for our five most recent financial years:

|     |  |      |       |     |  |    |       | 
|---- |  | ---- | ----- | --- |  | -- | ----- | 
|     |  | High |       | Low
|     |  |      |       |    
|1998 |  | Ps   | 30.00 |     |  | Ps | 22.00 | 
|1999 |  |      | 58.00 |     |  |    | 38.00 | 
|2000 |  |      | 48.00 |     |  |    | 31.00 | 
|2001 |  |      | 24.00 |     |  |    | 24.00 | 
|2002 |  |      | 14.00 |     |  |    | 14.00 | 

The following table shows the annual high and low market prices per ADS
(in U.S. Dollars) as reported by the New York Stock Exchange for our five most
recent financial years:

|     |  |      |       |     |  |     |       | 
|---- |  | ---- | ----- | --- |  | --- | ----- | 
|     |  | High |       | Low
|     |  |      |       |    
|1997 |  | US$  | 17.75 |     |  | US$ | 12.00 | 

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|     |  |      |       |     |  |  |      | 
|---- |  | ---- | ----- | --- |  |  | ---- | 
|     |  | High |       | Low
|     |  |      |       |    
|1998 |  |      | 5.50  |     |  |  | 4.06 | 
|1999 |  |      | 11.88 |     |  |  | 7.00 | 
|2000 |  |      | 6.06  |     |  |  | 5.94 | 
|2001 |  |      | 5.55  |     |  |  | 5.15 | 
|2002 |  |      | 5.55  |     |  |  | 1.01 | 

The following table sets forth the quarterly high and low market prices
(in nominal Pesos) for the Series A Shares as reported by the Mexican Stock
Exchange for our two most recent full financial years and for the first quarter
of 2003:

|     |                |  |      |       |     |  |     |       | 
|---- | -------------- |  | ---- | ----- | --- |  | --- | ----- | 
|     |                |  | High |       | Low
|     |                |  |      |       |    
|2001 |                |  |      |       |     |  |     |      
|     | First Quarter  |  | US$  | 50.00 |     |  | US$ | 29.00 | 
|     | Second Quarter |  |      | 24.00 |     |  |     | 24.00 | 
|     | Third Quarter  |  |      | 26.25 |     |  |     | 26.25 | 
|     | Fourth Quarter |  |      | 24.00 |     |  |     | 24.00 | 
|2002 |                |  |      |       |     |  |     |      
|     | First Quarter  |  |      | 23.50 |     |  |     | 23.50 | 
|     | Second Quarter |  |      | 24.00 |     |  |     | 16.58 | 
|     | Third Quarter  |  |      | 16.58 |     |  |     | 14.00 | 
|     | Fourth Quarter |  |      | 14.00 |     |  |     | 14.00 | 
|2003 |                |  |      |       |     |  |     |      
|     | First Quarter  |  |      | 14.00 |     |  |     | 3.00  | 

The following table shows the quarterly high and low market prices per ADS
(in U.S. Dollars) as reported by the New York Stock Exchange for our two most
recent full financial years and for the first quarter of 2003:

|     |                |  |      |       |     |  |     |       | 
|---- | -------------- |  | ---- | ----- | --- |  | --- | ----- | 
|     |                |  | High |       | Low
|     |                |  |      |       |    
|2001 |                |  |      |       |     |  |     |      
|     | First Quarter  |  | US$  | 6.20  |     |  | US$ | 6.11  | 
|     | Second Quarter |  |      | 6.20  |     |  |     | 4.67  | 
|     | Third Quarter  |  |      | 5.50  |     |  |     | 5.05  | 
|     | Fourth Quarter |  |      | 5.70  |     |  |     | 5.10  | 
|     |                |  |      |       |     |  |     |      
|     | First Quarter  |  |      | 5.350 |     |  |     | 5.160 | 
|     | Second Quarter |  |      | 5.28  |     |  |     | 1.40  | 
|     | Third Quarter  |  |      | 2.98  |     |  |     | 2.20  | 
|     | Fourth Quarter |  |      | 2.31  |     |  |     | 1.15  | 
|2003 |                |  |      |       |     |  |     |      
|     | First Quarter  |  |      | 1.34  |     |  |     | 0.36  | 

The following table sets forth the monthly high and low market prices (in
nominal Pesos) for the Series A Shares as reported by the Mexican Stock
Exchange for the most recent six months:

|              |  |      |       |     |  |    |       | 
|------------- |  | ---- | ----- | --- |  | -- | ----- | 
|              |  | High |       | Low
|              |  |      |       |    
|May 2003      |  | Ps   | 4.00  |     |  | Ps | 3.00  | 
|April 2003    |  |      | 3.00  |     |  |    | 3.00  | 
|March 2003    |  |      | 14.00 |     |  |    | 6.00  | 
|February 2003 |  |      | 14.00 |     |  |    | 14.00 | 
|January 2003  |  |      | 14.00 |     |  |    | 14.00 | 
|December 2002 |  |      | 14.00 |     |  |    | 14.00 | 

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The following table shows the monthly high and low market prices per ADS
(in U.S. Dollars) as reported by the New York Stock Exchange for the most
recent six months:

|              |  |      |      |     |  |     |      | 
|------------- |  | ---- | ---- | --- |  | --- | ---- | 
|              |  | High |      | Low
|              |  |      |      |    
|May 2003      |  | US$  | 1.35 |     |  | US$ | 0.44 | 
|April 2003    |  |      | 0.60 |     |  |     | 0.40 | 
|March 2003    |  |      | 0.62 |     |  |     | 0.36 | 
|February 2003 |  |      | 0.63 |     |  |     | 0.45 | 
|January 2003  |  |      | 1.34 |     |  |     | 0.51 | 
|December 2002 |  |      | 1.80 |     |  |     | 1.15 | 




Item 10. Additional Information.

Limitations Affecting ADS Holders

Holders of ADSs and CPOs have no voting rights with respect to the
underlying Series A Shares. Voting rights with respect to the Series A Shares
held in the CPO Trust are exercised by the CPO Trustee, which is required to
vote the underlying Series A Shares in the same manner as the majority of the
Series A Shares that are not so held and that are voted at the relevant
meeting.

Mexican law places certain restrictions on non-Mexican ownership of the
common stock of Mexican companies. Our by-laws prohibit ownership of Series A
Shares by foreign investors. Any acquisition of Series A Shares in violation
of such provision would be null and void under Mexican law and such Series A
Shares would be canceled and our share capital accordingly reduced.
Non-Mexican nationals may, however, hold financial interests in shares through
the CPOs issued under the CPO Trust.

Whenever a shareholders meeting approves a change of corporate purpose,
change of nationality or restructuring from one type of corporate form to
another, any shareholder who has voted against such change or restructuring has
the right to withdraw from the Company and receive an amount equal to the book
value of its shares (in accordance with our latest balance sheet approved by
the annual ordinary general meeting), provided such shareholder exercises its
right to withdraw during the 15-day period following the meeting at which such
change or restructuring was approved. Because the CPO Trustee is required to
vote the Series A Shares held in the CPO Trust in the same manner as the
holders of a majority of the Series A Shares that are not held in the CPO Trust
and that are voted at the relevant meeting, appraisal rights will not be
available to holders of CPOs or ADSs.

Exchange Controls

The Mexican government does not currently restrict the ability of Mexican
or foreign persons or entities to convert Pesos into U.S. Dollars or other
currencies, and vice versa. However, prior to 1991 some forms of exchange
control were in effect, and there can be no assurance that the Mexican
government will not reinstate a restrictive exchange control policy in the
future. The imposition of such a policy in the future might impair our ability
to obtain or transfer U.S. Dollars in respect of any interest and principal
payments due on our indebtedness, and it could also have a material adverse
effect on our business and financial condition.

Mexican Income Taxation

The following is a description of the material Mexican income tax
consequences of the purchasing, owning and disposing of Series A Shares, ADSs
and CPOs. The tax treatment of a holder of the Series A Shares, ADSs and CPOs
may vary depending upon the particular situation of the holder.

The following summary of the principal consequences under Mexican law, as
currently in effect, and of the Treaty (defined below) is limited to an
investment in Series A Shares, CPOs and ADSs by a holder who is not a resident
of Mexico and who will not hold Series A Shares, CPOs and ADSs or a beneficial
interest therein in connection with a permanent establishment (establecimiento
permanente) in Mexico (a Foreign Holder). For purposes of Mexican taxation,
an individual or corporation that does not satisfy the necessary requirements
to be considered a Mexican resident for tax purposes as described below is
deemed to be a Foreign Holder. For purposes

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of Mexican taxation, an individual is a resident of Mexico if such person
has established his or her home in Mexico, unless such person has resided in
another country for more than 183 days, whether consecutive or not, during a
calendar year and can demonstrate that such person has become a resident of
that country for tax purposes. A legal entity is a resident of Mexico if (i)
it was incorporated under Mexican law, or (ii) it has its main management or
its principal administrative office located in Mexico. A Mexican citizen is
presumed to be a resident of Mexico unless such person can demonstrate the
contrary. A permanent establishment of a non-resident will be required to pay
taxes in Mexico with respect to income attributable to such permanent
establishment in accordance with applicable law.

This summary is based upon the federal tax laws, regulations and treaty
obligations of Mexico as in effect on June 30, 2003, which are subject to
change. Such tax laws, their regulations and treaty obligations of Mexico are
also subject to various interpretations, and the Ministry of Finance and Public
Credit (Secretaría de Hacienda y Crédito Público) or the Mexican competent
courts may disagree with the explanations or conclusions set out below. The
discussion below does not address all Mexican tax considerations that may be
relevant to particular investors, nor does it address the special tax rules
applicable to certain categories of investors or any tax consequences under the
tax laws of any state or municipality of Mexico. Prospective purchasers of
Series A Shares, CPOs and ADSs are urged to consult their own tax advisors as
to the Mexican or other tax consequences of the purchase, ownership and
disposition of the Series A Shares, ADSs and CPOs, including, in particular,
the effect of any foreign, state or local tax laws.

The United States and Mexico have entered into a Convention for the
Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to
Income Taxes and accompanying protocol (the Treaty) that generally became
effective on January 1, 1994. In general, the Treaty does not have adverse
effects on holders of ADSs, Series A Shares and CPOs.

The United States and Mexico have also entered into an agreement that
regulates the exchange of information regarding tax matters.

Series A Shares, ADSs, CPOs

Taxation of Dividends

Under the Mexican Income Tax Law (Ley del Impuestos Sobre la Renta),
dividends, either in cash or in kind, paid with respect to Series A Shares
underlying the CPOs and ADSs to a Foreign Holder will not be subject to any
withholding tax.

On the other hand, Mexican companies paying dividends with profits that
have not yet been subject to the corporate income tax, are obligated to pay a
tax of 35% of the amount resulting from the increase to the amount of the
dividend multiplied by a factor of 1.5385, as if the distributed profits would
have been a profit after the payment of the tax. Such tax rate will decrease
by 1% in each of the subsequent years of 2003, 2004 and 2005, to a minimum rate
of 32%, while the applicable factor will be 1.5152 during 2003, 1.4925 during
2004 and 1.4706 as of 2005.

However, Mexican companies will not be subject to any income tax in
addition to the corporate tax as long as the amount maintained in its after tax
profits account (cuenta de utilidad fiscal neta, or CUFIN) exceeds or equals
the dividend payment to be made.

In addition, until December 31, 2001, Mexican companies were authorized to
defer a portion of their taxes, in which case a company was obligated to
maintain a reinvested after tax profits account (cuenta de utilidad fiscal neta
reinvertida, or CUFINRE). In this regard, companies that had elected to defer
their income taxes are required to pay such deferred taxes when distributing
their profits that were partially taxed; therefore, any dividend coming from
their CUFINRE balances will be taxed by applying a rate of 3% (in case those
profits were obtained during 1999) or of 5% (in case those profits were
obtained during 2000 and 2001) to the amount of distributed dividends already
grossed-up by the 1.5385 factor.

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Mexican companies that maintain a CUFINRE account set up under the
provisions in full force and effect during the tax years prior to 2002, must
first exhaust the balance in their CUFINRE account before they can utilize
CUFIN balances.

Disposition of Series A Shares, ADSs and CPOs

The sale or other disposition of shares or securities that represent the
ownership of assets by nonresidents are subject to income taxation in Mexico as
long as (i) they are issued by a Mexican resident, or (ii) more than 50% of the
accounting value of such shares or securities comes from immovable property
located in Mexico.

However, deposits of CPOs in exchange for ADSs and withdrawals of CPOs in
exchange for ADSs will not give rise to Mexican taxation. The sale or other
disposition of ADSs by a Foreign Holder will not be subject to Mexican tax.

The sale or other disposition of Series A Shares or CPOs by a Foreign
Holder will be:



| |  |  | Subject to Mexican income tax assessed at the rate of 25% on the
total amount of the transaction, without any deduction. The purchaser
of Series A Shares is obligated to withhold the tax only if he is a
Mexican resident or has a permanent establishment in Mexico; in any
other cases, the Foreign Holder will be obligated to pay the tax
directly to the Mexican tax authorities; or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Subject to Mexican income tax assessed at the optional rate of 35%
on the gains obtained (if any) as long as the Foreign Holder (i) has a
representative in Mexico that meets certain requirements, and is
appointed before the actual sale or disposition takes place, (ii) is
not a resident of a country considered as a tax haven or of a country
with territorial taxation system in terms of the provisions of the
Income Tax Law, and (iii) files an audited opinion of the transaction
prepared by a public accountant authorized for such purposes with the
Mexican Ministry of Finance and Public Credit. In this case, the
Foreign Holder will be obligated to pay the tax through the appointed
representative to the Mexican tax authorities. Such tax rate will
decrease 1% in each of the subsequent years of 2003, 2004 and 2005, to
a minimum rate of 32%; or
|
| |  |  | Exempt from Mexican income tax as long as (i) the transaction is
carried out through the Mexican Stock Exchange, (ii) the Foreign Holder
is an individual, and (iii) the income from the sale or other
disposition would have been exempt if obtained by a Mexican resident
individual.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

However, under the Treaty, a Foreign Holder that is eligible to claim the
benefits of the Treaty will be exempt from Mexican tax on gains realized on a
sale or other disposition of Series A Shares or CPOs, so long as such Foreign
Holder did not own, directly or indirectly, 25% or more of the outstanding
shares of the Company (including those represented by ADSs) within the 12-month
period preceding such sale or other disposition.

Estate and Gift Taxes

A Foreign Holder will not be liable in Mexico for estate, gift,
inheritance or similar taxes with respect to its holdings of Series A Shares,
CPOs or ADSs; provided, however, that gifts or any gratuitous transfers of
Series A Shares or CPOs may in certain circumstances result in the imposition
of a Mexican federal income tax upon the recipient. There are no Mexican
stamp, issue, registration or similar taxes payable by a Foreign Holder with
respect to the Series A Shares, CPOs or ADSs.

United States Federal Income Taxation

The following is a description of the material U.S. federal income tax
consequences of owning and disposing of Series A Shares, CPOs or ADSs. This
description addresses only the United States federal income tax considerations
of holders that will hold Series A Shares, CPOs or ADSs as capital assets.
This description is based on the Internal Revenue Code of 1986, as amended (the
Code), United States Treasury Regulations (temporary, proposed and final)
issued under the Code, and administrative and judicial interpretations of the
Code and regulations, each as in effect and available as of June 30, 2003.

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These income tax laws, regulations, and interpretations, however, may
change at any time, and any change could be retroactive to the issuance date of
the Series A Shares, CPOs or ADSs as the case may be. These income tax laws
and regulations are also subject to various interpretations, and the U.S.
Internal Revenue Service (the IRS) or the U.S. courts could later disagree
with the explanations or conclusions set out below.

This description does not address all of the tax consequences that may be
relevant to a holder. This description does not address, except as stated
below, any of the tax consequences to:



| |  |  | holders that may be subject to special tax treatment, such as
financial institutions, insurance companies, real estate investment
trusts, regulated investment companies, tax-exempt organizations,
grantor trusts or dealers or traders in securities or currencies,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | persons whose functional currency for U.S. federal income tax
purposes is not the U.S. Dollar, and                                                                                                                                                                   
|
| |  |  | persons that will hold Series A Shares, CPOs or ADSs as part of a
position in a straddle or as part of a hedging, conversion or other
integrated investment transaction for U.S. federal income tax purposes.                                                        

For purposes of this description, a U.S. Holder is a beneficial owner of
Series A Shares, CPOs or ADSs who for U.S. federal income tax purposes is:



| |  |  | a citizen or resident of the United States, including some former
citizens or residents of the United States;                                                                                                                                                                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a corporation or partnership created or organized in or under the
laws of the United States or any state thereof, including the District
of Columbia;                                                                                                                                                                
|
| |  |  | an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or                                                                                                                                                                                                                
|
| |  |  | a trust (1) that validly elects to be treated as a United States
person for U.S. federal income tax purposes or (2)(a) the
administration over which a U.S. court can exercise primary supervision
and (b) all of the substantial decisions of which one or more United
States persons have the authority to control.

In general, this discussion does not address the tax consequences
applicable to holders that are treated as partnerships or other pass-through
entities for U.S. federal income tax purposes. A partner of a partnership,
member in a limited liability company that is treated as a partnership for U.S.
federal income tax purposes, and other owners of a pass-through entity that
holds Series A Shares, CPOs or ADSs should consult its own tax advisor as to
such consequences.

A non-U.S. Holder is a beneficial owner of the Series A Shares, CPOs or
ADSs, other than a U.S. Holder.

ADSs

This description is based in part on the representations of the Depositary
and the assumption that each obligation in the Deposit Agreement and any
related agreement will be performed in accordance with its terms. The United
States Treasury Department has expressed concern that depositaries for American
depositary receipts, or other intermediaries between the holders of shares of
an issuer and the issuer, may be taking actions that are inconsistent with the
claiming of United States foreign tax credits by U.S. Holders of such receipts
or shares. Accordingly, the analysis regarding the sourcing rules described
below for United States foreign tax credit purposes could be affected by future
actions that may be taken by the United States Treasury Department.

This description does not address, except as stated below, any of the tax
consequences to persons that received Series A Shares, CPOs or ADSs as
compensation for the performance of services, persons that will hold Series A
Shares, CPOs or ADSs or holders that own (or are deemed to own) 10% or more (by
voting power or value) of the stock of the Company. Moreover, this summary
does not address the U.S. federal estate and gift or alternative minimum tax
consequences of the acquisition, ownership and disposition of Series A Shares
CPOs or ADSs.

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Ownership of CPOs or ADSs in General

For United States federal income tax purposes, a holder of CPOs or ADSs
generally will be treated as the owner of the Series A Shares represented by
such CPOs or ADSs.

Distributions

Subject to the discussion below under Passive Foreign Investment Company
Considerations, the gross amount of any distribution by the Company of cash or
property (other than certain distributions, if any, of Series A Shares, CPOs or
ADSs distributed pro rata to all shareholders of the Company, including holders
of CPOs or ADSs) with respect to Series A Shares, CPOs or ADSs, before
reduction for any Mexican taxes withheld therefrom, will be includible in
income by a U.S. Holder as dividend income to the extent such distributions are
paid out of the current or accumulated earnings and profits of the Company as
determined under United States federal income tax principles. Such dividends
will not be eligible for the dividends received deduction generally allowed to
corporate U.S. Holders. Subject to the discussion below under Passive Foreign
Investment Company Considerations, with respect to dividends received in
taxable years after December 31, 2002, individuals who are U.S. Holders will be
taxed on such distributions at the lower rates applicable to long-term capital
gains. Subject to the discussion below under Passive Foreign Investment
Company Considerations, to the extent, if any, that the amount of any
distribution by the Company exceeds the Companys current and accumulated
earnings and profits as determined under United States federal income tax
principles, it will be treated first as a tax-free return of the U.S. Holders
adjusted tax basis in the Series A Shares, CPOs or ADSs and thereafter as
capital gain. The Company does not maintain calculations of the Companys
earnings and profits under United States federal income tax principles.

Any such dividend paid in Pesos will be included in the gross income of a
U.S. Holder in an amount equal to the U.S. Dollar value of the Pesos on the
date of receipt. The amount of any distribution of property other than cash
will be the fair market value of such property on the date of distribution.

Dividends received by a U.S. Holder with respect to Series A Shares, CPOs
or ADSs will be treated as foreign source income, which may be relevant in
calculating such holders foreign tax credit limitation. The limitation on
foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by the
Company generally will constitute passive income, or, in the case of certain
U.S. Holders, financial services income.

Subject to the discussion below under Backup Withholding Tax and
Information Reporting Requirements, a Non-U.S. Holder of Series A Shares, CPOs
or ADSs generally will not be subject to United States federal income or
withholding tax on dividends received on Series A Shares, CPOs or ADSs, unless
such income is effectively connected with the conduct by such Non-U.S. Holder
of a trade or business in the United States.

Sale or Exchange of Series A Shares or ADSs

Subject to the discussion below under Passive Foreign Investment Company
Considerations, a U.S. Holder generally will recognize gain or loss on the
sale or exchange of Series A Shares, CPOs or ADSs equal to the difference
between the amount realized on such sale or exchange and the U.S. Holders
adjusted tax basis in the Series A Shares, CPOs or ADSs. Such gain or loss
generally will be capital gain or loss. Currently, in the case of a
noncorporate U.S. Holder, the maximum marginal United States federal income tax
rate applicable to such gain will be lower than the maximum marginal United
States federal income tax rate applicable to ordinary income (other than with
respect to taxable years of the U.S. Holder that begin after December 31, 2002,
certain dividends) if such U.S. Holders holding period for such Series A
Shares, CPOs or ADSs exceeds one year. Gain or loss, if any, recognized by a
U.S. Holder generally will be treated as United States source income or loss
for United States foreign tax credit purposes. The deductibility of capital
losses is subject to limitations.

The initial tax basis of Series A Shares to a U.S. Holder will be the U.S.
Dollar value of any Peso-denominated purchase price determined on the date of
purchase. If the Series A Shares are treated as traded on an established
securities market, a cash basis U.S. Holder (or, if it elects, an accrual
basis U.S. Holder) will determine the dollar value of the cost of such Series A
Shares by translating the amount paid at the spot rate of exchange on the

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settlement date of the purchase. The conversion of U.S. Dollars to Pesos
and the immediate use of that currency to purchase Series A Shares generally
will not result in taxable gain or loss for a U.S. Holder.

With respect to the sale or exchange of Series A Shares, the amount
realized generally will be the U.S. Dollar value of the payment received
determined on (i) the date of receipt of payment in the case of a cash basis
U.S. Holder and (ii) the date of disposition in the case of an accrual basis
U.S. Holder. If the Series A Shares are treated as traded on an established
securities market, a cash basis taxpayer (or, if it elects, an accrual basis
taxpayer) will determine the U.S. Dollar value of the amount realized by
translating the amount received at the spot rate of exchange on the settlement
date of the sale.

Subject to the discussion below under Backup Withholding Tax and
Information Reporting Requirements, a Non-U.S. Holder of Series A Shares, CPOs
or ADSs generally will not be subject to United States federal income or
withholding tax on any gain realized on the sale or exchange of such Series A
Shares, CPOs or ADSs unless (i) such gain is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business in the United States or
(ii) in the case of any gain realized by an individual Non-U.S. Holder, such
holder is present in the United States for 183 days or more in the taxable year
of such sale or exchange and certain other conditions are met.

Passive Foreign Investment Company Considerations

A Non-United States corporation will be classified as a passive foreign
investment company (a PFIC) for U.S. federal income tax purposes in any
taxable year in which, after applying certain look-through rules, either (i) at
least 75% of its gross income is passive income or (ii) at least 50% of the
gross value of its assets is attributable to assets that produce passive
income or are held for the production of passive income. Passive income for
this purpose generally includes dividends, interest, royalties, rents and gains
from commodities and securities transactions.

Based on certain estimates of the Companys gross income and gross assets
and the nature of the Companys business, the Company believes that it will not
be classified as a PFIC for the taxable year ended December 31, 2002. The
Companys status in future years will depend on the Companys assets and
activities in those years. The Company has no reason to believe that its
assets or activities will change in a manner that would cause the Company to be
classified as a PFIC. If the Company were a PFIC, a U.S. Holder of Series A
Shares, CPOs or ADSs generally would be subject to imputed interest charges and
other disadvantageous tax treatment (including, with respect to dividends
received in taxable years after December 31, 2002, the denial of the taxation
of certain dividends at the lower rates applicable to long-term capital gains,
as discussed above under Distributions) with respect to any gain from the
sale or exchange of, and certain distributions with respect to, the Series A
Shares, CPOs or ADSs.

If the Company were a PFIC, a U.S. Holder of Series A Shares, CPOs or ADSs
could make a variety of elections that may alleviate the tax consequences
referred to above, and one of these elections may be made retroactively.
However, it is expected that the conditions necessary for making certain of
such elections will not apply in the case of the Series A Shares, CPOs or ADSs.
U.S. Holders should consult their own tax advisors regarding the tax
consequences that would arise if the Company were treated as a PFIC.

U.S. Backup Withholding Tax and Information Reporting

U.S. backup withholding tax and information reporting requirements
generally will apply to certain payments to certain noncorporate holders of
stock. Information reporting generally will apply to payments of dividends on,
and to proceeds from the sale or redemption of, Series A Shares, CPOs or ADSs,
in each case, made within the United States to a holder of Series A Shares,
CPOs or ADSs (other than an exempt recipient, including a corporation, a payee
that is not a United States person who provides appropriate certification and
certain other persons). A payor will be required to withhold backup
withholding tax from any such payments within the United States to a holder
(other than an exempt recipient) if such holder fails to furnish its correct
taxpayer identification number or otherwise fails to comply with, or establish
an exemption from, such backup withholding requirements. The backup
withholding tax rate was 30% for the year 2002 and is 28% for years 2003
through 2010. In the case of such payments within the United States to a
foreign simple trust, a foreign grantor trust or a foreign partnership (other
than payments to a foreign simple trust, a foreign grantor trust or foreign
partnership that qualifies as a withholding foreign trust or a withholding
foreign partnership within the meaning of applicable U.S. Treasury Regulations
and

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payments to a foreign simple trust, a foreign grantor trust or a foreign
partnership that are effectively connected with the conduct of a trade or
business in the United States), the beneficiaries of the foreign simple trust,
the persons treated as the owners of the foreign grantor trust or the partners
of the foreign partnership, as the case may be, will be required to provide the
certification discussed above in order to establish an exemption from backup
withholding tax and information reporting requirements. Moreover, a payor may
rely on a certification provided by a payee that is not a United States person
only if such payor does not have actual knowledge or a reason to know that any
information or certification stated in such certificate is incorrect.

THE ABOVE DESCRIPTION OF MEXICAN INCOME TAXATION AND UNITED STATES FEDERAL
INCOME TAXATION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX
CONSEQUENCES RELATING TO ACQUISITION, OWNERSHIP AND DISPOSITION OF THE SERIES A
SHARES, CPOs OR ADSs. PROSPECTIVE PURCHASERS OF SERIES A SHARES, CPOs OR ADSs
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR
PARTICULAR SITUATIONS.

Documents on Display

We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended. In accordance with these requirements, we file
reports and other information with the United States Securities and Exchange
Commission. You may read and copy any reports, statements or other information
filed by us, including this annual report and the exhibits hereto, at the
Securities and Exchange Commissions public reference facilities located at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or
at one of the Securities and Exchange Commissions public reference facilities
in New York, New York and Chicago, Illinois. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference facilities. The Commission also maintains a web site at
http://www.sec.gov that contains reports, proxy statements and other
information regarding registrants that file electronically with the Commission.

Set forth below is a summary of the material provisions of our bylaws
(estatutos sociales) and applicable Mexican law. This description does not
purport to be complete and is qualified by reference to Mexican law and to the
bylaws of the Company, incorporated by reference herein.

Registration and Transfer

The Series A Shares are evidenced by share certificates in registered
form. Stockholders of the Company may hold their Series A Shares in the form
of physical certificates or indirectly through institutions that have an
account with Indeval. Accounts may be maintained at Indeval by brokers, banks
or other entities approved by the CNBV (collectively, Indeval Participants).

Voting Rights

Each of the shares of the Company entitles the holder thereof to one vote
at any general meeting of the stockholders of the Company. Currently, only
Series A Shares are outstanding.

General stockholders meetings may be ordinary meetings or extraordinary
meetings. Extraordinary general meetings are those called to consider certain
matters specified in Article 182 of the Mexican Companies Law (Ley General de
Sociedades Mercantiles), including amendments to the bylaws, anticipated
dissolution, merger and transformation from one type of company to another and
increases or decreases affecting the fixed portion of the capital stock.
General meetings called to consider all other matters, including increases and
decreases affecting the variable portion of the Companys capital stock, are
ordinary meetings. An annual ordinary general meeting must be held at least
once a year, within four months after the end of the preceding fiscal year.

The annual ordinary general meeting of stockholders is held to consider
the approval of the annual report of the Board of Directors of the Company and
for companies in which the Company has an investment that exceeds 20% of the
Companys net worth, including the approval of the financial statements for the
preceding fiscal year, the election of directors and the statutory auditor and
the allocation of the profits, if any, from the preceding year.

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The quorum for an ordinary general meeting convened at the first call is
at least 50% of all outstanding shares and action may be taken by holders of a
majority of all such shares present at such meeting. If a quorum is not
present, a subsequent meeting may be called at which a quorum shall exist
regardless of the number of shares present, and action may be taken by a
majority of the shares present at such meeting. The quorum for an
extraordinary general meeting convened at the first call is 75% of all
outstanding shares. If a quorum is not present, a subsequent meeting may be
called at which 50% of all outstanding shares constitutes a quorum. Whether on
first or subsequent call, actions at an extraordinary general meeting may be
taken only by holders of at least 50% of the outstanding shares.

Stockholders meetings may be called by:



| |  |  | the Board of Directors or the statutory auditor;                                                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | stockholders representing at least 10% of the outstanding shares
(including the Series A Shares) by requesting the Board of Directors or
the statutory auditor to issue such a call;
|
| |  |  | a Mexican court in the event the Board of Directors or the
statutory auditor do not comply with a valid request of the
stockholders described above; and                            
|
| |  |  | any stockholder when no meeting has been held for two consecutive
years or when any of the following matters has not been dealt with at
such a meeting:                             



| |  |  | the annual report of the Board of Directors regarding the Companys financial statements;
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | the appointment of directors and the statutory auditor; or                               
|
| |  |  | the compensation of the Companys directors and statutory auditor.                       

Notices of meetings must be published in a newspaper of general
circulation in Mexico City at least 15 days prior to a meeting. Only
stockholders who have either deposited their shares at the offices of the
Company or are holding certificates issued by Indeval, an Indeval Participant
or a Mexican bank and present a receipt from any such institution indicating
ownership by such person will be admitted as such to stockholders meetings. A
stockholder may be represented by an attorney-in-fact who holds a duly granted
proxy or a power-of-attorney.

Dividends

At the annual ordinary meeting of stockholders, the Board of Directors
submits the financial statements of the Company for the previous fiscal year,
together with a report thereon by the Board, to the stockholders for approval.
The stockholders, once they have approved the financial statements, determine
the allocation of the Companys distributable earnings for the preceding year.
Five percent of the Companys net income must be allocated to a legal reserve
fund until such fund reaches an amount equal to at least 20% of the Companys
then current capital stock. As of June 10, 2002, the Companys legal reserve
was Ps 193.3 million. Allocation to the legal reserve is determined without
reference to inflation adjustment under Mexican GAAP. Thereafter, the
remainder of net income is allocated as determined by the stockholders meeting
and may be distributed as dividends. All shares which are fully paid and
outstanding at the time a dividend or other distribution is declared are
entitled to share equally in such dividend or other distribution. Shares which
are only partially paid participate in a dividend or distribution in the same
proportion that such shares have been paid at the time of the dividend or
distribution.

