** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**Form 20-F**

** **

**o****  REGISTRATION STATEMENT PURSUANTTO SECTION 12(b) OR (g) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**OR**

 

**ý****  ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2003**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

**for the transition period from     to    **

 

**Commission File Number: 1-14852**

 

**GRUMA, S.A. de C.V.**

(Exact name of Registrant as specified in its charter)

 
| **N/A**                                                                                                                                                                                                                                                                                                                                                               |   | **United Mexican States**                        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| (Translation of  Registrant’s name into English)                                                                                                                                                                                                                                                                                                                 |   | (Jurisdiction of  incorporation or organization) |
|                                                                                                                                                                                                                                                                                                                                                                  |   |                                             |
| **Calzada  del Valle, Ote. 407  Colonia del Valle  San Pedro Garza García, Nuevo León  66220, México**                                                                                                                                                                                                                                                 |
| (Address of  principal executive offices)                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                  |
| Securities  registered or to be registered pursuant to Section 12(b) of the Act:                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                  |
| **Title of  each class:**                                                                                                                                                                                                                                                                                                                                             |   | **Name of  exchange on which registered:**       |
| Series B Common  Shares, without par value                                                                                                                                                                                                                                                                                                                            |   | New York Stock  Exchange*                        |
| American  Depositary Shares, each                                                                                                                                                                                                                                                                                                                                     |   | New York Stock  Exchange                         |
| representing  four Series B Common                                                                                                                                                                                                                                                                                                                                    |   |                                             |
| Shares, without  par value                                                                                                                                                                                                                                                                                                                                            |   |                                             |
|                                                                                                                                                                                                                                                                                                                                                                  |   |                                             |
| 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:                                                                                                                                                                                                                                                                     |
| **7.625% Notes due 2007**                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                  |   |                                             |
| **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:**                                                                                                                                                                                           |
| **450,133,443  Series B Common 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** | **ý** | **No** | **o** |
|---------|------------|--------|-------|

 

**Indicate by check mark which financial statement itemthe registrant has elected to follow:**

 

| **Item  17 ****o** | **Item  18 ****ý** |
|-------------------------|------------------------------|

 

----

*                                         Notfor trading but only in connection with the registration of American DepositaryShares, pursuant to the requirements of the Securities and Exchange Commission.

 

 

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| **PART I**   |                                                                           |   |
|--------------|--------------------------------------------------------------------------------|--------|
|         |                                                                           |   |
| **ITEM 1.**  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND  ADVISORS.                        |   |
|         |                                                                           |   |
| **ITEM 2.**  | OFFER STATISTICS AND EXPECTED TIMETABLE.                                       |   |
|         |                                                                           |   |
| **ITEM 3.**  | KEY INFORMATION.                                                               |   |
|         |                                                                           |   |
| **ITEM 4.**  | INFORMATION ON THE COMPANY.                                                    |   |
|         |                                                                           |   |
| **ITEM 5.**  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS.                                  |   |
|         |                                                                           |   |
| **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 DISCLOSURES 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 16A.    | FINANCIAL EXPERT                                                               |   |
|         |                                                                           |   |
| ITEM 16B.    | CODE OF ETHICS                                                                 |   |
|         |                                                                           |   |
| ITEM 16C.    | PRINCIPAL ACCOUNTANT  FEES AND SERVICES                                        |   |
|         |                                                                           |   |
| ITEM 16D.    | NOT APPLICABLE                                                                 |   |
|         |                                                                           |   |
| ITEM 16E.    | NOT APPLICABLE                                                                 |   |
|         |                                                                           |   |
| **PART III** |                                                                           |   |
|         |                                                                           |   |
| **ITEM 17.** | FINANCIAL STATEMENTS.                                                          |   |
|         |                                                                           |   |
| **ITEM 18.** | FINANCIAL STATEMENTS.                                                          |   |
|         |                                                                           |   |
| **ITEM 19.** | EXHIBITS.                                                                      |   |

 

----

 

**PRESENTATIONOF FINANCIAL INFORMATION**

** **

Gruma, S.A. de C.V. is acorporation (*sociedad anónima de capital variable*) organized under thelaws of the United Mexican States, or Mexico.

 

In this Annual Report onForm 20-F, references to “pesos” or “Ps.” are to Mexican pesos, and referencesto “U.S. dollars,” “U.S.$,” “dollars” or “$” are to United States dollars.  “We,” “our,” “us,” “our company,” “GRUMA”and similar expressions refer to Gruma, S.A. de C.V. and its consolidatedsubsidiaries, except when the reference is specifically to Gruma, S.A. de C.V.(parent company only) or the context otherwise requires.

 

This Annual Reportcontains our audited consolidated financial statements as of December 31,2002 and 2003 and for the years ended December 31, 2001, 2002 and2003.  The financial statements havebeen audited by PricewaterhouseCoopers, independent registered publicaccounting firm.

 

We publish our financialstatements in pesos and prepare our consolidated financial statements inaccordance with accounting principles generally accepted in Mexico, commonlyreferred to as “Mexican GAAP.” Mexican GAAP differs in certain significantrespects from accounting principles generally accepted in the United States ofAmerica, commonly referred to as “U.S. GAAP.” See Note 20 to our audited consolidated financial statements forinformation relating to the nature and effect of such differences and for aquantitative reconciliation of our consolidated net income and stockholders’equity to U.S. GAAP.

 

As the Mexican economyhas experienced significant levels of inflation in the past, we are requiredunder Mexican GAAP to recognize the effects of inflation in our financialstatements.  Under Bulletin B-10, issuedby the Mexican Institute of Public Accountants, we are required to present ourfinancial information in inflation-adjusted monetary units to allow for moreaccurate comparisons of financial line items over time and to mitigate thedistortive effects of inflation on our financial statements.  Unless otherwise indicated, all financialinformation in this Annual Report has been restated in pesos of constantpurchasing power as of December 31, 2003.

 

We are required todetermine our monetary position gain/loss to reflect the effect of inflation onour monetary assets and liabilities.  Wedetermine our net monetary position by subtracting our monetary liabilitiesfrom our monetary assets and then adjusting our net monetary position by theappropriate inflation rate for the period with the resulting monetary gain orloss reflected in earnings.   In sodoing, we can reflect the effect inflation is having on our monetary items.

 

Pursuant to BulletinB-15, we apply the actual inflation rate in the relevant country of eachnon-Mexican subsidiary and then translate the inflation-adjusted financialstatements into pesos.

 

For the purposes of thequantitative reconciliation to U.S. GAAP, we have restated the data as ofDecember 31, 2002 and for years ended December 31, 2001 and 2002 inpesos of constant purchasing power as of December 31, 2003 using theMexican National Consumer Price Index, or NCPI, rather than the internationalrestatement factor in Bulletin B-15. For a more detailed discussion of Mexican GAAP inflation accountingmethodologies, see “Item 5. Operating and Financial Review and Prospects—Management’s Discussion andAnalysis of Results of Operations—Overview of Accounting Presentation.”

 

----

 

**MARKETSHARE AND OTHER INFORMATION**

** **

The information containedin this Annual Report regarding market share and market position of corn flour,tortillas and wheat flour in Mexico, Venezuela, Central America and the UnitedStates is presented for the twelve-month period ended December 31,2003.  Market share and market positioninformation for Mexico and Central America is based primarily on our ownestimates and internal analysis.  Marketshare and market position information for Venezuela is based on data providedby Information Resource Inc.  Market andmarket position information for the United States is based on data from theTortilla Industry Association as well as our own estimates and internalanalysis.  While we believe our internalresearch and estimates are reliable, they have not been verified by anyindependent source and we cannot assure you as to their accuracy.

 

All references to “tons”in this Annual Report refer to metric tons. One metric ton equals 2,204 pounds. Estimates of production capacity contained herein assume operation ofthe relevant facilities on the basis of 24 hours a day, 360 days a year onthree shifts and assume only regular intervals for required maintenance.

 

**FORWARDLOOKING STATEMENTS**

** **

This Annual Reportincludes “forward-looking statements” within the meaning of Section 27A ofthe U.S. Securities Act of 1933, as amended, or the Securities Act, andSection 21E of the Securities Exchange Act of 1934, as amended, or theExchange Act, including the statements about our plans, strategies andprospects under “Item 4. Information on the Company” and “Item 5.  Operating and Financial Review and Prospects.”  Some of these statements contain words suchas “believe,” “expect,” “intend,” “anticipate,” “estimate,” “strategy,” “plans”and other similar words.  Although webelieve that our plans, intentions and expectations as reflected in orsuggested by these forward-looking statements are reasonable, we cannot assureyou that these plans, intentions or expectations will be achieved.  Actual results could differ materially fromthe forward-looking statements as a result of risks, uncertainties and otherfactors discussed in “Item 3.  KeyInformation—Risk Factors,” “Item 4. Information on the Company,” “Item 5.  Operating andFinancial Review and Prospects” and “Item 11.  Quantitative and Qualitative Disclosures About Market Risk.”  These risks, uncertainties and factorsinclude:  general economic and businessconditions, including changes in the Mexican peso/U.S. dollar exchange rate,the Venezuelan bolívar/U.S. dollar exchange rate, and conditions that affectthe price of corn and wheat; potential changes in demand for our products;price and product competition; and other factors discussed herein.

 

2

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# **PARTI**

# ** **

## **ITEM 1**.                                                     Identityof Directors, Senior Management and Advisors.

 

Not applicable.

 

## **ITEM 2**.                                                     OfferStatistics and Expected Timetable.

## ** **

Not applicable.

 

## **ITEM 3**.                                                     KeyInformation.

 

**SELECTEDFINANCIAL DATA**

** **

The following tablespresent our selected consolidated financial data as of and for each of theyears indicated.  The data as ofDecember 31, 2002 and 2003 and for the years ended December 31, 2001,2002 and 2003 are derived from and should be read together with our financialstatements included herein and “Item 5. Operating and Financial Review and Prospects.”

 

Our consolidatedfinancial statements are prepared in accordance with Mexican GAAP, whichdiffers in certain significant respects from accounting principles generallyaccepted in the United States of America. Note 20 to the consolidated financial statements provides informationrelating to the nature and effect of such differences, as they relate to us,and provides a reconciliation to U.S. GAAP of majority net income and totalstockholders’ equity.

 

Pursuant to Mexican GAAP,the consolidated financial statements and the selected consolidated financialdata set forth below restate the components of stockholders’ equity using theNCPI factors and record gains and losses in purchasing power from holdingmonetary assets or liabilities.  UnderMexican GAAP, non-monetary assets, with the exception of inventories and fixedassets of non-Mexican origin, are restated using the NCPI factors.  Inventories are restated at currentreplacement costs while fixed assets of foreign origin are restated by theinflation rate of the country of origin prior to translation to pesos at theperiod-end exchange rate.  Mexican GAAPalso requires restatement of all financial statements to pesos of constantpurchasing power as of the date of the most recent balance sheet presented, andaccordingly all data in the consolidated financial statements and in theselected consolidated financial data set forth below have been restated inpesos of constant purchasing power as of December 31, 2003.  The effects of inflation accounting underMexican GAAP, other than for the use of a specific index for the restatement offixed assets of foreign origin, have not been reversed in the reconciliation toU.S. GAAP.  See Note 20 to ourconsolidated financial statements.

 

3

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|                                                             |   | **1999**                                                                                                               |       | **2000**    |   | **2001**    |   | **2002**    |       | **2003**    |   |
|------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|------------|-------------|--------|-------------|--------|-------------|------------|-------------|--------|
|                                                             |   | **(thousands  of Mexican pesos of constant purchasing power  as of December 31, 2003, except per share amounts)** |       |
| **Income Statement Data:**                                       |   |                                                                                                                   |       |        |   |        |   |        |       |        |   |
| ***Mexican**GAAP*:**                                             |   |                                                                                                                   |       |        |   |        |   |        |       |        |   |
| Net  sales                                                       |   | Ps.                                                                                                                    | 19,385,050 |        | Ps.    | 20,945,280  |   | Ps.         | 20,573,402 |        | Ps.    | 20,660,420 |   | Ps. | 23,041,522 |   |
| Cost  of sales                                                   |   | (12,769.034                                                                                                            | )          | (13,353,234 | )      | (12,973,861 | )      | (12,921,388 | )          | (14,671,572 | )      |
| Gross  profit                                                    |   | 6,616,016                                                                                                              |       | 7,592,046   |   | 7,599,541   |   | 7,739,032   |       | 8,369,950   |   |
| Selling,  general and administrative expenses                    |   | (6,168,418                                                                                                             | )          | (6,655,986  | )      | (6,538,275  | )      | (6,131,105  | )          | (6,621,626  | )      |
| Operating  income                                                |   | 447,598                                                                                                                |       | 936,060     |   | 1,061,266   |   | 1,607,927   |       | 1,748,324   |   |
| Net  comprehensive financing income (cost):                      |   |                                                                                                                   |       |        |   |        |   |        |       |        |   |
| Interest  expense                                                |   | (765,274                                                                                                               | )          | (908,699    | )      | (728,899    | )      | (610,566    | )          | (531,858    | )      |
| Interest  income                                                 |   | 176,369                                                                                                                |       | 169,070     |   | 101,179     |   | 62,147      |       | 64,680      |   |
| Monetary  position gain (loss), net                              |   | 242,304                                                                                                                |       | 255,010     |   | 195,606     |   | 173,407     |       | 188,073     |   |
| Foreign  exchange gain (loss), net                               |   | 99,299                                                                                                                 |       | (66,363     | )      | 108,722     |   | (283,483    | )          | (181,667    | )      |
| Total  net comprehensive financing income (cost)                 |   | (247,302                                                                                                               | )          | (550,982    | )      | (323,392    | )      | (658,495    | )          | (460,722    | )      |
| Other  (expenses) income, net                                    |   | (198,812                                                                                                               | )          | 41,225      |   | 75,486      |   | 129,860     |       | (175,018    | )      |
| Income  before income tax and Other items                        |   | 1,484                                                                                                                  |       | 426,303     |   | 813,360     |   | 1,079,292   |       | 1,112,534   |   |
| Income  tax (current and deferred)                               |   | (311,113                                                                                                               | )          | (24,769     | )      | (299,925    | )      | (604,726    | )          | (675,977    | )      |
| Employees’  statutory profit sharing (current and deferred) |   | (2,553                                                                                                                 | )          | 512         |   | (14,128     | )      | (13,941     | )          | 4,698       |   |
| Other  items(1)                                                  |   | 91,861                                                                                                                 |       | 73,383      |   | 69,628      |   | 174,573     |       | 235,151     |   |
| Minority  interest                                               |   | (129,919                                                                                                               | )          | (207,420    | )      | (207,861    | )      | (211,536    | )          | (183,432    | )      |
| Majority  net income (loss)                                      |   | (350,240                                                                                                               | )          | 268,009     |   | 361,074     |   | 423,662     |       | 492,974     |   |
| Per  share data:                                                 |   |                                                                                                                   |       |        |   |        |   |        |       |        |   |
| Majority  net income (loss) per share(2)                         |   | (0.93                                                                                                                  | )          | 0.62        |   | 0.83        |   | 0.95        |       | 1.11        |   |
| ***U.S. GAAP:***                                                 |   |                                                                                                                   |       |        |   |        |   |        |       |        |   |
| Net  sales                                                       |   | 19,358,766                                                                                                             |       | 20,712,433  |   | 19,381,846  |   | 19,784,829  |       | 22,840,798  |   |
| Operating  (loss) income                                         |   | (124,328                                                                                                               | )          | 847,598     |   | 1,262,922   |   | 1,486,344   |       | 1,778,014   |   |
| Net  (loss) income                                               |   | (599,460                                                                                                               | )          | 74,217      |   | 207,810     |   | 322,214     |       | 589,050     |   |
| Per  share data:                                                 |   |                                                                                                                   |       |        |   |        |   |        |       |        |   |
| Net (loss)  income per share(2)                                  |   | (1.59                                                                                                                  | )          | 0.17        |   | 0.48        |   | 0.72        |       | 1.32        |   |
|                                                                  |        |                                                                                                                        |            |             |        |             |        |             |            |             |        |  |  |  |  |  |

 

4

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|                                                                   |   | **1999**                                                                                                                              |   | **2000**   |   | **2001**   |   | **2002**   |   | **2003**   |   |
|------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|
|                                                                   |   | **(thousands  of Mexican pesos of constant purchasing power  as of December 31, 2003, except capital stock and operating data)** |   |
| **Balance Sheet Data (at period end):**                                |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| ***Mexican GAAP:***                                                    |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| Property,  plant and equipment, net                                    |   | 14,199,991                                                                                                                            |   | 14,435,382 |   | 13,711,059 |   | 13,557,299 |   | 13,029,626 |   |
| Total  assets                                                          |   | 26,012,985                                                                                                                            |   | 25,015,399 |   | 23,800,322 |   | 23,859,382 |   | 23,381,682 |   |
| Short-term  debt(3)                                                    |   | 378,204                                                                                                                               |   | 1,471,029  |   | 386,813    |   | 851,815    |   | 499,329    |   |
| Long-term  debt(3)                                                     |   | 8,278,994                                                                                                                             |   | 6,717,772  |   | 7,208,740  |   | 6,522,038  |   | 5,980,269  |   |
| Total  liabilities                                                     |   | 11,283,518                                                                                                                            |   | 11,470,704 |   | 10,783,990 |   | 10,893,809 |   | 10,456,869 |   |
| Excess  of book value over cost of subsidiaries acquired, net          |   | 354,611                                                                                                                               |   | 419,538    |   | 116,554    |   |       |   |       |   |
| Capital  stock                                                         |   | 14,068,384                                                                                                                            |   | 14,009,792 |   | 14,017,795 |   | 13,804,346 |   | 14,122,966 |   |
| Total  stockholders’ equity(4)                                    |   | 14,374,856                                                                                                                            |   | 13,125,157 |   | 12,899,778 |   | 12,965,573 |   | 12,924,813 |   |
| ***U.S. GAAP:***                                                       |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| Total  assets                                                          |   | 25,541,855                                                                                                                            |   | 24,202,192 |   | 22,243,520 |   | 22,442,234 |   | 22,869,349 |   |
| Long-term  debt                                                        |   | 8,600,294                                                                                                                             |   | 6,937,006  |   | 7,058,314  |   | 6,491,291  |   | 6,163,582  |   |
| Capital  stock                                                         |   | 14,068,849                                                                                                                            |   | 13,811,135 |   | 13,819,160 |   | 13,804,346 |   | 14,122,966 |   |
| Total  stockholders’ equity                                       |   | 10,557,319                                                                                                                            |   | 9,605,730  |   | 9,229,541  |   | 8,920,409  |   | 9,243,180  |   |
|                                                                   |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| **Other Financial Information:**                                       |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| ***Mexican GAAP:***                                                    |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| Capital  expenditures                                                  |   | 3,021,416                                                                                                                             |   | 1,719,956  |   | 750,684    |   | 1,003,996  |   | 767,776    |   |
| Depreciation  and amortization                                         |   | 1,140,966                                                                                                                             |   | 861,685    |   | 900,855    |   | 1,063,336  |   | 1,142,941  |   |
| Resources  provided by (used in):                                      |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| Operating  activities                                                  |   | 420,101                                                                                                                               |   | 1,827,946  |   | 1,675,374  |   | 1,557,527  |   | 1,334,301  |   |
| Financing  activities                                                  |   | 3,155,137                                                                                                                             |   | (662,101   | )      | (1,073,564 | )      | (872,449   | )      | (1,054,733 | )      |
| Investing  activities                                                  |   | (3,526,707                                                                                                                            | )      | (1,498,534 | )      | (294,082   | )      | (640,381   | )      | (396,632   | )      |
| ***U.S. GAAP:***                                                       |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| Depreciation  and amortization                                         |   | 1,210,562                                                                                                                             |   | 1,085,591  |   | 1,187,382  |   | 1,077,077  |   | 1,033,576  |   |
| Net  cash provided by (used in):                                       |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| Operating  activities                                                  |   | 296,765                                                                                                                               |   | 1,514,244  |   | 1,334,669  |   | 1,004,378  |   | 1,184,816  |   |
| Investing  activities                                                  |   | (3,843,343                                                                                                                            | )      | (1,612,022 | )      | (282,795   | )      | (563,156   | )      | (251,790   | )      |
| Financing  activities                                                  |   | 3,647,154                                                                                                                             |   | (181,284   | )      | (743,561   | )      | (583,532   | )      | (839,708   | )      |
|                                                                   |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| **Operating Data:**                                                    |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| ***Sales volume (thousands of tons):***                                |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| Gruma  Corporation (corn flour and tortillas)(5)                       |   | 799                                                                                                                                   |   | 836        |   | 856        |   | 899        |   | 979        |   |
| GIMSA  (corn flour)                                                    |   | 1,547                                                                                                                                 |   | 1,507      |   | 1,436      |   | 1,386      |   | 1,395      |   |
| Venezuelan  Operations (corn flour, wheat flour and other products)    |   | 221                                                                                                                                   |   | 455        |   | 458        |   | 454        |   | 518        |   |
| Molinera de México (wheat flour)                                  |   | 318                                                                                                                                   |   | 480        |   | 489        |   | 536        |   | 575        |   |
| Gruma  Centroamérica (corn flour and other products)(5)           |   | 129                                                                                                                                   |   | 137        |   | 140        |   | 139        |   | 144        |   |
| PRODISA  (tortillas and bread)                                         |   | 30                                                                                                                                    |   | 29         |   | 28         |   | 15         |   | 21         |   |
| ***Production capacity (thousands of tons):***                         |   |                                                                                                                                  |   |       |   |       |   |       |   |       |   |
| Gruma  Corporation (corn flour and tortillas)                          |   | 1,312                                                                                                                                 |   | 1,329      |   | 1,335      |   | 1,346      |   | 1,394      |   |
| GIMSA  (corn flour)(6)                                                 |   | 2,345                                                                                                                                 |   | 2,345      |   | 2,345      |   | 2,345      |   | 2,345      |   |
| Venezuelan  Operations (corn flour, wheat flour and other products)(7) |   | 789                                                                                                                                   |   | 780        |   | 792        |   | 792        |   | 792        |   |
| Molinera de México (wheat flour)                                  |   | 697                                                                                                                                   |   | 717        |   | 717        |   | 717        |   | 717        |   |
| Gruma  Centroamérica (corn flour and other products)              |   | 163                                                                                                                                   |   | 172        |   | 181        |   | 217        |   | 217        |   |
| PRODISA  (tortillas and bread)                                         |   | 73                                                                                                                                    |   | 81         |   | 42         |   | 42         |   | 42         |   |
| Number  of employees                                                   |   | 16,513                                                                                                                                |   | 17,208     |   | 15,585     |   | 14,887     |   | 15,104     |   |

 

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(1)                                  Other items include extraordinary items,equity in earnings of associated companies and gain from sale of subsidiariesand associated companies’ common stock.

 

5

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(2)                                  Based upon weighted average ofoutstanding shares of our common stock (in thousands), giving retroactiveeffect to the stock dividend declared in April 1999, as follows:  377,456 shares for the year endedDecember 31, 1999; 435,515 shares for the year ended December 31,2000; 433,235 shares for the year ended December 31, 2001; 446,202 for theyear ended December 31, 2002; and 445,098 shares for the year endedDecember 31, 2003;.

 

(3)                                  Short-term debt consists of bank loansand the current portion of long-term debt. Long-term debt consists of debentures and bank loans.

 

(4)                                  Total stockholders’ equity includesminority interests as follows:  Ps.3,182million at December 31, 1999; Ps.2,799 million at December 31, 2000;Ps.2,708 million at December 31, 2001; Ps.2,785 million at December 31, 2002; and Ps.2,862 million atDecember 31, 2003.

 

(5)                                  Net of intercompany transactions.

 

(6)                                  Includes 300,000 tons of temporarilyidled production capacity.

 

(7)                                  Includes 83,309 tons of temporarily idledproduction capacity.

 

**DIVIDENDS**

** **

Our ability to paydividends is limited by Mexican law, our bylaws (*estatutos sociales*) and byfinancial covenants contained in some of our credit agreements.  Because we are a holding company with nosignificant operations of our own, we have distributable profits to paydividends to the extent that we receive dividends from our subsidiaries.  Accordingly, there can be no assurance thatwe will pay dividends or of the amount of any such dividends.

 

Pursuant to Mexican lawand our bylaws, the declaration, amount and payment of dividends are determinedby a majority vote of the holders of the outstanding shares represented at aduly convened shareholders’ meeting. The amount of any future dividend would depend on, among other things,operating results, financial condition, cash requirements, losses for priorfiscal years, future prospects, the extent to which debt obligations imposerestrictions on dividends and other factors deemed relevant by the board ofdirectors and the shareholders.

 

In addition, underMexican law, companies may only pay dividends:

 

from earnings included inyear-end financial statements that are approved by shareholders at a dulyconvened meeting;

 

after any existing lossesapplicable to prior years have been made up or absorbed into capital;

 

after at least 5% of netprofits for the relevant fiscal year have been allocated to a legal reserveuntil the amount of the reserve equals 20% of a company’s paid-in capitalstock; and

 

after shareholders haveapproved the payment of the relevant dividends at a duly convened ordinaryshareholders’ meeting.

 

Holders of our AmericanDepositary Receipts, or ADRs, on the applicable record date are entitled toreceive dividends declared on the shares represented by American DepositaryShares, or ADSs, evidenced by such ADRs. The depositary will fix a record date for the holders of ADRs in respectof each dividend distribution.  We paydividends in pesos and holders of ADSs will receive dividends in U.S. dollars(after conversion by the depositary from pesos, if not then restricted underapplicable law) net of the fees, expenses, taxes and governmental chargespayable by holders under the laws of Mexico and the terms of the depositagreement.

 

The ability of oursubsidiaries to make distributions to us is limited by the laws of each countryin which they were incorporated and by their constitutive documents.  For example, our ability to repatriatedividends from our Venezuelan Operations may be adversely affected by exchangecontrols and other recent events.  See“Item 3.  Risk Factors—RisksRelated to Venezuela—Venezuela Presents Significant Economic Uncertainty andPolitical Risk.”  In the particular caseof Gruma Corporation, our principal U.S. subsidiary, its ability to paydividends is subject to financial covenants contained in some of its debt andlease agreements, including covenants which limit the amount of dividendpayments.  Upon the occurrence of anydefault or event of default under these credit and lease agreements, GrumaCorporation generally is prohibited from making any dividend or otherpayments.  See “Item 5.  Operating and Financial Review andProspects—Liquidity and Capital Resources—Indebtedness.”

 

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In April 1999, weissued 5,882,717 series B shares in connection with the capitalization ofretained earnings of approximately Ps.141 million.  In that year we issued a stock dividend of one series B share foreach 60 outstanding series B shares.  Wedid not pay dividends in 2000, 2001 or 2002. We paid dividends of Ps.294 million in 2003 and Ps.315 million (nominalterms) in 2004.

 

**EXCHANGERATE INFORMATION**

** **

Mexico has had a freemarket for foreign exchange since 1991. Prior to December 1994, the Mexican central bank (*Banco deMéxico*) kept the peso-U.S. dollar exchange rate within a rangeprescribed by the government through intervention in the foreign exchangemarket.  In December 1994, thegovernment suspended intervention by *Banco de México* and allowed the peso tofloat freely against the U.S. dollar. The peso declined sharply in December 1994 and continued to fallunder conditions of high volatility in 1995. In 1996 and most of 1997, the peso fell more slowly and was lessvolatile.  In the last quarter of 1997and for much of 1998, the foreign exchange markets were volatile as a result offinancial crises in Asia and Russia and financial turmoil in countriesincluding Brazil and Venezuela.  Thepeso declined during this period, but was relatively stable in 1999, 2000 and2001.  In late 2001 and early 2002, theMexican peso appreciated considerably against the U.S. dollar and, morestrongly, against other foreign currencies. From the second quarter of 2002 and until the end of 2003, the Mexicanpeso depreciated in value.  To date in2004, the foreign exchange markets have been volatile due to internationaldevelopments, including events in Argentina and Venezuela as well as the war inthe Middle East and the weaker U.S. dollar. There can be no assurance that the government will maintain its currentpolicies with regard to the peso or that the peso will not depreciate or appreciatein the future.

 

The following table setsforth, for the periods indicated, the high, low, average and period-end noonbuying rate in New York City for cable transfers in pesos published by theFederal Reserve Bank of New York, expressed in pesos per U.S. dollar.  The rates have not been restated in constantcurrency units.

 

7

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|                         |   | **Noon  Buying Rate (Ps. Per U.S.$ )** |    |
|------------------------------|--------|----------------------------------------|---------|
| **Year**                     |   | **High (1)**                           |    | **Low (1)** |   | **Average  (2)** |   | **Period End** |   |
| 1999                         |   | Ps.                                    | 10.6000 |   | Ps. | 9.2430 |   | Ps. | 9.5630 |   | Ps. | 9.4800 |   |
| 2000                         |   | 10.0870                                |    | 9.1825 |   | 9.4716 |   | 9.6180 |   |
| 2001                         |   | 9.9720                                 |    | 8.9460 |   | 9.3255 |   | 9.1560 |   |
| 2002                         |   | 10.4250                                |    | 9.0005 |   | 9.7458 |   | 10.4250 |   |
| 2003                         |   | Ps.                                    | 11.4063 |   | Ps. | 10.1130 |   | Ps. | 10.8460 |   | Ps. | 11.2420 |   |
| 2004  (through June 18) |   | 11.6350                                |    | 10.8050 |   | 11.2355 |   | 11.3400 |   |
|                         |   |                                   |    |   |   |   |   |   |   |
| December 2003           |   | 11.4063                                |    | 11.1725 |   | 11.2510 |   | 11.2420 |   |
| January 2004            |   | 11.0973                                |    | 10.8050 |   | 10.9200 |   | 11.0120 |   |
| February 2004           |   | 11.2450                                |    | 10.9095 |   | 11.0320 |   | 11.0620 |   |
| March 2004              |   | 11.2290                                |    | 10.9180 |   | 11.0190 |   | 11.1830 |   |
| April 2004              |   | 11.4315                                |    | 11.1570 |   | 11.2700 |   | 11.4020 |   |
| May  2004                    |   | 11.6350                                |    | 11.3815 |   | 11.5200 |   | 11.4140 |   |
| June 2004(3)            |   | 11.4885                                |    | 11.3400 |   | 11.3970 |   | 11.3400 |   |
|                              |        |                                        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  Rates shown are the actual low and high,on a day-by-day basis for each period.(2)                                  Average of month-end rates.(3)                                  Through June 18, 2004.

 

On June 18, 2004,the noon buying rate for pesos was Ps.11.34 to U.S.$1.00.

 

**RISKFACTORS**

** **

**RisksRelating to Mexico**

** **

***Our Business OperationsCould Be Affected by Economic Conditions in Mexico***

*** ***

We are a Mexican companywith a significant portion of our consolidated assets located in Mexico and 35%of our consolidated net sales derived from our Mexican operations.  As a result, Mexican economic conditionscould impact our sales and profitability.

 

In December 1994,Mexico experienced an economic crisis characterized by exchange rateinstability and significant devaluation of the peso, increased inflation, highdomestic interest rates, a substantial outflow of capital, negative economicgrowth, reduced consumer purchasing power and high unemployment.  In addition, the financial crises in 1998and early 1999 in Asia, Russia and Latin America resulted in instability in theforeign exchange markets and international financial markets.  These events resulted in limited liquidityfor the Mexican government and for local corporations as well as an increase ininterest rates in Mexico.  The recenteconomic and financial crises in Argentina and recent civil and political unrestin Venezuela could produce similar results. See “—Adverse Developments in Other Emerging Market Countries May AffectMexico or the Price of Our Securities.” Although the Mexican economy declined by 0.3% in 2001, the Mexican economy grew by 0.9% in 2002, by 1.3% in 2003 and by 3.7% in the first quarterof 2004.

 

***Our Business OperationsCould Be Affected by Government Policies in Mexico***

*** ***

The Mexican governmenthas exercised, and continues to exercise, significant influence over theMexican economy.  Mexican governmentalactions concerning the economy could have a significant effect on Mexicanprivate sector entities, as well as on market conditions, prices and returns onsecurities of Mexican issuers, including our securities.

 

On December 1, 2000,Vicente Fox of the *Partido Acción Nacional* (National ActionParty, or PAN) was inaugurated as president of Mexico, ending more than 70years of presidential rule by the *Partido Revolucionario Institucional*(Institutional Revolutionary Party, or PRI). Neither the PRI nor the PAN succeeded in securing a majority in theCongress or Senate.  In elections heldin July 2003 the PAN lost additional seats in the Congress and stategovernorships.  The resulting gridlockhas impeded the process of reform in Mexico which may adversely 

 

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affect economicconditions in Mexico or our business and results of operations.  During 2004, there will be elections forgovernors in ten of 32 states and for local legislatures in 14 states.

 

In the case of our salesof corn flour, governmental policies have affected us negatively and maycontinue to do so.  The elimination ofthe tortilla subsidy for consumers, coupled with the government’s decision toclose *CompañíaNacional de Subsistencias Populares*, or CONASUPO, which resulted inthe sale of its corn reserves at below market prices, reduced sales and hurtprofits in 1999.  The Mexican government issues corn import permitsto corn purchasers typically based upon the availability of domestic corn,which contributes to the stability of domestic corn prices.  However, in the past, in election years, theMexican government has increased the number of corn import permits, which hasdriven down the price of domestic corn, which had the effect of reducing salesof corn flour.  We currently depend oncorn import permits to ensure an adequate supply of corn in non-corn producingregions of the country.  We cannotassure you that the Mexican government will not take actions that couldadversely affect us.  See“Item 5.  Operating and FinancialReview and Prospects—Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Factors Affecting Financial Condition andResults of Operations—Effects of Deregulation of the Mexican Tortilla and CornFlour Industry.”

 

The level ofenvironmental regulation and enforcement in Mexico has increased in thepast.  The *Comisión Nacional del Agua*(“Water National Commission” or “CNA”), has brought enforcement proceedingsagainst us for water discharges from five of our facilities in Mexico.  While we are vigorously defending thisaction, we cannot assure you that we will succeed or that further actions ofthis type will not be brought against us. We expect the trend toward greater environmental regulation andenforcement to continue and to be accelerated by international agreementsbetween Mexico and the United States. The promulgation of new environmental regulations or higher levels ofenforcement may adversely affect us. See “Item 8.  FinancialInformation3⁄4Legal Proceedings”.

 

***Devaluations of theMexican Peso Affect our Financial Performance***

*** ***

As of December 31,2003, 99% of our debt obligations were denominated in U.S. dollars.  However, we generate 48% of our revenues inU.S. dollars which in 2003 represented 173% of our then outstanding debtobligations.  While the dollar revenueswe earn may act as a natural hedge for part of our dollar-denominated debtobligations, we have not entered into derivative contracts to hedge our foreigncurrency risk.  Therefore, we remainexposed to foreign exchange risks that could affect our ability to meet ourobligations and result in foreign exchange losses on our dollar-denominatedobligations.

 

The peso depreciation of1994 to 1996 resulted in an aggregate net foreign exchange loss of Ps.314 millionover this three-year period.  We postednet foreign exchange gains of Ps.109 million in 2001, net foreign exchangelosses of Ps.283 million in 2002 and net foreign exchange losses of Ps.182million in 2003.  Any significantdecrease in the value of the peso relative to the U.S. dollar in the near termmay have an adverse effect on our liquidity and on our ability to meet ourdollar-denominated debt obligations.