Liquidation Rights

Upon dissolution of the Company, one or more liquidators must be appointed
by an extraordinary general meeting of the stockholders to wind up its affairs.
All fully paid and outstanding shares of capital stock will be entitled to
participate equally in any distribution upon liquidation. Partially paid
shares participate in a liquidating distribution in the same manner as they
would in a dividend distribution.

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Changes in Share Capital

The fixed portion of the Companys capital stock may be increased or
decreased at an extraordinary general meeting of stockholders. The variable
portion of the Companys capital stock may be increased or decreased in the
same manner and on the terms authorized by an ordinary stockholders meeting,
unless such increase or decrease is derived from the repurchase of the
Companys own shares which are converted into treasury shares and, subsequent
to such repurchase, sold in the public market, in which case a Board of
Directors resolution authorizing such action will be sufficient. Capital
increases and decreases must be inscribed in the Companys book of capital
variations.

Pre-Emptive Rights

In the event of a capital increase, a holder of issued and outstanding
shares has a preferential right to subscribe for a sufficient number of shares
to maintain the holders existing proportional holdings of shares. Pre-emptive
rights must be exercised within 15 days following the publication of notice of
the capital increase in the Official Gazette of the Federation (Diario Oficial
de la Federación) and in a newspaper of general circulation in Mexico City.
Under Mexican law, pre-emptive rights cannot be represented by an instrument
that is negotiable separately from the corresponding share.

Repurchase Obligation

In accordance with the Companys bylaws, and as prescribed by the CNBV,
the majority stockholders of the Company are obligated to make a public offer
for the purchase of stock of the minority stockholders in the event that the
listing of stock of the Company with the Mexican Stock Exchange is cancelled,
either by resolution of the Company or by an order of the CNBV. The price at
which the stock must be purchased by the majority stockholder is the greater
of:



| |  |  | the average quotation price for the 30 days prior to the date of the offer; or                     
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | the book value, as reflected in the last report filed with the CNBV and the Mexican Stock Exchange.

The majority stockholders are not bound to make such public offer if the
cancellation of the listing is adopted by resolution of all the stockholders of
the Company. This provision, contained in the Companys bylaws may not be
amended without the consent of holders of at least 95% of the capital stock of
the Company and the prior approval of the CNBV.

Other Provisions

Variable Capital and Withdrawal Rights. Pursuant to the Companys bylaws,
the Companys capital stock must consist of fixed capital and may have, in
addition thereto, variable capital. Currently, the Companys outstanding
capital stock consists of fixed capital in the amount of Ps 699.7 million and
variable capital in the amount of Ps 678.9 million.

The outstanding variable portion of the Companys capital stock may be
fully or partially withdrawn by the stockholders. The minimum fixed portion of
the Companys capital stock specified in the Companys bylaws cannot be
withdrawn. A stockholder who wishes to effect a total or partial withdrawal of
its shares must notify the Company in an authenticated written notice to that
effect. If notice of withdrawal is received prior to the last quarter of any
fiscal year, the withdrawal becomes effective at the end of the fiscal year in
which the notice is given. Otherwise, the withdrawal becomes effective at the
end of the following fiscal year. Because the fixed 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 would be satisfied pro rata to the
extent of the available variable capital.

Reimbursement of withdrawn shares is made at the lesser of:

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| |  |  | 95% of the average share price quoted on the Mexican Stock Exchange
during the 30 business days prior to the date on which the withdrawal
becomes effective; and                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the book value per share as calculated from the Companys financial
statements (as approved at the annual ordinary general meeting) for the
fiscal year at the end of which the withdrawal becomes effective.

Any such amount to be paid by the Company becomes due on the day following the
annual ordinary general meeting referred to above.

Right of Dissenting Stockholders to Tender Their Shares. The Mexican
Companies Law provides that upon the adoption at an extraordinary general
meeting of stockholders of resolutions approving changes in the Companys
business purpose, nationality or its form of corporate organization, dissenting
stockholders acquire the right to withdraw from a Mexican company and to compel
the Company to reimburse their shares, subject to the fulfillment of certain
terms and conditions. The amount of the reimbursement is determined by the
proportion of the tendered shares to the net worth of the Company as set forth
in the financial statements approved at the then most recent stockholders
meeting. Dissenting stockholders must perfect their withdrawal rights by
making a request to this effect within 15 days following the date on which the
meeting adopting the relevant resolution adjourns. Holders of CPOs, who cannot
vote, will not be entitled to this right. See Limitations Affecting ADS
Holders.

Restrictions on Foreign Investment. The bylaws provide that Series A
Shares may only be acquired by Mexican investors and that Series A Shares shall
at all times represent at least 51% of the Companys capital stock. The bylaws
also provide that Series B Shares may be acquired either by Mexican or
non-Mexican investors and that Series B Shares shall in no event represent no
more than 49% of the capital stock of the Company.

Forfeiture of Shares. As required by Mexican law, the bylaws of the
Company provide that any non-Mexican that at the moment of incorporation of
the Company or at any subsequent time acquires an interest or participation in
the capital stock of the Company shall be considered by virtue of such
acquisition, as a Mexican national with respect to such interest or
participation, and it shall be deemed that such non-Mexican agrees not to
invoke the protection of its government under the penalty, in case it does not
comply with such agreement, of losing such interest or participation to the
benefit of the Mexican Nation. Under this provision a non-Mexican stockholder
of the Company is deemed to have agreed not to ask such stockholders
government to interpose a diplomatic claim against the Mexican government with
respect to the stockholders rights as a stockholder. If the stockholder
should invoke such governmental protection in violation of this agreement, its
shares could be forfeited to the Mexican government. Mexican law requires that
such a provision be included in the bylaws of any Mexican corporation admitting
non-Mexican stockholders.

Duration. The Companys existence under the bylaws continues until 99
years from the date of the Companys incorporation and can be extended by
resolution of an extraordinary general meeting of stockholders.

Conflict of Interest. A stockholder that votes on a business transaction
in which its interest conflicts with that of the Company may be liable for
losses and damages only if the transaction would not have been approved without
its vote. Additionally, a member of the Board of Directors or of any committee
whose interests shall conflict with those of the Company must disclose the
conflict to the other members of the Board or the respective committee and
abstain from any deliberation or vote in connection therewith. Failure by a
Director or member to comply with such obligations may result in such Director
or member being liable for damages and losses.

Purchase by the Company of its Shares. The Company may purchase its
shares (including Series A Shares) for cancellation pursuant to a decision of
its extraordinary general meeting of stockholders. The Company may also
repurchase Series A Shares on the Mexican Stock Exchange at the then prevailing
market price in accordance with the provisions of Article 14 Bis 3 of the
Securities Market Law (Ley del Mercado de Valores). Any such repurchase must
be approved by the Board of Directors. Upon any such repurchase, the share
capital of the Company would be reduced accordingly.

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Purchase of Shares by Subsidiaries of the Company. Companies or other
entities controlled by the Company may not purchase, directly or indirectly,
shares of the Companys capital stock or shares of companies or entities that
are stockholders of the Company.

Material Contracts

On September 30, 2002, we entered into an assignment of claims whereby
Durango Paper Company assigned to us all of its claims against HG Estate, LLC
arising out of a stock purchase agreement among HG Estate, LLC, St. Marys
Railroad Corporation, W.O. Corporation and Durango Paper Company.

On October 7, 2002, we entered into a securities purchase agreement
whereby we sold all of our shares of Durango Paper Company, a holding company
that directly and indirectly held 100% of the ownership interests of Durango
Georgia Paper Company, Durango Georgia Receivables Company, Durango Georgia
Converting Corporation, Durango Georgia Converting LLC and St. Marys Railroad,
and certain promissory notes with an aggregate principal amount of US$128.8
million to Operadora Omega Internacional, S.A. de C.V., a related party, for an
aggregate of US$100,000. This gave rise to an aggregate loss of Ps 1,451.4
million. Under the agreement, we have the option to repurchase all of the
capital stock of Durango Paper Company and the notes for US$100,000 plus LIBOR
+ 4% at any time on or prior to October 7, 2012.

On February 27, 2003, our subsidiary, Empaques de Cartón Titán, S.A. de
C.V., sold the assets of its molded pulp division for approximately Ps 589.1
million, generating a profit in 2003 of Ps 316.1 million. The assets sold
included certain accounts receivable and the buyer assumed certain trade
accounts payable related to the production and sale of molded products.

Enforceability of Civil Liabilities

We are a limited liability company (sociedad anónima de capital variable)
organized under the laws of Mexico. In addition, most of our directors,
officers and controlling persons, as well as experts named in this annual
report reside outside the United States, and all or a substantial portion of
their assets and the assets of our Company are located in Mexico. As a result,
it may be difficult for investors to effect service of process within the
United States upon these persons or to enforce against them, either inside or
outside the United States, judgments obtained against these persons in U.S.
courts, or to enforce in U.S. courts judgments obtained against these persons
in courts in jurisdictions outside the United States, in each case, in any
action predicated upon civil liabilities under the U.S. federal securities
laws. The Company has been advised by Mexican counsel, White & Case S.C., that
there is doubt as to the enforceability against these persons in Mexico,
whether in original actions or in terms for enforcement of judgments of U.S.
courts, of liabilities predicated solely upon the U.S. federal securities laws.




Item 11. Quantitative and Qualitative Disclosure about Market Risk.

We periodically review our exposure to risks arising from fluctuations in
interest rates and foreign exchange and determine at the senior management
level how to manage these risks. We do not have a derivatives trading
portfolio. We have not entered into market risk sensitive instruments for
speculative purposes. See Note 11 to our audited consolidated financial
statements.

Interest Rate Risk

We face primary market risk exposure mostly due to interest rate risk. Of
our long-term interest-bearing debt at December 31, 2002, 68.3% was fixed rate
and 31.7% was variable rate. Substantially all of our long-term debt is
denominated in U.S. Dollars. As a result, depreciation of the Peso will result
in increases in our interest expense in Peso terms. Variable rate long-term
debt denominated in U.S. Dollars bears interest at rates tied to the London
interbank offered rate, or LIBOR, the rate that banks in the London
interbank market offer for U.S. Dollar deposits of varying maturities.
Although we have from time to time entered into a derivatives contract for the
purpose of hedging interest rate risk on this long-term debt, we had no open
contracts at December 31, 2002.

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The table below summarizes our debt obligations, which include notes, bank
loans and leases, at December 31, 2002. The table presents payment obligations
in thousands of Pesos by maturity date and the related weighted-average
interest rates. U.S. Dollar denominated liabilities and notional amounts have
been converted to Pesos based on the exchange rate at December 31, 2002, which
was US$1.00=Ps 10.4393.

Our notes and bank loans contain covenants, obligations and restrictions
with which we and/or our subsidiaries must comply, mainly in respect of
incurring other indebtedness, paying dividends and making other distributions,
engaging in transactions with related parties and the maintenance of certain
financial ratios, as well as paying interest and principal when due. During
November and December 2002, we failed to comply with the payment of interest
and principal on certain bank loans and were consequently in default with
respect to such obligations. According to the terms of the governing
agreements, the holders of such indebtedness may accelerate the entire amount
of principal of such debt. Therefore, according to Bulletin C-9, such
indebtedness has been classified as short-term debt.

|                     |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |           | 
|-------------------- | --------------------------------------------- | ---- | --------- | --------- | - | ---- | ------- | ------- | - | ---- | ------- | ---------- | - | ----- | ------- | ------------- | - |  | ------- | ------- | - |  | ------- | ------- | - |  | --------- | --------- |  |  | --------- | --------- | 
|Liabilities          |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |          
|                     |                                               | 2003 |           | 2004      |   | 2005 |         | 2006    |   | 2007 |         | Thereafter |   | Total |         | Fair Value(1)
|(Thousands of Pesos) |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |              
|Long-Term Debt       |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |          
|Fixed Rate:          |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |          
|                     | US$-denominated                               |      |           |         |   |      |         |       |   |      |         |          |   |       |         |             |   |  |         |       |   |  |         |       |   |  |           |         |  |  |           |         | 
|                     | Weighted average
interest rate
Variable Rate: |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |           | 
|                     | US$-denominated                               |      |           |         |   |      |         | 232,118 |   |      |         | 216,247    |   |       |         | 174,968       |   |  |         | 174,364 |   |  |         | 285,675 |   |  |           | 1,083,372 |  |  |           | 1,083,372 | 
|                     | Weighted average
interest rate                |      |           |           |   |      |         | 7.09    | % |      |         | 7.20       | % |       |         | 7.25          | % |  |         | 7.33    | % |  |         | 7.33    | % |  |           |           |  |  |           |           | 
|Short-Term Debt      |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |          
|Fixed Rate:          |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |          
|                     | US$-denominated                               |      |           | 5,914,219 |   |      |         |       |   |      |         |          |   |       |         |             |   |  |         |       |   |  |         |       |   |  |           | 5,914,219 |  |  |           |         | 
|                     | Weighted average
interest rate                |      |           | 13.32     | % |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |           | 
|Variable Rate:       |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |          
|                     | US$-denominated                               |      |           | 1,662,127 |   |      |         |       |   |      |         |          |   |       |         |             |   |  |         |       |   |  |         |       |   |  |           | 1,662,127 |  |  |           |         | 
|                     | Weighted average
interest rate                |      |           | 6.99      | % |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |           | 
|                     |                                               |      |           |           |   |      |         |         |   |      |         |            |   |       |         |               |   |  |         |         |   |  |         |         |   |  |           |           |  |  |           |           | 
|Total Debt           |                                               |      | 7,576,346 |           |   |      | 232,118 |         |   |      | 216,247 |            |   |       | 174,968 |               |   |  | 174,364 |         |   |  | 285,675 |         |   |  | 8,659,718 |           |  |  | 1,083,372 |          



---

|(1) |  | As of December 2002, due to the financial situation of the Company, the
comparable market information required to determine the estimated fair
value of long-term debt was not attainable. As such, the Company was not
able to calculate a reasonable estimate of the fair value of the Companys
long-term debt at December 31, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Foreign Currency Exchange Rate Risk

Since substantially all of our long-term interest-bearing debt is
denominated in U.S. Dollars, the interest expense varies with exchange rate
movements between the Peso and the U.S. Dollar. We have not entered into any
derivative contracts to limit our exposure to exchange rate fluctuations.
Although prices for our products in Mexico are quoted in Pesos, prices are
linked to U.S. Dollars. We believe that this link mitigates in part the effect
of exchange rate fluctuations between the U.S. Dollar and the Peso. However,
because the majority of our costs of production are paid in Pesos, in periods
in which the Peso appreciates against the U.S. Dollar, our operating margins
are reduced.

The table set forth above summarizes our debt obligations which are
sensitive to foreign currency exchange rates at December 31, 2002. The table
presents principal payment obligations in thousands of Pesos by maturity date
for U.S. Dollar-denominated debt.

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Item 12. Description of Securities Other than Equity Securities.

Not applicable.




PART II




Item 13. Defaults, Dividend Arrearages and Delinquencies.

As discussed under Item 4. Information on the CompanySignificant
Developments During 2002 and Recent Developments, on November 29, 2002, we
suspended payment of principal and interest on our unsecured debt instruments.
In December 2002, we retained financial advisors to advise us in evaluating
debt-restructuring alternatives and the sale of non-strategic assets to
implement a long-term solution to our capital structure and debt service
requirements and began discussions with our bank creditors and bondholders. As
of June 30, 2003, holders of approximately US$598 million of our debt, have
agreed to forbear from taking any action or commencing any proceeding to
enforce their rights or remedies until June 30, 2003.

The Company currently has the following payment defaults under the
following indebtedness:

Notes issued under an issuing and paying agency agreement, dated October
4, 2001, among our Company, JPMorgan Chase Bank (f/k/a Chase Manhattan Bank)
and JPMorgan Chase Bank, London Branch (f/k/a Chase Manhattan Bank, London
Branch). As of June 30, 2003, principal in the amount of US$5.0 million is in
default.

Notes issued under an indenture, dated July 25, 1996, among our Company,
Wells Fargo Bank Minnesota, National Association and JPMorgan Chase Bank (f/k/a
Chase Manhattan Bank), as amended and supplemented. As of June 30, 2003,
interest of US$2.2 million is in default.

Notes issued under an indenture, dated February 5, 2001, among our
Company, Wells Fargo Bank Minnesota, National Association and JPMorgan Chase
Bank (f/k/a Chase Manhattan Bank), as amended and supplemented. As of June 30,
2003, interest is US$38.2 million is in default.

Notes issued under an indenture, dated September 13, 2001, among our
Company, Wells Fargo Bank Minnesota, National Association and JPMorgan Chase
Bank (f/k/a Chase Manhattan Bank), as amended and supplemented. As of June 30,
2003, interest is US$1.3 million is in default.

Notes issued under an indenture, dated June 24, 2002, among our Company,
Wells Fargo Bank Minnesota, National Association and JPMorgan Chase Bank (f/k/a
Chase Manhattan Bank), as amended and supplemented. As of June 30, 2003,
interest in the amount of US$26.3 million is in default.

A promissory note issued on May 28, 2002 to HG Estate, LLC and St. Marys
Railroad Corporation in exchange for a subordinated promissory note issued by
Durango Paper Company in connection with our acquisition of Durango Paper
Company. As of June 30, 2003, interest in the amount of US$5.9 million is in
default. We are currently engaged in arbitration with HG Estate, LLC
challenging the validity of this note.

A promissory note issued on May 28, 2002 to HG Estate, LLC in exchange for
a subordinated promissory note issued by Durango Paper Company in connection
with our acquisition of Durango Paper Company. As of June 30, 2003, the total
amount of principal and interest in default is US$6.9 million. We are
currently engaged in arbitration with HG Estate, LLC challenging the validity
of this note.

A promissory note issued on May 28, 2002 to HG Estate, LLC in exchange for
a subordinated promissory note issued by Durango Paper Company in connection
with our acquisition of Durango Paper Company. As of June 30, 2003, the total
amount of principal and interest in default is US$14.5 million. We are
currently engaged in arbitration with HG Estate, LLC challenging the validity
of this note.

A promissory note issued on July 22, 2002 to Banamex by our Company (f/k/a
Grupo Industrial Durango, S.A. de C.V.). As of June 30, 2003, the total amount
of principal and interest in default is US$5.9 million.

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A bank loan made under a credit agreement dated May 25, 2001 between our
Company (f/k/a Grupo Industrial Durango, S.A. de C.V.) and Banamex. As of June
30, 2003, the total amount of principal and interest in default is US$21.4
million.

A bank loan made under a trade finance facility agreement, dated December
17, 1997, between our Company (f/k/a Grupo Industrial Durango, S.A. de C.V.)
and JPMorgan Chase Bank (f/k/a Chase Manhattan Bank). As of June 30, 2003,
the total amount of principal and interest in default is US$10.7 million.

A bank loan made under a business loan agreement, dated January 4, 2001,
between our Company (f/k/a Grupo Industrial Durango, S.A. de C.V.) and
California Commerce Bank. As of June 30, 2003, the total amount of principal
and interest in default is US$3.0 million.

A bank loan made under a business loan agreement, dated May 18, 2001,
between our Company (f/k/a Grupo Industrial Durango, S.A. de C.V.) and
California Commerce Bank. As of June 30, 2003, the total amount of principal
and interest in default is US$12.6 million.

A guaranty of a bank loan made to our former subsidiary, Durango Georgia
Receivables Company. As of June 30, 2003, the total amount of principal and
interest in default is U.S. $18.0 million.

A bank loan made under a credit agreement, dated May 22, 2002, between our
subsidiary, Durango McKinley Paper Company and the Bank of Albuquerque and
guaranteed by our subsidiary Durango International, Inc. As of June 30, 2003,
principal in the amount of US$22 million is in default.




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

Not applicable.




Item 15. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in Rules 13a-15 (c)
and 15d-15(c) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of a date which was within 90 days of this annual report
(the Evaluation Date), was carried out by the Company under the supervision
and with the participation of the Companys management, including our Chief
Executive Officer and Chief Financial Officer. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the Evaluation Date, the Companys disclosure controls and procedures have been
designed to provide, and are effective in providing, reasonable assurance that
the information required to be disclosed by the Company in reports filed under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and
forms.

Change in Internal Controls

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of their evaluation. There were no significant deficiencies or material
weaknesses, and therefore there were no corrective actions taken, including
corrective actions with regard to significant deficiencies and material
weakness.




Item 16. [Reserved].

Not applicable.

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PART III




Item 17. Financial Statements.

Not applicable.




Item 18. Financial Statements.

See
pages F-1 to F-75, incorporated herein by reference.




Item 19. Exhibits.

Documents filed as exhibits to this annual report:

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1  |  | Bylaws of the Company., as amended (English translation) (incorporated by
reference to Exhibit 1.1 to the Companys annual report on Form 20-F filed
on June 12, 2002)                                                                                                                                                                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.1  |  | Indenture, dated as of July 25, 1996, between the Company, Wells Fargo
Bank Minnesota, National Association and JPMorgan Chase Bank (f/k/a Chase
Manhattan Bank), relating to the 2003 notes (incorporated by reference to
Exhibit 4.2 to the Companys registration statement No. 333-64506 on Form
F-4 filed on July 30, 2001)                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.2  |  | Form of Indenture between CODUSA, Wells Fargo Bank Minnesota, National
Association and JPMorgan Chase Bank (f/k/a Chase Manhattan Bank), relating
to the 2006 notes (incorporated by reference from Registration Statement
No. 333-13082 on Form F-1 filed on January 19, 2001)                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.3  |  | First Supplemental Indenture, dated as of October 8, 2001, among CODUSA,
GIDUSA, Wells Fargo Bank Minnesota, National Association and JPMorgan
Chase Bank (f/k/a Chase Manhattan Bank), relating to the assumption by the
Company of CODUSAs obligations under the 2006 notes and the indenture for
the 2006 notes (incorporated by reference to Exhibit 2.3 to the Companys
annual report on Form 20-F filed on June 12, 2002)
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.4  |  | Second Supplemental Indenture, dated as of June 24, 2002 among the
Company, certain of the Companys subsidiaries, Wells Fargo Bank
Minnesota, National Association and JPMorgan Chase Bank, relating to the
guarantee by certain of our subsidiaries of the 2006 notes                                                                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.5  |  | Form of Indenture between CODUSA, Wells Fargo Bank Minnesota, National
Association and JPMorgan Chase Bank (f/k/a Chase Manhattan Bank), relating
to the 2008 notes (incorporated by reference to Exhibit 4.1 to the
Companys registration statement No. 333-64506 on Form F-4 filed on July
30, 2001)                                                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.6  |  | First Supplemental Indenture, dated as of October 8, 2001, among CODUSA,
GIDUSA, Wells Fargo Bank Minnesota, National Association and JPMorgan
Chase Bank (f/k/a Chase Manhattan Bank), relating to the assumption by the
Company of CODUSAs obligations under the 2008 notes and the indenture for
the 2008 notes (incorporated by reference to Exhibit 2.5 to the Companys
annual report on Form 20-F filed on June 12, 2002)
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.7  |  | Second Supplemental Indenture, dated as of June 24, 2002 among the
Company, certain of the Companys subsidiaries, Wells Fargo Bank
Minnesota, National Association and JP Morgan Chase Bank, relating to the
guarantee by certain of our subsidiaries of the 2008 notes                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.8  |  | Form of Indenture between the Company, Wells Fargo Bank Minnesota,
National Association and JPMorgan Chase Bank, relating to the 2009 notes                                                                                                                                                                                                                                                                                      
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.9  |  | First Supplemental Indenture, dated as of June 24, 2002, relating to the
guarantee by certain of our subsidiaries of the 2009 notes                                                                                                                                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.10 |  | Form of Amended and Restated Pledge Agreement between the Company and
JPMorgan Chase Bank (f/k/a Chase Manhattan Bank), relating to the pledge
of 2006 intercompany note issued by GIDUSA TO CODUSA (incorporated by
reference to Exhibit 4.4 to the Companys registration statement No.
333-64506 on Form F-4 filed on July 30, 2001)                                                                                          
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.11 |  | Form of Amended and Restated Unsubordinated Promissory Note issued by
GIDUSA to CODUSA (incorporated by reference to Exhibit 4.5 to the
Companys registration statement No. 333-64506 on Form F-4 filed on July
30, 2001)                                                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2.12 |  | Form of Pledge Agreement between the Company and JPMorgan Chase Bank
(f/k/a Chase Manhattan Bank), relating to the pledge of the 2008
intercompany note issued by GIDUSA to CODUSA (incorporated by reference to
Exhibit 4.6 to the Companys registration statement No. 333-64506 on Form
F-4 filed on July 30, 2001)                                                                                                           

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|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.13 |  | Form of Unsubordinated Promissory Note issued by GIDUSA to CODUSA
(incorporated by reference to Exhibit 4.8 to the Companys registration
statement No. 333-64506 on Form F-4 filed on July 30, 2001)                                                                                                                                                             
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|2.14 |  | Form of Deposit Agreement among the Company, The Bank of New York and
owners and beneficial owners of American Depositary Receipts issued
thereunder, including the form of American Depositary Receipts
(incorporated by reference to Exhibit 4.3 to the Companys registration
statement No. 33-80148 on Form F-1 filed on June 10, 1994)                       
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|2.15 |  | Trust Agreement, dated November 24, 1989, between Nacional Financiera,
S.N.C., as grantor, and Nacional Financiera, S.N.C., Trust Department, as
CPO trustee, together with an English translation (incorporated by
reference to Exhibit 4.4 to the Companys registration statement No.
33-80148 on Form F-1 filed on June 10, 1994)                             
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|2.16 |  | Public Deed with respect to the CPOs, together with an English
translation (incorporated by reference to Exhibit 4.5 to the Companys
registration statement No. 33-80148 on Form F-1 filed on June 10, 1994)                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|2.17 |  | Instrumental of Resignation, Appointment and Acceptance, dated as of
February 5, 2003, among the Company Wells Fargo Bank Minnesota, National
Association and JPMorgan Chase Bank (f/k/a Chase Manhattan Bank), relating
to the replacement of the trustee for the Companys 2003, 2006, 2008 and
2009 notes                                                      
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|2.18 |  | Forbearance Agreement, dated as of April 7, 2003, by and among the
Company, certain holders of the Companys notes and Bingham McCutchen,
LLP, as initial paying agent                                                                                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|4.1  |  | Securities Purchase Agreement, dated as of October 7, 2002, between the
Company and Operadora Omega Internacional, S.A. de C.V., relating to the
sale of 100% of the total issued and outstanding capital stock and certain
promissory notes of Durango Paper Company                                                                                             
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|4.2  |  | Asset Purchase Agreement, dated as of February 3, 2003, among the
Company, Empaques de Cartón Titán, S.A. de C.V. and Empaques Moldeados de
América Tecnologías, S.R.L. de C.V., relating to the sale of assets of the
Companys molded pulp division                                                                                                             
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|4.3  |  | Amendment No. 1, dated February 28, 2003, to the Asset Purchase
Agreement, dated as of February 3, 2003, among the Company, Empaques de
Cartón Titán, S.A. de C.V. and Empaques Moldeados de América Tecnologías,
S.R.L. de C.V., relating to the sale of assets of the Companys molded
pulp division                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|4.4  |  | Purchase Agreement, dated as of July 31, 2000, between Celulosa Avicola
de Tepatitlan, S.A. de C.V. and Envases y Empaques de México, S.A. de
C.V., relating to the purchase of mill in Jalisco, Mexico (English
translation) (incorporated by reference to Exhibit 10.4 to the Companys
registration statement No. 333-64506 on Form F-4 filed on July 30, 2001)
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|4.5  |  | Merger Agreement, dated October 8, 2001, between Corporación Durango,
S.A. de C.V. and Grupo Industrial Durango, S.A. de C.V. (English
translation) (incorporated by reference to Exhibit 4.4 to the Companys
annual report on Form 20-F filed on June 12, 2002)                                                                                                 
|     |  |                                                                                                                                                                                                                                                                                                                                                                   
|8    |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                              

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

| |                                   |                          | 
| | --------------------------------- | ------------------------ | 
| | CORPORACIÓN DURANGO, S.A. DE C.V.
| |                                   |                          | 
| | By:                               | /s/ Gabriel Villegas     | 
| |                                   |                          | 
| |                                   | Name:   Gabriel Villegas | 
| |                                   | Title:     Secretary     | 

Date: June 30, 2003

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Certification of the Principal Executive Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Miguel Rincón, the Chairman and Chief Executive Officer of Corporación
Durango, S.A. de C.V. (the Company), certify that:



| | (1) |  | I have reviewed this annual report on Form 20-F of the
Company;                                                                                                                                                                                                                                                         
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (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 Company as of, and for, the periods
presented in this annual report;                      
|
| | (4) |  | The Companys other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company
and we have:                                                                                                     
|

| | (a) |  | designed such disclosure controls and procedures
to ensure that material information relating to the Company,
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 Company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 Companys other certifying officers and I have disclosed,
based on our most recent evaluation, to the Companys auditors and
the audit committee of Company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 Companys ability to record, process, summarize and report
financial data and have identified for the Company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 Companys internal controls; and                                                                                                                                     
|

| | (6) |  | The Companys other certifying officers 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.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

/s/ Miguel Rincón
Miguel Rincón
Corporación Durango, S.A. de C.V.
Chairman and Chief Executive Officer
June 30, 2003



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##### Table of Contents



Certification of the Principal Financial Officer
Pursuant to 15 U.S.C. 78m(a) or 78o(d)
(Section 302 of the Sarbanes-Oxley Act of 2002)

I, Mayela Rincón de Velasco, the Vice President and Chief Financial Officer of
Corporación Durango, S.A. de C.V. (the Company), certify that:



| | (1) |  | I have reviewed this annual report on Form 20-F of the
Company;                                                                                                                                                                                                                                                         
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (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 Company as of, and for, the periods
presented in this annual report;                      
|
| | (4) |  | The Companys other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company
and we have:                                                                                                     
|

| | (a) |  | designed such disclosure controls and procedures
to ensure that material information relating to the Company,
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 Company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 Companys other certifying officers and I have disclosed,
based on our most recent evaluation, to the Companys auditors and
the audit committee of Company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 Companys ability to record, process, summarize and report
financial data and have identified for the Company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 Companys internal controls; and                                                                                                                                     
|

| | (6) |  | The Companys other certifying officers 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.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

/s/ Mayela Rincón de Velasco
Mayela Rincón de Velasco
Corporación Durango, S.A. de C.V.
Vice President and Chief Financial Officer
June 30, 2003



---



##### Table of Contents



Certification of the Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

I, Miguel Rincón, the Chairman and Chief Executive Officer of Corporación
Durango, S.A. de C.V. (the Company) certify that to the best of my knowledge,
based upon a review of the Annual Report on Form 20-F for the period ended
December 31, 2002 of the Company (the Report):



| | (1) |  | The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and                   
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.

/s/ Miguel Rincón
Miguel Rincón
Corporación Durango, S.A. de C.V.
Chairman and Chief Executive Officer
June 30, 2003



---



##### Table of Contents



Certification of the Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

I, Mayela Rincón de Velasco, the Vice President and Chief Financial Officer of
Corporación Durango, S.A. de C.V. (the Company) certify that to the best of
my knowledge, based upon a review of the Annual Report on Form 20-F for the
period ended December 31, 2002 of the Company (the Report):



| | (1) |  | The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and                   
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.