 

***High Levels of Inflationand High Interest Rates in Mexico Could Adversely Affect the Business Climatein Mexico and our Financial Condition and Results of Operations***

*** ***

Mexico has experiencedhigh levels of inflation in the past. The annual rate of inflation, as measured by changes in the NationalConsumer Price Index, was 4.40% for 2001, 5.70% for 2002 and 3.98% for2003.  From January through May2004, the inflation rate was 1.46%.  OnJune 18, 2004, the 28-day CETES rate was 6.54%.  While the substantial part of our debt is dollar-denominated atthis time, high interest rates in Mexico may adversely affect the businessclimate in Mexico generally and our financing costs in the future and thus ourfinancial condition and results of operations.

 

***Developments in OtherCountries Could Adversely Affect the Mexican Economy, the Market Value of OurSecurities and Our Results of Operations***

*** ***

The Mexican economy maybe, to varying degrees, affected by economic and market conditions in othercountries.  Although economic conditionsin other countries may differ significantly from economic conditions in Mexico,investors’ reactions to adverse developments in other countries may have anadverse effect on the market value of securities of Mexican issuers.  In recent years, economic conditions inMexico have become increasingly 

 

9

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correlated to economicconditions in the United States. Therefore, adverse economic conditions in the United States could have asignificant adverse effect on the Mexican economy.  In addition, in the past, economic crises in Asia, Russia,Brazil, Argentina and other emerging market countries adversely affected theMexican economy.

 

We cannot assure you thatthe events in other emerging market countries, in the United States orelsewhere will not adversely affect our business, financial condition andresults of operations.

 

***You May Be Unable toEnforce Judgments Against Us in Mexican Courts***

*** ***

We are a Mexicancorporation (*sociedad anónima de capital variable*).  Most of our directors and executive officersare residents of Mexico, and a significant portion of the assets of ourdirectors and executive officers, and a significant portion of our assets, arelocated in Mexico.  You may experiencedifficulty in effecting service of process upon our company or our directorsand executive officers in the United States, or, more generally, outside ofMexico and in enforcing civil judgments of non-Mexican courts in Mexico,including judgments predicated on civil liability under U.S. federal securitieslaws, against us, or our directors and executive officers.  We have been advised by our General Counsel,that there is doubt as to the enforceability in original actions in Mexicancourts of liabilities predicated solely on the U.S. federal securities laws.

 

***Differences BetweenMexican GAAP and U.S. GAAP May Have an Impact on the Presentation of OurFinancial Information***

*** ***

Our annual auditedconsolidated financial statements are prepared in accordance with Mexican GAAP,which differ in some significant respects from U.S. GAAP.  Financial results reported using MexicanGAAP may differ substantially from those results that would have been obtainedusing U.S. GAAP.  We are required,however, to file an annual report on Form 20-F containing financial statementsreconciled to U.S. GAAP, although this filing only contains year-end financialstatements reconciled to U.S. GAAP for our three most recent fiscal years.  See Note 20 to our audited consolidatedfinancial statements.

 

**RisksRelating to Our Company**

** **

***The Presence ofGenetically Altered Corn and Wheat in Our Products May Have a Negative Impacton Our Sales, Profits or Stock Price***

*** ***

As we do not grow our owncorn or wheat, we are required to buy these items from various producers in theUnited States, Mexico and elsewhere. Although we only buy corn and wheat from farmers and grain elevators whoagree to supply us with approved varieties of grain and we have developed aprotocol to test and monitor our grain for certain strains of bacteria andchemicals that have not been approved for human consumption, we may unwittinglybuy genetically modified corn and wheat that is not approved for humanconsumption.  This may result in costlyrecalls and subject us to lawsuits.

 

In recent years, variousclaims have been alleged, mostly in the United States and the European Union,that genetically modified foods are unsafe for human consumption, pose risks ofdamage to the environment and create legal, social and ethical dilemmas.  Some countries, particularly in the EuropeanUnion, have instituted a de facto moratorium on the import of grain producedfrom genetically modified seeds.  Somecountries have imposed labeling requirements on genetically modifiedagricultural and food products, which may affect the acceptance of these products.  To the extent that we may be perceived to bea seller of genetically modified foods, this may have a significant negativeimpact on our sales, profits or stock price or may force us to pay a premiumfor non-genetically modified foods.

 

***Claims Related to theAlleged Presence of StarLinkTM Yellow Corn in Cornmeal Sold May Havea Significant Effect on Our Profitability***

*** ***

In October 2000, twoof our U.S. subsidiaries initiated a voluntary recall of all yellow cornproducts, replacing them with products made from white corn because of thepossibility that the yellow corn products may have contained StarLinkTM,a protein not approved for human consumption in the United States.  Because of this, for a time we sold onlyproducts made from white corn in the U.S., which is more expensive than yellow corn.

 

10

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Since that date we havebeen sued by various parties alleging damages due to the alleged presence ofthis protein.  We cannot assure you thatwe will not be subject to additional suits regarding this matter or similarmatters in the future.  However, thisrisk has been reduced by our implementation of a stringent testing protocol,our agreement with a third party to indemnify us for consumer claims alleging thepresence of StarLinkTM yellow corn, and the Cry9C protein, in ourproducts and the Environmental Protection Agency’s promulgation of the “PlantIncorporated Protectant Rule,” or PIP Rule, which states that the detection ofDNA tracks of the Cry9C protein in products will no longer provide, by itself,a basis for government intervention. See “Item 8.  FinancialInformation3⁄4Legal Proceedings.”

 

***Downgrades of Our DebtMay Increase Our Financing Costs or Otherwise Adversely Effect Us or Our StockPrice***

*** ***

We are currently ratedBBB- by Standard & Poor’s and Ba2 by Moody’s.  These ratings represent an improvement since 1999 when Standard& Poor’s lowered its rating of our notes. Any downgrade or changes in outlook could cause our costs with respectto new debt to increase which could ultimately affect our stock price.

 

***Fluctuations in the Costand Availability of Corn and, to a Lesser Extent, Wheat May Affect OurFinancial Performance***

*** ***

Our financial performancemay be effected by the price and availability of corn and, to a lesser extent,wheat and wheat flour as each raw material represented 28%, 15% and 5% of ourcost of sales in 2003, respectively. Mexican and world markets have experienced periods of over-supply andshortage of corn and wheat, some of which have caused adverse effects on ourresults of operations.  Because of thisvolatility, we may not always be able to pass along our increased costs to ourcustomers in the form of price increases. We cannot always predict whether or when shortages or over-supply ofcorn and wheat will occur.  In addition,as described above, future Mexican or other governmental actions could affectthe price and availability of corn and wheat. Any adverse developments in domestic and international corn and wheatmarkets could have a material adverse effect upon our business, financialcondition, results of operations and prospects.

 

***We Have Suffered Lossesat PRODISA, Our Mexican Packaged Tortilla Operations***

*** ***

We have sufferedoperating losses at PRODISA, our packaged tortilla operations in Mexico,amounting to Ps.237 million in 2001, Ps.79 million in 2002 and Ps.57 million in2003.  PRODISA’s operating losses in2001 resulted primarily from the operation of the bread business which wasdiscontinued in November 2001. While PRODISA’s Operating losses have decreased in 2002 and 2003, wecannot assure you that this trend will continue.

 

**RisksRelated to Venezuela**

** **

***Venezuela PresentsSignificant Economic Uncertainty and Political Risk, Which May in the FutureHave an Adverse Impact on Our Operations and Financial Performance***

*** ***

Our operations inVenezuela accounted for approximately 15% of our net sales in 2003.  The current president, Hugo Chávez, waselected in December 1998.  The newconstitution, brought into force in December 1999, required new elections,which were held on July 20, 2000. Chávez was re-elected for a six-year term.  His election, as a candidate of the Movimiento Quinta República,or MRV, represents a radical disenfranchisement of the Venezuelan populationfrom traditional political parties. Subsequent congressional elections failed to result in the MRV gainingdecisive control of the legislative body. Therefore, it is difficult and premature to determine the nature of newpolicies this administration will continue to adopt.  Our financial condition and results of operations may beadversely affected by such policies.

 

In recent years,political instability and civil unrest have plagued Venezuela.  The severe civil and political unrest inVenezuela presents a risk to our business that we cannot control and thatcannot be accurately measured or estimated. As a result of the nation-wide general strike that began in earlyDecember 2002, our Venezuelan Operations temporarily suspended operationsfor an average of 14 days.  In responseto such strike and in an effort to shore up the economy and control inflation,Venezuelan authorities imposed foreign exchange and price controls in early2003.  Foreign exchange controls couldlimit our ability to convert bolívars (the Venezuelan currency) into othercurrencies and transfer funds out of Venezuela.  On February 6, 2003, the Venezuelan government set a single 

 

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fixed exchangerate for the bolívar against the U.S. dollar of 1,600.00 bolívars to U.S.$1.00.Thereafter, on February 2004, the Venezuelan government set a new singlefixed exchange rate for the bolívar against the U.S. dollar of 1,920.00bolívars to U.S.$1.00. In addition, in February 11, 2003, the Venezuelangovernment established price controls on products such as corn flour and wheatflour.  Our financial condition andresults of operations could be adversely affected due to the fact that (i) aportion of our sales are denominated in bolívars, (ii) our VenezuelanOperations produce products that are subject to price controls and (iii) we mayhave difficulties repatriating dividends from our Venezuelan Operations andimporting some of our raw material requirements because of the foreign exchangecontrols.

 

***RisksRelated to the United States***

*** ***

***We May Be Unable toMaintain Our U.S. Profit Margin in the Face of a Consolidated RetailEnvironment***

*** ***

Net sales in the U.S.constituted 48% of our total sales in 2003. As the retail grocery trade continues to consolidate and our retailcustomers grow larger and become more sophisticated, our retail customersdemand lower pricing and increased promotional programs.  There is a risk that we will not be able tomaintain our U.S. profit margin in this environment.

 

***RisksRelated to Our Controlling Shareholders and Capital Structure***

*** ***

***Holders of ADSs May NotBe Able to Vote at our Shareholders’ Meetings***

*** ***

Our shares are traded onthe New York Stock Exchange in the form of ADSs.  There can be no assurance that holders of our shares through ADSswill receive notices of shareholder meetings from our ADS depositary withsufficient time to enable such holders to return voting instructions to our ADSdepositary in a timely manner.  Undercertain circumstances, a person designated by us may receive a proxy to votethe shares underlying the ADSs at our discretion at a shareholder meeting.

 

***Holders of ADSs Are NotEntitled to Attend Shareholder Meetings, and They May Only Vote Through theDepositary***

*** ***

Under Mexican law, ashareholder is required to deposit its shares with a Mexican custodian in orderto attend a shareholders’ meeting.  Aholder of ADSs will not be able to meet this requirement, and accordingly isnot entitled to attend shareholders’ meetings. A holder of ADSs is entitled to instruct the depositary as to how tovote the shares represented by ADSs, in accordance with procedures provided forin the deposit agreement, but a holder of ADSs will not be able to vote itsshares directly at a shareholders’ meeting or to appoint a proxy to do so.  In addition, such voting instructions may belimited to matters enumerated in the agenda contained in the notice toshareholders and with respect to which information is available prior to theshareholders’ meeting.

 

***Holders of ADSs May NotBe Able to Participate in Any Future Preemptive Rights Offering and as a ResultMay Be Subject to a Dilution of Equity Interest***

*** ***

Under Mexican law, if weissue new shares for cash as a part of a capital increase, we must generallygrant our shareholders the right to purchase a sufficient number of shares tomaintain their existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptiverights.  We may not legally be permittedto allow holders of our shares through ADSs in the United States to exerciseany preemptive rights in any future capital increases unless (i) we file aregistration statement with the U.S. Securities and Exchange Commission, orSEC, with respect to that future issuance of shares or (ii) the offeringqualifies for an exemption from the registration requirements of the SecuritiesAct.  At the time of any future capitalincrease, we will evaluate the costs and potential liabilities associated withfiling a registration statement with the SEC, as well as the benefits ofpreemptive rights to holders of our shares through ADSs in the United Statesand any other factors that we consider important in determining whether to filea registration statement.

 

We are under noobligation to, and there can be no assurance that we will, file a registrationstatement with the SEC to allow holders of our shares through ADSs in theUnited States to participate in a preemptive rights offering.  In addition, under current Mexican law,sales by the ADS depositary of preemptive rights and distribution of theproceeds from such sales to the holders of our shares through ADSs is notpossible.  As a result, the equityinterest of holders of our shares through ADSs would be diluted proportionatelyand such holders may not receive any economic compensation.  See “Item 10.  Additional Information—Bylaws—Preemptive Rights.”

 

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***The Protections Affordedto Minority Shareholders in Mexico Are Different From Those in the UnitedStates***

*** ***

Under Mexican law, theprotections afforded to minority shareholders are different from those in theUnited States.  In particular, the lawconcerning fiduciary duties of directors and controlling shareholders is notwell developed and there are different procedural requirements for bringingshareholder lawsuits.  As a result, inpractice it may be more difficult for our minority shareholders to enforcetheir rights against us or our directors or controlling shareholders than itwould be for shareholders of a U.S. company.

 

***We Have SignificantTransactions With Affiliates That Could Create Potential Conflicts of Interest***

*** ***

We have obtained loansfrom a subsidiary of Grupo Financiero Banorte, S.A. de C.V., a financialinstitution in which we own 10.9% of its capital stock.  We purchase some of our inventoryingredients from our shareholder and associate Archer-Daniels-Midland Company,or Archer-Daniels-Midland.  During 2001,2002 and 2003, we purchased U.S.$90 million, U.S.$84 million and U.S. $111million, respectively, from Archer-Daniels-Midland.  Transactions with affiliates may create the potential forconflicts of interest.  See“Item 7.  Major Shareholders andRelated Party Transactions—Related Party Transactions.”

 

***Exchange RateFluctuations May Affect the Value of Our Shares***

*** ***

Fluctuations in the exchangerate between the Peso and the U.S. Dollar will affect the U.S. Dollar value ofan investment in our shares and of dividend and other distribution payments onthose shares.  See “Item 3.  Key Information—Exchange Rate Information.”

 

***Our Bylaws Restrict theAbility of Non-Mexican Shareholders to Invoke the Protection of TheirGovernments With Respect to Their Rights as Shareholders***

*** ***

As required by Mexicanlaw, our bylaws provide that non-Mexican shareholders shall be considered asMexican in respect of their ownership interests in Gruma, S.A. de C.V. andshall be deemed to have agreed not to invoke the protection of theirgovernments in certain circumstances. Under this provision, a non-Mexican shareholder is deemed to have agreednot to invoke the protection of its own government by asking such government tointerpose a diplomatic claim against the Mexican government with respect to theshareholder’s rights as a shareholder, but is not deemed to have waived anyother rights it may have, including any rights under the U.S. securities laws,with respect to its investment in Gruma, S.A. de C.V.  If you invoke such governmental protection in violation of thisagreement, your shares could be forfeited to the Mexican government.

 

***Our ControllingShareholder Exerts Substantial Control Over Our Company***

*** ***

As of April 30,2004, Roberto González Barrera controlled directly or indirectly approximately52.6% of our outstanding shares. Consequently, Mr. González Barrera has the power to elect the majorityof our directors and to determine the outcome of most actions requiringapproval of our stockholders.  Theinterests of Mr. González Barrera may differ from those of our othershareholders.  Mr. González Barrera’sholdings are described under “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.”

 

Mr. González Barrera haspledged part of his shares in our company to secure some of hisborrowings.  If there is a default andthe lenders enforce their rights against any or all of these shares, Mr.González Barrera could lose control over us and a change of control couldresult.  In addition, this could triggera default in one of our credit agreements and have a material adverse effectupon our business, financial condition, results of operations andprospects.  For more information aboutthis pledge, see “Item 7.  MajorShareholders and Related Party Transactions.”

 

***Archer-Daniels-Midland,Our Strategic Partner, Has Influence Over Some Corporate Decisions; OurRelationship With Archer-Daniels-Midland Could Become Adverse and Hurt OurPerformance***

*** ***

Archer-Daniels-Midlandowns, directly or indirectly, approximately 29.1% of our outstandingshares.  However, a portion of suchinterest is held through a Mexican corporation jointly owned with Mr. GonzálezBarrera, who has the sole authority to determine how those shares arevoted.  Thus, Archer-Daniels-Midlandonly has the right to vote 24.1% of our outstanding shares.  In addition, Archer-Daniels-Midland has theright to nominate two of the 14 members of our board of directors and theircorresponding alternates.  Subject tocertain requirements under 

 

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Mexican law,Archer-Daniels-Midland may also: initiate civil lawsuits against members of the board of directors,members of the audit committee, and statutory auditors for breach of duty;appoint a statutory auditor; judicially oppose resolutions adopted atshareholder meetings; request the deferral of any vote regarding an issue aboutwhich it does not believe it has been sufficiently informed.  As a result, Archer-Daniels-Midland mayinfluence the outcome of actions requiring the approval of our shareholders orour board of directors.  Mr. GonzálezBarrera and Archer-Daniels-Midland have also granted each other rights of firstrefusal in respect of their shares in our company, subject to specifiedconditions.

 

Archer-Daniels-Midlandowns, directly or indirectly, approximately 29.1% of our outstanding shares andan interest of 5.0% in Molinos Nacionales, C.A., or MONACA, 40.0% in Molinerade México, S.A. de C.V., or Molinera de México, and 20.0% in Azteca Milling,L.P., or Azteca Milling.  Thesesubsidiaries account for 38.0% of our revenue. Although we own a majority ownership interest in these subsidiaries, ineach of Azteca Milling and Molinera de México we are required to obtain theconsent and cooperation of Archer-Daniels-Midland with respect to certainmatters in order to increase our capital expenditures and to implement andexpand upon our business strategies.

 

We cannot assure you thatour relationships with Archer-Daniels-Midland will be harmonious andsuccessful.  Disagreements withArcher-Daniels-Midland could affect the execution of our strategy and, as aresult, we may be placed at a competitive disadvantage.

 

***Our AntitakeoverProtections May Deter Potential Acquirors***

*** ***

Certain provisions of ourbylaws could make it substantially more difficult for a third party to acquirecontrol of us.  These provisions in ourbylaws may discourage certain types of transactions involving the acquisitionof our securities.  These provisionscould discourage transactions in which our shareholders might otherwise receivea premium for their shares over the then current market price.  Holders of our securities who acquire sharesin violation of these provisions will not be able to vote, or receivedividends, distributions or other rights in respect of, these securities andwould be obligated to pay us a penalty. For a description of these provisions, see “AdditionalInformation—Bylaws—Antitakeover Protections.”

 

***We Are a Holding Companyand Depend Upon Dividends and Other Funds From Subsidiaries to Service Our Debt***

*** ***

We are a holding companywith no significant assets other than the shares of our subsidiaries.  As a result, our ability to meet our debtservice obligations depends primarily upon our receiving sufficient funds fromour subsidiaries.  Under Mexican law,companies may only pay dividends:

 

from earnings included inyear-end financial statements that are approved by shareholders at a dulyconvened meeting;

 

after any existing lossesapplicable to prior years have been made up or absorbed into capital;

 

after at least 5% of netprofits for the relevant fiscal year have been allocated to a legal reserveuntil the amount of the reserve equals 20% of a company’s paid-in capitalstock; and

 

after shareholders haveapproved the payment of the relevant dividends at a duly convened meeting.

 

In addition, GrumaCorporation is subject to covenants in some of its debt and lease agreementswhich partially restrict the amount of dividends that can be paid, limitadvances or loans to us, and require the maintenance of specified financialratios and balances.  For additionalinformation concerning these restrictions on inter-company transfers, see“Item 3.  KeyInformation—Dividends” and “Item 5. Operating and Financial Review and Prospects—Liquidity and CapitalResources.”

 

We own approximately83.2% of the outstanding shares of Grupo Industrial Maseca, S.A. de C.V., orGIMSA, 95% of MONACA, 50% of Derivados de Maíz Seleccionado, S.A. or DEMASECA,80% of Azteca Milling (through Gruma Corporation) and 60% of Molinera deMéxico.  Accordingly, we are entitled toreceive only our *pro rata* share of any of these subsidiaries’ dividends.

 

14

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Our ability to repatriatedividends from our Venezuelan Operations may be adversely affected by exchangecontrols and other recent events.  See“Item 3.  Risk Factors—RisksRelated to Venezuela—Venezuela Presents Significant Economic Uncertainty andPolitical Risk.”

 

## **ITEM 4**.                                                     Informationon the Company.

 

**DESCRIPTIONOF BUSINESS**

** **

We are one of the largestcorn flour and tortilla producers and distributors in the world.  Based on production and sales volumes, weare one of the leading producers and distributors of corn flour and tortillasin the United States, the leading producer of corn flour and one of the leadingproducers of wheat flour in Mexico and the second largest producer of cornflour and wheat flour in Venezuela.  Weare also the largest producer of corn flour and tortillas in Central America.

 

Our focus has been andcontinues to be the efficient and profitable expansion of our corebusiness—corn flour, tortilla, and wheat flour production.  We pioneered the dry corn flour method oftortilla production, which offers several advantages over the centuries-oldtraditional wet dough method.  Theseadvantages include higher production yields, reduced production costs, moreuniform quality and longer shelf life. The corn flour method of production offers significant opportunities forgrowth.  Using our technology andknow-how, we hope to encourage tortilla and tortilla chip producers in Mexico,Central America and the United States to convert to the corn flour method oftortilla and tortilla chip production. Additionally, we hope to increase the presence of our other corebusinesses, including packaged tortillas in the United States, Mexico, CentralAmerica and Europe and wheat flour in Mexico and Venezuela.

 

The following table setsforth our revenues by geographic market for years ended December 31, 2001,2002 and 2003.

 
|                     |   | **Year ended  December 31,**                                                      |   |
|--------------------------|--------|----------------------------------------------------------------------------------------|--------|
|                     |   | **2001**                                                                               |   | **2002** |   | **2003** |   |
|                     |   | **(in  millions of Pesos of constant purchasing power  as of December 31, 2003)** |   |
| United  States (includes |   |                                                                                   |   |   |   |   |   |
| European  operations)    |   | Ps.                                                                                    | 9,806  |   |   | Ps.9,986 |   | Ps. | 11,217 |   |
| Mexico                   |   |                                                                                   | 7,089  |   |   | 6,880 |   |   | 7,357 |   |
| Venezuela                |   |                                                                                   | 2,416  |   |   | 2,676 |   |   | 3,357 |   |
| Central  America         |   |                                                                                   | 1,262  |   |   | 1,118 |   |   | 1,111 |   |
| Total                    |   | Ps.                                                                                    | 20,573 |   |   | Ps.20,660 |   | Ps. | 23,042 |   |

 

**Historyand Developmental Highlights**

** **

Gruma, S.A. de C.V. is acorporation (*sociedad anónima de capital variable)* registered inMonterrey, Mexico under the *Ley General de Sociedades Mercantiles*, orthe Mexican Companies Law on December 24, 1971 with a corporate life of 99years.  Our full legal name is Gruma,S.A. de C.V., but we are also known by our commercial names: Gruma andMaseca.  The address of our principal executiveoffice is Calzada del Valle Ote. 407, Colonia del Valle, San Pedro GarzaGarcía, Nuevo León, 66220 México and our telephone number is (52)81-8-3-99-33-00.  Our legal domicile isMonterrey, Nuevo León, México.

 

We were founded in 1949,when Roberto González Barrera, the Chairman of our board of directors and ChiefExecutive Officer, started producing and selling corn flour in NortheasternMexico as an alternative ingredient in producing tortillas.  For more than 55 years, we haverevolutionized the manner and the scale in which tortilla and other cornproducts are produced within Mexico and other countries.

 

Prior to our founding,all corn tortillas were made using a rudimentary process.  The principal ingredient in tortillas iscorn dough, which can be prepared in one of two ways: by the traditional methodin which a batch of corn is boiled in a limestone solution, following which thewet cooked corn is milled into corn dough, or by using dry corn flour that canbe made into dough by adding water (the “corn flour method”).  We believe that the preparation 

 

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of tortillas usingthe corn flour method presents major advantages, including greater efficiencyand higher quality, which make tortillas consistent and readily available.

 

The corn flour processhas been a significant impetus for growth, resulting in expanding corn flourand tortilla production and sales throughout Mexico, the United States, CentralAmerica, Venezuela and Europe.  Inaddition, we have diversified our product mix to include wheat flour in Mexicoand Venezuela.

 

The following are somesignificant historical highlights:

 

**In 1949**, we founded GIMSA, which is engagedprincipally in the production, distribution and sale of corn flour inMexico.  GIMSA’s corn flour is usedmainly in the preparation of tortillas and other related products.  GIMSA pioneered the dry corn flour method ofproducing tortillas, which results in greater efficiency and productconsistency in contrast to the centuries-old wet corn dough method.  We are now the largest corn flour producerin Mexico, with a corn flour market share of approximately 71% in 2003.  We estimate that our corn flour is used in36% of the corn tortillas consumed in Mexico.

 

**In 1972**, we entered the Central Americanmarket with our first operation in Costa Rica. Today, we produce and sell corn flour in Costa Rica, Guatemala, Hondurasand El Salvador, and export corn flour to Nicaragua.  To a lesser extent, we now produce in Central America tortillasand snacks and also cultivate and sell hearts of palm and process and sell rice.

 

**In 1977**, we entered the U.S. market.  Our operations have grown to includeproducts such as tortillas, corn flour and other tortilla relatedproducts.  We are one of the largestproducers and distributors of corn flour and packaged tortillas in the UnitedStates.

 

**In 1993**, we entered the Venezuelan cornflour market through an investment in DEMASECA, a Venezuelan corporationproducing corn flour.  We increased ourbeneficial ownership in 1998 to 50%.  InAugust 1999, with the acquisition of MONACA, the second largest corn flourand wheat flour producer in Venezuela at the time, we significantlystrengthened our presence in the Venezuelan market.  In 2003, we continued to be the second largest corn flour and wheatflour producer in that country.

 

**In 1994**, we began our packaged tortillaoperations in Mexico as part of our strategy to broaden our product lines inMexico, achieve vertical integration of our corn flour operations andcapitalize upon our experience in producing and distributing packaged tortillasin the United States.

 

**In 1996**, we strengthened our position inthe U.S. corn flour market through an association withArcher-Daniels-Midland.  Through thisassociation we combined our existing U.S. corn flour operations andstrengthened our position in the U.S. corn flour market.  This association also allowed us to enterthe Mexican wheat flour market by acquiring a 60% ownership interest inArcher-Daniels-Midland’s Mexican wheat flour operations.  We have expanded our presence in this marketby acquiring all or part of several additional wheat mills.

 

**From 1997 through 2000**, we initiated asignificant plant expansion program. During this period, we acquired MONACA in Venezuela (as described above)and several wheat flour plants in Mexico. We also expanded two existing corn flour plants and built a bread plantin Mexico.  We acquired two existingtortilla plants and built three tortilla plants in the United States.  We also expanded a corn flour plant inHonduras, built a corn flour plant in El Salvador and built a frozen breadplant in Costa Rica.  We also completedconstruction of a tortilla plant in Coventry, England.

 

**From 2001 to 2003**, as a result of ourcomprehensive review of our business portfolio and our focus on our corebusiness, we discontinued our bread operations in Mexico, Central America andthe United States.  InNovember 2001, we sold our bread business in Central America and the breadmanufacturing equipment of our Mexican operations.  In 2002, we sold certain assets of our bread operations in theUnited States.  We rationalized ourcapital expenditures and most of them were oriented to capacity expansions andtechnology upgrades in our U.S. operations, where we have experiencessignificant growth.

 

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**Subsidiaries**

** **

We are a holding companyand conduct our operations through subsidiaries.  The table below sets forth our principal subsidiaries.

 
| **Name of Company**                                                                 |   | **Principal  Markets**                                   |   | **Jurisdiction  of  Incorporation** |   | **Percentage  Owned(1)** |   | **Products/  Services** |                                                          |
|-------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|-------------------------------------|--------|--------------------------|--------|-------------------------|---------------------------------------------------------------|
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |
| **Mexican Operations**                                                              |   |                                                     |   |                                |   |                     |   |                    |                                                          |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |
| Grupo  Industrial Maseca, S.A. de C.V. (“GIMSA”)                          |   | Mexico                                                   |   | Mexico                              |   | 83                       | %      |                    | Corn flour                                                    |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Molinera  de México, S.A. de C.V.  (“Molinera de México”)       |   | Mexico                                                   |   | Mexico                              |   | 60                       |   |                    | Wheat flour                                                   |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Productos  y Distribuidora Azteca, S.A. de  C.V. (“PRODISA”)              |   | Mexico                                                   |   | Mexico                              |   | 100                      |   |                    | Packaged  tortillas, Other related products                   |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| U.S.  and European Operations                                                       |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Gruma  Corporation                                                                  |   | United States  Europe                                    |   | Nevada                              |   | 100                      |   |                    | Packaged  tortillas, Other tortilla related products          |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Azteca  Milling(2)                                                                  |   | United States                                            |   | Texas                               |   | 80                       |   |                    | Corn flour                                                    |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Central  American Operation                                                         |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Gruma  Centroamerica, LLC.                                                          |   | Costa Rica,  Honduras, Guatemala, El Salvador, Nicaragua |   | Nevada                              |   | 100                      |   |                    | Corn flour,  Packaged tortillas, Snacks, Hearts of Palm, Rice |   |
| Venezuelan  Operations(3)                                                           |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Molinos  Nacionales, C.A. (“MONACA”)                                      |   | Venezuela                                                |   | Venezuela                           |   | 95                       |   |                    | Corn flour,  Wheat flour, Other products                      |   |
| Derivados  de Maíz Seleccionado, C.A. (“DEMASECA”)                   |   | Venezuela                                                |   | Venezuela                           |   | 50                       |   |                    | Corn flour                                                    |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Other  Subsidiaries                                                                 |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
|                                                                                |   |                                                     |   |                                |   |                     |   |                    |                                                          |   |
| Investigación  de Tecnología Avanzada,  S.A. de C.V. (“INTASA”) |   | Mexico                                                   |   | Mexico                              |   | 100                      | %      |                    | Construction,  Technology and Equipment operations            |   |

 

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(1)                                  Percentage of equity capital owned by usdirectly or indirectly through subsidiaries.

(2)                                  A limited partnership between GrumaCorporation (80%) and Archer-Daniels-Midland (20%).

(3)                                  Together these subsidiaries are referredto as “our Venezuelan Operations” or “Venezuela operations.”

 

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Our subsidiariesaccounted for the following percentages and amount of our net sales in millionsof pesos of constant purchasing power as of December 31, 2003 for theyears ended December 31, 2001, 2002 and 2003.

 
|                       |   | **Year ended  December 31,** |   |
|----------------------------|--------|-----------------------------------|--------|
|                       |   | **2001**                          |   | **2002** |   | **2003** |   |
|                       |   | **In  Millions  of Pesos**        |   | **Percentage  of Net Sales** |   | **In  Millions  of Pesos** |   | **Percentage  of Net Sales** |   | **In  Millions  of Pesos** |   | **Percentage  of Net Sales** |   |
| Gruma  Corporation         |   | Ps.                               | 9,724  |   | 47 | % | Ps. | 9,986 |   | 48 | % | Ps. | 11,217 |   | 49 | % |
| GIMSA                      |   | 5,143                             |   | 25 |   | 4,952 |   | 24 |   | 5,201 |   | 23 |   |
| Venezuelan  Operations     |   | 2,394                             |   | 12 |   | 2,676 |   | 13 |   | 3,357 |   | 14 |   |
| Molinera  de México   |   | 1,609                             |   | 8 |   | 1,789 |   | 9 |   | 1,992 |   | 8 |   |
| Gruma  Centroamérica  |   | 1,262                             |   | 6 |   | 1,118 |   | 5 |   | 1,111 |   | 5 |   |
| PRODISA                    |   | 417                               |   | 2 |   | 194 |   | 1 |   | 243 |   | 1 |   |
| Others  (and eliminations) |   | 24                                |   | 0 |   | (55 | ) | 0 |   | (79 | ) | 0 |   |
|                            |        |                                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Associationwith Archer-Daniels-Midland**

** **

We entered into anassociation with Archer-Daniels-Midland in September 1996.  Archer-Daniels-Midland is one of the world’slargest corn refiners, oil seed processors and flour millers and produces,processes, transports and exports agricultural products worldwide.  Through our partnership we have improved ourposition in the U.S. corn flour market and gained an immediate presence in theMexican wheat flour market.

 

As a result of thisassociation, we received 80% ownership of Gruma Corporation andArcher-Daniels-Midland’s combined U.S. corn flour operations and 60% ofArcher-Daniels-Midland’s Mexican wheat milling operations.  We also gained exclusive rights fromArcher-Daniels-Midland in specified corn flour and wheat flour markets.  In return, Archer-Daniels-Midland receivedapproximately 22% of our total outstanding shares, and 20% ownership of ourcombined U.S. corn flour operations. Archer-Daniels-Midland also obtained the right to designate two of the14 members of our board of directors and their corresponding alternates.  We and Archer-Daniels-Midland, exclusivelythrough our jointly-owned enterprises, produce and distribute wheat flour inMexico and corn flour in the United States. Currently, Archer-Daniels-Midland owns, directly or indirectly,approximately 29.1% of our outstanding shares. See “Item 3.  KeyInformation—Risk Factors—Risks Relating to Our Controlling Shareholders andCapital Structure—Archer-Daniels-Midland, Our Strategic Partner, Has InfluenceOver Some Corporate Decisions.”

 

**Strategy**

** **

Our strategy for growthis to focus on our core business—the manufacturing of tortillas, corn flour andwheat flour—and to capitalize upon our leading positions in the corn flour andtortilla industries.  Our strategyincludes the following key elements:

 

*Encourage Transition from Traditional Cooked-Corn Method toCorn Flour Method*:  Wepioneered the dry corn flour method of tortilla production, which offersseveral advantages over the centuries-old traditional wet dough method.  We continue to view the transition from thetraditional method to the corn flour method of making tortillas and tortillachips as the primary opportunity for increased corn flour sales.  We will continue to encourage thistransition through improving customer service, advertising and promoting ourMASECA® brand corn flour, as well as leveraging off of our manufacturingcapacity and distribution networks in Mexico, the United States, CentralAmerica and Venezuela.

 

*Expand in the Growing Retail and Food Service TortillaMarkets in the United States and Elsewhere*:  We believe that the size and growth of theU.S. retail and food service tortilla markets offer significant opportunitiesfor expansion.  We also believe newmarkets in other countries offer us significant opportunities.

 

Continue the Process ofEstablishing Gruma Corporation’s MISSION® Tortilla Brand as theFirst National

 

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*TortillaBran**d*:  We intend to achieve this byincreasing our efforts at building brand name recognition and by furtherexpanding and utilizing Gruma Corporation’s distribution network, first in ourexisting markets, where we believe there is potential for further growth, andsecond, in markets where Gruma Corporation currently does not have asignificant presence but where we believe strong demand for tortillas alreadyexists.