/s/ Mayela Rincón de Velasco
Mayela Rincón de Velasco
Corporación Durango, S.A. de C.V.
Vice President and Chief Financial Officer
June 30, 2003



---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2001 and 2002 and for the years ended December 31, 2000,
2001 and 2002

|                                                                                                                |  |            
|--------------------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                                |  | Page       
|                                                                                                                |  |            
|Report of independent accountants                                                                               |  | F2 to F-4  
|Consolidated balance sheets as of December 31, 2001 and 2002                                                    |  | F-5        
|Consolidated statements of income for the years ended December 31, 2000,
2001 and 2002                          |  | F-6        
|Consolidated statements of changes in shareholders Equity for the years ended
December 31, 2000, 2001 and 2002 |  | F-7        
|Consolidated statements of changes in financial position for the years ended
December 31, 2000, 2001 and 2002   |  | F-8        
|Notes to consolidated financial statements                                                                      |  | F-9 to F-75

COMPAÑIA PAPELERA DE ATENQUIQUE, S.A. DE C.V. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2001 and 2002 and for the years ended December 31, 2000,
2001 and 2002

|                                                                                                                |  | 
|--------------------------------------------------------------------------------------------------------------- |  | 
|Report of independent accountants                                                                               |  | 
|Consolidated balance sheets as of December 31, 2001 and 2002                                                    |  | 
|Consolidated statements of income for the years ended December 31, 2000,
2001 and 2002                          |  | 
|Consolidated statements of changes in shareholders Equity for the years ended
December 31, 2000, 2001 and 2002 |  | 
|Consolidated statements of changes in financial position for the years ended
December 31, 2000, 2001 and 2002   |  | 
|Notes to consolidated financial statements                                                                      |  | 

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

INDEX TO FINANCIAL STATEMENTS

As of December 31, 2001 and 2002 and for the years ended December 31, 2000,

|                                                                                                                |  | 
|--------------------------------------------------------------------------------------------------------------- |  | 
|Report of independent accountants                                                                               |  | 
|Consolidated balance sheets as of December 31, 2001 and 2002                                                    |  | 
|Consolidated statements of income for the years ended December 31, 2000,
2001 and 2002                          |  | 
|Consolidated statements of changes in shareholders Equity for the years ended
December 31, 2000, 2001 and 2002 |  | 
|Consolidated statements of changes in financial position for the years ended
December 31, 2000, 2001 and 2002   |  | 
|Notes to consolidated financial statements                                                                      |  | 

F-1



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

Mexico, D. F., April 25, 2003

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

We have audited the accompanying consolidated balance sheets of Corporación
Durango, S.A. de C.V. and subsidiaries (formerly Grupo Industrial Durango, S.
A. de C. V. and subsidiaries), as of December 31, 2001 and 2002 and the related
consolidated statements of income, of changes in shareholders equity and of
changes in financial position for each of the three years in the period ended
December 31, 2002, which, as described in Note 2, have been prepared on the
basis of accounting principles generally accepted in Mexico. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Corporación Durango, S. A. de C. V. and subsidiaries (formerly Grupo Industrial
Durango, S. A. de C. V. and subsidiaries), as of December 31, 2001 and 2002 and
the consolidated results of their operations, the changes in their
shareholders equity and the changes in their financial position for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in Mexico.

F-2



---



##### Table of Contents





|1. |  | The accompanying financial statements have been prepared considering the
Company as a going concern, which assumes that assets will be realized and
liabilities will be settled with in the normal course of business
operations. As mentioned in Note 10, the Company has significant bank
loans and bondholder debt, which requires, aside from compliance with a
number of financial ratios, compliance with prompt payment upon maturity
of principal and interest. As a result of both internal and external
market and economic factors, in the last quarter of fiscal year 2002, the
Company experienced a significant reduction in cash flow, which resulted
in the inability to pay principal and interest in the case of certain
obligations that matured in November and December 2002. As a result of
these factors, the Company reclassified several bank loans as short-term
debt as the Company was in default with its bank creditors and
bondholders. The Companys current financial situation raises substantial
doubt about its ability to continue as a going concern.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | As a consequence, the Company shows negative working capital at December 31,
2002, amounting to $5,932,855 thousand, and a net loss of $3,545,923
thousand in the period ended December 31, 2002. Due to the above-mentioned
financial and operating deterioration, the Companys ability to continue
operating as a going concern will depend on managements ability to generate
profits, obtain waivers from its creditors and/or renegotiate the bank and
bond debts or obtain new financing. The accompanying financial statements
include no adjustment pertaining to the recoverability and classification of
the amounts recorded as assets and the amounts and classification of the
liabilities that may become necessary in the event that the Company is
unable to continue in operation as a going concern.                                                                                                                                                                                                                                                                   
|  
|2. |  | As mentioned in Note 1 iii, the Companys Management sold the shares of
Durango Paper Co. to Operadora Omega, S.A de C.V. (related party) in
October 2002, with the effects mentioned in that Note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|3. |  | As mentioned in Note 1 to the financial statements, at the General
Extraordinary Shareholders Meeting held on October 8, 2001, the
shareholders approved the merger of Corporación Durango, S.A. de C.V.
(CODUSA) into its subsidiary Grupo Industrial Durango, S.A. de C.V.
(GIDUSA). The merger was effective for financial purposes on October 8,
2001. In connection with the merger, the Company changed its name to
Corporación Durango, S.A de C.V. on February 7, 2002, when its bylaws were
amended. The merger was effected through the exchange of all of the
outstanding shares in CODUSA for shares in GIDUSA, whose name was changed
on the same date to Corporación Durango, S.A. de C.V.                                                                                                                                                                                                                                                                                                                                                                              

F-3



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##### Table of Contents



Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of accounting principles generally accepted in the
United Sates of America would have affected the determination of consolidated
net income for each of the three years in the period ended December 31, 2002
and the determination of consolidated shareholders equity as of December 31,
2001 and 2002, to the extent summarized in Note 21 to the consolidated
financial statement.

PricewaterhouseCoopers





Rafael Maya Urosa
Public Accountant

F-4



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2002
(Notes 1, 2, 3 and 4)
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                                                                          |  |              |            |      |  |   |            |  
|------------------------------------------------------------------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                                                                          |  | December 31,
|                                                                          |  |             
|                                                                          |  | 2001         |            | 2002
|                                                                          |  |              |            |     
|ASSETS                                                                    |  |              |            |      |  |   |            |  
|CURRENT ASSETS:                                                           |  |              |            |      |  |   |            |  
|Cash and temporary investments                                            |  | $            | 508,894    |      |  | $ | 255,711    |  
|Accounts receivable, net (Note 6)                                         |  |              | 2,230,610  |      |  |   | 1,937,042  |  
|Taxes recoverable                                                         |  |              | 29,688     |      |  |   | 38,797     |  
|Inventories, net (Note 7)                                                 |  |              | 1,459,597  |      |  |   | 1,277,433  |  
|Prepaids                                                                  |  |              | 26,850     |      |  |   | 28,551     |  
|                                                                          |  |              |            |      |  |   |            |  
|Total current assets                                                      |  |              | 4,255,639  |      |  |   | 3,537,534  |  
|PROPERTY, PLANT AND EQUIPMENT, net (Note 8)                               |  |              | 16,488,984 |      |  |   | 13,063,711 |  
|OTHER ASSETS (Note 9)                                                     |  |              | 532,908    |      |  |   | 711,429    |  
|                                                                          |  |              |            |      |  |   |            |  
|Total assets                                                              |  | $            | 21,277,531 |      |  | $ | 17,312,674 |  
|                                                                          |  |              |            |      |  |   |            |  
|LIABILITIES                                                               |  |              |            |      |  |   |            |  
|CURRENT LIABILITIES:                                                      |  |              |            |      |  |   |            |  
|Bank loans (Note 10)                                                      |  | $            | 317,775    |      |  | $ | 7,292,875  |  
|Interest payable                                                          |  |              | 302,083    |      |  |   | 453,057    |  
|Current portion of long-term debt (Note 10)                               |  |              | 299,621    |      |  |   | 283,471    |  
|Trade accounts payable                                                    |  |              | 1,218,333  |      |  |   | 899,471    |  
|Notes payable                                                             |  |              | 36,739     |      |  |   | 49,624     |  
|Accrued liabilities and other payables                                    |  |              | 468,876    |      |  |   | 489,551    |  
|Employee profit sharing                                                   |  |              | 9,020      |      |  |   | 2,340      |  
|                                                                          |  |              |            |      |  |   |            |  
|Total current liabilities                                                 |  |              | 2,652,447  |      |  |   | 9,470,389  |  
|                                                                          |  |              |            |      |  |   |            |  
|LONG TERM LIABILITIES:                                                    |  |              |            |      |  |   |            |  
|Long-term debt (Note 10)                                                  |  |              | 7,243,673  |      |  |   | 1,083,372  |  
|Notes payable                                                             |  |              | 86,363     |      |  |   | 136,932    |  
|Derivative instruments (Note 11b)                                         |  |              | 72,157     |      |  |   |           |  
|Deferred tax (Note 15)                                                    |  |              | 3,090,368  |      |  |   | 2,009,274  |  
|Other liabilities                                                         |  |              | 16,199     |      |  |   |           |  
|Pension plans and seniority premiums (Note 12)                            |  |              | 239,654    |      |  |   | 182,409    |  
|                                                                          |  |              |            |      |  |   |            |  
|Total long-term liabilities                                               |  |              | 10,748,414 |      |  |   | 3,411,987  |  
|                                                                          |  |              |            |      |  |   |            |  
|Total liabilities                                                         |  |              | 13,400,861 |      |  |   | 12,882,376 |  
|                                                                          |  |              |            |      |  |   |            |  
|Contingencies and commitments (Note 13)                                   |  |              |           |      |  |   |           |  
|                                                                          |  |              |            |      |  |   |            |  
|SHAREHOLDERS EQUITY                                                      |  |              |            |      |  |   |            |  
|CONTRIBUTED CAPITAL                                                       |  |              |            |      |  |   |            |  
|Capital stock (Note 14)                                                   |  |              |            |      |  |   |            |  
|Nominal                                                                   |  |              | 1,412,214  |      |  |   | 1,412,214  |  
|Restatement                                                               |  |              | 3,260,252  |      |  |   | 3,260,252  |  
|                                                                          |  |              |            |      |  |   |            |  
|                                                                          |  |              | 4,672,466  |      |  |   | 4,672,466  |  
|                                                                          |  |              |            |      |  |   |            |  
|Additional paid-in capital                                                |  |              | 1,271,766  |      |  |   | 1,222,835  |  
|                                                                          |  |              |            |      |  |   |            |  
|Retained earnings (Note 14)                                               |  |              | 9,494,771  |      |  |   | 5,948,848  |  
|                                                                          |  |              |            |      |  |   |            |  
|Deficit from restatement                                                  |  |              | (4,485,883 | )    |  |   | (4,384,180 | )
|                                                                          |  |              |            |      |  |   |            |  
|Adjustment for additional pension liability related
to seniority premiums |  |              | (140,858   | )    |  |   | (140,858   | )
|                                                                          |  |              |            |      |  |   |            |  
|Deferred income tax (Note 3n)                                             |  |              | (2,963,255 | )    |  |   | (2,963,255 | )
|                                                                          |  |              |            |      |  |   |            |  
|Cumulative translation adjustment of foreign subsidiaries                 |  |              | (14,191    | )    |  |   | 6,024      |  
|                                                                          |  |              |            |      |  |   |            |  
|Total majority interest                                                   |  |              | 7,834,816  |      |  |   | 4,361,880  |  
|Total minority interest                                                   |  |              | 41,854     |      |  |   | 68,418     |  
|                                                                          |  |              |            |      |  |   |            |  
|Total shareholders equity                                                |  |              | 7,876,670  |      |  |   | 4,430,298  |  
|                                                                          |  |              |            |      |  |   |            |  
|Total liabilities and shareholders equity                                |  | $            | 21,277,531 |      |  | $ | 17,312,674 |  
|                                                                          |  |              |            |      |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.

F-5



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(Notes 1, 2, 3 and 4)

(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                                                                                                      |  | 2000 |            | 2001 |  | 2002
|                                                                                                                                                                      |  |      |            |      |  |     
|NET SALES                                                                                                                                                             |  | $    | 12,921,871 |      |  | $    | 10,532,395 |   |  | $ | 8,498,205  |  
|COSTS OF SALES                                                                                                                                                        |  |      | 10,652,130 |      |  |      | 8,770,658  |   |  |   | 7,242,966  |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Gross profit                                                                                                                                                          |  |      | 2,269,741  |      |  |      | 1,761,737  |   |  |   | 1,255,239  |  
|Selling, general and administrative expenses                                                                                                                          |  |      | 803,267    |      |  |      | 728,132    |   |  |   | 611,262    |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|OPERATING INCOME                                                                                                                                                      |  |      | 1,466,474  |      |  |      | 1,033,605  |   |  |   | 643,977    |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Other expense, net                                                                                                                                                    |  |      | (16,386    | )    |  |      | (40,309    | ) |  |   | (46,506    | )
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|FINANCING COST (INCOME):                                                                                                                                              |  |      |            |      |  |      |            |   |  |   |            |  
|Interest expense                                                                                                                                                      |  |      | 1,091,732  |      |  |      | 1,077,654  |   |  |   | 1,088,703  |  
|Interest income                                                                                                                                                       |  |      | (123,629   | )    |  |      | (66,897    | ) |  |   | (39,165    | )
|Foreign exchange loss (gain), net                                                                                                                                     |  |      | 101,628    |      |  |      | (313,372   | ) |  |   | 1,049,835  |  
|Gain from monetary position                                                                                                                                           |  |      | (600,596   | )    |  |      | (310,005   | ) |  |   | (415,172   | )
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|                                                                                                                                                                      |  |      | 469,135    |      |  |      | 387,380    |   |  |   | 1,684,201  |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Amortization of negative goodwill (Note 4)                                                                                                                            |  |      | 1,513,928  |      |  |      | 495,297    |   |  |   |           |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Special items (Note 17)                                                                                                                                               |  |      |           |      |  |      |           |   |  |   | (1,451,431 | )
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Income (loss) before provisions for income and asset taxes,
Employee Profit sharing, deferred income tax, extraordinary
items, impairment loss and minority interests |  |      | 2,494,881  |      |  |      | 1,101,213  |   |  |   | (2,538,161 | )
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Current income and asset taxes (Note 15)                                                                                                                              |  |      | (289,875   | )    |  |      | (235,819   | ) |  |   | (114,382   | )
|Employee profit sharing                                                                                                                                               |  |      | (7,596     | )    |  |      | (4,720     | ) |  |   | (1,041     | )
|Deferred income tax (loss) benefit (Note 15)                                                                                                                          |  |      | (387,519   | )    |  |      | 267,291    |   |  |   | 667,294    |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|                                                                                                                                                                      |  |      | (684,990   | )    |  |      | 26,752     |   |  |   | 551,871    |  
|Income (loss) before extraordinary items, impairment
loss and minority interest                                                                                       |  |      | 1,809,891  |      |  |      | 1,127,965  |   |  |   | (1,986,290 | )
|Impairment loss (Note 8)                                                                                                                                              |  |      |           |      |  |      |           |   |  |   | (1,556,511 | )
|Extraordinary items (Note 18)                                                                                                                                         |  |      |           |      |  |      | (298,638   | ) |  |   |           |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Net income (loss) before minority interest                                                                                                                            |  |      | 1,809,891  |      |  |      | 829,327    |   |  |   | (3,542,801 | )
|Minority interest                                                                                                                                                     |  |      | 175,318    |      |  |      | 4,029      |   |  |   | 3,122      |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Net income (loss)                                                                                                                                                     |  | $    | 1,634,573  |      |  | $    | 825,298    |   |  | $ | (3,545,923 | )
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Basic and diluted income (loss) per share                                                                                                                             |  | $    | 17.38      |      |  | $    | 8.77       |   |  | $ | (38.20     | )
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  
|Weighted average shares outstanding (000s)                                                                                                                           |  |      | 94,072     |      |  |      | 94,072     |   |  |   | 92,828     |  
|                                                                                                                                                                      |  |      |            |      |  |      |            |   |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.

F-6



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(Notes 1, 2, 3 and 4)

(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|                                              |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   |             |   |  |  |             |  
|--------------------------------------------- |  | ------------- | --------- | ----------- |  | ------- | ---------- | ------- |  | ------- | --------- | ----- |  | ---------------------------- | -------- | ------- |  | ------------ | ---------- | - |  | - | ----------- | - |  |  | ----------- | -
|                                              |  |               |           |             |  |         |            |         |  |         |           |       |  | Retained earnings (Note 15): |          |         |  |             
|                                              |  | Capital stock |           |             |  |         |            |         |  |         |           |      
|                                              |  |               |           | Additional  |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |  
|                                              |  |               |           |             |  |         |            |         |  | Paid in |           | Legal |  | Prior                        |          | Current |  | Deficit from
|                                              |  | Nominal       |           | Restatement |  | capital |            | reserve |  | year    |           | year  |  | restatement                 
|                                              |  |               |           |             |  |         |            |         |  |         |           |       |  |                             
|Combined balances as of January 1, 2000       |  | $             | 527,040   |             |  | $       | 2,048,881  |         |  | $       | 803,093   |       |  | $                            | 113,972  |         |  | $            | 5,183,455  |   |  | $ | 1,073,662   |   |  |  | ($2,113,279 | )
|Paid in capital                               |  |               | 1,844,847 |             |  |         | 312,504    |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   |             |   |  |  |             |  
|Appropriation of 1999 net income              |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              | 372,925    |   |  |   | (372,925    | ) |  |  |             |  
|Loss on operations on own shares              |  |               |           |             |  |         |            |         |  |         | (49,087   | )     |  |                              |          |         |  |              |            |   |  |   |             |   |  |  |             |  
|Comprehensive income                          |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   | 1,634,573   |   |  |  | (524,999    | )
|Cancellation of GIDUSA shareholders equity   |  |               | (470,071  | )           |  |         | (1,941,498 | )       |  |         | (803,092  | )     |  |                              | (103,896 | )       |  |              | (2,383,420 | ) |  |   | (700,737    | ) |  |  | 2,668,444   |  
|                                              |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   |             |   |  |  |             |  
|Consolidated balances as of December 31, 2000 |  |               | 1,901,816 |             |  |         | 419,887    |         |  |         | (49,086   | )     |  |                              | 10,076   |         |  |              | 3,172,960  |   |  |   | 1,634,573   |   |  |  | 30,166      |  
|Appropriation of 2000 net income              |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              | 420,791    |   |  |   | (420,791    | ) |  |  |             |  
|Effects of merger                             |  |               | (489,602  | )           |  |         | 2,840,365  |         |  |         | 1,320,852 |       |  |                              | 179,249  |         |  |              | 4,886,397  |   |  |   | (1,213,782  | ) |  |  | (3,545,359  | )
|Comprehensive loss                            |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   | 825,298     |   |  |  | (970,690    | )
|                                              |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   |             |   |  |  |             |  
|Consolidated balances as of December 31, 2001 |  |               | 1,412,214 |             |  |         | 3,260,252  |         |  |         | 1,271,766 |       |  |                              | 189,325  |         |  |              | 8,480,148  |   |  |   | 825,298     |   |  |  | (4,485,883  | )
|Appropriation of 2001 net income              |  |               |           |             |  |         |            |         |  |         |           |       |  |                              | 40,424   |         |  |              | 784,874    |   |  |   | (825,298    | ) |  |  |             |  
|Swaps cancellation                            |  |               |           |             |  |         |            |         |  |         | (48,931   | )     |  |                              |          |         |  |              |            |   |  |   |             |   |  |  |             |  
|Comprehensive loss                            |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   | (3,545,923  | ) |  |  | 101,703     |  
|                                              |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   |             |   |  |  |             |  
|Consolidated balances as of December 31, 2002 |  | $             | 1,412,214 |             |  | $       | 3,260,252  |         |  | $       | 1,222,835 |       |  | $                            | 229,749  |         |  | $            | 9,265,022  |   |  |   | ($3,545,923 | ) |  |  | ($4,384,180 | )
|                                              |  |               |           |             |  |         |            |         |  |         |           |       |  |                              |          |         |  |              |            |   |  |   |             |   |  |  |             |  

[Additional columns below]

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

|                                              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   |            |       |  |   |            |   |  |   |            |  
|--------------------------------------------- |  | ----------------- | --------- | ---------- |  | ------------ | ----------- | ----------- |  | -------- | ------- | ------------- |  | - | ---------- | ----- |  | - | ---------- | - |  | - | ---------- | -
|                                              |  | Adjustment        |           |            |  |              |             | Cumulative  |  |          |         |               |  |   |            |       |  |   |            |  
|                                              |  | for additional    |           |            |  |              |             | translation |  |          |         |               |  |   |            |       |  |   |            |  
|                                              |  | pension liability |           |            |  |              |             | adjustment  |  | Total    |         |               |  |   |            | Total
|                                              |  | related to senio- |           | Deferred   |  | of foreign   |             | Majority    |  | Minority |         | shareholders'
|                                              |  | irity premiums    |           | income tax |  | subsidiaries |             | interest    |  | interest |         | equity       
|                                              |  |                   |           |            |  |              |             |             |  |          |         |              
|Combined balances as of January 1, 2000       |  | $                 |          |            |  | $            |            |             |  | $        | 3,118   |               |  | $ | 7,639,942  |       |  | $ | 2,614,927  |   |  | $ | 10,254,869 |  
|Paid in capital                               |  |                   |           |            |  |              |             |             |  |          |         |               |  |   | 2,157,351  |       |  |   |            |   |  |   | 2,157,351  |  
|Appropriation of 1999 net income              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   |           |       |  |   |            |   |  |   |           |  
|Loss on operations on own shares              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   | (49,087    | )     |  |   | (34,095    | ) |  |   | (83,182    | )
|Comprehensive income                          |  |                   | (12,658   | )          |  |              | (492,463    | )           |  |          | 11,179  |               |  |   | 615,632    |       |  |   | 1,535,768  |   |  |   | 2,151,400  |  
|Cancellation of GIDUSA shareholders equity   |  |                   |           |            |  |              |             |             |  |          | 2,491   |               |  |   | (3,731,779 | )     |  |   | (2,552,770 | ) |  |   | (6,284,549 | )
|                                              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   |            |       |  |   |            |   |  |   |            |  
|Consolidated balances as of December 31, 2000 |  |                   | (12,658   | )          |  |              | (492,463    | )           |  |          | 16,788  |               |  |   | 6,632,059  |       |  |   | 1,563,830  |   |  |   | 8,195,889  |  
|Appropriation of 2000 net income              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   |            |       |  |   |            |   |  |   |            |  
|Effects of merger                             |  |                   |           |            |  |              | (2,470,792  | )           |  |          | (11,118 | )             |  |   | 1,496,210  |       |  |   | (1,526,004 | ) |  |   | (29,794    | )
|Comprehensive loss                            |  |                   | (128,200  | )          |  |              |             |             |  |          | (19,861 | )             |  |   | (293,453   | )     |  |   | 4,028      |   |  |   | (289,425   | )
|                                              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   |            |       |  |   |            |   |  |   |            |  
|Consolidated balances as of December 31, 2001 |  |                   | (140,858  | )          |  |              | (2,963,255  | )           |  |          | (14,191 | )             |  |   | 7,834,816  |       |  |   | 41,854     |   |  |   | 7,876,670  |  
|Appropriation of 2001 net income              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   |           |       |  |   |            |   |  |   |           |  
|Swaps cancellation                            |  |                   |           |            |  |              |             |             |  |          |         |               |  |   | (48,931    | )     |  |   |            |   |  |   | (48,931    | )
|Comprehensive loss                            |  |                   |           |            |  |              |             |             |  |          | 20,215  |               |  |   | (3,424,005 | )     |  |   | 26,564     |   |  |   | (3,397,441 | )
|                                              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   |            |       |  |   |            |   |  |   |            |  
|Consolidated balances as of December 31, 2002 |  |                   | ($140,858 | )          |  |              | ($2,963,255 | )           |  | $        | 6,024   |               |  | $ | 4,361,880  |       |  | $ | 68,418     |   |  | $ | 4,430,298  |  
|                                              |  |                   |           |            |  |              |             |             |  |          |         |               |  |   |            |       |  |   |            |   |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.

F-7



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(Notes 1, 2, 3 and 4)

(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                |  | 2000 |            | 2001 |  | 2002
|                                                                                |  |      |            |      |  |     
|OPERATING ACTIVITIES:                                                           |  |      |            |      |  |      |            |   |  |   |            |  
|Net income (loss) before minority interest                                      |  | $    | 1,809,891  |      |  | $    | 829,327    |   |  | $ | (3,542,801 | )
|Items recognized in net income not (generating)
requiring the use of resources: |  |      |            |      |  |      |            |   |  |   |            |  
|Depreciation and amortization                                                   |  |      | 564,683    |      |  |      | 492,288    |   |  |   | 475,429    |  
|Amortization of negative goodwill                                               |  |      | (1,513,928 | )    |  |      | (495,297   | ) |  |   |           |  
|Deferred income tax                                                             |  |      | 387,519    |      |  |      | (267,291   | ) |  |   | (667,294   | )
|Special items (Note 17)                                                         |  |      |           |      |  |      |           |   |  |   | 1,451,431  |  
|Impairment loss (Note 8)                                                        |  |      |           |      |  |      |           |   |  |   | 1,556,511  |  
|Other                                                                           |  |      | 97,548     |      |  |      | 78,376     |   |  |   | 137,869    |  
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|                                                                                |  |      | 1,345,713  |      |  |      | 637,403    |   |  |   | (588,855   | )
|Changes in operating assets and liabilities:                                    |  |      |            |      |  |      |            |   |  |   |            |  
|(Increase) decrease in accounts receivable, net                                 |  |      | 173,854    |      |  |      | 62,253     |   |  |   | (40,220    | )
|(Increase) decrease in inventories                                              |  |      | (67,274    | )    |  |      | 965,540    |   |  |   | (372,889   | )
|Increase in other assets                                                        |  |      | (13,116    | )    |  |      | (62,858    | ) |  |   | (5,890     | )
|Increase (decrease) in other accounts payable and
accrued expenses              |  |      | (82,369    | )    |  |      | (696,186   | ) |  |   | 870,233    |  
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|Resources generated by (used in) operating activities                           |  |      | 1,356,808  |      |  |      | 906,152    |   |  |   | (137,621   | )
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|FINANCING ACTIVITIES:                                                           |  |      |            |      |  |      |            |   |  |   |            |  
|Bank loans                                                                      |  |      | (130,094   | )    |  |      | 2,571,709  |   |  |   | 3,157,591  |  
|Payment of bank loans                                                           |  |      | (145,029   | )    |  |      | (3,107,122 | ) |  |   | (2,358,942 | )
|Long-term debt, net                                                             |  |      | (10,841    | )    |  |      | (115,067   | ) |  |   | (62,912    | )
|Paid in capital                                                                 |  |      | 2,160,999  |      |  |      |           |   |  |   |           |  
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|Resources generated by (used in) financing activities                           |  |      | 1,875,035  |      |  |      | (650,480   | ) |  |   | 735,737    |  
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|INVESTING ACTIVITIES:                                                           |  |      |            |      |  |      |            |   |  |   |            |  
|Additions to property, plant and equipment, net                                 |  |      | (1,092,054 | )    |  |      | (345,591   | ) |  |   | (305,255   | )
|Increase (decrease) in minority interest                                        |  |      |           |      |  |      | (6,656     | ) |  |   | 23,430     |  
|Investment in subsidiaries                                                      |  |      | (2,160,999 | )    |  |      |           |   |  |   | (204,770   | )
|Other assets                                                                    |  |      | (105,248   | )    |  |      | (205,717   | ) |  |   | (364,704   | )
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|Resources used in investing activities                                          |  |      | (3,358,301 | )    |  |      | (557,964   | ) |  |   | (851,299   | )
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|Decrease in cash and temporary investments                                      |  |      | (126,458   | )    |  |      | (302,292   | ) |  |   | (253,183   | )
|CASH AND TEMPORARY INVESTMENTS AT THE
BEGINNING OF THE YEAR                     |  |      | 937,644    |      |  |      | 811,186    |   |  |   | 508,894    |  
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  
|CASH AND TEMPORARY INVESTMENTS AT THE
END OF THE YEAR                           |  | $    | 811,186    |      |  | $    | 508,894    |   |  | $ | 255,711    |  
|                                                                                |  |      |            |      |  |      |            |   |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.

F-8



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

NOTE 1  ENTITY AND NATURE OF BUSINESS:



|i. |  | Entity
|-- |  | ------

The consolidated financial statements as of December 31, 2002 referred to
herein reflect the accounts of Corporación Durango, S.A. de C.V. (CODUSA) and
its subsidiaries, which arose from the merger of Grupo Industrial Durango, S.A.
de C.V. (GIDUSA) and its subsidiaries and Corporación Durango, S.A. de C.V.
and its subsidiaries (collectively, the Company). The Company is primarily
engaged in the manufacturing and selling of packaging (corrugated container,
molded pulp, and multi-wall sacks and bags), paper (kraft and semikraft paper
and paper to be used in the manufacturing of newspaper, books and magazines)
and other business products (plywood, particleboard and lumber) in Mexico and
in the United States of America (U.S.).

The following transactions have occurred over the last three years:



|a. |  | In March 2000, CODUSA acquired 46,892,700 Series A shares of GIDUSA in
different transactions over the Bolsa Mexicana de Valores (Mexican Stock
Exchange), at prices ranging between $63.83 and $66.21 Mexican Pesos per
share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b. |  | As a result of the acquisition of Series A shares mentioned above,
CODUSA and its affiliated companies held approximately 87% of Series A
shares of GIDUSA, with the remaining shares available in the public
market. As of December 31, 2000, the Rincón family held 59% and 100% of
the outstanding shares of GIDUSA and CODUSA, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|c. |  | At the General Extraordinary Shareholders Meeting held on October 8,
2001, the shareholders of CODUSA approved the merger of CODUSA into its
subsidiary, GIDUSA. The merger was effective for financial purposes on
October 8, 2001. In connection with the merger, the Company changed its
name to Corporación Durango, S.A. de C.V. on February 7, 2002, when its
bylaws were amended. The merger was effected through the exchange of
shares in CODUSA for shares in GIDUSA. As a result of the merger, the
Company recorded a net decrease in shareholders equity of $49,089 and
issued 72,257,378 common nominative shares without par value. As of
December 31, 2001 the total number of shares outstanding was 94,072,122.
In May 2002, the Company repurchased 2,240,000 shares as treasury shares.