 

*Improve Operating Efficiencies*:**Wehave cost and expense reduction opportunities in our administrative areas thatshould allow us to continue improving margins and cash flow in themid-term.  One of the ways in which weare accomplishing this is by implementing shared services within our operationsin order to achieve greater efficiencies through synergies in informationtechnology, accounting, cash management and supply chain managementsystems.  We expect that these effortswill enable us to achieve significant savings and greater profitability.  We also intend to continue our research anddevelopment efforts in order to further improve the efficiency of ourproprietary corn flour and tortilla production technology, which we believeprovides us a significant advantage over our competitors. 

 

*Capitalize on Our Existing Infrastructure*:**Weintend to pursue a profitable growth strategy and capitalize on existinginfrastructure and continue our drive to improve operational efficiencies.  We anticipate that additional productioncapacity will be provided primarily by adding new corn flour and tortillaproduction lines at some of our existing facilities, especially in the UnitedStates.  We expect to incur asubstantial portion of our capital expenditures in 2004 for manufacturingupgrades.

 

*ContinuallyImprove Service to Customers and Consumers*: We are working todevelop customer relationships by ensuring that our customer-service and salesrepresentatives develop an intimate knowledge of their clients’ business and byworking with clients to help them improve their products, services, and salesto their consumers.  We work toconstantly improve service to consumers, raise consumer awareness of ourproducts, and keep fully informed of our consumers’ preferences.

 

**U.S.and European Operations**

** **

***Overview***

*** ***

We conduct our UnitedStates and European operations principally through our subsidiary GrumaCorporation, which manufactures and distributes corn flour, packaged tortillasand related products.  Gruma Corporationcommenced operations in the United States in 1977, initially developing apresence in certain major tortilla consumption markets by acquiring smalltortilla manufacturers and converting their production processes from thetraditional “wet corn dough” method to our dry corn flour method.  Eventually, we began to build our ownstate-of-the-art tortilla plants in certain major tortilla consumptionmarkets.  We have vertically integratedour operations by (1) building corn flour and tortilla manufacturing facilitiesin the United States, (2) establishing corn purchasing operations, (3)launching marketing and advertising campaigns to develop brand namerecognition, (4) expanding distribution networks for corn flour and tortillaproducts, and (5) using our technology to design and build proprietary tortillamanufacturing machinery for use in our U.S. and European operations.

 

In September 1996,we combined our U.S. corn flour milling operations withArcher-Daniels-Midland’s corn flour milling operations into a newly formed limitedpartnership, known as Azteca Milling, L.P., in which Gruma Corporation holds an80% interest.

 

During 2000, GrumaCorporation opened its first European tortilla plant in Coventry, England,initiating our entry into the European market.

 

***Gruma Corporation***

*** ***

Gruma Corporationoperates primarily through its Mission Foods division and Azteca Milling, L.P.,a limited partnership between Gruma Corporation (80%) andArcher-Daniels-Midland (20%).  GrumaCorporation is one of the leading manufacturers and distributors of packagedtortillas and related products throughout the United States and Europe throughits Mission Foods division.  GrumaCorporation is one of the leading producers of corn flour in the United Statesthrough Azteca Milling, L.P.  GrumaCorporation’s tortilla and related products operations will be referred tobelow as “Mission Foods.”  GrumaCorporation’s corn flour operation will be referred to as “Azteca Milling.”

 

*Principal Products*.  Mission Foods manufactures and distributespackaged corn and wheat tortillas and related products (which include tortillachips) under the MISSION® and GUERRERO® brand names inthe United 

 

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States, as well asother minor regional brands.  Bycontinuing to build MISSION® into a strong national brand andGUERRERO® into a strong Hispanic focused brand, Mission Foodsexpects to increase market penetration, brand awareness and profitability.  Azteca Milling manufactures and distributescorn flour in the United States under the MASECA® brand.

 

*Sales and Marketing*.  Mission Foods serves both retail and foodservice customers.  Retail customers,which represent most of our business, include supermarkets, mass merchandisersand smaller independent stores, while food service customers include majorchain restaurants, food service distributors, schools, hospitals and themilitary.  Mission Foods is a majorsupplier of tortillas to Taco Bell, the largest Mexican food restaurant chain inthe United States.  For a discussion oflitigation involving Taco Bell and other purchasers, see “Item 8.  Financial Information—Legal Proceedings.”

 

In the tortilla market,Mission Foods’ current marketing strategy is to increase market penetration byincreasing consumer awareness of tortilla products in general, to expand intonew markets and to focus on product innovation and consumer and customerneeds.  Mission Foods promotes itsproducts primarily through cooperative advertising programs with supermarketsas well as radio and television advertising, targeting both Hispanic andnon-Hispanic populations.  We believethese efforts have contributed to greater consumer awareness.  Mission Foods also targets food servicecompanies and works with restaurants, institutions and distributors to addresstheir individual needs and provide them with a full line of products.  Mission Foods continuously attempts toidentify new customers and markets for its tortillas and related products inthe United States and Europe.

 

Azteca Millingdistributes approximately 37% of the corn flour it produces to Mission Foods’plants throughout the United States and Europe.  Azteca Milling’s third-party customers consist largely of othertortilla manufacturers, snack food producers, and retail customers.  Azteca Milling sells corn flour in variousquantities, ranging from four-pound retail packages to bulk railcar loads.

 

We anticipate continuedgrowth in the U.S. market for corn flour, tortillas, and related products.  In dollar terms, Gruma Corporation’s netsales have increased at a compounded annual rate of 7% between 1999 and2003.  We believe that the growingconsumption of Mexican-style foods by non-Hispanics in the United States andEurope will continue to increase demand for tortillas and tortilla relatedproducts.  Growth in recent years in thecorn flour market is attributable to this increase of corn tortilla andtortilla chip consumption in the U.S. market as well as the conversion oftortilla and tortilla chip producers from the wet dough process to our dry cornflour method and the increase of Hispanic population.

 

*Competition and Market Share*.  The increase in tortilla and tortilla chipconsumption translated into a U.S. tortilla market of approximately U.S.$4.2billion in total sales in 2003 and a U.S. tortilla chip market of approximatelyU.S.$1.0 billion in total sales in 2002 (excluding sales by businesses thatproduce only tortilla chips, which businesses also compete with Mission Foods),according to the Tortilla Industry Association.  The tortilla market is highly fragmented, regional in nature andextremely competitive.  Mission Foods’main competitors are hundreds of tortilla producers, who manufacture locally orregionally and tend to be sole proprietorships.  In addition, a few large companies have tortilla manufacturingdivisions that compete with Mission Foods. These companies include Tyson, Bimbo, Harvest States and Casa deOro.  We believe Mission Foods was oneof the leading manufacturers and distributors of packaged tortillas and relatedproducts throughout the United States and Europe in 2003.

 

Azteca Milling’s maincompetitor is by far the traditional method (cooked-corn method).  Competitors within the corn flour millingindustry include independent milling operations as well as corn flour millingdivisions of large companies, such as Cargill and Minsa.  Azteca Milling competes with other cornflour manufacturers in the United States primarily on the basis of superiorquality, technical support, customer service and brand recognition.  We believe Azteca Milling was one of theleading producers of corn flour in the United States in 2003.

 

*Operation and Capital Expenditures*.  Annual production capacity for AztecaMilling and Mission Foods is estimated at 1,394,000 tons, with an averageutilization of 85% in 2003.  On average,the size of our plants measured in square meters is approximately 9,800 as ofJune 15, 2004.  Capitalexpenditures for the past three years were U.S.$128 million, mostly forexpansion of existing facilities and purchase of additional productionequipment.  Gruma Corporation’s capitalexpenditures for 2004 will be primarily used for capacity expansions and alsofor 

 

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certainmanufacturing and technology upgrades. The expansion of the corn flour business includes one new productionunit at the plant located in Evansville, Indian.  The project began in June 2004 and is expected to becompleted by May 2005.  The expectedadditional production capacity will be approximately 63,000 tons, or 9.0% ofthe existing corn flour capacity of Azteca Milling.  These budgeted capital expenditures do not include any potentialacquisition.

 

Mission Foods producesits packaged tortillas and other related products at 13 manufacturingfacilities located primarily in large population centers in the western andsouthwestern United States and one plant in Coventry, England.  All of Mission Foods’ plants in the UnitedStates are graded by the American Institute of Baking.  Mission Foods’ tortilla plant in England isgraded by the British Retail Consortium.

 

Azteca Milling producescorn flour at six plants located in Amarillo, Edinburg and Plainview, Texas;Evansville, Indiana; Henderson, Kentucky; and Madera, California.  All plants are located within important corngrowing areas.  Due to Azteca Milling’smanufacturing practices and processes, we are the only corn milling company toachieve ISO 9002 certification as well as certification by the AmericanInstitute of Baking.  As ofApril 2004, Azteca Milling has four mills that are ISO 9002 certifiedwhile two mills are in the process of obtaining certification.

 

*Raw Materials*.  Corn is the principal raw material used inthe production of corn flour, which is purchased from local producers or, ifmarket conditions require, U.S. or international spot markets.  Azteca Milling buys corn only from farmersand grain elevators that agree to supply approved varieties of corn.  Azteca Milling tests and monitors the rawmaterials for certain strains of bacteria and chemicals not approved for humanconsumption.  In addition, AztecaMilling has implemented certain testing protocols to identify geneticallymodified proteins in raw materials it purchases to ensure safety.

 

Because corn prices tendto be somewhat volatile, Azteca Milling engages in a variety of non-speculativehedging activities in connection with the purchase of its corn supplies,including the purchase of corn futures contracts.  In so doing, Azteca Milling attempts to assure corn availabilityapproximately 12 months in advance of harvest time as well as guard againstprice volatility.  The Texas Panhandlecurrently is the single largest source of food-grade corn.  Azteca Milling is also involved inshort-term contracts for corn procurement with many corn suppliers.  Where suppliers fail to deliver, AztecaMilling can easily access the spot markets. Azteca Milling does not anticipate any difficulties in securing adequatecorn supplies in the future.

 

Corn flour for MissionFoods’ products is supplied almost entirely by Azteca Milling.  Wheat flour for the production of wheattortillas is purchased from third party producers at prices prevailing in thecommodities markets.  Because wheatflour prices tend to be somewhat volatile, Mission Foods engages in a varietyof non-speculative hedging activities in connection with the purchase of wheatflour, including the purchase of wheat futures contracts.  Mission Foods believes the market for wheatflour in the United States is sufficiently large and competitive to ensure thatwheat flour will be available at competitive prices to supply Mission Foods’needs.

 

*Distribution*.  An important element of Mission Foods’ salesgrowth has been the expansion and improvement of its tortilla distributionnetwork, including a direct-store-delivery system to distribute most of itsproducts.  Tortillas and other freshlymade products are generally delivered daily to customers.  In keeping with industry practice, MissionFoods generally does not have written sales agreements with its customers.  Mission Foods has also developed a foodservice distribution network on the west and east coasts of the United States,and in certain areas of the midwestern United States.

 

The vast majority of cornflour produced by Azteca Milling is sold to trade customers in bulk and isdelivered directly from the plants to the customer.  Azteca Milling’s retail customers are primarily serviced by anetwork of distributors, although a few large retail customers have their cornflour delivered directly to them from the plants.

 

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**MexicanOperations**

** **

***Overview***

*** ***

Our largest business inMexico is the manufacture and sale of corn flour, which we conduct through oursubsidiary GIMSA.  Through ourassociation with Archer-Daniels-Midland, we have also entered the wheat millingbusiness in Mexico.  In addition,PRODISA engages in the manufacturing and distribution of packaged tortillas andother related products.  Our othersubsidiaries conduct research and development regarding corn flour and tortillamanufacturing equipment, produce machinery for corn flour and tortillaproduction and construct our corn flour manufacturing facilities.

 

***GIMSA—Corn FlourOperation***

*** ***

*Principal Products. *GIMSA produces,distributes and sells corn flour in Mexico, which is then used in thepreparation of tortillas and other related products.  In 2003, GIMSA had net sales of Ps.5,201 million.  GIMSA is the largest corn flour producer inMexico, with a corn flour market share of approximately 71% in 2003.  GIMSA estimates that its corn flour is usedin 36% of the corn tortillas consumed in Mexico.  It sells corn flour in Mexico under the brand name MASECA®.  MASECA® flour is a ready-mixedcorn flour that becomes a dough when water is added.  This corn dough can then be pressed to an appropriate thickness,cut to shape and cooked to produce tortillas and similar food products.

 

GIMSA produces over 40varieties of corn flour for the manufacture of different food products.  It sells corn flour to tortilla and tortillachip manufacturers as well as in the retail market.  GIMSA’s principal corn flour product is a standard fine-textured,white flour used to manufacture tortillas.

 

*Sales and Marketing*.  GIMSA sells packaged corn flour in20-kilogram sacks in the trade market, principally to thousands of tortillamanufacturers, and one-kilogram packages in the retail market.

 

The following table setsforth GIMSA’s sales volumes of corn flour in Mexico for the periods indicated.

 
|   |   | **Year Ended  December 31,** |   |
|--------|--------|-----------------------------------|--------|
|   |   | **2001**                          |   | **2002** |   | **2003** |   |
|   |   | **Tons**                          |   | **%** |   | **Tons** |   | **%** |   | **Tons** |   | **%** |   |
| Trade  |   | 1,217,197                         |   | 85 |   | 1,179,186 |   | 85 |   | 1,190,597 |   | 85 |   |
| Retail |   | 219,033                           |   | 15 |   | 206,344 |   | 15 |   | 204,730 |   | 15 |   |
|   |   | 1,436,230                         |   | 100 |   | 1,385,530 |   | 100 |   | 1,395,327 |   | 100 |   |

 

GIMSA’s customer base iscomprised primarily of small tortilla producers, or *tortillerías*, which purchasecorn flour in 20 kg sacks and produce tortillas on their premises, which arethen sold locally.  Retail sales arechanneled to two distinct markets: urban centers and rural areas.  Sales to urban consumers are made mostlythrough supermarket chains that use their own distribution networks todistribute MASECA® flour or through wholesalers who sell the productto smaller grocery stores throughout Mexico. Sales to rural consumers are made principally through the Mexicangovernment’s social and distribution program *DistribuidoraConasupo, S.A.,* or DICONSA, which consists of a network of smallgovernment-owned stores and which supplies rural areas with basic foodproducts.  GIMSA’s sales representativesare mainly concerned with promoting the dry corn flour method to tortillaproducers.  Mexico’s tortilla industryis highly fragmented, consisting mostly of *tortillerías*, some of which continue toutilize, in our opinion, the relatively inefficient wet corn dough method oftortilla production.  We estimate thatthe traditional wet corn dough method accounts for approximately 49% of alltortillas produced in Mexico.  Tortillaproducers that do not utilize corn flour buy the wet dough from dough producersor buy and mill their own corn and produce tortillas themselves.

 

This traditional methodis a rudimentary practice requiring more energy, time and labor since itinvolves cooking the corn in water and with lime, milling the cooked corn, creatingand shaping the dough, and then making tortillas from that dough.  We pioneered the dry corn flour method inwhich we mill the raw corn in our facilities into corn flour.  Tortilla producers and consumers may thensimply add water to transform the flour into tortilla dough.  We believe the preparation of tortillasusing the dry corn flour method possesses several advantages over thetraditional method.  Our internalstudies show that the dry corn flour method consumes less water, electricity,fuel 

 

22

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and labor.  We estimate that one kilogram of cornprocessed through the corn flour method yields more tortillas on average than asimilar amount of corn processed using the traditional method.  Corn flour is also transported more easilythan wet corn dough and has a shelf life of approximately three months,compared with one or two days for wet corn dough.  The market for wet corn dough is limited due to the perishablenature of the product, restricting sales of most wet corn dough producers totheir immediate geographic areas. Additionally, the corn flour’s longer shelf life makes it easier forconsumers in rural areas to produce their own tortillas, as *tortillerías*are relatively scarce.

 

We strongly believe inthe superiority of our dry corn flour method and, thus also, believe that wehave substantial opportunities for growth by encouraging a transition to ourmethod.  Corn flour is primarily used toproduce corn tortillas, a principal staple of the Mexican diet.  In fact, in 2003, corn flour for tortillamanufacturing accounted for approximately 94% of our total corn flour salesvolume in Mexico, with the balance being used for the manufacture of tortillachips.  The tortilla industry is one ofthe largest industries in Mexico as tortillas constitute the single largestcomponent of Mexico’s food industry. However, there is still reluctance to abandon traditional practice,particularly in central and southern Mexico because corn dough producers and/ortortilla producers using the traditional method incur lower expenses by workingin an underground economy. Additionally, most of the time they are not requiredto comply with environmental regulations, which also represent savings forthem.  To the extent regulations inMexico improve and we and our competitors are on the same footing, we expect tobenefit from these developments.

 

GIMSA has embarked onseveral programs to promote corn flour sales
to tortilla producers and consumers.  GIMSA offers incentives to potentialcustomers, such as small independent *tortillerías*, to convert to the corn flourmethod from the traditional wet corn dough method.  The incentives GIMSA offers include new, easy to use equipmentdesigned specifically for small-volume users, financing, and individualizedtraining.  For example, in order toassist traditional tortilla producers in making the transition to corn flour,GIMSA also sells specially designed mixers made by Tecnomaíz, S.A. de C.V., orTecnomaíz, one of our research and development subsidiaries.  For more information about our research anddevelopment department, see “—Miscellaneous—INTASA—Technology and EquipmentOperations.”  These incentives areexpected to help GIMSA tap into a significant potential market.  GIMSA also helps its *tortillería* customers toimprove sales by directing consumer promotions to heighten the desirability oftheir products and increase consumption, which, in turn, should increase cornflour sales.  These efforts to improvesales include prime time advertising on television as well as radio, magazineand billboard advertising.  In 2004, weintend to have GIMSA’s specialized sales teams continue their efforts toprovide better and more individualized service to different types of customers.