F-9



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|d. |  | As a result of this merger, the financial statements for the years ended
December 31, 2000, 2001 and 2002 are presented on a consolidated basis.
The minority interest in CODUSAs consolidated financial statements prior
to the merger reflected the shareholding in GIDUSA not owned by CODUSA.
This minority interest was eliminated upon the merger.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii. |  | Current status of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In order to expand its production plant and continue to consolidate as a
leader in the paper industry throughout Mexico and Latin America, the
company and its subsidiaries have contracted significant financing from
banks in Mexico and abroad, mainly in the U.S. Additionally, on
different dates it placed certain debt bonds on the New York securities
market. Both types of financing were realized in U.S. dollars.
However, in 2002, the Company and its subsidiaries were severely
affected by a combination of economic factors, such as the slowdown of
the U.S. and the international economies, a significant drop in the
world price of paper, a drastic reduction in the demand for
manufactured products requiring the goods supplied by the Company, an
increase in the cost of raw materials, electric power, gas and labor,
and the entry of imported products into the Mexican market.
|
| |     |  | The above-mentioned negative economic events led to a significant
reduction in the generation of cash flow for the Company and its
subsidiaries during the last quarter of fiscal year 2002, and the
Company was unable to cover the payment of interest and capital on
certain debts maturing in November and December 2002, which meant that
it was unable to comply with certain obligations imposed by the banks
and bondholders in order to maintain the maturity terms of the capital.
Said loans and debt bonds have been classified as short term (see Note
10 e), resulting in negative working capital and serious doubts as to
the ability of the Company to continue in operation as a going concern.                                                                                                                                                                                            
|
| |     |  | As a result of the foregoing, the Company began a financial
restructuring process in November 2002, by holding discussions with the
banks and bondholders in an effort to agree on a debt refinancing plan
and the sale of non-strategic assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |     |  | In April 2003, the Company signed a Forbearance Agreement; most of the
creditors have agreed to continue productive financial discussions
regarding the terms of the recapitalization of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | The Companys expectation is that its financial structure will be
enforced after the restructuring plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-10



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



| | iii. |  | Sale of Durango Paper Company                                                                                                                                                                                                                                                                                                                                                           
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      |  | In August 2002, Durango Paper Company (DPC) had a boiler explosion at one
of its plants located in Georgia, which made it necessary to suspend
operations and gave rise to significant losses. Additionally, at the date of
the accident, the Company did not have insurance
coverage for such an event. As such, the Company was exposed to the entire
loss relating to the incident.
|
| |      |  | In October 2002, the Company sold its investment in Durango Paper Co. to
Operadora Omega Internacional, S.A. de C.V. (related company).                                                                                                                                                                                                                                                 
|
| |      |  | The sale was made for an aggregate amount of $1,016 (US$100,000), allocated
US$50,000 for the purchase of the capital stock and US$50,000 for the
purchase of certain promissory notes due to the Company. This sale gave rise
to an aggregate loss of $1,451,431, which was considered as a special item in
the statement of income (see Note 17).                                     

NOTE 2  BASIS OF PRESENTATION:



|a. |  | Monetary unit
|-- |  | -------------

Amounts in the consolidated financial statements and footnotes thereto are
stated in thousands of Mexican Pesos (except for shares and per share amounts),
as are the records of the Company, in conformity with corresponding laws. In
these financial statements, references to $ are to Mexican Pesos and
references to US$ are to U.S. Dollars.



|b. |  | Basis of presentation
|-- |  | ---------------------

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Mexico (Mexican GAAP) as
promulgated by the Mexican Institute of Public Accountants (MIPA).
Additionally, Bulletin A-8, Supplementary Application of International
Accounting Standards states that where Mexican GAAP does not provide guidance,
International Accounting Standards must be applied. A reconciliation from
Mexican GAAP to Generally Accepted Accounting Principles in the United States
of America. (U.S. GAAP) is included in Note 21.



|c. |  | Basis of consolidation
|-- |  | ----------------------

All significant inter-company accounts and transactions have been eliminated in
consolidation.

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

The consolidation was based on the audited individual financial statements of
the individual subsidiaries. The consolidated financial statements include the
assets, liabilities and results of the subsidiaries in which the Company holds
over 50% of common stock and exercises control over operating and financial
activities.

The reportable segments and principal subsidiaries within those segments, along
with their main activities are the following:

Packaging

Manufacturing and selling of corrugated containers, molded pulp and multi-wall
sacks and bags.

Empaques de Cartón Titán, S.A. de C.V. and subsidiaries (see Note 20)
Durango McKinley Paper Company

Paper

Manufacturing and selling of kraft and semikraft paper made with virgin pulp
and/or recycled paper.

Compañía Papelera de Atenquique, S.A. de C.V. and subsidiaries (formerly Compañía Industrial de Atenquique, S.A. de C.V. and subsidiaries)
Industrias Centauro, S.A. de C.V.
Grupo Pipsamex, S.A. de C.V. and subsidiaries
Durango McKinley Paper Company
Durango International, Inc.

Other businesses

Manufacturing and selling of plywood and particleboard.

Ponderosa Industrial de México, S.A. de C.V.

NOTE 3  ACCOUNTING POLICIES:

A summary of the Companys significant accounting polices is as follows:

F-12



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|a. |  | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The preparation of the financial statements in conformity with Mexican
GAAP requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting years. Actual results may differ from these estimates.
|  
|b. |  | Recognition of the effects of inflation                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | The Companys consolidated financial statements have been prepared in
accordance with Bulletin B-10, Effects of Inflation on Financial
Information, and its amendments. Bulletin B-10 requires restatement of
all financial statement items to Mexican Pesos of the most current
purchasing power.                                                                                                                              
|  
|   |  | For comparative purposes, the consolidated financial statements presented
herein have been restated to Mexican Pesos as of December 31, 2002, as
follows:                                                                                                                                                                                                                                                                         



| | 1. |  | The financial statements as of December 31, 2001 and for the years
ended December 31, 2000 and 2001 of Mexican holding companies and
subsidiaries have been restated to Mexican Pesos as of December 31, 2002
by applying to the year-end balances of constant Mexican Pesos as of
December 31, 2001 an inflation factor of 1.057. The inflation factor is
derived from the National Consumer Price Index (NCPI), published by
Banco de México (the Central Bank of México).                                                                                                                                                     
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | The financial statements as of December 31, 2001 and for the years
ended December 31, 2000 and 2001 of foreign subsidiaries have been
restated to Mexican Pesos as of December 31, 2002, by applying to the
year-end foreign currency balances the General Consumer Price Index
(GCPI) of the foreign country in which the subsidiary operates and
then applying the exchange rate as of December 31, 2002.                                                                                                                                                                                                                      
|
| |    |  | Statement of changes in financial position:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |    |  | Bulletin B-12, Statement of
Changes in Financial Position (Bulletin B-12), addresses the appropriate presentation of the statement of changes
in financial position where financial statements have been restated to
constant Mexican Pesos as of the latest balance sheet date. Bulletin B-12
identifies the generation and application of resources representing
differences between beginning and ending balances of the balance sheets in
constant Mexican Pesos, excluding the effect from holding non-monetary
assets. Bulletin B-12 also requires that monetary position and foreign
exchange gains (losses) be excluded

F-13



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



| |  |  | from non-cash items in the determination of resources provided by (used
in) operating activities.
| |  |  | -------------------------------------------------------------------------------------------------



|c. |  | Translation of foreign subsidiaries                                                                                                                                                                                                                                                                                                                                 
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The translation of foreign subsidiaries is in accordance with Bulletin B-15,
Foreign Currency Transactions and Translation of Financial Statements of
Foreign Operations (Bulletin B-15). In accordance with Bulletin
B-15, the Company translates the financial statements of subsidiaries under
the foreign entity method applying the following procedures:



| |  |  | Foreign subsidiaries apply the restatement provisions of Bulletin
B-10 and its amendments using the GCPI, which reflects the changes in
the purchasing power of the monetary unit of the country in which the
subsidiary operates.                                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | After the financial statements of the foreign subsidiary are restated
to constant purchasing power, all assets and liabilities are translated
to Mexican Pesos by applying the exchange rate in effect as of the
balance sheet date. Income and expenses are translated using the
exchange rate as of the balance sheet date for the reporting period.
|
| |  |  | The translation effects are recorded as part of shareholders equity
in the cumulative translation adjustment of foreign subsidiaries.                                                                                                                                                                                                                



|d. |  | Temporary investments                                                                                                                                                                         
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Short-term investments consist of marketable securities with maturities of
less than 3 months and are carried at market value. Unrealized gains
(losses) are included in the income statement.
|  
|e. |  | Inventories                                                                                                                                                                                   
|  
|   |  | Inventories are valued at average cost, which does not exceed market value.
The average cost approximates the last purchase price or production
cost.                                         
|  
|f. |  | Cost of sales                                                                                                                                                                                 
|  
|   |  | Cost of sales is determined on the estimated replacement value of the
inventory as of the date on which sales were made.                                                                      

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|g. |  | Investment in affiliated companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Investments in shares of affiliated companies in which the percentage of
ownership is less than 10% are recorded at cost and restated in constant
Mexican Pesos with December 31, 2002 purchasing power by applying factor
derived from the NCPI.                                                                                                                                                                                                                                                                  
|  
|h. |  | Property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Property, plant and equipment are recorded at their acquisition cost, and are
restated by applying factors derived from the NCPI to the historical cost,
except for machinery and equipment of foreign origin which are restated by
applying factors derived from the GCPI of the country of origin to the
corresponding foreign currency amounts and translating those amounts to
Mexican Pesos at the prevailing exchange rate at the balance sheet date.                                                        
|  
|   |  | Recurring maintenance and repair expenditures are charged to operating
expense as incurred. Major overhauls to fixed assets are capitalized and
amortized over the period in which benefits are expected to be received.                                                                                                                                                                                                                                                                                           
|  
|   |  | The integral cost of financing attributable to assets under construction is
capitalized. Capitalized integral financing costs include interest costs,
gain from monetary position and foreign exchange gains or losses and are
determined by reference to the Companys interest cost of outstanding
borrowings directly attributable to the construction of assets. The integral
cost capitalized in 2001 was $32,841; during 2002, the Company did not record
any amount in relation to integral financing costs.
|  
|i. |  | Depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Depreciation of property, plant and equipment is based upon the restated
carrying value of the assets and calculated by the method of units produced,
based on their useful lives and the estimated production capacity as shown
below:                                                                                                                                                                                                                                                                            

|                         |  |       |       | 
|------------------------ |  | ----- | ----- | 
|                         |  | Years
|                         |  |      
|Buildings                |  |       | 25-50 | 
|Machinery and equipment  |  |       | 23-40 | 
|Office equipment         |  |       | 5-10  | 
|Transportation equipment |  |       | 1-5   | 
|Computer equipment       |  |       | 1-3   | 

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|j. |  | Debt issuance cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During 2002, the Company capitalized debt issuance cost amounting to $215,888
($251,503 during 2001). Debt issuance cost is amortized over the outstanding
term of the debt on a straight-line basis, which does not materially differ
from the interest method. In 2002, the Company amortized $121,293 ($58,111 in
2001) in relation to debt issuance costs.                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | For the year ended December 31, 2001, the Company wrote off debt issuance
costs related to the Yankee Bond issuance with maturities in 2001 and 2003 of
$13,861 and $20,830, respectively. The outstanding amount of the 2001 Yankee
Bonds and $1,235,747 (US$128.3 million) of the 2003 Yankee Bonds, were
extinguished in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|k. |  | Goodwill and negative goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Acquired companies are recorded at their restated value; goodwill is the
difference between the fair value of the net assets of the acquired company
and the purchase price paid. If the purchase price paid exceeds the fair
value of the net assets acquired, the excess is recorded as goodwill. If the
fair value of the net assets acquired exceeds the purchase price paid, the
excess is recorded as negative goodwill. Both goodwill and negative goodwill
are restated by applying factors derived from the NCPI and amortized under
the straight-line method over a period not to exceed two years, which, in
managements opinion approximates the period in which the acquired
subsidiaries are integrated into the Company (see Note 4).
|  
|l. |  | Pension plans, seniority premiums and indemnities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | In accordance with Mexican Federal Labor Law, the Companys Mexican employees
are entitled to seniority premiums after 15 years of service or upon
dismissal, disability or death. Under Bulletin D-3, Labor Obligations, the
actuarially determined projected benefit obligation is computed using
estimates of salaries that would be in effect at the time of payment.
Employees not yet eligible for seniority premiums are also included in the
determination of the obligation with necessary adjustments made in accordance
with the probability that these employees will reach the required seniority.
The cost of past service is amortized over the average period required for
workers to reach their retirement age.                  
|  
|   |  | The cost of the employee retirement plans (pensions and seniority premiums),
both formal and informal, is recognized as expense in the years in which the
services are rendered, in
accordance with studies performed by independent actuaries using the
projected unit credit method.                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|   |  | In accordance with Mexican Federal Labor Law, other compensation, based on
length of service, to which employees may be entitled in the event of
dismissal or death, are charged to income in the year in which they become
payable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | A defined contribution pension plan has been established for the U.S.
subsidiaries covering all employees who meet certain eligibility
requirements. The benefits of this plan are based mainly on the employees
years of service and compensation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|m. |  | Payments for retirements and terminations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Payments for retirements and terminations are charged to income in the period
in which they occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|n. |  | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Effective on January 1, 2001, the Company adopted the guidelines of amended
Bulletin C-2, Financial Instruments (Bulletin C-2), which gives new
guidelines for the recognition and disclosure of derivative financial
instruments. Bulletin C-2 requires, for instruments not designated as a
hedge, the recognition of asset or liability derived from the difference
between acquisition cost and fair value of these instruments. Subsequent
fair value adjustments are reflected in the statement of income. Upon
adoption, the most significant effect of this new accounting bulletin was for
the accounting of equity swap share (Equity Swap) transactions, which the
Company undertakes with respect to its own American Depositary Receipts as
further discussed below.
|  
|   |  | Derivative financial instruments are used by the Company primarily to manage
its (i) interest rate risk and (ii) foreign exchange rate risk. Interest
rate swaps are employed to achieve the Companys interest rate objectives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The interest differential to be paid or received under the related interest
rate swap agreements is recognized over the life of the related contract and
is included in interest expense or income. At December 2001 and 2002, the
Company had no open contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | Additionally, the Company entered into several Equity Swap transactions with
respect to its own American Depositary Receipts. The difference between the
fair value and the acquisition cost of those shares (including purchase
expenses and premiums or discounts) as well as financing cost was recorded
directly to shareholders equity through December 31, 2000. As
a result of the adoption of Bulletin C-2, during 2001, the Company recorded
$21,305 in the statement of income.                                                                                                                                                                                                                                                                                             

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|   |  | The contract for these financial instruments matured in May 2002. As a
result, The Company recognized a charge to income and equity for $8,204 and
$78,758, respectively and a liability for $70,554 for the year ended December
31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|o. |  | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Sales are recognized upon delivery of products and customer acceptance.
Revenues are recognized only when the Company has transferred to the buyer
the significant risks and rewards of ownership of the goods, and when the
amount of revenue and the cost incurred or to be incurred in the transaction
can be measured reliably.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|p. |  | Income tax and employee statutory profit sharing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The Company recognized deferred income tax through the comprehensive asset
and liability method, which consists in determining said tax by applying the
corresponding income tax rate to the temporary differences between the book
and tax values of assets and liabilities at the date of the financial
statements. Beginning on January 1, 2000, the Company adopted the guidelines
of amended Bulletin D-4, Accounting Treatment of Income Tax, Tax on Assets
and Employee Statutory Profit Sharing. The accrued effect of this
accounting change, effective January 1, 2000, originated a net increase in
the deferred tax liability in the amount of $492,463 and a reduction of
shareholders equity of the same amount. Employees statutory profit sharing
is determined at a 10% rate on the taxable income of the companies, adjusted
according to the previous of the Mexican income tax law.
|  
|q. |  | Foreign currency transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | Transactions denominated in foreign currency are recorded in Mexican Pesos at
the exchange rate in effect at the date they are consummated. Assets and
liabilities in foreign currency are translated into Mexican Pesos at the
exchange rate in effect as of the balance sheet date. Exchange differences
resulting from such translations are recognized in income for the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|r. |  | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Earnings per share computations are based on the net income attributable to
the majority interest divided by the weighted average number of shares
outstanding. Due to the merger mentioned in Note 1, the computation for the
two years ended December 31, 2001 was based
on the number of shares outstanding after the merger. The number of shares
outstanding as of December 31, 2000 and 2001 was 94,072,122.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|   |  | Due to the repurchase of shares as treasury shares mentioned in Note 1,
the computation for the year ended December 31, 2002 was based on the
weighted average number of shares outstanding during fiscal year 2002.
The number of shares outstanding as of December 31, 2002 was 92,828,029.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|s. |  | Long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The Company evaluates potential impairment losses to long-lived assets by
assessing whether the unamortized carrying amount can be recovered over the
remaining life of the assets through undiscounted future expected cash flows
generated by the assets and without interest charges. If the sum of the
expected future undiscounted cash flow is less than the carrying amount of
the assets, a loss is recognized for the difference between the fair value
and carrying value of the assets. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Long-
lived assets for which management has committed to a plan of disposal are
recorded at the lower of the unamortized carrying amount or fair value less
disposal cost.
|  
|   |  | During 2002, the Company evaluated the value of its long-lived assets, which
was determined with cash flow generated during the useful lives of the
assets evaluated, which extends from 10 to 15 years after 2003. As a
result, the Company recorded $1,556,511 as an impairment loss for fixed
assets (see Note 8).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|t. |  | Shareholders equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The capital stock, retained earnings, additional paid-in-capital and
comprehensive income accounts include the effect from restatement, determined
by applying the NCPI factor from the date when capital was contributed and
from the year in which the results were determined. The restatements
represent the amounts required to maintain the contributions and accumulated
results in constant Mexican Pesos as of December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                       
|  
|u. |  | Segment reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | In August 1997, the International Accounting Standards Committee issued
revised IAS No. 14, Segment Reporting (IAS 14), which is applicable to
Mexican companies under Bulletin A-8. IAS 14, is effective for years
beginning after June 30, 1998. This standard requires companies to identify
within the internal organizational structure and internal reporting system
qualifying segments to be reported separately (see Note 16).                                                                                                                                                                                                                                                                                                                                                                                      

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|v. |  | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | As of January 1, 2001, Bulletin B-4, Comprehensive Income, entered into
effect. This bulletin requires that the various components of shareholders
equity resulting from non-owner transactions be shown in the statement of
changes in shareholders equity under the item of comprehensive income.
Therefore, in order for the various items within the statement of changes in
shareholders equity to be comparable, said statement was adjusted for prior
years.

NOTE 4  ACQUISITIONS:



|a. |  | In December 1999, the Company acquired Gilman Paper Company and
affiliated companies, its converting plants and the assets of St. Marys
Railroad LLC (now known as Durango Paper Company). The acquisition
totaled $1,219.9 million (US$119.9 million) and the negative goodwill
amounted to $1,617,130 (US$158.9 million). This acquisition was financed
with bank loans for an amount of $864.8 million (US$85.0 million) and a
note payable to the seller for $249.2 million (US$24.5 million) and $105.9
million (US$10.4 million) was paid in cash. The amortization of negative
goodwill for the years ended December 31, 2000, 2001 and 2002 was
$1,078,085, $449,203 and $nil, respectively.
On August 1, 2000, the Company reached a favorable purchase price adjustment
settlement with the seller for US$6 million ($59.5 million). The Company
received US$3 million ($29.8million) in cash and a reduction to its note to
the seller of US$3 million ($29.8 million).
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b. |  | In March 2000, the Company acquired from the Rincón family its 59%
ownership interest in GIDUSA resulting in negative goodwill in the amount
of $325,189, which was amortized fully in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

NOTE 5  FOREIGN CURRENCY POSITION:

As of December 31, the Mexican Peso to the U.S. Dollar exchange rate was as
follows:

|     |  |   |         | 
|---- |  | - | ------- | 
|2001 |  | $ | 9.1695  | 
|2002 |  | $ | 10.4393 | 

As of December 31, 2001 and 2002 the Company had the following foreign currency
monetary assets and liabilities:

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                      |  |                           |          |      |  |     |          |  
|--------------------- |  | ------------------------- | -------- | ---- |  | --- | -------- | -
|                      |  | Thousands of U.S. Dollars
|                      |  |                          
|                      |  | 2001                      |          | 2002
|                      |  |                           |          |     
|Assets                |  | US$                       | 90,007   |      |  | US$ | 52,851   |  
|                      |  |                           |          |      |  |     |          |  
|Current liabilities   |  |                           | 168,683  |      |  |     | 796,841  |  
|Long-term liabilities |  |                           | 737,960  |      |  |     | 128,908  |  
|                      |  |                           |          |      |  |     |          |  
|Liabilities           |  |                           | 906,643  |      |  |     | 925,749  |  
|                      |  |                           |          |      |  |     |          |  
|Net monetary position |  | US$                       | (816,636 | )    |  | US$ | (872,898 | )
|                      |  |                           |          |      |  |     |          |  

The Companys foreign currency transactions were as follows:

|                                         |  |                           |          |      |  |      |          |   |  |     |          |  
|---------------------------------------- |  | ------------------------- | -------- | ---- |  | ---- | -------- | - |  | --- | -------- | -
|                                         |  | Year ended December 31   
|                                         |  |                          
|                                         |  | 2000                      |          | 2001 |  | 2002
|                                         |  |                           |          |      |  |     
|                                         |  | Thousands of U.S. Dollars
|                                         |  |                          
|Sales                                    |  | US$                       | 558,867  |      |  | US$  | 433,802  |   |  | US$ | 302,174  |  
|Interest income                          |  |                           | 3,145    |      |  |      | 2,558    |   |  |     | 613      |  
|Purchase of fixed assets
and inventories |  |                           | (581,333 | )    |  |      | (456,771 | ) |  |     | (337,821 | )
|Interest expense                         |  |                           | (95,333  | )    |  |      | (111,876 | ) |  |     | (81,441  | )
|Other                                    |  |                           | (11,753  | )    |  |      | (17,831  | ) |  |     | (20,978  | )
|                                         |  |                           |          |      |  |      |          |   |  |     |          |  
|                                         |  | US$                       | (126,407 | )    |  | US$  | (150,118 | ) |  | US$ | (137,453 | )
|                                         |  |                           |          |      |  |      |          |   |  |     |          |  

Additionally, as of December 31, 2001 and 2002, the Company had non-monetary
assets of foreign origin, amounting to US$1,072 million and US$800 million,
respectively.

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

NOTE 6  ACCOUNTS RECEIVABLE:

Accounts receivable consist of the following:

|                                       |  |              |           |      |  |   |           | 
|-------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2001         |           | 2002
|                                       |  |              |           |     
|Trade                                  |  | $            | 2,207,881 |      |  | $ | 1,831,084 | 
|Other                                  |  |              | 166,445   |      |  |   | 238,016   | 
|                                       |  |              |           |      |  |   |           | 
|                                       |  |              | 2,374,326 |      |  |   | 2,069,100 | 
|Less  Allowance for doubtful accounts |  |              | 143,716   |      |  |   | 132,058   | 
|                                       |  |              |           |      |  |   |           | 
|                                       |  | $            | 2,230,610 |      |  | $ | 1,937,042 | 
|                                       |  |              |           |      |  |   |           | 

NOTE 7  INVENTORIES:

Inventories consist of the following:

|                                  |  |              |           |      |  |   |           | 
|--------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2001         |           | 2002
|                                  |  |              |           |     
|Finished products                 |  | $            | 249,370   |      |  | $ | 320,574   | 
|Work-in-process                   |  |              | 34,881    |      |  |   | 29,487    | 
|Raw materials                     |  |              | 448,891   |      |  |   | 327,809   | 
|Direct material and spare parts   |  |              | 438,178   |      |  |   | 348,976   | 
|Molds and dies, net               |  |              | 69,135    |      |  |   | 70,866    | 
|Merchandise in transit            |  |              | 183,456   |      |  |   | 147,652   | 
|Advanced payment to suppliers     |  |              | 75,287    |      |  |   | 56,314    | 
|Other                             |  |              | 7,576     |      |  |   | 16,648    | 
|                                  |  |              |           |      |  |   |           | 
|                                  |  |              | 1,506,774 |      |  |   | 1,318,326 | 
|Less  Allowance for obsolescence |  |              | 47,177    |      |  |   | 40,893    | 
|                                  |  |              |           |      |  |   |           | 
|                                  |  | $            | 1,459,597 |      |  | $ | 1,277,433 | 
|                                  |  |              |           |      |  |   |           | 

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

NOTE 8  PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of the following:

|                                                                         |  |              |            |      |  |   |            | 
|------------------------------------------------------------------------ |  | ------------ | ---------- | ---- |  | - | ---------- | 
|                                                                         |  | December 31,
|                                                                         |  |             
|                                                                         |  | 2001         |            | 2002
|                                                                         |  |              |            |     
|Land                                                                     |  | $            | 1,134,604  |      |  | $ | 1,095,484  | 
|Buildings                                                                |  |              | 4,264,728  |      |  |   | 3,828,640  | 
|Machinery and equipment                                                  |  |              | 24,102,080 |      |  |   | 19,588,078 | 
|Transportation equipment, data-processing equipment,
furniture and other |  |              | 1,906,989  |      |  |   | 1,790,855  | 
|Construction-in-progress                                                 |  |              | 369,375    |      |  |   | 227,175    | 
|                                                                         |  |              |            |      |  |   |            | 
|                                                                         |  |              | 31,777,776 |      |  |   | 26,530,232 | 
|Less  Accumulated depreciation                                          |  |              | 15,288,792 |      |  |   | 11,910,010 | 
|                                                                         |  |              |            |      |  |   |            | 
|                                                                         |  |              | 16,488,984 |      |  |   | 14,620,222 | 
|Less  Impairment loss                                                   |  |              |           |      |  |   | 1,556,511  | 
|                                                                         |  |              |            |      |  |   |            | 
|                                                                         |  | $            | 16,488,984 |      |  | $ | 13,063,711 | 
|                                                                         |  |              |            |      |  |   |            | 

Depreciation expense for the years ended December 31, 2000, 2001 and 2002 was
$536,337, $459,374 and $460,862, respectively.

The Company tested certain long-lived assets for recoverability in 2002 in
response to significant adverse changes in business climate occurring during
the year (see Notes 1 ii and 3 s).

As of December 31, 2002, the Company recorded a $1,556,511 impairment loss for
the fixed assets of a number of subsidiaries. The deferred income tax effect
for this reserve resulted in a benefit of $498,084.

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

NOTE 9  OTHER ASSETS:

Other assets consist of the following:

|                                                                  |  |              |         |      |  |   |         | 
|----------------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                                                  |  | December 31,
|                                                                  |  |             
|                                                                  |  | 2001         |         | 2002
|                                                                  |  |              |         |     
|Investment in shares of affiliated companies                      |  | $            | 40,672  |      |  | $ | 43,235  | 
|Intangible pension assets  labor obligation Mexican
subsidiaries |  |              | 83,467  |      |  |   | 74,286  | 
|Debt issuance costs                                               |  |              | 286,136 |      |  |   | 383,445 | 
|Prepaid pension cost  foreign subsidiaries                       |  |              | 34,005  |      |  |   |        | 
|Other                                                             |  |              | 88,628  |      |  |   | 210,463 | 
|                                                                  |  |              |         |      |  |   |         | 
|                                                                  |  | $            | 532,908 |      |  | $ | 711,429 | 
|                                                                  |  |              |         |      |  |   |         | 

Total amortization expense was $40,413, $91,025 and $135,860 for 2000, 2001 and
2002, respectively. Total amortization expense includes amortization of debt
issuance cost totaling $26,214, $58,111 and $121,293 for 2000, 2001 and 2002,
respectively.

NOTE 10  DEBT:



|a. |  | Short-term debt as of December 31, were comprised of:
|-- |  | -----------------------------------------------------

| |                                                                                                                                                                                                                                                                                   |  |              |   |      |  |   |         | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | - | ---- |  | - | ------- | 
| |                                                                                                                                                                                                                                                                                   |  | December 31,
| |                                                                                                                                                                                                                                                                                   |  |             
| |                                                                                                                                                                                                                                                                                   |  | 2001         |   | 2002
| |                                                                                                                                                                                                                                                                                   |  |              |   |     
| | Euro Commercial Paper for US$5 million,
maturing on February 12, 2003, bearing
interest at 9.75% per annum.                                                                                                                                                                       |  |              |  |      |  | $ | 52,197  | 
| | Senior Notes for US$250 million, with The
Bank of New York acting as trustee, payable
in a lump sum and maturing on August 1, 2003,
bearing interest at a fixed rate 12.625% per
annum, payable semiannually. As of December
31, 2002 the outstanding amount was US$18.2
million. |  |              |  |      |  |   | 190,308 | 

F-24



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

| |                                                                                                                                                                                                                                                                          |  |              |        |      |  |  |           | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---- |  |  | --------- | 
| |                                                                                                                                                                                                                                                                          |  | December 31,
| |                                                                                                                                                                                                                                                                          |  |             
| |                                                                                                                                                                                                                                                                          |  | 2001         |        | 2002
| |                                                                                                                                                                                                                                                                          |  |              |        |     
| | Senior Notes for US$301.7 million, with Wells
Fargo Bank Minnesota, N.A. acting as trustee,
payable in a lump sum and maturing on August
1, 2006, bearing interest at a fixed rate of
13.125% per annum, payable semiannually (see
point e). (1)                         |  |              |       |      |  |  | 3,149,986 | 
| | Euro Commercial Paper for US$5 million,
maturing in May 2002, bearing interest at
8.9% per annum.                                                                                                                                                                        |  |              | 48,461 |      |  |  |          | 
| | Senior Notes for US$10.4 million, with Wells
Fargo Bank Minnesota, N.A. acting as trustee,
payable in a lump sum and maturing on August
1, 2008, bearing interest at fixed rate of
13.5% per annum, payable semiannually (see
point e) (1).                              |  |              |       |      |  |  | 108,182   | 
| | Senior Notes for US$175 million, with Wells
Fargo Bank Minnesota acting as trustee,
payable in a lump sum and maturing on July
15, 2009, bearing interest at a fixed rate of
13.75% per annum, payable semiannually (see
point e) (1).                                   |  |              |       |      |  |  | 1,826,878 | 
| | Bank loan for US$50 million with The Chase
Manhattan Bank payable in five semiannual
installments beginning on December 5, 2000,
bearing interest at LIBOR plus 1.50% per annum,
payable semiannually. Outstanding amount as of
December 31, 2002 was US$10 million (1). |  |              |       |      |  |  | 104,393   | 
| | Bank loan for US$3.1 million with Mifel,
payable in a lump sum and maturing on May 30,
2002, bearing interest at LIBOR plus 4.8926%
per annum. Outstanding amount as of December
31, 2001 was US$0.8 million.                                                            |  |              | 7,707  |      |  |  |          | 

F-25



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

| |                                                                                                                                                                                                                                                                                           |  |              |         |      |  |  |         | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  |  | ------- | 
| |                                                                                                                                                                                                                                                                                           |  | December 31,
| |                                                                                                                                                                                                                                                                                           |  |             
| |                                                                                                                                                                                                                                                                                           |  | 2001         |         | 2002
| |                                                                                                                                                                                                                                                                                           |  |              |         |     
| | Bank loan for US$94 million with Banamex
payable in quarterly installments from March
2003 through June 2005, bearing interest at
LIBOR plus 2.80% per annum
Outstanding amount as of December 31, 2002 was
US$75.3 million (see point e).                                                |  |              |        |      |  |  | 786,451 | 
| | Bank loan for US$35 million with Bank of
America payable in a lump sum and maturing on
January 2004, bearing interest at LIBOR plus
3.0% per annum. Outstanding amount as of
December 31, 2001 was US$17.4 million.                                                                       |  |              | 186,223 |      |  |  |        | 
| | Bank loan for US$15 million with Bank of
America payable in a lump sum and maturing in
January 2004, bearing interest at LIBOR plus
3.5% per annum. Outstanding amount as of
December 31, 2001 was US$6.2 million.                                                                        |  |              | 66,788  |      |  |  |        | 
| | Subordinated promissory note for US$24.5
million to HG Estate maturing on December 17,
2004, bearing interest at 10% per annum,
payable semiannually. Outstanding amount as of
December 31, 2002 was US$30.2 million, which
includes capitalized interest (see point e and
Note 13 I.e.). |  |              |        |      |  |  | 313,159 | 
| | Notes payable for US$18.1 million to HG Estate
maturing in April 2003 and December 2002,
US$12.1 million bearing interest at 10.0% per
annum and US$6.0 million bearing interest at
13% per annum (see Note 13 I.e.).                                                                     |  |              |        |      |  |  | 188,952 | 
| | Bank loan for US$11.7 million with California
Commerce Bank payable in a lump sum and
maturing in January 2003 bearing interest at
LIBOR plus 2.75% per annum.                                                                                                                            |  |              |        |      |  |  | 121,931 | 