 

GIMSA has alsodeveloped the “in-store *tortillería*” concept, which involves theon-site manufacture and sale of tortillas in supermarkets using MASECA®brand corn flour and machinery supplied by our technology and equipmentoperations.  Through this promotion, GIMSAseeks to increase consumer exposure to, and acceptance of, tortillas made withcorn flour.  As of December 31,2003, 67% of supermarkets throughout Mexico hosted GIMSA’s “in-store *tortillerías*.”

 

During 2003, ourmain initiatives were focused on developing a successful business model for ourcustomers to increase the consumption of corn-flour based products generallyand our products specifically.  Someexamples of these initiatives were:

 

•                  helpingour customers to develop new higher margin products such as tortilla chips,taco shells and enchilada tortillas, reflecting current consumption trends;

 

•                  helpingour customers develop new profitable distribution schemes to increase theirmarket penetration and sales; and

 

•                  developingtailored marketing promotions to increase consumption in certain customersegments.

 

Atthe end of 2003, we started a national marketing campaign to emphasize thebenefits and nutritional value of tortillas made with 100% MASECA®corn flour.  This campaign will targetboth consumption of tortillas made by 

 

23

 

ourcustomers and consumption of our retail corn flour packages sold directly toconsumers by repositioning the use of corn flour not only for making tortillasbut for a wide variety of foods which are part of the Mexican diet.

 

The demand for cornflour varies slightly with the seasons. After the May/June and December harvests, when corn is moreabundant and thus less expensive, tortilla producers are more inclined topurchase corn and use the traditional method. In the months immediately preceding such harvests, corn is more costlyand in shorter supply and more tortilla producers then employ the dry cornflour method of production.

 

*Competitionand Market Share*.  GIMSA facescompetition on three levels—from other corn flour producers, from sellers ofwet corn dough and from the many *tortillerías* that produce their own wetcorn dough on their premises.  Ourestimates indicate that 49% of tortilla producers continue to use thetraditional wet corn dough method.

 

GIMSA’s biggestchallenge in increasing market share is the prevalence of the traditionalmethod (cooked-corn method).  In thecorn flour industry, GIMSA’s principal competitors are Grupo Minsa, S.A. deC.V., previously known as Maíz Industrializado Conasupo, S.A. de C.V., orMICONSA, and regional corn flour producers. We estimate that our market share of corn flour sales in Mexico during2003 was approximately 71%.  We competeagainst other corn flour manufacturers on the basis of quality, brandrecognition, technology, customer service and nationwide coverage.  We believe that GIMSA has certaincompetitive advantages resulting from its proprietary technology, greatereconomies of scale and broad geographic coverage, which may afford itopportunities to more effectively source raw materials and reducetransportation costs.

 

*Operationsand Capital Expenditures*. GIMSA currently owns 18 corn flour mills, all of which are locatedthroughout Mexico, typically within corn growing regions and those of largetortilla consumption.  One of the plants(Chalco) is temporarily closed.  TheChalco plant has been inactive since October 1999.  GIMSA has temporarily shifted production toother plants to achieve savings in overhead costs.  We intend to reopen the Chalco plant in the fourth quarter of2004.  Due to the maintenance program weput in place in the Chalco plant since its closing, we currently estimate thatthe reopening costs of the Chalco plant will not be significant, and we plan tostart production with an estimated 40,000 tons per year.  The Zamora plant has been inactive sinceJuly 2000 and its real estate assets are available for sale.

 

As a result ofconstruction and expansion of our plants, we increased our installed corn flourmanufacturing capacity from approximately 1.0 million tons per year as ofJanuary 1, 1990 to 2.3 million tons per year as of December 31,2003.  Most of this construction andexpansion took place between 1992 and 1995. On average, the size of our plants measured in square meters isapproximately 15,000 as of June 15, 2004. In recent years, GIMSA’s capital expenditures for plants were primarilyused to update technology and corn flour production process.  We spent U.S.$0.4 million, U.S.$2.9 millionand U.S.$7.2 million for these purposes in 2001, 2002 and 2003,respectively.  Although no assurancescan be given as to future levels of capital expenditures, during the firstquarter of 2004, we spent U.S.$0.6 million on investments in fixed assets of GIMSA,and currently project total investments in fixed assets during 2004 ofapproximately U.S.$7.6 million, which will be used primarily for upgradingproduction equipment, acquisition of transportation equipment and informationtechnology upgrades.

 

We believe we havethe most extensive nationwide corn purchasing and corn flour distributioncapabilities (supported by our warehouses and distribution centers) of any cornflour producer in Mexico, providing us with a significant competitiveadvantage.  To enhance our presence inparticular geographic areas, we have transferred a minority interest in certainsubsidiaries to local investors, unions and development agencies.  Pursuant to an agreement between GIMSA and *Investigaciónde Tecnología Avanzada*, or**INTASA, our wholly-owned subsidiary,INTASA provides technical assistance to each of GIMSA’s operating subsidiariesfor which each pays to INTASA a fee equal to 0.5% of its consolidated netsales.  Each of GIMSA’s corn flourfacilities uses proprietary technology developed by our technology andequipment operations.  For moreinformation about our in-house technology and design initiatives, see“—Miscellaneous—INTASA—Technology and Equipment Operations.”

 

*RawMaterials*.  Corn is theprincipal raw material required for the production of corn flour, andconstituted approximately 69% of GIMSA’s cost of sales for 2003.  We purchase corn primarily from Mexicangrowers and grain elevators, or if domestic supply proves insufficient, fromworld markets at international prices under import permits granted by theMexican government.  Our domestic cornpurchases are made on a spot basis pursuant to 

 

24

 

short-termcontractual arrangements, which are generally in the form of oral agreementsentered into at the beginning of the harvest. Compañía Nacional Almacenadora, S.A. de C.V., a subsidiary of GIMSA,contracts for and purchases the corn, and also monitors, selects, handles andships the corn.

 

We believe that thediverse geographic locations of GIMSA’s production facilities in Mexico enablesGIMSA to achieve savings in raw material transportation and handling.  In addition, by sourcing corn locally forits plants, GIMSA is better able to communicate with local growers concerningthe size and quality of the corn crop and is better able to maintain qualitycontrol.  In Mexico, GIMSA purchasescorn for cash in order to strengthen its ability to obtain the highest qualitycorn on the best terms.

 

Traditionally,domestic corn prices in Mexico tend to be higher than those abroad, but dofollow trends in the international market. During most periods, the price at which GIMSA purchases corn depends onthe international corn market.  As aresult, corn prices are sometimes unstable and volatile.  In certain periods in the past, however,these fluctuations have been significantly affected by government regulationsand policies.  The Mexican government’sdecision to discontinue the subsidy program for tortilla consumers in 1999 andto increase corn imports and support for corn growers in 1999 and 2000,resulted in drastic decreases in corn prices. In 1998, the average cost for GIMSA’s corn purchases in Mexico andabroad were approximately Ps.2,503 per ton compared to Ps.1,350 per ton in2001.  In 2002, corn prices generallyremained stable through October but increased to approximately Ps.1,612per ton beginning in November, reflecting an international trend.  However, the average cost of our cornpurchases in 2002 was Ps.1,346 per ton. In 2003, the average cost of our corn purchases increased to Ps.1,518per ton.  For more information regardingthe government’s effect on corn prices, see “Item 5.  Operating and Financial Review andProspects—Management’s Discussion and Analysis of Financial Condition andResults of Operations—Factors Affecting Financial Condition and Results ofOperations—Effects of Deregulation of the Mexican Tortilla and Corn FlourIndustry.”

 

In addition tocorn, the other principal materials and resources used in the production ofcorn flour are packaging materials, water, lime and energy.  GIMSA believes that its sources of supplyfor these materials and resources are adequate, although energy and packagingcosts tend to be volatile.

 

*Distribution*.  GIMSA’s products are distributed throughindependent transport firms contracted by GIMSA.  Most of GIMSA’s sales are made free-on-board at GIMSA’s plants,in particular those to tortilla manufacturers. With respect to other sales, in particular retail sales (one-kilogrampackages) to the Mexican government and large supermarket chains, GIMSA paysthe freight cost.

 

***Molinera de México—Wheat FlourOperation***

*** ***

*PrincipalProducts*.  In 1996, weentered the wheat milling market in Mexico by acquiring a 60% ownershipinterest in Archer-Daniels-Midland’s wheat flour operation, Molinera deMéxico.  Molinera’s main product iswheat flour, although it also sells wheat bran and other byproducts.  Our wheat flour brands are REPOSADA®,PODEROSA® and SELECTA®, among others.

 

*Sales andMarketing*.  In 2003,approximately 92% of Molinera’s wheat flour production was sold in the trademarket and 8% was sold for the retail segment. Most of the bulk sales are made to thousands of bakeries and, to alesser extent, to cookie and pasta manufacturers.  Most of the one-kilogram package sales are made to largesupermarkets and wholesalers throughout Mexico.  Through wholesalers, our products are distributed to small grocerystores.  Molinera’s sales are seasonalin that higher sales volumes are achieved in the fourth and first quartersduring the winter, when, we believe, per capita consumption of wheat-basedproducts, especially bread and cookies, increases due in part to thecelebration of holidays that take place during these quarters.

 

Our marketingstrategy depends on the type of customer and region.  Overall, our aim is to offer products according to customers’specifications as well as technical support. We are trying to increase our market share in bakeries by offeringproducts with consistent quality.  Inthe retail segment we target small grocery stores through wholesalers, andsupermarkets through centralized and national level negotiations.  We are focusing on improving customerservice, continuing to increase our distribution of products to supermarkets’in-store bakeries, and developing new types of pre-mixed flours for thesupermarket in-store bakery segment.  Weprovide direct delivery 

 

25

 

tosupermarkets, supermarkets’ in-store bakeries, wholesalers, industrialcustomers and some large bakeries.  Mostsmall bakeries and small grocery stores are served by wholesalers.

 

*Competitionand Market Share*.  We are oneof Mexico’s largest wheat flour producers, with a market share in 2003 ofapproximately 16% of a total estimated wheat flour market of U.S.$950million.  Molinera de México competeswith many small wheat flour producers. We believe the wheat flour industry is highly fragmented and estimatethat there are about 94 participants. Our main competitors are Munsa, Trimex, Tablex, La Espiga and Elizondo.

 

*Operationsand Capital Expenditures.*  Atthe time we acquired our interest in Molinera, the operation consisted of twoproduction facilities having an aggregate estimated annual production capacityof 157,000 tons.  FromSeptember 1997 through January 2000, we increased our productioncapacity by 357% from 157,000 to 717,000 tons through acquisitions of wheatflour mills and companies operating in the wheat flour and related productsmarket.  Today we own and operate ninewheat flour plants, in one of which we hold only a 40% ownership interest.  The facilities’ average extent ofutilization is estimated at 80% for 2003. On average, the size of our plants measured in square meters is on approximately12,800 as of June 15, 2004.

 

Capitalexpenditures from 2001 through 2003 amounted to U.S.$13 million.  Molinera de México’s capital expenditures in2004 will be used for capacity expansions at one plant and technology upgrades.

 

*RawMaterials. *Wheat is theprincipal raw material required for the production of wheat flour.  Molinera de México purchases approximately20% of its wheat from Mexican growers, and 80% from world markets.  Molinera de México purchases from localfarmers, farmers associations and trading companies.  In the case of domestic wheat, purchases are made pursuant toshort-term oral arrangements, the terms of which are negotiated at the time ofexecution.  These arrangements areusually made approximately two months in advance of the beginning of theharvest.  In the case of imported wheat,which we import from the United States and Canada through several tradingcompanies, purchases are made based on short-term requirements, with the aim ofmaintaining low levels of inventories.

 

In recent years theprice of wheat domestically and abroad has been volatile.  Volatility is due to the availability ofwheat, which depends on various factors including the size of the harvest(which depends in large part on the weather).

 

***PRODISA—Packaged TortillaOperation***

*** ***

*PrincipalProducts*.  We began ourpackaged tortilla operations through PRODISA in Mexico in 1994 as part of ourstrategy to broaden our product lines in Mexico, achieve vertical integrationof our corn flour operations, and capitalize upon our experience andinvestments in the United States in producing and distributing packagedtortillas.  Our packaged tortillas aremarketed under the MISION® and TORTI RICA® brandnames.  In 1998, we broadened ourbusiness to include the production and distribution of bread under the BREDDY®brand name.  In November 2001, aspart of our strategy to improve profitability and build on our core business,we discontinued our bread business and sold the bread manufacturing equipment.

 

*Sales andMarketing*.  In 1994, weentered the packaged tortilla business in Mexico because we perceived a greatpotential for growth in this market.  Inlate 1996 and early 1997, we decided to focus our efforts initially in thenortheastern region of Mexico and in the state of Baja California.  PRODISA’s sales volume during 2003 was20,652 tons, of which approximately 58% was for small grocery stores, 26% wasfor supermarkets, 7% was for convenience stores, and 9% was for exports to GrumaCorporation.

 

In 2003, PRODISAachieved 34% sales volume growth compared to 2002 as a result of theintroduction of warm corn tortillas and the expansion of PRODISA’s product lineto include different types of flour tortillas based on regional consumerpreferences.

 

*Competitionand Market Share*.  In thetortilla industry, PRODISA competes against thousands of tortillamanufacturers.  We believe PRODISA had a1% market share of the total tortilla industry, inclusive of packaged 

 

26

 

andnon-packaged tortillas, in Mexico, and approximately 40% of the packagedtortilla markets in the regions where we had a presence in 2003.

 

*Operationand Capital Expenditures*.  Wecurrently operate two tortilla plants, which have a combined annual productioncapacity of 42,000 tons as of December 31, 2003, and average extent ofutilization of 49%.  On average, thesize of our plants measured in square meters is approximately 1,500 as ofJune 15, 2004.

 

Capitalexpenditures for the past three years were U.S.$4 million.  We expect that our capital expenditures in2004 will be focused on manufacturing, distribution and information technologyequipment.

 

*RawMaterials*.  The principal rawmaterial, corn flour, is supplied internally by GIMSA.  The availability of corn flour and thevolatility of its price are thus subject to the same factors that affectGIMSA’s operation.  See “—MexicanOperations—GIMSA—Corn Flour Operation—Raw Materials.”

 

*Distribution*.  PRODISA’s products are distributed to our 10warehouses throughout northeastern Mexico and three warehouses in BajaCalifornia (northwestern Mexico).  Thegoods are then distributed with our delivery trucks to customers.  Frequency of delivery depends upon thecustomer; supermarkets receive daily deliveries while smaller stores receivethese products three times a week.

 

**Central American Operations**

** **

***Overview***

*** ***

In 1972, we enteredthe Costa Rican market.  Our operationssince then have expanded into Guatemala, Honduras, El Salvador, and Nicaragua.

 

***Gruma Centroamérica***

*** ***

*PrincipalProducts*.  GrumaCentroamérica produces corn flour, and to a lesser extent tortillas andsnacks.  We also cultivate and sellhearts of palm and process and sell rice. We are the largest corn flour producer in the region.  We sell corn flour in Costa Rica under theMASECA®, TORTIMASA® and MASARICA® brands.  In Costa Rica, we sell packaged tortillasunder the TORTI RICA® brand. We operate a Costa Rican snack operation which manufactures tortillachips, potato chips and similar products under the TOSTY® brand.  Hearts of palm are exported to numerousEuropean countries as well as the United States and Canada.  In November 2001, as part of ourstrategy to improve profitability and build on our core competencies, we soldour Central American bread business.

 

*Sales andMarketing*.  The largestportion, 108,570 tons or 75%, of Gruma Centroamérica’s sales volume in 2003derived from the sale of corn flour.

 

Gruma Centroaméricasells bulk and retail corn flour.  Bulkcorn flour is sold predominantly to small tortilla manufacturers through directdelivery and wholesalers.  Supermarketsmake up the customer base for retail corn flour.  Bulk sales volume represented 68% and retail sales represented32% of Gruma Centroamérica’s corn flour sales volume during 2003.  Typically, corn flour sales volume is lowerduring the second quarter of the year due to higher availability and lowerprices of corn.

 

The total potentialcorn flour market in Central America is estimated at U.S.$460 million.  We believe that there is significantpotential for growth in Central America as corn flour is used in only 25% ofall tortilla production; the majority of tortilla manufacturers use the wetdough method.

 

*Competitionand Market Share*.  Weestimate that Gruma Centroamérica’s corn flour sales constituted approximately70% of total corn flour sales in Central America in 2003 and that our cornflour is used in 17% of the corn tortillas consumed in Central America.  In Costa Rica we estimate we had 87% of thepackaged tortilla market, 31% of the snack market and 4% of the rice market in2003.

 

27

 

Our main competitoris the traditional method (cooked-corn method).  Within the corn flour industry, our main competitors are Minsa,Del Comal and Instamasa.

 

*Operationsand Capital Expenditures. *Wehave in corn flour production an installed capacity of 175,000 tons, with anaverage utilization of 62% during 2003. Total annual production capacity, including other products, represents217,000 tons as of December 31, 2003 and total average extent ofutilization was approximately 66% during 2003. Throughout the region we operate four corn flour plants in Costa Rica,Honduras, Guatemala and El Salvador.  InCosta Rica, we also have one plant producing packaged tortillas, one plantproducing snacks, one plant processing hearts of palm and one plant processingrice.  In Nicaragua we have one smalltortilla plant.  On average, the size ofour plants measured in square meters is approximately 3,800 as of June 15,2004.

 

In 2001, weexpanded our corn flour capacity in El Salvador, which increased overall cornflour capacity in El Salvador by 26% by the beginning of 2002. During 2002 and 2003, most of our capital expenditures were oriented totechnical upgrades, the construction of a tortilla plant, a distribution centerand administrative offices in Costa Rica. Total capital expenditures for the past three years wasapproximately U.S.$14.7 million. Capital expenditures for 2004 will be mostly oriented to manufacturingupgrades.