F-26



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|   |                                                                                                                                                                                                                                                                                                                                            |   |              |           |      |   |           |         | 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------ | --------- | ---- | - | --------- | ------- | 
|   |                                                                                                                                                                                                                                                                                                                                            |   | December 31,
|   |                                                                                                                                                                                                                                                                                                                                            |   |             
|   |                                                                                                                                                                                                                                                                                                                                            |   | 2001         |           | 2002
|   |                                                                                                                                                                                                                                                                                                                                            |   |              |           |     
|   | Bank loan for US$7.3 million with Banamex
payable in a lump sum and maturing in June
2005, bearing interest at a fixed rate of 4.86%
per annum. Outstanding amount as of December
31, 2002 was US$5.1 million (see point e).                                                                                                               |   |              |          |      |   |           | 53,240  | 
|   | Bank loan for US$15 million with California
Commerce Bank payable in a lump sum and
maturing in May 2004, bearing interest at LIBOR
plus 3.25% per annum. Outstanding amount as of
December 31, 2002 was US$12.5 million (see
point e).                                                                                                    |   |              |          |      |   |           | 130,492 | 
|   | Bank loan for US$24 million with Bank of
Albuquerque payable quarterly maturing on May
15, 2008, bearing interest at LIBOR plus 2.75%
Outstanding amount as of December 31, 2002 was
US$22 million (see point e).                                                                                                                          |   |              |          |      |   |           | 229,664 | 
|   | Bank loan for US$3 million with Bancomext
S.N.C. payable in a lump sum and maturing in
October 2003, bearing interest at LIBOR plus
3.53%.                                                                                                                                                                                                 |   |              |          |      |   |           | 31,318  | 
|   | Other short-term debt                                                                                                                                                                                                                                                                                                                      |   |              | 8,596     |      |   |           | 5,724   | 
|   |                                                                                                                                                                                                                                                                                                                                            |   |              |           |      |   |           |        
|   |                                                                                                                                                                                                                                                                                                                                            | $ | 317,775      |           |      | $ | 7,292,875 |        
|   |                                                                                                                                                                                                                                                                                                                                            |   |              |           |      |   |           |        
|   |                                                                                                                                                                                                                                                                                                                                            |   |              |           |      |   |           |        
|b. | Long-term debt as of December 31, was comprised of:                                                                                                                                                                                                                                                                                        |   |              |           |      |   |           |         | 
|   |                                                                                                                                                                                                                                                                                                                                            |   |              |           |      |   |           |        
|   | Senior Notes for US$250 million with JP Morgan
Chase Bank acting as trustee, payable in a lump
sum and maturing on August 1, 2003, bearing
interest at a fixed rate of 12.625% per annum,
payable semiannually. As of December 31, 2001
the outstanding amount was US$121.7 million
During 2002, US$103.5 million was paid on these
notes. |   | $            | 1,179,633 |      |   | $         |        | 

F-27



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

| |                                                                                                                                                                                                                                                                                                                                     |  |              |           |      |  |  |         | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- |  |  | ------- | 
| |                                                                                                                                                                                                                                                                                                                                     |  | December 31,
| |                                                                                                                                                                                                                                                                                                                                     |  |             
| |                                                                                                                                                                                                                                                                                                                                     |  | 2001         |           | 2002
| |                                                                                                                                                                                                                                                                                                                                     |  |              |           |     
| | Senior Notes for US$301.7 million, with JP
Morgan Chase Bank acting as trustee, payable in
a lump sum and maturing on August 1, 2006,
bearing interest at a fixed rate of 13.125% per
annum, payable semiannually (see point e).                                                                                                    |  |              | 2,924,541 |      |  |  |        | 
| | Senior Notes for US$10.4 million, with JP
Morgan Chase Bank acting as trustee, payable in
a lump sum and maturing on August 1, 2008,
bearing interest at fixed rate of 13.5% per
annum, payable semiannually (see point e).                                                                                                         |  |              | 100,441   |      |  |  |        | 
| | Bank loan for US$50 million with the Chase
Manhattan Bank payable in five semiannual
installments beginning on December 5, 2000,
bearing interest at LIBOR plus 1.50% per annum,
payable semiannually. Outstanding amount as of
December 31, 2001 was US$20 million
During 2002, US$10 million was paid on this
loan (see point e). |  |              | 193,843   |      |  |  |        | 
| | Bank loan for US$11.7 million with California
Commerce Bank payable in a lump sum and
maturing in January 2003, bearing interest at
LIBOR plus 2.75% per annum.                                                                                                                                                                     |  |              | 113,205   |      |  |  |        | 
| | Financial lease agreement for the acquisition
of machinery for US$3.1 million with Bank of
America maturing on February 2005, bearing
interest at LIBOR plus 3.5% per annum
Outstanding amount as of December 31, 2002 was
US$0.9 million. (2)                                                                                      |  |              | 11,937    |      |  |  | 9,583   | 
| | Financial lease agreement for the acquisition
of machinery for US$29.3 million with
BankAmerica maturing on February 2005 and
August 2005, bearing interest at LIBOR plus
3.5% per annum. Outstanding amount as of
December 31, 2002 was US$19.5 million. (2)                                                                       |  |              | 222,189   |      |  |  | 203,856 | 

F-28



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

| |                                                                                                                                                                                                                                                                                        |  |              |         |      |  |  |         | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  |  | ------- | 
| |                                                                                                                                                                                                                                                                                        |  | December 31,
| |                                                                                                                                                                                                                                                                                        |  |             
| |                                                                                                                                                                                                                                                                                        |  | 2001         |         | 2002
| |                                                                                                                                                                                                                                                                                        |  |              |         |     
| | Financial lease agreement for the acquisition
of machinery for US$10.0 million with GE
Capital Leasing maturing in October 2008 and
April 2009, bearing interest at LIBOR plus
3.25% per annum. Outstanding amount as of
December 31, 2002 was US$9.3 million (2).                     |  |              | 67,048  |      |  |  | 97,184  | 
| | Bank loan for $9.5 million Euros with
Commerze
Bank, maturing from January 2003 to January
2010, bearing interest at Eurolibor plus 1.15%
per annum. Outstanding amount as of December
31, 2002 was US$11.2 million (2).                                                               |  |              | 87,649  |      |  |  | 116,479 | 
| | Bank loan for US$94 million with Banamex
payable in quarterly installments from March
2003 through June 2005, bearing interest at
LIBOR plus 2.80% per annum. Outstanding amount
as of December 31, 2001 was US$94.0 million
During 2002, US$18.7 was paid on this loan (see
point e). |  |              | 911,064 |      |  |  |        | 
| | Bank loan for US$80 million with Bancomext,
S.N.C. payable in 14 semiannual installments
beginning July 2002, bearing interest at LIBOR
plus 7.0% per annum, collaterized with
machinery and equipment. Outstanding amount as
of December 31, 2002 was US$74.3 million.                |  |              | 775,372 |      |  |  | 775,491 | 
| | Bank loan for US$15 million with California
Commerce Bank payable in a lump sum and
maturing in May 2004, bearing interest LIBOR
plus 3.25% per annum. Outstanding amount as of
December 31, 2001 was US$15.0 million. During
2002, US$2.5 million was paid on the loan (see
point e). |  |              | 145,383 |      |  |  |        | 

F-29



---



##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

| |                                                                                                                                                                                                                                                      |   |              |         |      |   |           |         | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | ------- | ---- | - | --------- | ------- | 
| |                                                                                                                                                                                                                                                      |   | December 31,
| |                                                                                                                                                                                                                                                      |   |             
| |                                                                                                                                                                                                                                                      |   | 2001         |         | 2002
| |                                                                                                                                                                                                                                                      |   |              |         |     
| | Subordinated promissory note for US$24.5
million to HG Estate maturing on December 17,
2004, bearing interest at 10% per annum,
payable semiannually. Outstanding amount as of
December 31, 2001 was US$30.2 million (see
point e and Note 13 I.e.). |   |              | 322,551 |      |   |           |        | 
| | Notes payable for US$18.1 million to HG Estate
maturing in April 2003 and December 2002,
US$12.1 million bearing interest at 10.0% per
annum and US$6.0 million bearing interest at
12.5% per annum.                                                 |   |              | 193,429 |      |   |           |        | 
| | Bank loan for US$15.4 million, with Bancomext,
S.N.C. payable in 14 semiannually installments
maturating on September 2009, bearing interest
at LIBOR plus 6.5% per annum. Outstanding
amount as of December 31, 2002 was US$15.4
million            |   |              | 149,260 |      |   |           | 160,765 | 
| | Other long-term debt                                                                                                                                                                                                                                 |   |              | 145,749 |      |   |           | 3,485   | 
| |                                                                                                                                                                                                                                                      |   |              |         |      |   |           |        
| |                                                                                                                                                                                                                                                      |   | 7,543,294    |         |      |   | 1,366,843 |        
| | Current portion of long-term debt                                                                                                                                                                                                                    |   |              | 299,621 |      |   |           | 283,471 | 
| |                                                                                                                                                                                                                                                      |   |              |         |      |   |           |        
| |                                                                                                                                                                                                                                                      | $ | 7,243,673    |         |      | $ | 1,083,372 |        
| |                                                                                                                                                                                                                                                      |   |              |         |      |   |           |        



|(1) |  | Payments on the notes are guaranteed, jointly and severally on an
unsecured basis by our subsidiaries, Empaques de Cartón Titán, S.A. de
C.V., Compañia Papelera de Atenquique, S.A. de C.V., Ponderosa
Industrial de Mexico, S.A. de C.V. and Industrias Centauro, S.A. de
C.V.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The leased machinery has been pledged
as collateral.                                                                                                                                                                                                                            

F-30



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|c. |  | As of December 31, 2002, the maturities of the long-term debt were as follows:
|-- |  | ------------------------------------------------------------------------------

|                    |  |        |           | 
|------------------- |  | ------ | --------- | 
|Year ended          |  |        |           | 
|December 31         |  | Amount
|                    |  |       
|2004                |  | $      | 232,118   | 
|2005                |  |        | 216,247   | 
|2006                |  |        | 174,968   | 
|2007                |  |        | 174,364   | 
|2008 and thereafter |  |        | 285,675   | 
|                    |  |        |           | 
|                    |  | $      | 1,083,372 | 
|                    |  |        |           | 



|   |  | The Company had Euro Commercial Paper Program of US$100 million, of which,
as of December 31, 2001, US$5 million had been utilized. As of December
31, 2002 this amount had been fully paid.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|d. |  | The following is an analysis of the capital leases:                                                                                                                                         

|                               |  |                    |         |      |  |   |         |  
|------------------------------ |  | ------------------ | ------- | ---- |  | - | ------- | -
|                               |  | As of December 31,
|                               |  |                   
|                               |  | 2001               |         | 2002
|                               |  |                    |         |     
|Machinery and equipment        |  | $                  | 404,503 |      |  | $ | 406,279 |  
|Less: Accumulated depreciation |  |                    | (24,522 | )    |  |   | (34,936 | )
|                               |  |                    |         |      |  |   |         |  
|                               |  | $                  | 379,981 |      |  | $ | 371,343 |  
|                               |  |                    |         |      |  |   |         |  

As of December 31, 2002, the future minimum lease payments and the present
value of the future minimum lease payments were as follows:

F-31



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                                        |  |        |         | 
|--------------------------------------- |  | ------ | ------- | 
|Year ended                              |  |        |         | 
|December 31                             |  | Amount
|                                        |  |       
|2003                                    |  | $      | 130,467 | 
|2004                                    |  |        | 76,221  | 
|2005                                    |  |        | 60,004  | 
|2006                                    |  |        | 16,561  | 
|20027                                   |  |        | 16,561  | 
|2008 and thereafter                     |  |        | 21,954  | 
|                                        |  |        |         | 
|                                        |  |        | 321,768 | 
|Less  interest                         |  |        | 11,145  | 
|                                        |  |        |         | 
|Present value of minimum lease payments |  | $      | 310,623 | 
|                                        |  |        |         | 



|e. |  | Short-term debt reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Senior Notes and bank loans contain covenants, obligations and
restrictions with which the Company and/or its subsidiaries must comply,
mainly in respect of contracting other credit lines, payment of dividends and
decrease in capital stock, restrictions in transactions with related parties
and the maintenance of certain financial ratios, as well as compliance with
prompt payment of interest and principal upon each maturity. During November
and December 2002, the Company failed to comply with the payment of interest
and principal maturing on certain bank loans. As a result, the Company was
in default with respect to such obligations. According to the terms of
certain of the Companys debt instruments, the banks and bondholders may
demand in advance, the immediate payment of principal and interest
outstanding on the loans and bonds in default. Therefore, according to
Bulletin C-9, the principal amount of these loans and bonds have been
classified as short-term debt.

NOTE 11  FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL TRANSACTIONS:



|a. |  | The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:                                                                                                                                                                                                                                      
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | As of December 31, 2001 and 2002, the carrying amount of cash and temporary
investments, accounts receivable, trade accounts payable and accrued
liabilities and other accounts payable approximate their fair value because
of their short maturity. The net carrying value of accounts receivable
represents the cash flow expected to be received by the Company.

F-32



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



| |  | As of December 31, 2001 and 2002, the carrying amount of short-term debt
approximates its fair value due to the variable rate used in such instruments
and its short-term maturity.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | As of December 31, the estimated fair values of the Companys long-term debt,
including senior notes, are as follows:                                                              

|                                                                         |  |          |           |            |  |        |           |            |  |   |           |  |  |   |           | 
|------------------------------------------------------------------------ |  | -------- | --------- | ---------- |  | ------ | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                                                                         |  | 2001     |           | 2002      
|                                                                         |  |          |           |           
|                                                                         |  | Carrying |           |            |  |        |           | Carrying   |  |   |           | 
|                                                                         |  | amount   |           | Fair value |  | amount |           | Fair value
|                                                                         |  |          |           |            |  |        |           |           
|Notes classified as a short-term (1)                                     |  | $        | 4,204,615 |            |  | $      | 3,923,957 |            |  | $ | 5,275,354 |  |  | $ | 1,604,606 | 
|                                                                         |  |          |           |            |  |        |           |            |  |   |           |  |  |   |           | 
|Variable debt:                                                           |  |          |           |            |  |        |           |            |  |   |           |  |  |   |           | 
|Libor plus 1.5%                                                          |  |          | 193,843   |            |  |        | 193,843   |            |  |   |          |  |  |   |          | 
|Libor plus 7.0% notes (2)                                                |  |          | 775,372   |            |  |        | 887,724   |            |  |   | 775,491   |  |  |   |          | 
|Financial lease agreements bearing
interest LIBOR plus 2.5% and 3.5% (2) |  |          | 301,174   |            |  |        | 301,174   |            |  |   | 310,623   |  |  |   |          | 
|Libor plus 6.0% notes (2)                                                |  |          | 149,260   |            |  |        | 149,260   |            |  |   | 160,765   |  |  |   |          | 
|Libor plus 3.0% and 3.5%                                                 |  |          | 145,383   |            |  |        | 145,383   |            |  |   |          |  |  |   |          | 
|Libor plus 2.8% notes                                                    |  |          | 911,064   |            |  |        | 911,064   |            |  |   |          |  |  |   |          | 
|Libor plus 2.75% notes                                                   |  |          | 113,205   |            |  |        | 113,205   |            |  |   |          |  |  |   |          | 
|Eurolibor plus 1.15% notes                                               |  |          | 87,649    |            |  |        | 87,649    |            |  |   |          |  |  |   |          | 
|Notes payable (2)                                                        |  |          |          |            |  |        |          |            |  |   | 116,479   |  |  |   |          | 
|Subordinated promissory note bearing
interest at 10%                     |  |          | 322,551   |            |  |        | 322,551   |            |  |   |          |  |  |   |          | 
|Other notes bearing interest at 10% to 12%                               |  |          | 193,429   |            |  |        | 193,429   |            |  |   |          |  |  |   |          | 
|Other debt (2)                                                           |  |          | 145,749   |            |  |        | 145,749   |            |  |   | 3,485     |  |  |   |          | 
|                                                                         |  |          |           |            |  |        |           |            |  |   |           |  |  |   |           | 
|                                                                         |  | $        | 7,543,294 |            |  | $      | 7,374,988 |            |  | $ | 1,366,843 |  |  | $ |          | 
|                                                                         |  |          |           |            |  |        |           |            |  |   |           |  |  |   |           | 



| | (1) |  | The fair value of the Notes is estimated based on quoted market
prices.                                                                                                                                                                                                                                                               
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | As of December 2002, due to the financial situation of the Company,
the comparable market information required to determine the estimated
fair value of long-tem debt was not attainable. As such, the Company
was not able to calculate a reasonable estimate of the fair value of the
Companys long-term debt at December 31, 2002.



|b. |  | As of December 31, 2001, the estimated fair value of the Companys
financial derivatives was as follows:
|-- |  | --------------------------------------------------------------------------------------------------------

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                |  |          |        |       |  |   |        | 
|--------------- |  | -------- | ------ | ----- |  | - | ------ | 
|                |  | Carrying |        | Fair 
|                |  | amount   |        | value
|                |  |          |        |      
|Equity Swap (1) |  | $        | 72,157 |       |  | $ | 72,157 | 
|                |  |          |        |       |  |   |        | 



| | (1) |  | The Company entered into several equity swaps with respect to its
American Depositary Receipts (ADRs). The carrying value of these
contracts at December 31, 2001 is as follows:
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             |  |   |          |  
|-------------------------------------------- |  | - | -------- | -
|Loss from valuation of financial instruments |  |   | ($71,214 | )
|- Financial cost for period                  |  |   | (11,179  | )
|- Financial cost from prior periods          |  |   | (39,636  | )
|- Accumulated financial cost paid            |  |   | 49,872   |  
|                                             |  |   |          |  
|                                             |  | $ | (72,157  | )
|                                             |  |   |          |  

The balance of ($72,157) as of December 31, 2001 was recorded in long-term
liabilities as derivative instruments, with a corresponding charge to
shareholders equity and the income statement (see Note 3 n).

The equity swap matured in May 2002, therefore the Company had no outstanding
swaps at December 31, 2002.

The fair value of the equity swaps is estimated based on their quoted market
price.

Concentration of credit risk

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

F-34



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

NOTE 12  PENSION PLANS AND SENIORITY PREMIUMS:



|a. |  | The valuation of labor obligations for retirement pensions and seniority
premiums covers all Mexican employees. The principal financial data
related to these obligations is as follows:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                 |  |              |         |      |  |   |         |  
|---------------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                                 |  | December 31,
|                                                                 |  |             
|                                                                 |  | 2001         |         | 2002
|                                                                 |  |              |         |     
|Current benefit obligation                                       |  | $            | 177,202 |      |  | $ | 179,760 |  
|Plan assets                                                      |  |              |        |      |  |   |        |  
|                                                                 |  |              |         |      |  |   |         |  
|Net current liability                                            |  | $            | 177,202 |      |  | $ | 179,760 |  
|                                                                 |  |              |         |      |  |   |         |  
|Projected benefit obligation                                     |  | $            | 211,951 |      |  | $ | 217,098 |  
|Unamortized transition asset                                     |  |              | (97,807 | )    |  |   | (89,472 | )
|Unamortized differences in assumptions and
experience adjustment |  |              | (22,416 | )    |  |   | (24,090 | )
|Plan assets                                                      |  |              |        |      |  |   |        |  
|                                                                 |  |              |         |      |  |   |         |  
|Projected net liability                                          |  |              | 91,728  |      |  |   | 103,536 |  
|Additional minimum liability                                     |  |              | 85,474  |      |  |   | 76,224  |  
|                                                                 |  |              |         |      |  |   |         |  
|Labor obligations                                                |  | $            | 177,202 |      |  | $ | 179,760 |  
|                                                                 |  |              |         |      |  |   |         |  
|Intangible pension asset-labor obligation                        |  | $            | 83,467  |      |  | $ | 74,286  |  
|                                                                 |  |              |         |      |  |   |         |  
|Amortization period (years):                                     |  |              |         |      |  |   |         |  
|Transition asset                                                 |  |              | 18.5    |      |  |   | 18.5    |  
|Experience adjustment                                            |  |              | 24      |      |  |   | 24      |  



| |  | The net cost for the year consisted of the following:
| |  | -----------------------------------------------------

|                                   |  |              |        |      |  |      |        |  |  |   |        | 
|---------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                   |  | December 31,
|                                   |  |             
|                                   |  | 2000         |        | 2001 |  | 2002
|                                   |  |              |        |      |  |     
|Service cost                       |  | $            | 15,594 |      |  | $    | 9,471  |  |  | $ | 9,174  | 
|Amortization of prior service cost |  |              | 18,642 |      |  |      | 8,820  |  |  |   | 10,344 | 
|Financial cost for the year        |  |              | 14,724 |      |  |      | 10,010 |  |  |   | 9,040  | 
|                                   |  |              |        |      |  |      |        |  |  |   |        | 
|                                   |  | $            | 48,960 |      |  | $    | 28,301 |  |  | $ | 28,558 | 
|                                   |  |              |        |      |  |      |        |  |  |   |        | 



| |  | Prior service costs (transition liability), plan amendment costs and
actuarial losses are recorded through charges to income using the
straight-line method over the average remaining service life over which
employees are expected to receive the benefits.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-35



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



| |  | During 2001, due to labor contract terminations of the subsidiaries Compañía
Papelera de Atenquique, S.A. de C.V. and Ponderosa Insustrial de Mexico, S.A.
de C.V., cash severance payments were made amounting to $171,969.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 2002, due to labor contract terminations, cash severance payments were
made amounting to $11,936.                                                                                                                    
|
| |  | The following actuarial assumptions were used to determine the present value
of accumulated plan benefits for pension plans and seniority premiums
(excluding inflation effects):                                           

|                     |  |              |   |      |  |      |   |   |  |  |   |  
|-------------------- |  | ------------ | - | ---- |  | ---- | - | - |  |  | - | -
|                     |  | December 31,
|                     |  |             
|                     |  | 2000         |   | 2001 |  | 2002
|                     |  |              |   |      |  |     
|Discount rate        |  |              | 5 | %    |  |      | 5 | % |  |  | 5 | %
|Salary increase rate |  |              | 2 | %    |  |      | 2 | % |  |  | 2 | %



|b. |  | The subsidiaries in the U.S. have established the following employee
benefits: a 401 (k) retirement savings plan, money purchase and defined
benefit plans, health insurance plan, disability plan, and life insurance
plan. For the years ended December 31, 2000, 2001 and 2002, total
expenses related to these plans were $95,360 (US$9,839), $115,972
(US$10,852) and $45,818 (US$4,389), respectively.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The principal financial data and significant assumptions related to the defined
benefit obligation plans related to foreign subsidiaries are as follows:

|                                |  |              |          |      |  |   |   | 
|------------------------------- |  | ------------ | -------- | ---- |  | - | - | 
|                                |  | December 31,
|                                |  |             
|                                |  | 2001         |          | 2002
|                                |  |              |          |     
|Projected benefit obligation    |  | $            | 520,586  |      |  | $ |  | 
|Plan assets                     |  |              | (458,134 | )    |  |   |  | 
|Unrecognized net loss           |  |              | (141,355 | )    |  |   |  | 
|Unrecognized prior service cost |  |              | (34,005  | )    |  |   |  | 
|Additional minimum liability    |  |              | 175,360  |      |  |   |  | 
|                                |  |              |          |      |  |   |   | 
|Net pension (asset) liability   |  | $            | 62,452   |      |  | $ |  | 
|                                |  |              |          |      |  |   |   | 

F-36



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##### Table of Contents



CORPORACIÓN DURANGO,
S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

The additional minimum liability has been offset by an intangible asset
amounting to $34,005 to the extent of previously unrecognized prior service
cost. The remaining amount of $141,358 was recorded as a component of
shareholders equity.

The net cost for the year consisted of the following:

|                                                |  |      |        |      |  |              |        |  |  |   |   | 
|----------------------------------------------- |  | ---- | ------ | ---- |  | ------------ | ------ |  |  | - | - | 
|                                                |  |      |        |      |  | December 31, |        |  |  |  
|                                                |  |      |        |      |  |              |        |  |  |  
|                                                |  | 2000 |        | 2001 |  | 2002        
|                                                |  |      |        |      |  |             
|Service cost                                    |  | $    | 9,060  |      |  | $            | 8,564  |  |  | $ |  | 
|Interest cost                                   |  |      | 35,809 |      |  |              | 36,114 |  |  |   |  | 
|Amortization of unrecognized prior
service cost |  |      | 2,765  |      |  |              | 2,866  |  |  |   |  | 
|                                                |  |      |        |      |  |              |        |  |  |   |   | 
|                                                |  | $    | 47,634 |      |  | $            | 47,544 |  |  | $ |  | 
|                                                |  |      |        |      |  |              |        |  |  |   |   | 

The expected return on plan assets was $52,652 and $45,727 for the years
ended December 31, 2000 and 2001, respectively.

The actuarial assumptions were used to determine the present value of
accumulated plan benefits for pension plans of foreign subsidiaries as
follows:

|                                                                                |  |              |      |      |  |  |      |  
|------------------------------------------------------------------------------- |  | ------------ | ---- | ---- |  |  | ---- | -
|                                                                                |  | December 31,
|                                                                                |  |             
|                                                                                |  | 2001         |      | 2002
|                                                                                |  |              |      |     
|Expected long-term rate of return on plan assets                                |  |              | 9.00 | %    |  |  | 9.00 | %
|Weighted average discount rate for year-end funded
status of all benefits costs |  |              | 7.25 | %    |  |  | 7.25 | %

NOTE 13  CONTINGENCIES AND COMMITMENTS:

The Company has the following contingencies and commitments:



|I. |  | Contingencies:
|-- |  | --------------



| | a. |  | The Company is contingently liable for indemnities payable to employees
in case of dismissal under certain circumstances as provided by the
Mexican Federal Labor Law. As of December 31, 2002, no obligations were
recognized in the financial statements.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-37



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



| | b. |  | The Company may be subject to a contingent liability for additional taxes
resulting from reviews of the tax returns filed by the Company, if its
interpretation criteria differs from that of the Mexican tax authorities.                                                                                                                                         
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | c. |  | The Company has initiated an injunction against the Mexican tax
authorities regarding the methodology used to determine its employee
statutory profit sharing. Management does not believe that any liabilities
relating to this injunction are likely to have a material adverse effect
on the Companys consolidated financial condition or result of operations.
|
| | d. |  | As of the date of issuance of these financial statements, the Company has
a lawsuit initiated by Compass Income Master Fund, Inc. due to the failure
of payment of principal and interest on the Euro Commercial Paper, which
matured February 12, 2003. The amount of the suit is
US$3.5 million.                                                                 
|
| | e. |  | The Company has a lawsuit against it initiated by HG Estate for
approximately US$48.0 million due to the failure of payment of principal and
interest, which matured in December 2002.                                                                                                                                                                             

The Company considers that the final resolution for these situations will not
have any material impact on its financial conditions or results of operations.



|II.  |  | Going Concern:                                                                                                                                                                                                                                                                                                
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|     |  | As mentioned in Note 1.ii, there is an uncertainty about the ability of the
Company to continue in operation as a going concern.                                                                                                                                                                              
|    
|III. |  | Gain Contingency:                                                                                                                                                                                                                                                                                             
|    
|     |  | Corporación Durango filed a counterclaim against HG Estate for US$85 million
due to discrepancies in the calculation of the value of the fixed assets of
Durango Paper Company. This claim is pending resolution. As part of the DPC
sale agreement, the benefit of this claim remains in Corporación Durango.
|    
|IV.  |  | Commitments:                                                                                                                                                                                                                                                                                                  



| | a. |  | As of December 31, 2002, the Mexican subsidiaries leased certain
equipment under non-cancelable operating leases. Rental expense under
these leases was approximately $61,479, $74,828 and $57,439 for the years
ended December 2000, 2001 and 2002, respectively.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-38



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

As of December 31, 2002 estimated future minimum lease payments under
non-cancelable operating leases were as follows:

|                    |  |   |         | 
|------------------- |  | - | ------- | 
|2003                |  | $ | 36,371  | 
|2004                |  |   | 15,115  | 
|2005                |  |   | 11,852  | 
|2006                |  |   | 8,675   | 
|2007                |  |   | 8,675   | 
|2008 and thereafter |  |   | 26,694  | 
|                    |  |   |         | 
|Total               |  | $ | 107,382 | 
|                    |  |   |         | 

b.     As of December 31, 2002, McKinley Paper Co. (a U.S. subsidiary) leased
certain equipment under non-cancelable operating leases. Rental expense under
these leases was approximately $27,469, $27,202 and $21,990 for the years ended
December 2000, 2001 and 2002, respectively.

As of December 31, 2002 estimated future minimum lease payments under
non-cancelable operating leases were as follows:

|                    |  |        |       | 
|------------------- |  | ------ | ----- | 
|                    |  | Amount
|2003                |  | $      | 4,625 | 
|2004                |  |        | 2,234 | 
|2005                |  |        | 1,785 | 
|2006                |  |        | 971   | 
|2007                |  |        | 355   | 
|2008 and thereafter |  |        |      | 
|                    |  |        |       | 
|Total               |  | $      | 9,970 | 
|                    |  |        |       | 



|V. |  | Guarantees
|-- |  | ----------

The Company is the guarantor for a bank loan and capital lease agreements held
by a related party amounting to US$22.7 million.

NOTE 14  CAPITAL STOCK AND RETAINED EARNINGS:

As of December 31, 2002, the nominal capital stock amounted to $1,412,214, and
the fixed minimum portion without a right to withdrawal was $699,714,
represented by 46,610,100 common nominative Series A shares without par
value. The variable portion of capital stock

F-39



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

amounted to $712,500, represented by 47,462,022 common nominative Series A
shares without par value.



|a. |  | In Mexico, income for the year is subject to legal requirements, which
provide that 5% of income for each year be allocated to increasing the
legal reserve, until this reserve reaches the equivalent of one-fifth of
the amount of paid-in capital stock.                                                                                                                                                                                                                    
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b. |  | Dividend tax regime:                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Dividends paid will be free of income tax if paid out of the Net Taxable
Income Account (CUFIN). A 34% rate will be paid in 2003 on the amount
exceeding the balance of the CUFIN by multiplying the dividend paid by a
factor of 1.5152 in 2003. The applicable tax will be payable by the Company,
and it may be credited against income tax that the Company is subject to in
the following three fiscal years. Dividends paid will not be subject to any
tax withholding.
|  
|c. |  | Under Mexican corporate law, the Company is not permitted to declare or
pay dividends if the dividends from its subsidiaries are not received
first. Additionally, neither the Company nor its subsidiaries is
permitted to declare or pay dividends as a result of the negative
covenants established in the debt instruments placed in the Mexican and
international markets.                                                                                                

NOTE 15  PROVISION FOR INCOME AND ASSET TAXES:

The income tax (ISR) provision at December 31, is comprised as follows.

|             |  |      |          |      |  |      |          |   |  |   |          |  
|------------ |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|             |  | 2000 |          | 2001 |  | 2002
|             |  |      |          |      |  |     
|Current ISR  |  | $    | (261,551 | )    |  | $    | (210,522 | ) |  | $ | (5,751   | )
|Asset tax    |  |      | (28,324  | )    |  |      | (25,297  | ) |  |   | (108,631 | )
|Deferred ISR |  |      | (387,519 | )    |  |      | 267,291  |   |  |   | 667,294  |  
|             |  |      |          |      |  |      |          |   |  |   |          |  
|             |  | $    | (677,394 | )    |  | $    | 31,472   |   |  | $ | 552,912  |  
|             |  |      |          |      |  |      |          |   |  |   |          |  

As of December 31, 2002 and 2001, the main components of deferred income tax
are as follows:
F-40Table of Contents

CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                                   |  |      |            |      |  |   |            |  
|---------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                   |  | 2001 |            | 2002
|                                   |  |      |            |     
|Inventories                        |  |      | ($54,456   | )    |  | $ | 98,388     |  
|Property, plant and equipment, net |  |      | 12,277,843 |      |  |   | 9,706,261  |  
|Liability provisions               |  |      | (469,651   | )    |  |   | (517,007   | )
|Tax loss carryforwards             |  |      | (2,184,152 | )    |  |   | (3,228,147 | )
|Deferred assets                    |  |      | 379,332    |      |  |   | 433,268    |  
|                                   |  |      |            |      |  |   |            |  
|                                   |  |      | 9,948,916  |      |  |   | 6,492,763  |  
|Income tax rate                    |  |      | 35         | %    |  |   | 32         | %
|                                   |  |      |            |      |  |   |            |  
|Deferred income tax                |  |      | 3,482,121  |      |  |   | 2,077,684  |  
|Recoverable tax on assets          |  |      | (391,753   | )    |  |   | (68,410    | )
|                                   |  |      |            |      |  |   |            |  
|Income tax payable                 |  | $    | 3,090,368  |      |  | $ | 2,009,274  |  
|                                   |  |      |            |      |  |   |            |  

Company management made a fully reserve of certain amounts pertaining to asset
tax recoverable and unamortized tax losses in the calculation for deferred
taxes, in light of the fact that there is no certainty as to whether said
amounts can be compensated or offset within the terms established by law.

Of the deferred income tax recorded as of December 31, 2001, and 2002, $22,108
and $145,398, was recorded directly to the restatement of non-monetary assets
within shareholders equity as it resulted from temporary differences generated
by non-monetary items, principally inventories and property, plant and
equipment.

As of December 31, 2002, the Company had tax loss carryforwards in the
approximate amount of $4,999,436, which are subject to an additional NCPI
restatement and may reduce future years taxable income for income tax purposes
as shown below:

|                    |  |        |           | 
|------------------- |  | ------ | --------- | 
|Year of             |  |        |           | 
|expiration          |  | Amount
|                    |  |       
|2004                |  | $      | 235,792   | 
|2005                |  |        | 604,751   | 
|2006                |  |        | 221,374   | 
|2007                |  |        | 158,237   | 
|2008                |  |        | 129,576   | 
|2009 and thereafter |  |        | 3,649,706 | 
|                    |  |        |           | 
|                    |  | $      | 4,999,436 | 
|                    |  |        |           | 

F-41



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

As of December 31, 2002, the foreign subsidiaries tax loss carryforwards
amounted to $47,391.

Asset tax is calculated at a rate of 1.8% on the net value of certain assets
and liabilities and is due only when the asset tax exceeds the income tax
payable. The asset tax paid can be recovered over the following 10 years, if
and when income taxes exceed asset tax during such years. As of December 31,
2002, the asset tax carryforwards totaled $377,374.

The reconciliation between the real and effective income tax rate is shown
below:

|                                                  |  |      |       |      |  |              |       |   |  |  |       |  
|------------------------------------------------- |  | ---- | ----- | ---- |  | ------------ | ----- | - |  |  | ----- | -
|                                                  |  |      |       |      |  | December 31, |       |   |  | 
|                                                  |  |      |       |      |  |              |       |   |  | 
|                                                  |  | 2000 |       | 2001 |  | 2002        
|                                                  |  |      |       |      |  |             
|                                                  |  | %   
|                                                  |  |     
|ISR at the statutory rate                         |  |      | 35.0  |      |  |              | 35.0  |   |  |  | (35.0 | )
|Increase (decrease) in effective ISR rate due to: |  |      |       |      |  |              |       |   |  |  |       |  
|Purchases                                         |  |      | (4.2  | )    |  |              | 23.0  |   |  |  | 8.3   |  
|Depreciation                                      |  |      | 0.4   |      |  |              |      |   |  |  | 2.2   |  
|Net effect of the comprehensive financing cost    |  |      | 0.9   |      |  |              | (1.4  | ) |  |  | 9.0   |  
|Reserves                                          |  |      | 0.7   |      |  |              | (0.4  | ) |  |  |      |  
|Non deductible expenses                           |  |      | 0.8   |      |  |              | 1.3   |   |  |  | (0.3  | )
|Goodwill                                          |  |      | (21.9 | )    |  |              | (19.9 | ) |  |  |      |  
|Tax loss carryforwards                            |  |      | (2.8  | )    |  |              | (26.0 | ) |  |  |      |  
|Loss in fixed assets sold                         |  |      | 2.8   |      |  |              | 11.8  |   |  |  |      |  
|Change of statutory income tax rate               |  |      |      |      |  |              |      |   |  |  | (1.5  | )
|Other                                             |  |      |      |      |  |              | 6.0   |   |  |  | 3.8   |  
|                                                  |  |      |       |      |  |              |       |   |  |  |       |  
|Effective income tax rate                         |  |      | 11.7  |      |  |              | 29.4  |   |  |  | (13.5 | )
|                                                  |  |      |       |      |  |              |       |   |  |  |       |  

As a result of the amendments to the Income Tax Law approved on January 1,
2002, beginning in 2003, the income tax rate (35%) will be reduced annually to
a nominal rate of 32% in 2005. Consequently, the effect of this gradual
decrease in the income tax rate is estimated to reduce the deferred income tax
liabilities by approximately $194,783 in 2002.

The Company is authorized by the Ministry of Finance and Public Credit to file
income tax returns on a consolidated basis with some of its Mexican
subsidiaries. Effective January 1, 1999, as a result of a change in the income
tax law, consolidated taxable income or loss methodology has changed; the most
significant modifications are the following:



| |  | Recognizing the proportional taxable income or loss of subsidiaries to
the extent of taking the ownership percentage of the holding company in
the subsidiaries and multiplying the amount
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|  |  | by a factor of 0.60. Controlled companies with prior year tax loss
carryforwards shall be considered at the total percentage of direct or
indirect equity participation share.                                                                         
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Eliminating the concept of effective control of subsidiaries.
Companies in which a direct or indirect equity interest of less than
50% is held should not be included in the consolidated tax return.                                                  
| 
| |  | The tax losses of the Company and its subsidiaries, which originated
individually, and which cannot be offset under the tax terms in
effect, must be added to income or deducted from the consolidated tax
loss in the year in which the rights expire.

The Employee Profit Sharing is calculated by applying the rate 10% over the
ISR (IT) base, in accordance with the special rules set-forth in the income tax
law.

NOTE 16  FINANCIAL INFORMATION BY BUSINESS SEGMENTS:

Reportable segments are those that are based on the Companys method of
internal reporting.

The Company is managed on a product basis and its reportable segments are as
follows:

Packaging -

Manufacturing and selling of corrugated containers, molded pulp and multi-wall
sacks and bags.

Paper -

Manufacturing and selling of kraft and semikraft paper made of virgin pulp or
recycled paper.

Other business -

Manufacturing and selling of plywood and particleboard.

Prices between segments are based on market prices. Management evaluates each
business segment according to its operating results.

The accounting policies of the segments are the same as those described in Note
3.

For the years ended December 31, 2000, 2001 and 2002, the financial information
by business segments is as follows:

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002

(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 
|------------ |  | ------------- | ---------- | ------------- |  | ----------- | ---------- | ---------------- |  | ---------------- | ---------- | ------------ |  | --------- | --------- | --------- |  | - | ------- |  |  | - | --------- | ------------ |  | - | --------- | 
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  | Operating |           |           |  |   |         |  |  |   |           |              |  |  
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  | Income    |           |           |  |   |         |  |  |   |           | Additions   
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  | before    |           |           |  |   |         |  |  |   |           | to property,
|             |  | Sales to      |            | Inter-        |  |             |            |                  |  | depreciation and |            | Depreciation |  | Operating |           | plant and
|2000         |  | third parties |            | segment sales |  | Total Sales |            | amortization and |  | amortization     |            | income       |  | equipment
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  |          
|Packaging    |  | $             | 5,957,907  |               |  | $           | 93,821     |                  |  | $                | 6,051,728  |              |  | $         | 870,556   |           |  | $ | 120,601 |  |  | $ | 749,955   |              |  | $ | 210,933   | 
|Paper        |  |               | 6,408,131  |               |  |             | 4,950,502  |                  |  |                  | 11,358,633 |              |  |           | 1,077,350 |           |  |   | 410,101 |  |  |   | 667,249   |              |  |   | 960,903   | 
|Other        |  |               | 555,833    |               |  |             | 57,793     |                  |  |                  | 613,626    |              |  |           | 83,251    |           |  |   | 33,981  |  |  |   | 49,270    |              |  |   | 9,670     | 
|Eliminations |  |               |           |               |  |             | (5,102,116 | )                |  |                  | (5,102,116 | )            |  |           |          |           |  |   |        |  |  |   |          |              |  |   |          | 
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 
|             |  | $             | 12,921,871 |               |  | $           |           |                  |  | $                | 12,921,871 |              |  | $         | 2,031,157 |           |  | $ | 564,683 |  |  | $ | 1,466,474 |              |  | $ | 1,181,506 | 
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 
|2001         |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 
|Packaging    |  | $             | 4,646,363  |               |  | $           | 90,645     |                  |  | $                | 4,737,008  |              |  | $         | 674,132   |           |  | $ | 109,691 |  |  | $ | 564,441   |              |  | $ | 412,067   | 
|Paper        |  |               | 5,652,544  |               |  |             | 3,892,285  |                  |  |                  | 9,544,829  |              |  |           | 794,524   |           |  |   | 365,985 |  |  |   | 428,539   |              |  |   | 326,717   | 
|Other        |  |               | 233,488    |               |  |             | 44,335     |                  |  |                  | 277,823    |              |  |           | 57,237    |           |  |   | 16,612  |  |  |   | 40,625    |              |  |   | 146,899   | 
|Eliminations |  |               |           |               |  |             | (4,027,265 | )                |  |                  | (4,027,265 | )            |  |           |          |           |  |   |        |  |  |   |          |              |  |   |          | 
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 
|             |  | $             | 10,532,395 |               |  | $           |           |                  |  | $                | 10,532,395 |              |  | $         | 1,525,893 |           |  | $ | 492,288 |  |  | $ | 1,033,605 |              |  | $ | 885,683   | 
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 
|2002         |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 
|Packaging    |  | $             | 4,054,088  |               |  | $           | 89,934     |                  |  | $                | 4,144,022  |              |  | $         | 699,030   |           |  | $ | 114,533 |  |  | $ | 584,497   |              |  | $ | 141,673   | 
|Paper        |  |               | 4,178,108  |               |  |             | 2,680,473  |                  |  |                  | 6,858,581  |              |  |           | 366,164   |           |  |   | 342,907 |  |  |   | 23,257    |              |  |   | 208,581   | 
|Other        |  |               | 266,009    |               |  |             | 43,825     |                  |  |                  | 309,834    |              |  |           | 54,212    |           |  |   | 17,989  |  |  |   | 36,223    |              |  |   | 91,112    | 
|Eliminations |  |               |           |               |  |             | (2,814,232 | )                |  |                  | (2,814,232 | )            |  |           |          |           |  |   |        |  |  |   |          |              |  |   |          | 
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 
|             |  | $             | 8,498,205  |               |  | $           |           |                  |  | $                | 8,498,205  |              |  | $         | 1,119,406 |           |  | $ | 475,429 |  |  | $ | 643,977   |              |  | $ | 441,366   | 
|             |  |               |            |               |  |             |            |                  |  |                  |            |              |  |           |           |           |  |   |         |  |  |   |           |              |  |   |           | 

As of December 31, segment information related to assets and liabilities is as follows:

|             |  |         |             |             |  |   |             |  
|------------ |  | ------- | ----------- | ----------- |  | - | ----------- | -
|             |  | Segment |             | Segment    
|2000         |  | assets  |             | liabilities
|             |  |         |             |            
|Packaging    |  | $       | 18,407,451  |             |  | $ | 12,471,284  |  
|Paper        |  |         | 33,661,532  |             |  |   | 12,802,381  |  
|Other        |  |         | 1,716,652   |             |  |   | 1,093,893   |  
|Eliminations |  |         | (30,110,163 | )           |  |   | (10,838,185 | )
|             |  |         |             |             |  |   |             |  
|             |  | $       | 23,675,472  |             |  | $ | 15,529,373  |  
|             |  |         |             |             |  |   |             |  

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|             |  |         |             |             |  |   |            |  
|------------ |  | ------- | ----------- | ----------- |  | - | ---------- | -
|             |  | Segment |             | Segment    
|2001         |  | assets  |             | liabilities
|             |  |         |             |            
|Packaging    |  | $       | 21,749,083  |             |  | $ | 12,546,430 |  
|Paper        |  |         | 22,452,085  |             |  |   | 8,585,588  |  
|Other        |  |         | 1,640,754   |             |  |   | 1,032,000  |  
|Eliminations |  |         | (24,564,391 | )           |  |   | (8,763,157 | )
|             |  |         |             |             |  |   |            |  
|             |  | $       | 21,277,531  |             |  | $ | 13,400,861 |  
|             |  |         |             |             |  |   |            |  

|             |  |   |             |   |  |   |            |  
|------------ |  | - | ----------- | - |  | - | ---------- | -
|2002         |  |   |             |   |  |   |            |  
|             |  |   |             |   |  |   |            |  
|Packaging    |  | $ | 19,508,582  |   |  | $ | 14,713,514 |  
|Paper        |  |   | 17,299,822  |   |  |   | 6,568,550  |  
|Other        |  |   | 1,743,006   |   |  |   | 1,290,250  |  
|Eliminations |  |   | (21,238,736 | ) |  |   | (9,689,938 | )
|             |  |   |             |   |  |   |            |  
|             |  | $ | 17,312,674  |   |  | $ | 12,882,376 |  
|             |  |   |             |   |  |   |            |  

Geographical segment information is as follows:

|              |  |         |            |        |  |   |            | 
|------------- |  | ------- | ---------- | ------ |  | - | ---------- | 
|              |  | Segment
|              |  |        
|              |  | Net     |            | fixed 
|2000          |  | sales   |            | assets
|              |  |         |            |       
|Mexico        |  | $       | 12,161,342 |        |  | $ | 13,369,846 | 
|United States |  |         | 5,862,645  |        |  |   | 4,186,460  | 
|Eliminations  |  |         | (5,102,116 | )      |  |   |            | 
|              |  |         |            |        |  |   |            | 
|              |  | $       | 12,921,871 |        |  | $ | 17,556,306 | 
|              |  |         |            |        |  |   |            | 

|              |  |   |            |   |  |   |            | 
|------------- |  | - | ---------- | - |  | - | ---------- | 
|2001          |  |   |            |   |  |   |            | 
|              |  |   |            |   |  |   |            | 
|Mexico        |  | $ | 10,411,858 |   |  | $ | 12,492,604 | 
|United States |  |   | 4,147,802  |   |  |   | 3,996,380  | 
|Eliminations  |  |   | (4,027,265 | ) |  |   |            | 
|              |  |   |            |   |  |   |            | 
|              |  | $ | 10,532,395 |   |  | $ | 16,488,984 | 
|              |  |   |            |   |  |   |            | 

F-45



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|     |  |               |  |   |            |         |           |        |            |   |            | 
|---- |  | ------------- |  | - | ---------- | ------- | --------- | ------ | ---------- | - | ---------- | 
|     |  |               |  |   |            | Segment
|     |  |               |  |   |            |        
|     |  |               |  |   |            | Net     |           | fixed 
|2002 |  |               |  |   |            | sales   |           | assets
|     |  |               |  |   |            |         |           |       
|     |  | Mexico        |  | $ | 8,257,034  |         |           | $      | 12,178,153 |  
|     |  | United States |  |   | 3,055,403  |         |           |        | 885,558    |  
|     |  | Eliminations  |  |   | (2,814,232 | )       |           |        |            |  
|     |  |               |  |   |            |         |           |        |            |   |            | 
|     |  |               |  |   |            | $       | 8,498,205 |        |            | $ | 13,063,711 | 
|     |  |               |  |   |            |         |           |        |            |   |            | 

The last financial information shown is useful in the making of decisions by
the Companys management.

NOTE 17  SPECIAL ITEMS:

As of December 31, 2002, special items are as follows.

|                                                               |  |   |           | 
|-------------------------------------------------------------- |  | - | --------- | 
|Loss on sale of subsidiary Durango Paper Company (Note 1 iii.) |  | $ | 1,451,431 | 
|                                                               |  |   |           | 
|Total special items                                            |  | $ | 1,451,431 | 
|                                                               |  |   |           | 

NOTE 18  EXTRAORDINARY ITEMS:

As of December 31, 2001, extraordinary items are as follows:

|                                                                           |  |   |         | 
|-------------------------------------------------------------------------- |  | - | ------- | 
|Severance Compañía Papelera de Atenquique, S.A. de C.V. (1)                |  | $ | 157,104 | 
|Severance Ponderosa Industrial de México, S.A. de C.V. (Plywood plant) (1) |  |   | 11,137  | 
|Net loss on sale of certain non-strategic assets (Sky and Eastman) (2)     |  |   | 130,397 | 
|                                                                           |  |   |         | 
|Total extraordinary items                                                  |  | $ | 298,638 | 
|                                                                           |  |   |         | 



---

|(1) |  | Early in 2001, the Company entered into negotiations with its unions,
with the objective of canceling labor contracts still in effect after
approximately 50 years regarding the operations of Compañía Papelera de
Atenquique, S.A. de C.V. and Ponderosa Industrial de México, S.A. de C.V.
After a few months of negotiations, such contracts were terminated and the
number of workers was reduced.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



|(2) |  | In April and May 2001, certain non-strategic assets (the Sky and Eastman
divisions) of Durango Georgia Paper Company (a subsidiary of DPC) were
sold, generating a loss as the book value under Mexican GAAP was higher
than the price for which they were sold.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 19  NEW ACCOUNTING STANDARDS:

In November 2001, the MIPA issued revised Bulletin C-9, Liabilities,
Provisions, Contingent Assets and Liabilities and Commitments (Bulletin
C-9), which supersedes existing Bulletin C-9, Liabilities and Bulletin C-12,
Contingencies and Commitments. Bulletin C-9 establishes a methodology for
valuation, presentation and disclosure of liabilities and provisions, as well
as for valuation and disclosure of contingent assets and liabilities, and for
disclosure of commitments.

Among other things, Bulletin C-9 establishes guidelines for the recognition of
liabilities and non-recognition of liabilities in the event of extinguishments,
restructurings or conversion to equity. In addition, in the case of
provisions, it introduces the concept of discounting long-term provisions.
With respect to contingent liabilities, Bulletin C-9 states that all contingent
liabilities that have a probable realization must be accounted for and
disclosed in the financial statements, contingent liabilities that have a
possible realization cannot be accounted for in the financial statements, but
must be disclosed, and contingent liabilities that have a remote realization
cannot be accounted for in the financial statements and are not required to be
disclosed. Bulletin C-9 requires disclosure of committed amounts when they
represent significant fixed asset additions, contracted services and goods that
exceed the Companys immediate needs or if the commitment is considered a
contracted obligation. The provisions of Bulletin C-9 are required to be
applied beginning on January 1, 2003, although early adoption is recommended.
Management is currently evaluating the impact that the adoption of Bulletin C-9
will have on its consolidated financial statements.

In addition, in December 2001, the MIPA issued Bulletin C-8, Intangible
Assets (Bulletin C-8), which defines intangible assets as costs incurred
and rights or privileges acquired that will generate a future economic benefit,
Bulletin C-8 provides a clear definition of research and development costs,
requiring that only development costs may be deferred to a future period.
Furthermore, Bulletin C-8 states that preoperating costs should be expensed as
a period cost, unless they could be classified as development costs. Bulletin
C-8 requires that intangible assets with indefinite useful lives should not be
amortized, but should be evaluated for impairment annually. Goodwill and
intangible assets with finite useful lives should be amortized over their
useful lives. The provisions of Bulletin C-8 are required to be applied
beginning on January 1,

F-47



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##### Table of Contents



CORPORACIÓN DURANGO,
S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

2003, although early adoption is recommended. Management is currently
evaluating the impact that the adoption of Bulletin C-8 will have on its
consolidated financial statements.

NOTE 20  SUBSEQUENT EVENTS:

On February 27, 2003 Empaques de Carton Titan, S. A. de C. V., a Company
subsidiary, sold the assets of its molded pulp division for approximately
US$53,657 ($589,140 Mexican pesos). As a result, the Company recognized a gain
on sale in 2003 of $316,057.

Additionally, according to the purchase agreement, Empaques de Carton Titan,
S.A. de C.V. transferred to the buyer some accounts receivable and trade
accounts payable, in order to continue with the production and selling of
molded products.

NOTE 21  RECONCILIATION BETWEEN MEXICAN AND U.S. GAAP:

The Companys consolidated financial statements are prepared in accordance with
Mexican GAAP, which differs in certain significant respects from U.S. GAAP.
The Mexican GAAP consolidated financial statements include the effects of
inflation as provided for under Bulletin B-10. The application of Bulletin B-10
represents a comprehensive measure of the effects of price level changes in the
Mexican economy, and is considered to result in a more meaningful presentation
than historical cost-based financial reporting for both Mexican and U.S.
accounting purposes. Therefore, the following reconciliation to U.S. GAAP does
not include the reversal of such inflationary effects.

The principal differences between Mexican GAAP and U.S. GAAP, other than
inflation accounting, are presented in the following pages with an explanation,
where appropriate, of the effects on consolidated net income and shareholders
equity. Reconciling items are presented net of any gain or loss from monetary
position.

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

Reconciliation of consolidated net income:

|                                                            |  |      |  |  |         |                          |            |      |         |          |          |   |           |          |            |  
|----------------------------------------------------------- |  | ---- |  |  | ------- | ------------------------ | ---------- | ---- | ------- | -------- | -------- | - | --------- | -------- | ---------- | -
|                                                            |  |      |  |  |         | Years ended December 31,
|                                                            |  |      |  |  |         |                         
|                                                            |  |      |  |  |         | 2000                     |            | 2001 |         | 2002    
|                                                            |  |      |  |  |         |                          |            |      |         |         
|Net income (loss) under Mexican GAAP                        |  |      |  |  |         | $                        | 1,634,573  |      |         | $        | 825,298  |   |           | $        | (3,545,923 | )
|Deferred income taxes                                       |  | i    |  |  |         | (284,561                 | )          |      |         | (305,125 | )        |   |           | (608,994 | )         
|Deferred employee profit sharing                            |  | i    |  |  |         | (49,755                  | )          |      |         | 14,801   |          |   |           | (46,426  | )         
|Purchase accounting adjustments:                            |  | iii  |  |  |         |                          |            |      |         |          |          |   |           |         
|· Amortization of negative goodwill                         |  |      |  |  |         |                          | (1,486,746 | )    |         |          | (449,203 | ) |           |          |           |  
|· Depreciation                                              |  |      |  |  |         |                          | 204,015    |      |         |          | 166,730  |   |           |          | 150,934    |  
|Reversal of loss on sale of fixed assets                    |  | iv   |  |  |        |                          |            |      | 123,216 |          |          |   |          |         
|Effect of fifth amendment to Bulletin B-10                  |  | v    |  |  |         | (68,914                  | )          |      |         | (62,060  | )        |   |           | (61,604  | )         
|Loss on extinguishment of Yankee Bonds                      |  | vi   |  |  |        |                          |            |      | 15,080  |          |          |   | 14,155    |         
|Debt issuance costs                                         |  | vii  |  |  |        |                          |            |      | (78,774 | )        |          |   | (2,630    | )       
|Capitalized financing costs                                 |  | viii |  |  |        |                          |            |      | 25,910  |          |          |   | 31,200    |         
|Effect of Bulletin B-15 on prior years                      |  | ix   |  |  | (24,651 | )                        |            |      | (5,264  | )        |          |   |          |         
|Adjustment to fixed asset impairment                        |  | x    |  |  |         |                         |            |      |         |         |          |   |           | 747,085  |           
|Adjustment to loss on sale of subsidiary                    |  | xi   |  |  |        |                          |            |      |        |          |          |   | 1,357,562 |         
|Equity swaps                                                |  | xii  |  |  | (83,339 | )                        |            |      |        |          |          |   | (48,931   | )       
|Deferred start up and research and development costs        |  | xiii |  |  |        |                          |            |      |        |          |          |   | (100,654  | )       
|Effect of U.S. GAAP adjustments on minority interest        |  | xiv  |  |  | 169,465 |                          |            |      | (1,231  | )        |          |   | (8,586    | )       
|                                                            |  |      |  |  |         |                          |            |      |         |          |          |   |           |          |            |  
|U.S. GAAP net income (loss) before extraordinary items      |  |      |  |  |         | $                        | 10,087     |      |         | $        | 269,378  |   |           | $        | (2,122,812 | )
|Extraordinary loss  Extinguishment of debt, net of taxes   |  |      |  |  |         |                          |           |      |         |          | (29,963  | ) |           |          |           |  
|                                                            |  |      |  |  |         |                          |            |      |         |          |          |   |           |          |            |  
|U.S. GAAP net income (loss)                                 |  |      |  |  |         | $                        | 10,087     |      |         | $        | 239,415  |   |           | $        | (2,122,812 | )
|                                                            |  |      |  |  |         |                          |            |      |         |          |          |   |           |          |            |  
|U.S. GAAP income (loss) per share before extraordinary loss |  |      |  |  |         | $                        | 0.11       |      |         | $        | 2.86     |   |           | $        | (22.87     | )
|                                                            |  |      |  |  |         |                          |            |      |         |          |          |   |           |          |            |  
|Extraordinary loss  Extinguishment at debt, net of taxes   |  |      |  |  |         | $                        |           |      |         | $        | (0.32    | ) |           | $        |           |  
|                                                            |  |      |  |  |         |                          |            |      |         |          |          |   |           |          |            |  
|U.S. GAAP basic and diluted income (loss)
per share         |  |      |  |  |         | $                        | 0.11       |      |         | $        | 2.54     |   |           | $        | (22.87     | )
|                                                            |  |      |  |  |         |                          |            |      |         |          |          |   |           |          |            |  
|Weighted average shares outstanding (000s)                 |  |      |  |  |         |                          | 94,072     |      |         |          | 94,072   |   |           |          | 92,828     |  
|                                                            |  |      |  |  |         |                          |            |      |         |          |          |   |           |          |            |  

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

Reconciliation of consolidated shareholders equity:

|                                                                                 |                |      |  |  |         |          |                          |           |          |          |            |           |          |            |            |           | 
|-------------------------------------------------------------------------------- | -------------- | ---- |  |  | ------- | -------- | ------------------------ | --------- | -------- | -------- | ---------- | --------- | -------- | ---------- | ---------- | --------- | 
|                                                                                 |                |      |  |  |         |          | Years ended December 31,
|                                                                                 |                |      |  |  |         |          |                         
|                                                                                 |                |      |  |  |         |          | 2000                     |           | 2001     |          | 2002      
|                                                                                 |                |      |  |  |         |          |                          |           |          |          |           
|Total shareholders equity corresponding to
majority interest under Mexican GAAP |                |      |  |  |         | $        | 6,632,059                |           |          | $        | 7,834,816  |           |          | $          | 4,361,880  |          
|Deferred income taxes                                                            |                | i    |  |  |         | 428,069  |                          |           |          | 56,013   |            |           |          | (927,526   | )         
|Deferred employee profit sharing                                                 |                | i    |  |  |         | (995,214 | )                        |           |          | (980,413 | )          |           |          | (1,026,839 | )         
|Purchase accounting adjustments:                                                 |                | iii  |  |  |         |          |                          |           |          |          |            |           |          |           
|· Accumulated negative goodwill                                                  |                |      |  |  |         |          | (5,966,143               | )         |          |          | (6,415,346 | )         |          |            | (4,625,752 | )        
|· Accumulated depreciation                                                       |                |      |  |  |         |          | 477,427                  |           |          |          | 644,157    |           |          |            | 723,247    |          
|Reversal of loss on sale of fixed assets                                         |                | iv   |  |  |        |          |                          |           | 123,216  |          |            |           |         |           
|Effect of fifth amendment to Bulletin B-10:                                      |                | v    |  |  |         |          |                          |           |          |          |            |           |          |            |           
|                                                                                 | · Fixed assets |      |  |  |         |          |                          | 2,588,962 |          |          |            | 4,310,020 |          |            |            | 3,546,353 | 
|· Fixed assets accumulated depreciation                                          |                |      |  |  |         |          | (552,914                 | )         |          |          | (1,214,702 | )         |          |            | (1,382,818 | )        
|Repurchase of Yankee Bonds:                                                      |                | vi   |  |  |         |          |                          |           |          |          |            |           |          |           
|· Loss on extinguishment of Yankee Bonds                                         |                |      |  |  |         |          |                         |           |          |          | (32,236    | )         |          |            | (32,236    | )        
|· Accumulated amortization                                                       |                |      |  |  |         |          |                         |           |          |          | 1,219      |           |          |            | 15,374     |          
|Debt issuance cost:                                                              |                | vii  |  |  |         |          |                          |           |          |          |            |           |          |           
|· Reversal of capitalized debt issuance cost                                     |                |      |  |  |         |          |                         |           |          |          | (84,578    | )         |          |            | (110,324   | )        
|· Accumulated amortization                                                       |                |      |  |  |         |          |                         |           |          |          | 5,804      |           |          |            | 28,920     |          
|Capitalized financing costs:                                                     |                | viii |  |  |         |          |                          |           |          |          |            |           |          |           
|· Capitalized financing cost                                                     |                |      |  |  |         |          |                         |           |          |          | 26,463     |           |          |            | 58,245     |          
|· Accumulated depreciation                                                       |                |      |  |  |         |          |                         |           |          |          | (553       | )         |          |            | (1,135     | )        
|Effect of restatement of prior year amounts per Bulletin B-15                    |                | ix   |  |  | (52,346 | )        |                          |           | (237,599 | )        |            |           |         |           
|Adjustment to fixed asset impairment                                             |                | x    |  |  |         |         |                          |           |          |         |            |           |          | 747,085    |           
|Adjustment to loss on sale of subsidiary                                         |                | xi   |  |  |        |          |                          |           |         |          |            |           | (236,973 | )         
|Deferred start up and research and development costs                             |                | xiii |  |  |        |          |                          |           |         |          |            |           | (100,654 | )         
|Effect of U.S. GAAP adjustments on minority interest                             |                | xiv  |  |  | 169,714 |          |                          |           | 20,443   |          |            |           | 11,856   |           
|                                                                                 |                |      |  |  |         |          |                          |           |          |          |            |           |          |            |            |          
|Total U.S. GAAP shareholders equity                                             |                |      |  |  |         | $        | 2,729,614                |           |          | $        | 4,056,724  |           |          | $          | 1,048,703  |          
|                                                                                 |                |      |  |  |         |          |                          |           |          |          |            |           |          |            |            |          