 

*RawMaterials*.  Corn is the mostimportant raw material needed in our operations and is obtained primarily fromlocal growers.  However, when domesticsupply is insufficient, we turn to the international markets through importpermits granted by the governments of countries in which we have corn flourplants.  Price fluctuation andvolatility are subject to domestic conditions, such as annual crop results, andto a lesser extent, international conditions.

 

**Venezuelan Operations**

** **

***Overview***

*** ***

In 1998, weincreased to 50% our beneficial ownership in DEMASECA, our corn flour operationin Venezuela at that time.  Localinvestors own the remaining 50% interest. In August 1999, we acquired DAMCA International Corporation, aDelaware corporation which owned 100% of MONACA, Venezuela’s second largestcorn and wheat flour producer at that time, for approximately U.S.$99million.  Thereafter, we sold 5% ofMONACA to Archer-Daniels-Midland for approximately U.S.$4.8 million.  We believe this acquisition enhanced ourexisting grain-based products business in Venezuela.  DEMASECA and MONACA are collectively referred to as our“Venezuelan Operations.”

 

In recent years,Venezuela has experienced considerable volatility and depreciation of itscurrency, high interest rates, political instability and declining assetvalues.  In 2003, in response to thegeneral strike and in an effort to shore up the economy and control inflation,the Venezuelan authorities imposed foreign exchange and price controls.  Further economic stagnation is expected toresult as a consequence of these market distortions.  These developments have had and may continue to have an adverseeffect on us.

 

***DEMASECA and MONACA***

*** ***

*PrincipalProducts*.  Our VenezuelanOperations produce and distribute corn flour as well as wheat flour, rice, oatsand other products.  We sell corn flourunder the brand names JUANA®, TIA BERTA® and DECASA®.  We sell wheat flour under the ROBIN HOOD®and POLAR® brand, rice under the MONICA® brand and oatsunder the LASSIE® brand.

 

*Sales andMarketing. *In 2003, combinedconsumption of corn flour, wheat flour and other grain-based products, such asrice and oats, in Venezuela totaled 1.5 million tons, representing an estimatedU.S.$730 million per year.  Venezuelansuse corn flour to produce and consume arepas, which are made at home or inrestaurants for personal consumption rather than manufactured by specialtyshops or other large manufacturers for sale and profit.  In 2003, we sold corn flour only in theretail market in one and two kilogram bags, respectively,  to independent distributors, supermarketsand wholesalers.  We sell wheat flour toboth industrial customers and retailers, distributing in 45 kilogram bags andin one kilogram bags, respectively. Sales to industrial customers like bakeries made up 80% of our totalwheat flour sales volume in 2003.  Theremaining 20% of sales in 2003 were in the retail 

 

28

 

market,which refers to independent distributors, supermarkets and wholesalers.  Sales fluctuate seasonally as demand forflour-based products is lower during those months when most schools are closedfor vacation.  In addition, sales arehigher in November as customers build inventory to satisfy increased demandduring the holiday season in December.

 

*Competitionand Market Share*.  With theMONACA acquisition, we significantly increased our share of the corn flourmarket and entered the wheat flour market. In 2003, we had 35% of the corn flour market and 28% of the wheat flourmarket.  As of December 31, 2003,we are the second largest corn flour and wheat flour producer and the thirdlargest food producer in Venezuela. During 2003, sales volumes for our Venezuelan Operations were 267,662tons of corn flour, 206,917 tons of wheat flour and approximately 43,863 tonsof other products.

 

In corn flour, ourmain competitor is Grupo Polar, C.A., which holds approximately 56% of themarket in 2003.  In wheat flour, ourprincipal competitor is Cargill, which we believe held approximately 38% of themarket in 2003.

 

*Operationand Capital Expenditures*.  Weoperate six corn flour plants four wheat flour plants and three more plantsthat produce for rice and oats in Venezuela with a total annual productioncapacity of 792,000 tons as of December 31, 2003 and an average extent ofutilization of approximately 65% during 2003. However, one corn flour plant, representing 39,245 tons, and one riceplant, representing 44,064 tons, are temporarily idle.  On average, the size of our plants measuredin square meters is approximately 9,300 as of June 15, 2003.

 

Capitalexpenditures for the past three years were U.S.$14 million.  Capital expenditures for 2004 are expectedto be focused on upgrades for manufacturing technology and informationtechnology, which are expected to be financed with cash flow from ourVenezuelan Operations.

 

*RawMaterials*.  Corn and, to alesser extent, wheat are our most important raw materials.  Corn is purchased in Venezuela and issubject to the corn market’s volatility. All wheat is purchased from the U.S. and Canada with its availabilityand price volatility dependent upon those markets.

 

**Miscellaneous**

** **

***INTASA—Technology and EquipmentOperations***

*** ***

Since 1976 ourtechnology and equipment operations have been conducted principally throughINTASA, which has two subsidiaries: Tecnomaíz, S.A. de C.V., or Tecnomaíz, andConstructora Industrial Agropecuaria, S.A. de C.V., or CIASA.  The principal activity of these subsidiariesis to provide research and development, equipment, and construction services tous and equipment to third parties. Through Tecnomaíz, we engage in the design, manufacture and sale ofmachines for the production of tortillas and tortilla chips.  The machinery for the tortilla industryincludes a range of capacities, from machines that make 50 to 300 corntortillas per minute to dough mixers. The equipment is sold under the TORTEC® and BATITEC®trademarks in Mexico.  Tecnomaíz alsomanufactures high volume energy efficient corn and wheat tortilla systems thatcan produce up to 1,200 corn tortillas and 400 wheat tortillas per minute.

 

We carry outproprietary technological research and development for corn milling andtortilla production as well as all engineering, plant design and constructionthrough INTASA and CIASA.  Thesecompanies administer and supervise the design and construction of our newplants and also provide advisory services and training to employees of our cornflour and tortilla manufacturing facilities. We manufacture corn tortilla-making machines for sale to tortillamanufacturers and for use in “in-store *tortillerías*,” as well as high-capacitycorn and flour tortilla-makers that are supplied only to us.  We have spent approximately Ps.36 million inresearch and development during the period from January 1, 2001 throughDecember 31, 2003, including Ps.3 million during 2003.

 

***Banorte Investment***

*** ***

In June 1992,we made an investment in Banco Mercantil del Norte, S.A., or Banorte, a Mexicanbank privatized by the Mexican government in 1992.  We purchased 10.1% of Banorte’s share capital by bidding inconjunction with a group of investors, led by the Chairman of our board ofdirectors and Chief Executive Officer, 

 

29

 

Mr.González Barrera.  InSeptember 1993, these shares were exchanged for an interest in GrupoFinanciero Banorte, S.A. de C.V., or GFNorte, a Mexican financial servicesholding company and Banorte’s parent. In addition, we acquired Ps.98.5 million (in nominal terms) of GFNortedebentures, which were converted into shares of GFNorte inDecember 2000.  As ofDecember 31, 2003, we owned 10.9% of the outstanding shares ofGFNorte.  As of the same date,approximately 6% or Ps.1,463 million of our total assets are invested inBanorte.  In accordance with MexicanGAAP, GFNorte’s results of operations are accounted for in our consolidatedresults of operations using the equity method of accounting.

 

**CAPITAL EXPENDITURES**

** **

Our capitalexpenditures for 2001, 2002 and 2003 were U.S.$68 million, U.S.$64 million andU.S.$75 million, respectively.  Ourcapital expenditures include investments in property, plant and equipment,acquisitions of new plants and brands and investments in common stock.  In 2000, we completed our four-year expansionprogram that required a capital expenditure of approximately U.S.$800million.  This large expansion programwas financed primarily through borrowed funds and capital contributions.  Since these expenditures allowed us toexpand our production capacity, in 2001 and 2002 we focused on more moderategrowth, thereby significantly lowering our capital expenditures.  Investments of approximately U.S.$68 millionin 2001 (including a U.S.$17 million early lease buyout option on certain ofGruma Corporation’s production equipment), U.S.$64 million in 2002 and U.S.$75million in 2003 were significantly lower than the annual averages during theperiod 1997-2000 and were mainly applied to capacity expansions in the UnitedStates and technology upgrades in all subsidiaries.  We have budgeted approximately U.S.$100 million for capitalexpenditures in 2004.  We anticipatefinancing these expenditures through our own cash flows.  This capital expenditures budget does notinclude any potential acquisitions.

 

A significantportion of the capital expenditures budgeted for 2004 is intended to be usedfor additional corn flour and tortilla capacity in the United States.  One of the most important projects includedin this capital expenditure budget is the expansion of the Gruma Corporationcorn flour mill located in Evansville, Indiana.  This project started in June 2004 and is expected to becompleted by May 2005.  The expectedadditional production capacity will be approximately 63,000 tons, or 9% of theexisting corn flour capacity in our U.S. operations.

 

During the firstquarter of 2004, we spent approximately U.S.$11 million.  For more information on capital expendituresplease refer to the discussion of the specific subsidiary.

 

The following tablesets forth the aggregate amount of our capital expenditures during the periodsindicated.

 

 

 

**Year ended December 31,**

 

 

 

**2001**

 

**2002**

 

**2003**

 

 

 

**(in millions of U.S. dollars(1))**

 

Gruma Corporation

 

$

43.3

 

$

43.6

 

$

40.6

 

GIMSA

 

0.4

 

5.4

 

6.6

 

Venezuelan Operations

 

6.3

 

3.4

 

4.3

 

Molinera de México

 

4.4

 

3.0

 

5.1

 

Gruma Centroamérica

 

6.2

 

6.2

 

2.3

 

PRODISA

 

0.9

 

0.7

 

1.9

 

Others and eliminations

 

6.8

 

1.4

 

13.8

 

Total consolidated

 

$

68.4

 

$

63.7

 

$

74.6

 

 

(1)                                  Amounts in respect of some of the capitalexpenditures were paid for in currencies other than the U.S. dollar.  These amounts were translated into U.S.dollars at the exchange rate in effect on the dates on which a given capitalexpenditure was made.  As a result, U.S.dollar amounts presented in the table above may not be comparable to datacontained elsewhere in this Annual Report.

 

For moreinformation on capital expenditures for each subsidiary, please see thesections entitled “Operation and Capital Expenditures” under the relevant sectionsabove.

 

30

 

**REGULATION**

** **

**Mexican Regulation**

** **

***Corn and Tortilla Subsidies andImport Policies***

*** ***

Due in part to theimportance of tortillas in the Mexican diet, the Mexican government has enactedvarious policies that have distorted the corn and tortilla markets.  Prior to January 1, 1999, thegovernment subsidized corn purchases made by tortilla producers and set retailtortilla prices.  Although the subsidiesand price controls were dismantled at that time, the government took othermeasures that affected the price of corn and tortillas.  These included the closing of CONASUPO,which resulted in the sale of its significant corn reserves, the increaseddistribution of corn import permits and increased funding for support programsfor corn growers.  For more informationon these policies and their effect on our costs and sales, see“Item 5.  Operating and FinancialReview and Prospects—Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Factors Affecting Financial Condition andResults of Operations—Effects of Deregulation of the Mexican Tortilla and CornFlour Industry.”

 

***Environmental Regulations***

*** ***

Our Mexicanoperations are subject to Mexican federal, state and municipal laws andregulations relating to the protection of the environment.  The principal federal environmental laws arethe *LeyGeneral de Equilibrio Ecológico y Protección al Ambiente* (theGeneral Law of Ecological Equilibrium and Protection of the Environment, or theMexican Environmental Law), which is enforced by the *Secretaría de Medio Ambiente y RecursosNaturales* (the Ministry of the Environment and Natural Resources, orSEMARNAT) and the *Ley Federal de Derechos* (the Mexican Federal Law ofGovernmental Fees).  Under the MexicanEnvironmental Law, each of our facilities engaged in the production of cornflour, wheat flour, and packaged tortillas is required to obtain an operatinglicense from SEMARNAT upon initiating operations, and then annually submit acertificate of operation to maintain the operating license.  Furthermore, the Mexican Federal Law ofGovernmental Fees requires that Mexican manufacturing plants pay a fee for thedischarge of residual waste water to drainage. Rules have been promulgated concerning hazardous substances and water,air and noise pollution. In particular, Mexican environmental laws andregulations require that Mexican companies file periodic reports with respectto air and water emissions and hazardous wastes.  They establish standards for waste water discharge.  We must also comply with zoning regulationsas well and rules regarding health, working conditions and commercialmatters.  SEMARNAT and the FederalBureau of Environmental Protection can bring administrative and criminalproceedings against companies that violate environmental laws, as well as closenon-complying facilities.

 

We believe we arecurrently in compliance in all material respects with all applicable Mexicanenvironmental regulations.  The level ofenvironmental regulation and enforcement in Mexico has increased in recentyears.  We expect this trend to continueand to be accelerated by international agreements between Mexico and the UnitedStates.  To the extent that newenvironmental regulations are promulgated in Mexico, we may be required toincur additional remedial capital expenditures to comply.  Management is not aware of any pendingregulatory changes that would require additional remedial capital expendituresin a significant amount.

 

***Competition Regulations***

*** ***

The *Ley Federalde Competencia Económica*(the Federal Economic Competition Law orthe Mexican Competition Law), was approved by the Mexican Congress andpublished in the *Diario Oficial de la Federación*on December 24, 1992and became effective on June 22, 1993. The Mexican Competition Law and the *Reglamento de la Ley Federal de Competencia Económica*(the Regulations of the Mexican Competition Law), effective as ofMarch 5, 1998, regulate monopolies and monopolistic practices and requireMexican government approval of certain mergers and acquisitions.  The Mexican Competition Law grantsgovernment the authority to establish price controls for products and servicesof national interest qualified as such by Presidential decree, and establishedthe *ComisiónFederal de Competencia*, or Federal Competition Commission, toenforce the law.  Mergers andacquisitions and other transactions that may restrain trade or that may resultin monopolistic or anti-competitive practices or combinations must be approvedby the Federal Competition Commission. The Mexican Competition Law may potentially limit our businesscombinations, mergers and acquisitions and may subject us to greater 

 

31

 

scrutinyin the future in light of our market presence, although it has had littleeffect on our operations, and we do not believe that this legislation will havea material adverse effect on our existing or developing business operations.

 

**U.S. Federal and State Regulations**

** **

Gruma Corporationis subject to regulation by various federal and state agencies, including theFood and Drug Administration, the Occupational Safety and HealthAdministration, the Federal Trade Commission, the Environmental ProtectionAgency and the Texas Department of Agriculture.  We believe that we are in compliance in all material respectswith all environmental and other legal requirements.  Our food manufacturing and distribution facilities are subject toperiodic inspection by various public health agencies, and the equipmentutilized in these facilities must generally be governmentally approved prior tooperation.

 

**European Regulation**

** **

We are subject toregulation in each country in which we operate in Europe.  We believe that we are currently incompliance with all applicable legal requirements in all material respects.

 

**Central America and Venezuela**

** **

Gruma Centroaméricaand our Venezuelan Operations are subject to regulation in each country inwhich they operate.  We believe thatGruma Centroamérica and our Venezuelan Operations are currently in compliancewith all applicable legal requirements in all material respects.

 
**ITEM 5**.                                                     Operatingand Financial Review and Prospects.** **
**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

** **

*You shouldread the following discussion in conjunction with our financial statements andthe notes thereto contained elsewhere herein. Our financial statements have been prepared in accordance with MexicanGAAP, which differ in some significant respects from U.S. GAAP.  See Note 20 to our financial statements forinformation related to the nature and effect of such differences and aquantitative reconciliation to U.S. GAAP of our majority net income and stockholders’equity.  For more information about ourfinancial statements in general, see “Presentation of Financial Information.”*

 

**Overview of Accounting Presentation**

** **

***Effects of Inflation***

*** ***

Mexican GAAPrequires that financial statements recognize the effects of inflation inaccordance with Bulletins B-10 and B-15 issued by the Mexican Institute ofPublic Accountants.  The purpose of thismethodology is to present all information in comparable monetary units andthereby mitigate the distortive effect of inflation in the financialstatements.  Unless otherwise statedherein, the financial statements and other financial data in this Annual Reporthave been restated in pesos of constant purchasing power as ofDecember 31, 2003.

 

We restate allnon-monetary assets using the Mexican National Consumer Price Index, exceptinventories, which are restated using actual replacement costs, and fixedassets of non-Mexican origin, which may be restated using a specified indexwhich considers the consumer price index of the relevant foreign country andthe fluctuations of the exchange rate between the Mexican peso and the currencyof such foreign country.

 

Bulletin B-15prescribes the methodology for restating and translating the financialstatements of a Mexican company’s non-Mexican subsidiaries into Mexican GAAPfor purposes of recognizing the effects of inflation in such financialstatements.  Bulletin B-15 requires,among other things, that local currency-based financial statements of anon-Mexican subsidiary of a Mexican company for a particular period be (1)restated by using the relevant inflation rate in the relevant foreign countryand (2) then translated into pesos.

 

32

 

Bulletin B-15 alsorequires that inflation rates in foreign countries be used in calculating monetaryposition gains or losses on a consolidated basis.  In addition, Bulletin B-15 provides that the consolidatedfinancial statements of a Mexican company for all periods prior to the mostrecent period are to be restated in pesos of constant purchasing power.  This restatement may be accomplished byusing an “international restatement factor,” which takes into account theinflation rates, exchange rate movements and relative net sales in Mexico andthe other countries in which the company and its subsidiaries operate, ratherthan using the inflation rate in Mexico.

 

For comparisonpurposes, the following table sets forth, for each of the three years endedDecember 31, 2001, 2002 and 2003:

 

the internationalrestatement factor used to restate the financial statements data for each ofthese periods to pesos of constant purchasing power as of December 31,2003;

 

the cumulative MexicanNational Consumer Price Index for each period which, in the absence of BulletinB-15, would have been used to restate the financial statements to pesos ofconstant purchasing power as of December 31, 2003; and

 

the comparison factor foreach period which represents the index that must be applied to the financialstatements for each period (which have been restated using the internationalrestatement factor) in order to restate the financial statements and financialdata in December 31, 2003 pesos of constant purchasing power using thecumulative Mexican National Consumer Price Index.