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

Provided below is an analysis of the changes in shareholders equity under
U.S. GAAP:

|                                                                          |  |                          |           |      |  |   |            |  
|------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | - | ---------- | -
|                                                                          |  | Years ended December 31,
|                                                                          |  |                         
|                                                                          |  | 2001                     |           | 2002
|                                                                          |  |                          |           |     
|Balance at beginning of the year                                          |  | $                        | 2,729,614 |      |  | $ | 4,056,724  |  
|Net income (loss) under U.S. GAAP                                         |  |                          | 239,415   |      |  |   | (2,122,812 | )
|(Deficit) from restatement                                                |  |                          | (991,548  | )    |  |   | (358,487   | )
|Adjustment for additional pension liability related to seniority premiums |  |                          | (128,200  | )    |  |   |           |  
|Cumulative translation adjustment                                         |  |                          | (19,861   | )    |  |   | 20,215     |  
|Effect of Bulletin B-15 on prior years                                    |  |                          | (242,196  | )    |  |   | 323,242    |  
|Effects of reorganization as a result of the merger with CODUSA           |  |                          | 1,496,210 |      |  |   |           |  
|Minority interest                                                         |  |                          | (148,040  | )    |  |   |           |  
|Effect of Fifth Amendment of Bulletin B-10                                |  |                          | 1,121,330 |      |  |   | (870,179   | )
|                                                                          |  |                          |           |      |  |   |            |  
|Balance at end of the year                                                |  | $                        | 4,056,724 |      |  | $ | 1,048,703  |  
|                                                                          |  |                          |           |      |  |   |            |  

Comprehensive income

Comprehensive income under Mexican GAAP is as follows:

|                                                                |  |                          |            |      |  |      |            |   |  |   |            |  
|--------------------------------------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                |  | Years ended December 31,
|                                                                |  |                         
|                                                                |  | 2000                     |            | 2001 |  | 2002
|                                                                |  |                          |            |      |  |     
|Mexican GAAP net income                                         |  | $                        | 1,634,573  |      |  | $    | 825,298    |   |  | $ | (3,545,923 | )
|                                                                |  |                          |            |      |  |      |            |   |  |   |            |  
|Other comprehensive income (loss), net:                         |  |                          |            |      |  |      |            |   |  |   |            |  
|Other comprehensive loss                                        |  |                          | (1,018,941 | )    |  |      | (1,118,751 | ) |  |   | 121,918    |  
|Cancellation of GIDUSA of shareholders equity upon acquisition |  |                          | 2,670,935  |      |  |      |           |   |  |   |           |  
|Cancellation of CODUSA shareholders
equity upon merger         |  |                          |           |      |  |      | (6,027,269 | ) |  |   |           |  
|                                                                |  |                          |            |      |  |      |            |   |  |   |            |  
|                                                                |  |                          | 1,651,994  |      |  |      | (7,146,020 | ) |  |   | 121,918    |  
|                                                                |  |                          |            |      |  |      |            |   |  |   |            |  
|Comprehensive income (loss)                                     |  | $                        | 3,286,567  |      |  | $    | (6,320,722 | ) |  | $ | (3,424,005 | )
|                                                                |  |                          |            |      |  |      |            |   |  |   |            |  
|Accumulated comprehensive loss                                  |  | $                        | (458,167   | )    |  | $    | (7,604,187 | ) |  | $ | (7,482,269 | )
|                                                                |  |                          |            |      |  |      |            |   |  |   |            |  

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

The components of other accumulated comprehensive loss is as follows as of
December 31, 2000, 2001 and 2002:

|                                                              |  |              |             |                      |  |                |           |              |  |               |         |             |  |       |             |   |  |  |             |  
|------------------------------------------------------------- |  | ------------ | ----------- | -------------------- |  | -------------- | --------- | ------------ |  | ------------- | ------- | ----------- |  | ----- | ----------- | - |  |  | ----------- | -
|                                                              |  |              |             |                      |  | Adjustment for |           |              |  |               |         | (Loss) from |  | Other
|                                                              |  | Effect of    |             | additional pension   |  | Cumulative     |           | holding      |  | accumulated  
|                                                              |  | adoption of  |             | liability related to |  | translation    |           | non monetary |  | comprehensive
|                                                              |  | Bulletin D-4 |             | seniority premiums   |  | adjustment     |           | assets (1)   |  | loss         
|                                                              |  |              |             |                      |  |                |           |              |  |              
|Balance at January 1, 2000                                    |  |              |             |                      |  |                |           |              |  | $             | 3,118   |             |  |       | ($2,113,279 | ) |  |  | ($2,110,161 | )
|Current period changes                                        |  |              | ($492,463   | )                    |  |                | ($12,658  | )            |  |               | 11,179  |             |  |       | (524,999    | ) |  |  | (1,018,941  | )
|Cancellation of GIDUSA shareholders  ́ equity upon acquisition |  |              |            |                      |  |                |          |              |  |               | 2,491   |             |  |       | 2,668,444   |   |  |  | 2,670,935   |  
|                                                              |  |              |             |                      |  |                |           |              |  |               |         |             |  |       |             |   |  |  |             |  
|Balances at December 31, 2000                                 |  |              | (492,463    | )                    |  |                | (12,658   | )            |  |               | 16,788  |             |  |       | 30,166      |   |  |  | (458,167    | )
|Current period changes                                        |  |              |            |                      |  |                | (128,200  | )            |  |               | (19,861 | )           |  |       | (970,690    | ) |  |  | (1,118,751  | )
|Cancellation of CODUSA shareholders  ́ equity upon merger      |  |              | (2,470,792  | )                    |  |                |          |              |  |               | (11,118 | )           |  |       | (3,545,359  | ) |  |  | (6,027,269  | )
|                                                              |  |              |             |                      |  |                |           |              |  |               |         |             |  |       |             |   |  |  |             |  
|Balances at December 31,2001                                  |  |              | (2,963,255  | )                    |  |                | (140,858  | )            |  |               | (14,191 | )           |  |       | (4,485,883  | ) |  |  | (7,604,187  | )
|Current period charges                                        |  |              |            |                      |  |                |          |              |  |               | 20,215  |             |  |       | 101,703     |   |  |  | 121,918     |  
|                                                              |  |              |             |                      |  |                |           |              |  |               |         |             |  |       |             |   |  |  |             |  
|Balances at December 31,2002                                  |  |              | ($2,963,255 | )                    |  |                | ($140,858 | )            |  | $             | 6,024   |             |  |       | ($4,384,180 | ) |  |  | ($7,482,269 | )
|                                                              |  |              |             |                      |  |                |           |              |  |               |         |             |  |       |             |   |  |  |             |  



|(1) |  | For 2000, 2001 and 2002, the loss from holding non-monetary assets
includes deferred tax effect of $6,979, $22,108 and ($145,398),
respectively, as a result of the adoption of Bulletin D-4.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

i.     Deferred income tax and employee profit sharing

Statement of Financial Accounting Standards No. 109 Accounting For Income
Taxes (SFAS No. 109) requires an asset and liability approach for financial
accounting and reporting for income tax under the following basic principles:
(a) a current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year, (b) a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary
differences and tax loss and tax credit carryforwards, (c) the measurement of
current and deferred tax assets and liabilities is based on provisions of the
enacted tax law; the effects of future changes in tax laws or rates are not
anticipated, and (d) the measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits for which available evidence
indicates that it is more likely than not that the tax benefit will not be
realized.

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

Under this method, deferred tax and employee profit sharing are recognized with
respect to all temporary differences, and the benefit from utilizing tax loss
carryforwards and asset tax credits is recognized in the year in which the
losses or credits arise (subject to a valuation allowance with respect to any
tax benefits which in managements opinion, are more likely than not that they
are not expected to be realized). The subsequent realization of this benefit
does not affect the income tax provision.

Temporary differences under FAS No. 109 are determined based on the difference
between the indexed tax-basis amount of the asset or liability and the related
restated amount reported in the financial statements. The deferred income tax
expense or benefit is calculated as the difference between (a) the deferred tax
assets and liabilities at the end of the current period, and (b) the deferred
tax assets and liabilities reported at the end of the prior period remeasured
to units of current general purchasing power at the end of the current period,
whereas, under Mexican GAAP Bulletin D-4, the change in the deferred tax asset
or liability is first measured on a historical cost basis and the components of
the change including monetary gains or losses are allocated between tax
provision, deficit from restatement and monetary gain or loss.

The significant components of income and asset tax expense under U.S. GAAP were
as follows:

|                                        |          |      |                          |          |   |      |         |         |  |   |         |         |  
|--------------------------------------- | -------- | ---- | ------------------------ | -------- | - | ---- | ------- | ------- |  | - | ------- | ------- | -
|                                        |          |      | Years ended December 31,
|                                        |          |      |                         
|                                        |          | 2000 |                          | 2001     |   | 2002
|                                        |          |      |                          |          |   |     
|Income and asset tax expense (benefit): |          |      |                          |          |   |      |         |         |  |   |         |        
|Current                                 |          |      |                          |          |   |      |         |         |  |   |         |        
|                                        | Domestic |      | $                        | 285,037  |   |      | $       | 224,956 |  |   | $       | 114,382 |  
|                                        |          |      |                          |          |   |      |         |         |  |   |         |         |  
|Deferred                                |          |      |                          |          |   |      |         |         |  |   |         |        
|                                        | Domestic |      |                          | 594,152  |   |      |         | 64,989  |  |   |         | (78,941 | )
|                                        | Foreign  |      |                          | (114,539 | ) |      |         | 23,961  |  |   |         | 68,186  |  
|                                        |          |      |                          |          |   |      |         |         |  |   |         |         |  
|                                        |          |      | 479,613                  |          |   |      | 88,950  |         |  |   | (10,755 | )      
|                                        |          |      |                          |          |   |      |         |         |  |   |         |         |  
|Income and asset tax provision          |          | $    | 764,650                  |          |   | $    | 313,906 |         |  | $ | 103,627 |        
|                                        |          |      |                          |          |   |      |         |         |  |   |         |         |  

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

The income tax and profit sharing effects of significant items comprising the
Companys net deferred income tax and profit sharing assets and liabilities
under U.S. GAAP are as follows:

|                                          |  |       |           |              |  |              |            |              |  |   |         |   |  |   |            |  
|----------------------------------------- |  | ----- | --------- | ------------ |  | ------------ | ---------- | ------------ |  | - | ------- | - |  | - | ---------- | -
|                                          |  |       |           |              |  | 2002        
|                                          |  |       |           |              |  |             
|                                          |  |       |           |              |  | SFAS No. 109 |            | SFAS No. 109 |  |   |         |  
|                                          |  |       |           |              |  | applied to   |            | applied to   |  |   |         |  
|                                          |  | Total |           | Mexican      |  | Foreign      |            |              |  |  
|                                          |  | 2001  |           | Subsidiaries |  | Subsidiaries |            | Total       
|                                          |  |       |           |              |  |              |            |             
|Deferred income tax liabilities (assets): |  |       |           |              |  |              |            |              |  |   |         |   |  |   |            |  
|Inventories                               |  | $     | 389,424   |              |  | $            | 421,381    |              |  | $ |        |   |  | $ | 421,381    |  
|Inventory Rule 106                        |  |       | (428,756  | )            |  |              | (365,840   | )            |  |   |        |   |  |   | (365,840   | )
|Property, plant and equipment             |  |       | 3,410,846 |              |  |              | 2,991,696  |              |  |   | 4,220   |   |  |   | 2,995,916  |  
|Other assets                              |  |       | 47,777    |              |  |              | 50,288     |              |  |   | 438     |   |  |   | 50,726     |  
|Reserves                                  |  |       | (79,219   | )            |  |              | (138,184   | )            |  |   | (113    | ) |  |   | (138,297   | )
|Equity swaps                              |  |       | (25,255   | )            |  |              |           |              |  |   |        |   |  |   |           |  
|Other                                     |  |       | (9,157    | )            |  |              | (7,717     | )            |  |   | (19,368 | ) |  |   | (27,085    | )
|Asset tax credits                         |  |       | (401,509  | )            |  |              | (388,669   | )            |  |   |        |   |  |   | (388,669   | )
|Tax loss carryforwards                    |  |       | (900,759  | )            |  |              | (1,640,852 | )            |  |   |        |   |  |   | (1,640,852 | )
|                                          |  |       |           |              |  |              |            |              |  |   |         |   |  |   |            |  
|                                          |  |       | 2,003,392 |              |  |              | 922,103    |              |  |   | (14,823 | ) |  |   | 907,280    |  
|Valuation Allowance                       |  |       | 945,319   |              |  |              | 2,029,521  |              |  |   |        |   |  |   | 2,029,521  |  
|                                          |  |       |           |              |  |              |            |              |  |   |         |   |  |   |            |  
|Total net deferred income tax liabilities |  | $     | 2,948,711 |              |  | $            | 2,951,624  |              |  | $ | (14,823 | ) |  | $ | 2,936,801  |  
|                                          |  |       |           |              |  |              |            |              |  |   |         |   |  |   |            |  

|                                                       |  |              |           |      |  |   |           |  
|------------------------------------------------------ |  | ------------ | --------- | ---- |  | - | --------- | -
|                                                       |  | December 31,
|                                                       |  |             
|                                                       |  | 2001         |           | 2002
|                                                       |  |              |           |     
|Deferred employee profit sharing liabilities (assets): |  |              |           |      |  |   |           |  
|Inventory                                              |  | $            | 101,436   |      |  | $ | 127,691   |  
|Inventory Rule 106                                     |  |              | (122,502  | )    |  |   | (110,861  | )
|Property, plant and equipment                          |  |              | 1,071,657 |      |  |   | 1,008,277 |  
|Other assets                                           |  |              | 2,417     |      |  |   | (5,129    | )
|Allowance for doubtful accounts                        |  |              | (27,797   | )    |  |   | (44,212   | )
|Exchange rate fluctuations                             |  |              | (43,368   | )    |  |   | 51,073    |  
|Equity swaps                                           |  |              | (1,430    | )    |  |   |          |  
|                                                       |  |              |           |      |  |   |           |  
|Total net deferred employee profit sharing liability   |  | $            | 980,413   |      |  | $ | 1,026,839 |  
|                                                       |  |              |           |      |  |   |           |  

F-54



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

The deferred income tax and profit sharing classification in the condensed
balance sheet as of December 31, 2001 and 2002 is as follows:

|                              |  |                   |           |                |  |       |           |   |  |   |           |  
|----------------------------- |  | ----------------- | --------- | -------------- |  | ----- | --------- | - |  | - | --------- | -
|                              |  | December 31, 2001
|                              |  |                  
|                              |  | Deferred          |           | Deferred       |  |       |           |  
|                              |  | Income Tax        |           | Profit Sharing |  | Total
|                              |  |                   |           |                |  |      
|Deferred income tax (assets)  |  |                   |           |                |  |       |           |   |  |   |           |  
|Current                       |  |                   | ($152,963 | )              |  |       | ($48,863  | ) |  |   | ($201,826 | )
|Long term                     |  |                   | (356,948  | )              |  |       | (44,799   | ) |  |   | (401,747  | )
|                              |  |                   |           |                |  |       |           |   |  |   |           |  
|                              |  |                   | (509,911  | )              |  |       | (93,662   | ) |  |   | (603,573  | )
|Deferred income tax liability |  |                   |           |                |  |       |           |   |  |   |           |  
|Current                       |  |                   |          |                |  |       |          |   |  |   |          |  
|Long term                     |  |                   | 3,458,622 |                |  |       | 1,074,075 |   |  |   | 4,532,697 |  
|                              |  |                   |           |                |  |       |           |   |  |   |           |  
|                              |  |                   | 3,458,622 |                |  |       | 1,074,075 |   |  |   | 4,532,697 |  
|                              |  |                   |           |                |  |       |           |   |  |   |           |  
|Deferred income tax, net      |  | $                 | 2,948,711 |                |  | $     | 980,413   |   |  | $ | 3,929,124 |  
|                              |  |                   |           |                |  |       |           |   |  |   |           |  

|                              |  |                   |           |                |  |       |           |   |  |   |           |  
|----------------------------- |  | ----------------- | --------- | -------------- |  | ----- | --------- | - |  | - | --------- | -
|                              |  | December 31, 2002
|                              |  |                  
|                              |  | Deferred          |           | Deferred       |  |       |           |  
|                              |  | Income Tax        |           | Profit Sharing |  | Total
|                              |  |                   |           |                |  |      
|Deferred
income tax (assets)  |  |                   |           |                |  |       |           |   |  |   |           |  
|Current                       |  | $                 | (531,222  | )              |  | $     | (155,073  | ) |  | $ | (686,295  | )
|Long term                     |  |                   |          |                |  |       |          |   |  |   |          |  
|                              |  |                   |           |                |  |       |           |   |  |   |           |  
|                              |  |                   | (531,222  | )              |  |       | (155,073  | ) |  |   | (686,295  | )
|Deferred income tax liability |  |                   |           |                |  |       |           |   |  |   |           |  
|Current                       |  | $                 | 421,381   |                |  | $     | 127,691   |   |  | $ | 549,072   |  
|Long term                     |  |                   | 3,046,642 |                |  |       | 1,054,221 |   |  |   | 4,100,863 |  
|                              |  |                   |           |                |  |       |           |   |  |   |           |  
|                              |  |                   | 3,468,023 |                |  |       | 1,181,912 |   |  |   | 4,649,935 |  
|                              |  |                   |           |                |  |       |           |   |  |   |           |  
|Deferred income tax, net      |  | $                 | 2,936,801 |                |  | $     | 1,026,839 |   |  | $ | 3,963,640 |  
|                              |  |                   |           |                |  |       |           |   |  |   |           |  

Under U.S. GAAP, employee profit sharing is recorded as an operating expense.

F-55



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

For the year ended December 31, 2001 and 2002, the difference in net deferred
tax liabilities between Mexican and U.S. GAAP was as follows:

|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |          |        | 
|----------------------- | ------------------------------------------- | -------------------------------------- | ---------- | --------- | ------ | ---- | --------- | ---------- | - | - | ---------- | -------- | ------ | 
|                        |                                             |                                        |            | Mexican   |        | U.S. |           |            |   |  
|                        |                                             |                                        |            | GAAP      |        | GAAP |           | Difference
|                        |                                             |                                        |            |           |        |      |           |           
|Deferred tax liability: |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|At December 31, 2000    |                                             | $                                      | 3,267,656  |           |        | $    | 2,900,543 |            |   | $ | 367,113    |         
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|At December 31, 2001:   |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|                        | Reported under Bulletin B-15                |                                        | $          | 3,090,368 |        |      | $         | 2,948,711  |   |   | $          | 141,657  |       
|                        | Effect of Bulletin B-15                     |                                        |            | (85,644   | )      |      |           |           |   |   |            | (85,644  | )     
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|                        | Index for effects of inflation in Mexico    |                                        |            | 3,004,724 |        |      |           | 2,948,711  |   |   |            | 56,013   |       
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|                        | Net change                                  |                                        |            | (262,932  | )      |      |           | 48,168     |   |   |            | (311,100 | )     
|                        | Reclassification made to extraordinary item |                                        |            |          |        |      |           | 16,134     |   |   |            | (16,134  | )     
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|                        |                                             | $                                      | (262,932   | )         |        | $    | 64,302    |            |   | $ | (327,234   | )       
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|At December 31, 2001:   |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|                        | Index for effects of inflation in Mexico    |                                        | $          | 3,004,724 |        |      | $         | 2,948,711  |   |   | $          | 56,013   |       
|                        |                                             | Effect of Bulletin B-15 on prior years |            |           | 85,644 |      |           |            |  |   |            |          | 85,644 | 
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|                        | Reported under Bulletin B-15                |                                        |            | 3,090,368 |        |      |           | 2,948,711  |   |   |            | (141,657 | )     
|At December 31, 2002    |                                             |                                        | 2,009,274  |           |        |      | 2,936,801 |            |   |   | (927,527   | )       
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|Net change              |                                             |                                        | (1,081,094 | )         |        |      | (11,910   | )          |   |   | (1,069,184 | )       
|                        | DPC Deferred income tax liability (1)       |                                        |            | 605,588   |        |      |           |           |   |   |            | 605,588  |       
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         
|                        |                                             | $                                      | (475,506   | )         |        | $    | (11,910   | )          |   | $ | (463,596   | )       
|                        |                                             |                                        |            |           |        |      |           |            |   |   |            |         



---

|(1) |  | Deferred tax effect on the sale of DPC included in discontinued operations
|--- |  | --------------------------------------------------------------------------

The net change in the deferred tax liabilities during 2001 and 2002 was
allocated to the following components:
F-56Table of Contents

CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                                            |  |         |          |      |  |            |        |  |  |   |          |  
|------------------------------------------- |  | ------- | -------- | ---- |  | ---------- | ------ |  |  | - | -------- | -
|                                            |  | Mexican |          | U.S. |  |            |        | 
|                                            |  | GAAP    |          | GAAP |  | Difference
|                                            |  |         |          |      |  |           
|Deferred tax liability in 2001:             |  |         |          |      |  |            |        |  |  |   |          |  
|Deferred tax expense                        |  | $       | (267,291 | )    |  | $          | 48,168 |  |  | $ | (315,459 | )
|Effect of Bulletin B-15 on prior years      |  |         | (4,801   | )    |  |            |       |  |  |   | (4,801   | )
|Monetary gain on initial balance            |  |         | (79,257  | )    |  |            |       |  |  |   | (79,257  | )
|Monetary loss on current period change      |  |         | 110,525  |      |  |            |       |  |  |   | 110,525  |  
|Reclassification made to extraordinary item |  |         |         |      |  |            | 16,134 |  |  |   | (16,134  | )
|                                            |  |         |          |      |  |            |        |  |  |   |          |  
|                                            |  | $       | (240,824 | )    |  | $          | 64,302 |  |  | $ | (305,126 | )
|Gain from holding non-monetary assets       |  |         | (22,108  | )    |  |            |       |  |  |   | (22,108  | )
|                                            |  |         |          |      |  |            |        |  |  |   |          |  
|                                            |  | $       | (262,932 | )    |  | $          | 64,302 |  |  | $ | (327,234 | )
|                                            |  |         |          |      |  |            |        |  |  |   |          |  

|                                       |  |         |          |      |  |            |         |   |  |   |          |  
|-------------------------------------- |  | ------- | -------- | ---- |  | ---------- | ------- | - |  | - | -------- | -
|                                       |  | Mexican |          | U.S. |  |            |         |  
|                                       |  | GAAP    |          | GAAP |  | Difference
|                                       |  |         |          |      |  |           
|Deferred tax liability in 2002:        |  |         |          |      |  |            |         |   |  |   |          |  
|Deferred tax expense                   |  | $       | (667,294 | )    |  | $          | (11,910 | ) |  | $ | (655,384 | )
|Monetary gain on initial balance       |  |         | (93,997  | )    |  |            |        |   |  |   | (93,997  | )
|Monetary loss on current period change |  |         | 140,387  |      |  |            |        |   |  |   | 140,387  |  
|                                       |  |         |          |      |  |            |         |   |  |   |          |  
|                                       |  | $       | (620,904 | )    |  | $          | (11,910 | ) |  | $ | (608,994 | )
|Gain from holding non-monetary assets  |  |         | 145,398  |      |  |            |        |   |  |   | 145,398  |  
|                                       |  |         |          |      |  |            |         |   |  |   |          |  
|                                       |  | $       | (475,506 | )    |  | $          | (11,910 | ) |  | $ | (463,596 | )
|                                       |  |         |          |      |  |            |         |   |  |   |          |  

ii Employee benefits

Liabilities and costs related to pension plans and seniority premiums are
recorded under Mexican GAAP according to Bulletin D-3 (Revised), Labor
Liabilities, as described in Note 3.l. Under
U.S. GAAP, the requirements of SFAS No. 87, Employers Accounting for
Pensions, as amended by SFAS, No. 132 Employees Disclosures about Pensions
and Other Postretirement Benefits, for recording liabilities and costs
relating to pension plans and seniority premiums using actuarial computations
are similar to those of Bulletin D-3.

F-57



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

The following sets forth the changes in benefit obligations, and the funded
status of such plans for 2001 and 2002 reconciled with the amounts reported in
the consolidated balance sheets under U.S. GAAP.



|a) |  | Mexican subsidiaries December 31
|-- |  | --------------------------------

|                                                |  |      |          |      |  |   |          |  
|----------------------------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                                                |  | 2001 |          | 2002
|                                                |  |      |          |     
|Accumulated benefit obligation                  |  | $    | 177,202  |      |  | $ | 179,760  |  
|Change in benefit obligation:                   |  |      |          |      |  |   |          |  
|Projected benefit obligation, beginning of year |  |      | 366,445  |      |  |   | 213,958  |  
|Service cost                                    |  |      | 9,471    |      |  |   | 9,174    |  
|Interest cost                                   |  |      | 10,010   |      |  |   | 10,344   |  
|Actuarial loss                                  |  |      | 8,820    |      |  |   | (2,042   | )
|Benefits paid                                   |  |      | (180,787 | )    |  |   | (14,336  | )
|                                                |  |      |          |      |  |   |          |  
|Projected benefit obligations, end of year      |  | $    | 213,958  |      |  | $ | 217,098  |  
|                                                |  |      |          |      |  |   |          |  
|Unfunded liability                              |  | $    | 213,958  |      |  | $ | 217,098  |  
|                                                |  |      |          |      |  |   |          |  
|Plan assets                                     |  | $    |         |      |  | $ |          |  
|Unrecognized transition obligation and other    |  |      | (120,223 | )    |  |   | (113,562 | )
|                                                |  |      |          |      |  |   |          |  
|Net pension liability                           |  | $    | 97,735   |      |  | $ | 103,536  |  
|                                                |  |      |          |      |  |   |          |  

|                                                  |  |             |         |      |  |   |         | 
|------------------------------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                                                  |  | December 31
|                                                  |  |            
|                                                  |  | 2001        |         | 2002
|                                                  |  |             |         |     
|Amounts recognized in balance sheets:             |  |             |         |      |  |   |         | 
|Accrued benefit liability                         |  | $           | 177,202 |      |  | $ | 179,760 | 
|Intangible pension asset  labor obligations      |  |             | 83,467  |      |  |   | 76,224  | 
|                                                  |  |             |         |      |  |   |         | 
|Net amount recognized under U.S. and Mexican GAAP |  | $           | 93,735  |      |  | $ | 103,536 | 
|                                                  |  |             |         |      |  |   |         | 

F-58



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

There were no plan assets during 2001.

|   |  |                      |  |                                                   |  |             |          |      |  |   |   | 
|-- |  | -------------------- |  | ------------------------------------------------- |  | ----------- | -------- | ---- |  | - | - | 
|   |  |                      |  |                                                   |  | December 31
|   |  |                      |  |                                                   |  |            
|   |  |                      |  |                                                   |  | 2001        |          | 2002
|   |  |                      |  |                                                   |  |             |          |     
|b) |  | Foreign subsidiaries |  |                                                   |  |             |          |      |  |  
|   |  |                      |  | Change in projected benefit obligation:           |  |             |          |      |  |   |   | 
|   |  |                      |  | Obligation at beginning of year                   |  | $           | 433,403  |      |  | $ |  | 
|   |  |                      |  | Service cost                                      |  |             | 7,767    |      |  |   |  | 
|   |  |                      |  | Interest cost                                     |  |             | 32,754   |      |  |   |  | 
|   |  |                      |  | Benefit payments                                  |  |             | (30,654  | )    |  |   |  | 
|   |  |                      |  | Plan amendment                                    |  |             |         |      |  |   |  | 
|   |  |                      |  | Actuarial (gain) loss                             |  |             | (346     | )    |  |   |  | 
|   |  |                      |  | Assumption change                                 |  |             | 4,511    |      |  |   |  | 
|   |  |                      |  |                                                   |  |             |          |      |  |   |   | 
|   |  |                      |  | Obligation at end of year                         |  | $           | 447,435  |      |  | $ |  | 
|   |  |                      |  |                                                   |  |             |          |      |  |   |   | 
|   |  |                      |  | Change in plan assets:                            |  |             |          |      |  |   |   | 
|   |  |                      |  | Market value of assets at beginning of year       |  |             | 482,215  |      |  |   |  | 
|   |  |                      |  | Actual return on plan assets                      |  |             | (36,063  | )    |  |   |  | 
|   |  |                      |  | Benefit payments                                  |  |             | (30,654  | )    |  |   |  | 
|   |  |                      |  |                                                   |  |             |          |      |  |   |   | 
|   |  |                      |  | Market value of assets at end of year             |  |             | 415,498  |      |  |   |  | 
|   |  |                      |  |                                                   |  |             |          |      |  |   |   | 
|   |  |                      |  | Funded status
Funded status at end of the year    |  |             | (56,640  | )    |  |   |  | 
|   |  |                      |  | Unrecognized net loss (gain)                      |  |             | 128,200  |      |  |   |  | 
|   |  |                      |  | Unrecognized prior service cost                   |  |             | 30,840   |      |  |   |  | 
|   |  |                      |  |                                                   |  |             |          |      |  |   |   | 
|   |  |                      |  | Prepaid pension cost asset at end of the year     |  |             | 102,400  |      |  |   |  | 
|   |  |                      |  | Additional minimum liability                      |  |             | (159,040 | )    |  |   |  | 
|   |  |                      |  |                                                   |  |             |          |      |  |   |   | 
|   |  |                      |  | Net amount recognized under U.S. and Mexican GAAP |  | $           | (56,640  | )    |  | $ |  | 
|   |  |                      |  |                                                   |  |             |          |      |  |   |   | 

The defined benefit plans for the foreign subsidiaries were included within
DPC, which was sold in October 2002 (see Note 1 iii).

The Company has no post-retirement health care insurance or other
cost-employment benefit plans, other than the pensions plans mentioned above.

F-59



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

iii.     Acquisitions

As discussed in Note 3.k, for various acquisitions realized in 1998 and 1999,
under Mexican GAAP, the Company has recorded negative goodwill, representing
the excess of the book value of the net assets acquired over the purchase
price. Such negative goodwill is being amortized into income, over the period
in which the Company expects to integrate these operations into the Company.

Under U.S. GAAP, these acquisitions have been accounted for under the purchase
method and consequently, the purchase price has been allocated to assets
acquired and liabilities assumed based on the relative fair values. As a
result under U.S. GAAP, negative goodwill was recorded as a reduction in the
carrying value of the long-term assets (primarily fixed assets). The results of
operations of the acquired companies have been included in the combined results
for periods subsequent to the acquisitions.

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

Under Mexican GAAP, post acquisition adjustments should be recognized directly
to income as incurred.

Acquisition of GIDUSA by CODUSA

As disclosed in Note 1, in 2000, the Rincon family contributed $2,157,351 to
CODUSA, which was used by CODUSA for the acquisition of the 59% interest in
GIDUSA previously held directly by the Rincon family. Under Mexican GAAP, these
transactions were accounted for as a capital contribution and subsequent
acquisition, resulting in negative goodwill of $325,189 which was fully
amortized in 2000. Accordingly, in the statement of shareholders equity under
Mexican GAAP, the capital contribution, and acquisition of GIDUSA are presented
separately. Under U.S. GAAP, this has been accounted for as a transaction of
two entities under common control and consequently, purchase accounting would
not apply. Under U.S. GAAP, the difference between the purchase price paid for
the 59% interest and the historical book value of the Rincon familys interest
in GIDUSA on a U.S. GAAP basis would be reflected as a capital contribution of
$43,518 and presented as one line item in the statement of shareholders
equity.

F-60



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

iv.     Reversal of loss on sale of fixed assets

As disclosed in Note 18, Extraordinary Items, during 2001 the Company sold,
certain non-strategic assets (the Sky and Eastman divisions). The U.S. GAAP
carrying value of the fixed assets sold in such divisions were different to the
carrying value recorded under Mexican GAAP due to differences in the
application of purchase accounting. As a result, the Company reversed the
additional loss recognized under Mexican GAAP. Additionally, under Mexican
GAAP, extraordinary items are presented as a separate line item in the income
statement before minority interest, whereas, for U.S. GAAP purposes these
expenses are presented as a part of operating income. Therefore, for U.S. GAAP
purposes, the Company reclassified extraordinary items to operating income
after given effect to the reversal of the loss on sale of fixed assets.

v.     Effect of fifth amendment to Bulletin B-10 (Modified)

As mentioned in Note 2, the Company elected, as a result of the adoption of the
Fifth Amendment to Bulletin B-10 (Modified), to restate its non-monetary assets
of foreign origin based on the change of the Mexican peso against the foreign
currencies and by applying inflation rates of the countries from which the
non-monetary assets originate.

This methodology is not consistent with Rule 3-20 of Regulation S-X
regarding the use of the same reporting currency for all periods. Under U.S.
GAAP, these assets, which are used in Mexico, are adjusted by the Mexican NCPI
and depreciation is calculated using the adjusted basis.

F-61



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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

vi.     Loss on extinguishment of Yankee Bonds

In February 2001, the Company extinguished early its US$150 million Yankee
Bonds maturing in 2001 (2001 Yankee Bonds). Under Mexican GAAP, the Company
capitalized the consent fee totaling $32,236 paid to the bondholders of the
2001 Yankee Bonds, and is amortizing such amount over the term of the new
US$180 million Yankee Bonds maturing in 2006 (2006 Yankee Bond), which were
issued simultaneously. Under Mexican GAAP, for the years ended December 31,
2001 and 2002 amortization of the debt issuance cost of the 2006 Yankee Bond
totaled $15,410 and $29,701. In addition, the Company wrote-off $15,080 of
unamortized debt issuance cost related to the 2001Yankee Bonds. Under U.S.
GAAP, this consent fee and the write-off of unamortized debt issuance cost
would be recognized in earnings immediately and considered as part of the cost
of extinguishing the 2001 Yankee Bonds. Under U.S. GAAP, the loss on
extinguishment of the 2001 Yankee Bonds (which includes the consent fee) would
have totaled $29,963, net of related tax benefit of $16,134 and would have been
reflected as an extraordinary item in the consolidated income statement. Under
U.S. GAAP, for the years ended December 31, 2001 and 2002 amortization of the
debt issuance cost 2006 Yankee Bond totaled $14,190 and $15,481.

vii.     Debt issuance cost

In August 2001, the Company exchanged US$138.7 million of its US$250 million
Yankee Bonds maturing in 2003 (2003 Yankee Bonds) for an additional US$128.3
million 2006 Yankee Bonds and US$10.4 million Yankee Bonds maturing in 2008
(2008 Yankee Bonds). Under Mexican GAAP, the Company capitalized $105,408 of
fees and expenses, excluding consent fees, incurred in connection with the
exchange offering as debt issuance cost. During 2001 and 2002, the company
amortized $7,170 and $25,327 in relation to these costs. In addition, the
Company wrote-off $20,830 representing the unamortized debt issuance cost of
the 2003 Yankee Bonds.

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

Under U.S. GAAP, debt issuance cost, excluding consent fees, relating to the
exchange offering would be expensed since the terms of the 2006 and 2008 Yankee
Bonds are not considered substantially different from the 2003 Yankee Bonds.
Furthermore, the unamortized portion of original 2003 Yankee bonds, which
totaled $1,366 and $4,098 for the years ended December 31, 2001 and 2002, would
be amortized over the new term of the 2006 and 2008 Yankee Bonds.

In September 2002, the Company initiated the process to register the 2009
Senior Notes. Under Mexican GAAP, the Company capitalized $25,746 of
fees and expenses.

Under U.S.GAAP those expenses were charged to operations in the condensed
statements of income, as the Company could not complete the registration
process.

viii.     Capitalized financing costs

Mexican GAAP allows, but does not require, capitalization of financing costs as
part of the cost of assets under construction. Capitalized financing costs
include interest costs, gains or losses from monetary position and foreign
exchange losses.

U.S. GAAP requires the capitalization of interest during construction on
qualifying assets. In an inflationary economy, such as Mexico, it is
acceptable practice to capitalize interest net of the monetary gain on the
related Mexican Peso debt, but not on U.S. dollar or other stable currency
debt. U.S. GAAP does not allow the capitalization of foreign exchange losses.

ix.     Effect of Bulletin B-15 on restatement to constant currency

As disclosed in Note 3, the Company adopted Bulletin B-15, during 1997.
Bulletin B-15 requires that the restatement of prior year amounts of foreign
subsidiaries be determined by first restating prior year foreign currency
amounts by the inflation of the foreign country and then retranslating such
amounts at the exchange rate as of the date of the latest balance sheet
(December 31, 2002). Under U.S. GAAP, the primary financial statements should
be presented in the same reporting constant currency for all periods. Prior to
the adoption of Bulletin B-15, prior year consolidated amounts were adjusted
for the effects of inflation in Mexico and such adjustments were considered to
be an integral part of preparing price level adjusted financial statements. The
methodology established by Bulletin B-15 separates the adjustment process for
the effects of inflation on prior year amounts for foreign and domestic
subsidiaries, which results in the presentation of amounts, which are not in a
constant unit of measure. The difference in the methodologies used to restate
balances to December 31, 2002 purchasing power is included as a one-line
adjustment in the reconciliation to U.S. GAAP of net income and shareholders
equity.

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                                                                  |  |             |            |      |  |   |            |  
|----------------------------------------------------------------- |  | ----------- | ---------- | ---- |  | - | ---------- | -
|                                                                  |  | December 31
|                                                                  |  |            
|                                                                  |  | 2000        |            | 2001
|                                                                  |  |             |            |     
|Consolidated net income:                                          |  |             |            |      |  |   |            |  
|As previously reported indexed for effects of inflation in Mexico |  | $           | 1,609,922  |      |  | $ | 820,034    |  
|As reported under Bulletin B-15                                   |  |             | (1,634,573 | )    |  |   | (825,298   | )
|                                                                  |  |             |            |      |  |   |            |  
|                                                                  |  | $           | (24,651    | )    |  | $ | (5,264     | )
|                                                                  |  |             |            |      |  |   |            |  
|Consolidated shareholders equity:                                |  |             |            |      |  |   |            |  
|As previously reported indexed for effects of inflation in Mexico |  | $           | 8,143,543  |      |  | $ | 7,639,071  |  
|As reported under Bulletin B-15                                   |  |             | (8,195,889 | )    |  |   | (7,876,670 | )
|                                                                  |  |             |            |      |  |   |            |  
|                                                                  |  | $           | (52,346    | )    |  | $ | (237,599   | )
|                                                                  |  |             |            |      |  |   |            |  

The following tables present the Companys condensed balance sheets as of
December 31, 2001 and 2002 and statements of income for the three years ended
December 31, 2000, 2001 and 2002, reflecting U.S. GAAP adjustments. All amounts
have been indexed to December 31, 2002 constant pesos, using the Mexican NCPI
factor:

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

CONDENSED BALANCE SHEETS:

|                                                                     |  |                 |            |      |  |   |            | 
|-------------------------------------------------------------------- |  | --------------- | ---------- | ---- |  | - | ---------- | 
|                                                                     |  | At December 31,
|                                                                     |  |                
|                                                                     |  | 2001            |            | 2002
|                                                                     |  |                 |            |     
|ASSETS                                                               |  |                 |            |      |  |   |            | 
|Current assets:                                                      |  |                 |            |      |  |   |            | 
|Cash and cash equivalents                                            |  | $               | 496,202    |      |  | $ | 255,711    | 
|Accounts receivable, net                                             |  |                 | 2,193,078  |      |  |   | 1,937,042  | 
|Inventories, net                                                     |  |                 | 1,427,307  |      |  |   | 1,277,433  | 
|Deferred income tax and employee profit sharing                      |  |                 | 201,826    |      |  |   | 686,295    | 
|Other                                                                |  |                 | 55,667     |      |  |   | 67,348     | 
|                                                                     |  |                 |            |      |  |   |            | 
|Total current assets                                                 |  |                 | 4,374,080  |      |  |   | 4,223,829  | 
|Property, plant and equipment                                        |  |                 | 13,590,320 |      |  |   | 12,128,938 | 
|Deferred income tax and employee profit sharing                      |  |                 | 401,747    |      |  |   |           | 
|Other assets                                                         |  |                 | 418,024    |      |  |   | 512,508    | 
|                                                                     |  |                 |            |      |  |   |            | 
|Total assets                                                         |  | $               | 18,784,171 |      |  | $ | 16,865,275 | 
|                                                                     |  |                 |            |      |  |   |            | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                 |  |                 |            |      |  |   |            | 
|Current liabilities:                                                 |  |                 |            |      |  |   |            | 
|Short-term debt, notes payable and current portion of long-term debt |  | $               | 593,850    |      |  | $ | 7,576,346  | 
|Accrued liabilities and other payable                                |  |                 | 1,977,942  |      |  |   | 2,131,015  | 
|Deferred income tax and employee profit sharing                      |  |                 |           |      |  |   | 549,072    | 
|                                                                     |  |                 |            |      |  |   |            | 
|Total current liabilities                                            |  |                 | 2,571,792  |      |  |   | 10,256,433 | 
|                                                                     |  |                 |            |      |  |   |            | 
|Long-term debt                                                       |  |                 | 7,195,653  |      |  |   | 1,220,304  | 
|Seniority premiums                                                   |  |                 | 233,842    |      |  |   | 182,409    | 
|Deferred income tax and employee profit sharing                      |  |                 | 4,532,697  |      |  |   | 4,100,863  | 
|Other                                                                |  |                 | 172,051    |      |  |   |           | 
|                                                                     |  |                 |            |      |  |   |            | 
|Total long-term liabilities                                          |  |                 | 12,134,243 |      |  |   | 5,503,576  | 
|                                                                     |  |                 |            |      |  |   |            | 
|Total liabilities                                                    |  |                 | 14,706,035 |      |  |   | 15,760,009 | 
|                                                                     |  |                 |            |      |  |   |            | 
|Minority interest                                                    |  |                 | 21,412     |      |  |   | 56,563     | 
|                                                                     |  |                 |            |      |  |   |            | 
|Shareholders equity                                                 |  |                 | 4,056,724  |      |  |   | 1,048,703  | 
|                                                                     |  |                 |            |      |  |   |            | 
|Total liabilities and shareholders equity                           |  | $               | 18,784,171 |      |  | $ | 16,865,275 | 
|                                                                     |  |                 |            |      |  |   |            | 

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

CONDENSED STATEMENTS OF INCOME:

|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | --------- | ---- |  | ---- | --------- | - |  | - | ---------- | -
|                                                                                                                         |  | Years ended December 31,
|                                                                                                                         |  |                         
|                                                                                                                         |  | 2000                     |           | 2001 |  | 2002
|                                                                                                                         |  |                          |           |      |  |     
|Net sales                                                                                                                |  | $                        | 9,141,912 |      |  | $    | 7,828,715 |   |  | $ | 7,075,707  |  
|Cost of sales                                                                                                            |  |                          | 7,133,399 |      |  |      | 6,087,210 |   |  |   | 5,607,243  |  
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|Gross profit                                                                                                             |  |                          | 2,008,513 |      |  |      | 1,741,505 |   |  |   | 1,468,464  |  
|Selling, general and administrative expenses                                                                             |  |                          | 565,342   |      |  |      | 459,823   |   |  |   | 1,317,713  |  
|Severances and loss on sale of non-
strategic assets                                                                     |  |                          |          |      |  |      | 167,561   |   |  |   | 93,869     |  
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|Operating income                                                                                                         |  |                          | 1,443,171 |      |  |      | 1,114,121 |   |  |   | 56,882     |  
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|Financing cost:                                                                                                          |  |                          |           |      |  |      |           |   |  |   |            |  
|Interest expense                                                                                                         |  |                          | 1,021,177 |      |  |      | 953,176   |   |  |   | 968,447    |  
|Interest income                                                                                                          |  |                          | (109,897  | )    |  |      | (65,503   | ) |  |   | (38,909    | )
|Foreign loss (gain), net                                                                                                 |  |                          | 101,628   |      |  |      | (313,372  | ) |  |   | 1,049,835  |  
|Gain from monetary position                                                                                              |  |                          | (562,070  | )    |  |      | (319,485  | ) |  |   | (426,797   | )
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|                                                                                                                         |  |                          | 450,838   |      |  |      | 254,816   |   |  |   | 1,552,576  |  
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|Other (expense) income, net                                                                                              |  |                          | (19,260   | )    |  |      | (11,325   | ) |  |   | 8,443      |  
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|Income (loss) before provisions for income and
asset taxes, minority interest, special items and discontinued
operations |  |                          | 973,073   |      |  |      | 847,980   |   |  |   | (1,487,251 | )
|Provision for:                                                                                                           |  |                          |           |      |  |      |           |   |  |   |            |  
|Income and asset tax expense                                                                                             |  |                          | 764,650   |      |  |      | 313,906   |   |  |   | 103,627    |  
|Minority interest                                                                                                        |  |                          | (4,634    | )    |  |      | (5,260    | ) |  |   | (11,708    | )
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|Net income (loss) before special items
and discontinued operations                                                       |  | $                        | 203,789   |      |  |      | 528,814   |   |  |   | (1,602,586 | )
|Special items:                                                                                                           |  |                          |           |      |  |      |           |   |  |   |            |  
|Extinguishment of debt, net                                                                                              |  |                          |          |      |  |      | (29,964   | ) |  |   |           |  
|Discontinued operations                                                                                                  |  |                          | (193,702  | )    |  |      | (259,435  | ) |  |   | (520,226   | )
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  
|Net income (loss)                                                                                                        |  | $                        | 10,087    |      |  | $    | 239,415   |   |  | $ | (2,122,802 | )
|                                                                                                                         |  |                          |           |      |  |      |           |   |  |   |            |  

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

x.     Adjustment to fixed asset impairment

For U.S. GAAP purposes, beginning on January 1, 2002, the Company follows SFAS
No.144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144).

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

The Company tested certain long-lived assets for recoverability in 2002 in
response to significant adverse changes in business climate occurring during
the year (see Note 1 ii). Under U.S. GAAP, certain assets being evaluated for
recoverability had lower book values than under Mexican GAAP and negative
goodwill from acquisition has been reduced the US GAAP carrying value of the
assets. As such, in 2002, the impairment charge recorded under Mexican GAAP was
greater than the impairment charge calculated under U.S. GAAP. As a result,
the Company recognized an adjustment of $747,085 to U.S. GAAP net income. In
2002, the expense relates primarily to machinery and equipment.

xi.     Adjustment to loss on sale of subsidiary

In October 2002, the Company sold the shares of Durango Paper Co. (DPC) to
Operadora Omega, S.A. de C.V. (affiliated company). Historically, under US
GAAP the carrying value of such subsidiary was different to the carrying value
recorded under Mexican GAAP due to deferred income taxes, negative goodwill and
the reversal of loss on sale of fixed assets. As such, the Company reversed the
amount of the U.S. GAAP accumulative prior period adjustments relating to DPC.
In accordance with SFAS No. 144, Accounting for the Impairment or disposal of
Long-Lived Assets, the sale of this component of the Company has been
presented as discontinued operations in the condensed statement of income.

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

xii.     Equity Swap agreements

As described in Note 11.b, the Company has entered into Equity Share Swap
Transactions (collectively, Equity Swaps) with financial institutions, with
respect to its American Depository Receipts (ADRs) at prices ranging from
US$10.4489 to US$14.2813. The Equity Swaps have notional amounts of US$11.88,
US$6.06 and US$5.15 at December 31, 2000, 2001 and 2002, respectively, bearing
interest at LIBOR plus 2.95% payable semiannually and was due in 2002. Under
Mexican GAAP, the Company has recorded the fair value of the Equity Swaps on
the balance sheet, with a corresponding adjustment to shareholders equity
through December 31, 2000.

Upon adoption of Bulletin C-2, under Mexican GAAP, effective January 1, 2001,
the Company recorded the fair value of the Equity Swap with a corresponding
adjustment to the income for the period. Under U.S. GAAP, the fair value of the
Equity Swaps is recorded in income for the period. The Equity Swaps matured in
May 2002, therefore the Company had no outstanding swaps at December 31, 2002.

xiii.     Deferred start up and research and development costs

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

xiv.     Minority Interest

Under Mexican GAAP, the minority interest in consolidated subsidiaries is
presented as a separate component within shareholders equity in the
consolidated balance sheet. For U.S. GAAP purposes, the minority interest is
not included in shareholders equity.

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

SUPPLEMENTAL U.S. GAAP DISCLOSURES

Cash flow information

Under U.S. GAAP, pursuant to SFAS 95, Statement of Cash Flows, a statement of
cash flow is a required component of a complete set of financial statements in
lieu of a statement of changes in financial position. SFAS 95 establishes
specific presentation requirements and additional disclosures, but does not
provide guidance with respect to inflation adjusted financial statements.
Based on requirements of the Securities and Exchange Commission (the SEC),
the effect of inflation restatements and foreign exchange gains and losses on
cash flow has been included in a separate line after cash flows from financing
activities.

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

The U.S. GAAP statements of cash flow for the year ended December 31, 2000,
2001 and 2002 are as follows:

|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |           |  
|------------------------------------------------------------------------------------- | ------------------------ | - | ------------------------ | --------- | ---- | - | ---------- | -------- | - | - | ---------- | --------- | -
|                                                                                      |                          |   | Years ended December 31,
|                                                                                      |                          |   |                         
|                                                                                      |                          |   | 2000                     |           | 2001 |   | 2002      
|                                                                                      |                          |   |                          |           |      |   |           
|Operating activities:                                                                 |                          |   |                          |           |      |   |            |          |   |   |            |          
|U.S. GAAP Net income before extraordinary item                                        |                          | $ | 10,087                   |           |      | $ | 269,378    |          |   | $ | (2,122,812 | )        
|Adjustment to reconcile net income to net cash
flow provided by operating activities: |                          |   |                          |           |      |   |            |          |   |   |            |          
|Depreciation and amortization                                                         |                          |   | 357,193                  |           |      |   | 312,838    |          |   |   | 324,495    |          
|Minority interest                                                                     |                          |   | 4,636                    |           |      |   | 5,260      |          |   |   | 11,708     |          
|Deferred income taxes                                                                 |                          |   | 657,323                  |           |      |   | 64,303     |          |   |   | (11,910    | )        
|Deferred employee profit sharing                                                      |                          |   | 49,755                   |           |      |   | (14,801    | )        |   |   | 46,426     |          
|Allowance for doubtful accounts                                                       |                          |   | 42,553                   |           |      |   | 37,350     |          |   |   | 12,360     |          
|Inventory obsolescence allowance                                                      |                          |   | 1,080                    |           |      |   | 9,412      |          |   |   | 3,446      |          
|Fixed asset impairment                                                                |                          |   |                         |           |      |   |           |          |   |   | 809,426    |          
|Gain on monetary position                                                             |                          |   | (589,348                 | )         |      |   | (339,542   | )        |   |   | (461,565   | )        
|Equity Swap                                                                           |                          |   | 83,339                   |           |      |   |           |          |   |   | 48,931     |          
|Loss (gain) on sale of non-strategic assets                                           |                          |   | 5,490                    |           |      |   | (82,802    | )        |   |   | 50,219     |          
|Unrealized foreign exchange loss, net                                                 |                          |   | 110,734                  |           |      |   | 226,851    |          |   |   | 1,062,089  |          
|Other                                                                                 |                          |   | 26,477                   |           |      |   | 78,552     |          |   |   | 137,869    |          
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|                                                                                      |                          |   | 759,319                  |           |      |   | 566,799    |          |   |   | (89,316    | )        
|Changes in operating assets and liabilities:                                          |                          |   |                          |           |      |   |            |          |   |   |            |          
|                                                                                      | Accounts receivable, net |   |                          | (986,795  | )    |   |            | (352,246 | ) |   |            | (813,369  | )
|                                                                                      | Inventories, net         |   |                          | (278,870  | )    |   |            | 956,128  |   |   |            | (449,241  | )
|                                                                                      | Prepaid expenses         |   |                          | (53,356   | )    |   |            | (73,193  | ) |   |            | (23,422   | )
|                                                                                      | Other liabilities        |   |                          | 1,249,017 |      |   |            | 129,869  |   |   |            | 1,749,954 |  
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|Cash flow provided by operating activities before
extraordinary items:                |                          |   | 689,315                  |           |      |   | 1,227,357  |          |   |   | 374,606    |          
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|Extraordinary Item                                                                    |                          |   |                         |           |      |   | (29,964    | )        |   |   |           |          
|Cash flow provided by operating activities:                                           |                          |   | 689,315                  |           |      |   | 1,197,393  |          |   |   | 374,606    |          
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|Financing activities:                                                                 |                          |   |                          |           |      |   |            |          |   |   |            |          
|Bank loans                                                                            |                          |   | 483,075                  |           |      |   | 2,344,858  |          |   |   | 3,727,042  |          
|Payments of long-term debt                                                            |                          |   | (132,668                 | )         |      |   | (3,107,122 | )        |   |   | (2,358,942 | )        
|Payment for debt issuance cost                                                        |                          |   | (24,859                  | )         |      |   | (225,690   | )        |   |   | (48,116    | )        
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|Cash flow provided by (used in) financing activities                                  |                          |   | 325,548                  |           |      |   | (987,954   | )        |   |   | 1,319,984  |          
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|Investing activities:                                                                 |                          |   |                          |           |      |   |            |          |   |   |            |          
|Acquisitions of fixed assets                                                          |                          |   | (1,171,250               | )         |      |   | (897,325   | )        |   |   | (450,865   | )        
|Proceeds from sale of non-strategic assets                                            |                          |   | 6,556                    |           |      |   | 283,230    |          |   |   | 96,986     |          
|Investments in subsidiaries                                                           |                          |   |                         |           |      |   | (6,656     | )        |   |   | (718,368   | )        
|Acquisitions of minority interest                                                     |                          |   |                          |           |      |   |            |          |   |   | 23,430     |          
|Other assets                                                                          |                          |   | (99,845                  | )         |      |   | 114,955    |          |   |   | (344,188   | )        
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|Cash flow used in investing activities                                                |                          |   | (1,264,539               | )         |      |   | (505,796   | )        |   |   | (1,393,005 | )        
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|Effect of inflation and exchange rate changes on
cash and cash equivalents            |                          |   | 106,210                  |           |      |   | (13,091    | )        |   |   | (542,076   | )        
|Net decrease in cash and cash equivalents                                             |                          |   | (143,466                 | )         |      |   | (309,448   | )        |   |   | (240,491   | )        
|Cash and cash equivalents at beginning of year                                        |                          |   | 949,116                  |           |      |   | 805,650    |          |   |   | 496,202    |          
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          
|Cash and cash equivalents at end of year                                              |                          | $ | 805,650                  |           |      | $ | 496,202    |          |   | $ | 255,711    |          
|                                                                                      |                          |   |                          |           |      |   |            |          |   |   |            |          

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

Supplemental cash flow disclosures:

|                                      |  |                          |         |      |  |      |         |  |  |   |         | 
|------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                      |  | Years ended December 31,
|                                      |  |                         
|                                      |  | 2000                     |         | 2001 |  | 2002
|                                      |  |                          |         |      |  |     
|Cash paid during the year for:        |  |                          |         |      |  |      |         |  |  |   |         | 
|Interest, net of capitalized interest |  | $                        | 932,277 |      |  | $    | 932,995 |  |  | $ | 773,064 | 
|Income and asset tax                  |  | $                        | 139,790 |      |  | $    | 241,998 |  |  | $ | 188,332 | 
|                                      |  |                          |         |      |  |      |         |  |  |   |         | 

Supplemental balance sheet information



| |  | Accrued liabilities and other current payables:
|- |  | -----------------------------------------------

Included within accrued liabilities and other current payables as of December
31, 2001 and 2002 are customers advances ($135 and $2,434, respectively) and
accrued freight costs ($39,483 and $23,487, respectively).



| |  | Segment disclosures:
|- |  | --------------------

The Company adopted SFAS 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS 131). SFAS 131 establishes guidelines for the way
that public enterprises report information about operating segments in the
financial statements. This statement also established guidelines for related
disclosures about products and services, geographic areas, and major customers.
See Note 16 for the Companys segment disclosures in accordance with IAS 14
and SFAS 131.



| |  | Valuation and qualifying accounts:
|- |  | ----------------------------------

The following table presents the rollforward of the allowance for doubtful
accounts for the years ended December 31, 2000, 2001 and 2002:

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

|                                       |  |                          |          |      |  |      |          |   |  |   |           |  
|-------------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | --------- | -
|                                       |  | Years ended December 31,
|                                       |  |                         
|                                       |  | 2000                     |          | 2001 |  | 2002
|                                       |  |                          |          |      |  |     
|Balance at the beginning of the period |  | $                        | (133,787 | )    |  | $    | (135,194 | ) |  |   | ($143,716 | )
|Effects of inflation                   |  |                          | 12,308   |      |  |      | 3,481    |   |  |   | 8,915     |  
|Increase in the allowance              |  |                          | (42,553  | )    |  |      | (37,350  | ) |  |   | (12,360   | )
|Write-offs                             |  |                          | 28,838   |      |  |      | 25,347   |   |  |   | 15,103    |  
|                                       |  |                          |          |      |  |      |          |   |  |   |           |  
|Balance at the end of the period       |  | $                        | (135,194 | )    |  | $    | (143,716 | ) |  | $ | (132,058  | )
|                                       |  |                          |          |      |  |      |          |   |  |   |           |  

The following table presents the rollforward of the inventory obsolescence
allowance for the years ended December 31, 2000, 2001 and 2002:

|                                       |  |                          |         |      |  |      |         |   |  |   |          |  
|-------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | -------- | -
|                                       |  | Years ended December 31,
|                                       |  |                         
|                                       |  | 2000                     |         | 2001 |  | 2002
|                                       |  |                          |         |      |  |     
|Balance at the beginning of the period |  | $                        | (52,167 | )    |  | $    | (43,390 | ) |  |   | ($47,177 | )
|Effects of inflation                   |  |                          | 4,108   |      |  |      | 1,828   |   |  |   | 2,543    |  
|Increase in the allowance              |  |                          | (1,080  | )    |  |      | (9,412  | ) |  |   | (3,446   | )
|Write-offs                             |  |                          | 5,749   |      |  |      | 3,797   |   |  |   | 7,187    |  
|                                       |  |                          |         |      |  |      |         |   |  |   |          |  
|Balance at the end of the period       |  | $                        | (43,390 | )    |  | $    | (47,177 | ) |  | $ | (40,893  | )
|                                       |  |                          |         |      |  |      |         |   |  |   |          |  

Risks and uncertainties



| |  | Environmental matters
|- |  | ---------------------



|a) |  | Mexican subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Companys Mexican operations are subject to the Mexican General Law of
Ecological Stabilization and Environment Protection (Ley General del
Equilibrio Ecológico y la Protección al Ambiente) and the rules published
there under (the Ecological Law). In accordance with the Ecological Law,
companies engaged in industrial activities are subject to the regulatory
jurisdiction of the Ministry of Natural Resources, Environment and Fishing
(Secretaría del Medio Ambiente, Recursos Naturales y Pesca), which has broad
discretion in carrying out its statutory mandate.

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##### Table of Contents



CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)



| |  | In 1998, the Company agreed with Mexican environmental regulatory authorities
to bring its paper plants into compliance with wastewater discharge
regulations. The Company has since instituted new procedures, and management
believes the Company is currently in compliance with both the general standard
established under the Ecological Law and with specific standards promulgated
by the regulatory authorities. However, there can be no assurance that
relevant authorities will continue finding the Company environmental
procedures adequate, or that more stringent environmental laws will not be
enacted in the future.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

New accounting pronouncements

U.S. GAAP  New Accounting pronouncements

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS 143). SFAS 143 requires the recognition of a liability
for the legal obligations associated with the retirement of a tangible
long-lived asset that results from the acquisition, construction and (or)
normal operation of the asset. The liability is recognized at fair value in
the period in which it is incurred if a reasonable estimate of fair value can
be made. A corresponding asset retirement cost is added to the carrying value
of the long-lived asset and is depreciated to expense using a systematic and
rational method over its useful life. SFAS 143 is effective for fiscal year
beginning after June 15, 2002. Upon initial adoption, a liability is
recognized for existing asset retirement obligations and the associated asset
retirement cost is capitalized as an increase to the carrying value of the
asset. The recognized liability and asset are adjusted for cumulative
accretion and accumulated depreciation, respectively, from the time period when
the asset retirement obligation would have originally been recognized had this
statement been in effect to the date of initial adoption. The cumulative
effect of initial adoption of SFAS 143 is recorded as a change in accounting
principle. Management is currently evaluating the impact that the adoption of
SFAS 143 will have on the consolidated financial statements.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS 146). The issuance of SFAS 146 nullifies
the former guidance provided by the Emerging Issues Task Force (EITF) Issue
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring (EITF 94-3). SFAS 146 requires the recognition of a liability
for costs associated with exit or disposal activity when the liability is
incurred, rather than on the date of commitment to an exit or disposal plan.
SFAS 146 is effective for liabilities, related to exit or disposal activities,
which are incurred after December 31, 2002, while earlier application is
encouraged. Management is currently evaluating the impact that the adoption of
SFAS 146 will have on the consolidated financial statement.

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

In July 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions (SFAS 147). This Statement amends SFAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method by removing acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9. SFAS
147 requires that such transactions be accounted for in accordance with FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. As such, acquisitions within the scope of this statement
are no longer required to recognize any excess of the fair value of liabilities
assumed over the fair value of intangible and identifiable intangible assets
acquired as an unidentifiable intangible asset.

This statement also amends FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions.
Accordingly, such intangible assets are subject to the same recoverability test
and impairment loss recognition required for other long-lived assets that are
held and used. This statement is effective for transactions entered into on or
after October 1, 2002. Management is currently evaluating the impact that the
adoption of SFAS 147 will have on the consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transaction and Disclosure- an amendment of FAS 123 (SFAS 148).
SFAS 148 continues to permit entities to apply the intrinsic method of APB 25,
Accounting for Stock Issued to Employees, however, SFAS 148 is intended to
encourage companies to adopt the accounting provisions of SFAS 123, Accounting
for Stock-Based Compensation SFAS 148 provides three transition methods for
companies who chose to adopt the provisions of SFAS 123, the prospective
method, the modified prospective method and the retroactive restatement method.
In addition, SFAS 148 mandates certain new disclosures. SFAS 148 is effective
for fiscal years ending after December 15, 2002, with early adoption permitted.
Management is currently evaluating the impact that the adoption of SFAS 148
will have on the consolidated financial statement.

In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB Statements
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
provisions of SFAS 149 that relate to Statement 133 implementation issued that
have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs that relate to forward

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CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES
(formerly Grupo Industrial Durango, S. A. de C. V. and subsidiaries)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
DECEMBER 31, 2000, 2001 AND 2002
(Thousands of constant Mexican Pesos restated as of December 31, 2002)

purchases or sales of when-issued securities or other securities that do not
yet exist, should be applied to both existing contracts and new contracts
entered into after June 30, 2003. The Company is presently evaluating the
impact, if any, that these new standards will have on its consolidated
financial statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of Interpretation No. 34). FIN 45
clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to a guarantors accounting for, and disclosure of, the issuance of
certain types of guarantees. FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. FIN 45s provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantors fiscal year-end. The guarantors previous accounting for guarantees
that were issued before the date of FIN 45s initial application may not be
revised or restated to reflect the effect of the recognition and measurement
provisions of the Interpretation. The disclosure requirements are effective for
financial statements of both interim and annual periods that end after December
15, 2002. Management is currently evaluating the impact that the adoption of
FIN 45 will have on the consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB 51.
The primary objectives of FIN 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights (variable interest entities or VIEs) and how to determine
when and which business enterprise should consolidate the VIE (the primary
beneficiary). This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entitys activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period, and it applies
to nonpublic enterprises as of the end of the applicable annual period.
Management is currently evaluating the impact that the adoption of FIN 46 will
have on the consolidated financial statements.

F-75