 

**Financial data in  Mexican pesos as of December 31,**

 

**Cumulative  International  Restatement Factor**

 

**Cumulative Mexican  National Consumer  Price Index**

 

**Comparison  Factor**

 

2001

 

15.45

 

 

9.90

 

 

0.9519

 

 

2002

 

7.75

 

 

3.98

 

 

0.9650

 

 

2003

 

—

 

 

—

 

 

1

 

 

 

In future periods,the application of U.S. inflation rates could have a substantial effect on ourreported results of operations and financial condition if such rates are lowerthan inflation rates in Mexico, assuming that we maintain significant U.S.dollar-denominated debt and other liabilities and assuming that all otherrelevant variables, such as foreign exchange rates, remain constant.  In addition, because Gruma Corporation, ourprincipal U.S. subsidiary, generates a significant portion of our consolidatednet sales in U.S. dollars, Bulletin B-15 could result in decreased net sales inpeso terms, again relative to prior periods. By contrast, if U.S. and other non-Mexican inflation rates exceedinflation rates in Mexico in future periods, then our monetary position gainand net sales as they relate to foreign subsidiaries would tend to increase incomparison to prior periods.

 

**Effects of Devaluation**

** **

Because asignificant portion of our net sales are generated in U.S. dollars, changes inthe peso/dollar exchange rate can have a significant effect upon our results ofoperations as reported in pesos.  Whenthe peso depreciates against the U.S. dollar, Gruma Corporation’s net sales inU.S. dollars represent a larger portion of our net sales in peso terms thanwhen the peso appreciates against the U.S. dollar.  And when the peso appreciates against the dollar, GrumaCorporation’s net sales in U.S. dollars represent a smaller portion of our netsales in peso terms than when the peso depreciates against the dollar.  For a description of the peso/U.S. dollar exchangerate see “Item 3.  KeyInformation—Exchange Rate Information.”

 

In addition to theabove, our net income may be affected by changes in our foreign exchange gainor loss, which may be affected by significant variations in the peso/dollarexchange rate.  In 2001, we recorded anet foreign exchange gain of Ps.109 million. During 2002, we recorded a net foreign exchange loss of Ps.283 million.  In 2003, we recorded a net foreign exchangeloss of Ps.182 million.

 

**Critical**AccountingPolicies

** **

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our consolidated financial statements, which have been prepared inaccordance with Mexican GAAP as promulgated by the Mexican Institute of PublicAccountants.  A reconciliation fromMexican GAAP to U.S. GAAP of majority net 

 

33

 

incomeand total stockholders’ equity is included in Note 20 to our consolidatedfinancial statements.  The preparationof these financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements, as well as the reported amounts of revenues and expenses during thereporting period.

 

We identify belowthe most critical accounting principles that involve a higher degree ofjudgment and complexity and that management believes are important to a morecomplete understanding of our financial position and results ofoperations.  These policies are outlinedbelow.

 

Additionalaccounting policies that are also used in the preparation of our financialstatements are outlined in the notes to our consolidated financial statementsincluded in this Annual Report.

 

***Property, Plant and Equipment***

*** ***

We depreciate ourproperty, plant and equipment over their respective estimated usefullives.  Useful lives are based onmanagement’s estimates of the period that the assets will continue to supportproduction requirements or generate sales of our products and are adjusted whenthose estimates change.  Estimates arebased on the nature of the asset, historical usage with consideration given totechnological changes, our current strategy, as well as engineering studies.  To the extent that our estimates areincorrect, our periodic depreciation expense or carrying value of our assetsmay be impacted.

 

We also evaluatethe carrying value of property, plant and equipment to be held and used and anyassets to be disposed of, when events or circumstances suggest that thecarrying value may not be recoverable, such as temporary shut downs orpermanent closures of plants.  Suchreviews have been necessary in recent years. Impairment losses for equipment held and used are recorded when theundiscounted cash flows estimated to be generated by those assets are less thantheir carrying amount.  The estimates ofundiscounted cash flows take into consideration expectations of futuremacroeconomic conditions as well as our internal strategic plans.  Therefore, inherent in the estimated futurecash flows is a certain level of risk which we have considered in ourvaluation; nevertheless, actual future results may differ.  Should impairment exist, the amount of theloss is then quantified by comparing the carrying amount of the assets to thediscounted cash flows.  For assets to bedisposed of, we assess whether machinery or equipment can be used at otherfacilities and, if not, estimate the net proceeds to be realized upon sale ofthe assets.  Primarily as a result ofplant rationalization, certain facilities and equipment are not currently inuse in operations.  We have recordedimpairment losses related to certain unused assets and such losses maypotentially occur in the future.

 

***Goodwill and Other IntangibleAssets***

*** ***

Under Mexican GAAP,goodwill and other intangible assets with definite lives are amortized on astraight-line basis over estimated useful lives.  Indefinite-lived intangible assets are no longer amortized, as ofJanuary 1, 2003, upon the application of Bulletin C-8, “IntangibleAssets.”

 

Under U.S. GAAP,effective January 1, 2002, we applied FAS 142.  Under FAS 142, goodwill and certain other intangible assetsdeemed to have an indefinite useful life are no longer being amortized, but aresubject to annual impairment testing.

 

The identificationand measure of goodwill and unamortized intangible assets impairment involvesthe estimation of fair value of the reporting units.  Determining the fair value of a reporting unit under the firststep of the goodwill impairment test and determining the fair value ofindividual assets and liabilities of a reporting unit (including unrecognizedintangible assets) under the second step of the goodwill impairment test isjudgmental in nature and often involves the use of significant estimates andassumptions.  Similarly, estimates andassumptions are used in determining the fair value of other intangibleassets.  These estimates and assumptionscould have a significant impact on whether or not an impairment charge isrecognized and also the magnitude of any such charge.  We perform internal valuation analyses and consider relevantinternal data as well as other market information that is publicly available.  Estimates of fair value are primarilydetermined using discounted cash flows. This approach uses significant estimates and assumptions includingprojected future cash flows (including time), a discount rate reflecting therisk inherent in future cash flows and a perpetual growth rate.  Inherent in these estimates and assumptionsis a certain level of risk which we believe we have considered in ourvaluation.  Nevertheless, if future 

 

34

 

actualresults differ from estimates, a possible impairment charge may be recognizedin future periods related to the write-down of the carrying value of goodwilland other intangibles.

 

***Deferred Income Taxes***

*** ***

Under both Mexicanand U.S. GAAP, we record deferred income tax assets and liabilities usingenacted tax rates for the effect of temporary differences between the book andtax basis of assets and liabilities.  Ifenacted tax rates change, we adjust the deferred tax assets and liabilitiesthrough the provision for income taxes in the period of change, to reflect theenacted tax rate expected to be in effect when the deferred tax itemsreverse.  We also record a valuationallowance to reduce our deferred tax assets to the amount that is more likelythan not to be realized.  While we haveconsidered future taxable income and ongoing prudent and feasible tax planningstrategies in assessing the need for the valuation allowance, in the event wewere to determine that we would be able to realize our deferred tax assets inthe future in excess of the net recorded amount, an adjustment to the deferredtax asset would increase income in the period such determination was made.  Should we determine that we would not beable to realize all or part of our net deferred tax asset in the future, anadjustment to the deferred tax asset would be charged to income in the periodsuch determination was made.

 

**Factors Affecting Financial Condition and Results of Operations**

** **

***General***

*** ***

In recent years,our financial condition and results of operations have been significantlyinfluenced by the following factors:

 

level of demand fortortillas;

 

effects of governmentpolices on the Mexican tortilla and corn flour industry;

 

costs of energy;

 

cost of corn and wheat; and

 

our acquisitions, plantexpansions and divestitures.

 

***Effects of Deregulation of theMexican Tortilla and Corn Flour Industry***

*** ***

Because of theimportance of tortillas as a principal staple in the Mexican diet, the Mexicangovernment has regulated the domestic corn, corn flour and tortilla industry,in one form or another, for approximately thirty years.  With the deregulation of the corn flour andtortilla markets on January 1, 1999, we believed that we were wellpositioned for growth.  As tortillaprices were no longer to be set by the government, we anticipated a price waramong tortilla producers that would accelerate the switch to the more efficientdry corn flour method in an effort to reduce costs.  However, the Mexican government accelerated the sale of itsremaining corn inventories during 1999 and since 1999 has issued import permitsfor corn which resulted in drastic decreases in corn prices.  This in turn drove down corn flour prices astortilla producers switched from corn flour to raw corn.  This trend continued in 2001 and 2002,although to a lesser extent, during which time corn prices fell approximately0.5% and 0.4%, respectively.  During2003, the cost of GIMSA’s corn purchases increased about 13% while our averagecorn flour price increased only about 4%.

 

Despite the drop incorn and corn flour prices after deregulation, tortilla prices drasticallyincreased after January 1, 1999 and have remained high throughJune of 2004.  Tortilla priceincreases generally have a negative effect on our sales volume.  During the period from 1999 through the endof 2003, tortilla prices increased approximately 104% (in nominal terms) whileinflation was approximately 40% in that period.  Most of the price increase took place at the beginning of 1999(once the deregulation was effective on January 1), with an estimatednationwide average tortilla price increase of 43% (in nominal terms) in 1999versus Mexican inflation of 12.3% in 1999. Since 2000, tortilla prices continued their upward trend, but at aslower rate.  During the first threemonths of 2004, we estimate that tortilla prices increased approximately3%.  We believe tortilla prices arelikely to stabilize or increase at lower rates although we can give noassurances in this regard.

 

35

 

*Complementary Revenues*.  Until December 31, 1998, the Mexicangovernment, in recognition of the importance of tortillas as a principal staplein the Mexican diet, established below-market tortilla prices and consequentlyregulated corn flour prices and paid complementary revenues to corn flourproducers, subject to specified volume ceilings.  Complementary revenues accounted for 12.2% of our net sales in1998.  Effective as of December 31,1998, the Mexican government deregulated the corn flour and tortilla industryand, in particular, terminated the complementary revenue program and allowedthe prices of corn flour and tortillas to be determined by competition andother market conditions.  Thetermination of this program, combined with the other market-distortive effectsdescribed above, has negatively affected the transition to competitive corn andcorn flour markets and has negatively affected our results of operations.

 

*Commercialization Program*.  Since December 1996, ASERCA, a Mexicangovernment agency, has maintained a separate program designed to promote thepurchase of corn in certain regions of Mexico. Under this program, called the commercialization program, the Mexicangovernment provides payments to corn purchasers based partly on internationalcorn prices.  The net effect is thatthese purchasers receive corn below the domestic market price of corn. Thereimbursements vary depending upon the size of the corn harvest in Mexico’svarious growing regions.  The amount ofcorn available under this program has been small.

 

**RESULTS OF OPERATIONS**

** **

The following tablesets forth our consolidated income statement data on a Mexican GAAP basis forthe years ended December 31, 2001, 2002 and 2003, expressed as apercentage of net sales.  All financialinformation has been prepared under the Bulletin B-15 methodology.  For a description of the method, see“Presentation of Financial Information” and “—Overview of AccountingPresentation.”

 

 

 

**Year Ended December 31,**

 

 

 

**2001**

 

**2002**

 

**2003**

 

**Income Statement Data**

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

100.0

%

Cost of sales

 

63.1

 

62.5

 

63.7

 

Gross profit

 

36.9

 

37.5

 

36.3

 

Selling, general and administrative expenses

 

31.8

 

29.7

 

28.7

 

Operating income

 

5.2

 

7.8

 

7.6

 

Net comprehensive financing cost

 

(1.6

)

(3.2

)

(2.0

)

Other income (expenses), net

 

0.4

 

0.6

 

(0.8

)

Income taxes (current and deferred)

 

1.5

 

2.9

 

2.9

 

Employee’s statutory profit sharing  (current and deferred)

 

0.1

 

0.1

 

0.0

 

Other items

 

0.3

 

0.8

 

1.0

 

Minority interest

 

1.0

 

1.0

 

0.8

 

Majority net (loss) income

 

1.8

 

2.1

 

2.1

 

 

The following tablesets forth our net sales and operating income as represented by our principalsubsidiaries for 2001, 2002 and 2003. Financial information with respect to GIMSA includes sales of Ps.37million, Ps.30 million and Ps.39 million in 2001, 2002 and 2003, respectively,in corn flour to PRODISA; financial information with respect to Molinera deMéxico includes sales of Ps.29 million, Ps.5 million and Ps.13 million in 2001,2002 and 2003, respectively, to PRODISA; financial information with respect toPRODISA includes sales of Ps.35 million, Ps.40 million and Ps.44 million in2001, 2002 and 2003, respectively, in tortilla related products to GrumaCorporation; and financial information with respect to INTASA includes sales ofPs.302 million, Ps.304 million and Ps.375 million in 2001, 2002 and 2003,respectively, in technological support to certain subsidiaries of Gruma, S.A.de C.V.  In the process ofconsolidation, all significant intercompany transactions are eliminated fromthe financial statements.

 

36

 

 

 

**Year Ended December 31,**

 

 

 

**2001**

 

**2002**

 

**2003**

 

 

 

**Net  Sales**

 

**Operating  Income**

** **

**Net  Sales**

** **

**Operating  Income**

** **

**Net  Sales**

** **

**Operating  Income**

** **

 

 

**(in millions of pesos of constant  purchasing power as of December 31, 2003)**

** **

Gruma Corporation

 

Ps.

9,724

 

Ps.

661

 

Ps.

9,986

 

Ps.

858

 

Ps.

11,217

 

Ps.

1,037

 

GIMSA

 

 

5,143

 

 

580

 

 

4,952

 

 

528

 

 

5,201

 

 

394

 

Venezuelan Operations

 

 

2,394

 

 

183

 

 

2,676

 

 

290

 

 

3,357

 

 

436

 

Molinera de México

 

 

1,609

 

 

14

 

 

1,789

 

 

19

 

 

1,992

 

 

(23

)

Gruma Centroamérica

 

 

1,262

 

 

(9

)

 

1,118

 

 

33

 

 

1,111

 

 

(3

)

PRODISA

 

 

417

 

 

(237

)

 

194

 

 

(79

)

 

243

 

 

(57

)

Others and eliminations

 

 

24

 

 

(131

)

 

(55

)

 

(41

)

 

(79

)

 

(36

)

Total

 

Ps.

20,573

 

Ps.

1,061

 

Ps.

20,660

 

Ps.

1,608

 

Ps.

23,042

 

Ps.

1,748

 

 

**Year Ended December 31, 2003 Compared with Year EndedDecember 31, 2002**

** **

***Net Sales***

*** ***

*Overview*:  Net sales increased by 12% to Ps.23,042million in 2003 compared to Ps.20,660 million in 2002.  The increase in net sales resulted primarilyfrom volume growth of 6%.  Sales volumerose in all of GRUMA’s subsidiaries in 2003, with the main drivers of volumegrowth being Gruma Corporation and Gruma Venezuela.  Higher average prices in connection with higher corn and wheatcosts also contributed to the rise in net sales in 2003.

 

*Net Sales bySubsidiary*: By major subsidiary, the percentages of consolidated netsales in 2003 and 2002 were as follows: 

 

 

 

**Percentage of Consolidated Net  Sales**

 

**Subsidiary**

 

**2003**

 

**2002**

 

Gruma Corporation

 

48.7

%

48.3

%

GIMSA

 

22.6

 

24.0

 

Venezuelan Operations

 

14.6

 

13.0

 

Molinera de México

 

8.6

 

8.7

 

Gruma Centroamérica

 

4.8

 

5.4

 

PRODISA

 

1.0

 

0.9

 

Others and eliminations

 

(0.3

)

(0.3

)

 

Gruma Corporation’snet sales increased 12% to Ps.11,217 million in 2003 compared to Ps.9,986million in 2002 primarily reflecting higher sales volume and, to a lesserextent, price increases for corn flour and tortillas, which were implementedduring the first quarter of 2003 to offset higher corn and energy costs.  Gruma Corporation’s combined corn flour andtortilla sales volume increased by 9% to 979,000 tons in 2003 from 899,000 tonsin 2002.  Corn flour sales volumeincreased 7% while tortilla sales volume increased 10%.

 

Factors causingGruma Corporation’s tortilla sales volume to increase included:

 

•                  an 18% increasein corn tortilla sales volume due to the successful rollout at the end of thethird quarter of 2002 of the “Great New Taste” formulation for corn tortillasfor retail sale;

 

•                  significantgrowth in corn tortilla sales volume in the food service sector as a result ofpromotional activities aimed at increasing penetration in all domestic markets;and

 

•                  a4% increase in wheat tortilla sales volume resulting from:

 

•                  several majorrestaurant chain customers creating new recipes and promoting menu itemsfeaturing wheat tortillas; and

 

37

 

•                  a full year ofnew business relationships with two restaurant chains based in the Midwest,which began during the third quarter of 2002.

 

Factors causing Gruma Corporation’s cornflour sales volume to increase included:

 

•                  increased demandfrom current trade customers due to their increasing tortilla production andconverting from the traditional cooked-corn method to the corn flour method;and

 

•                  improvedretail sales due to various factors including:

 

•                  continued focuson specific customer markets in the United States;

 

•                  strengthening ofthe MASECA® brand through promotions and advertising; and

 

•                  growth of itsdistribution network.

 

GIMSA’s netsales increased by 5% to Ps.5,201 million in 2003 compared with Ps.4,952million in 2002.  The increase in netsales resulted primarily from corn flour price increases related to higher corncosts and was also due to higher sales volume. We gradually implemented price increases throughout 2003 to offsethigher corn costs, although we were not able to do so to fully reflect theincrease.  In constant peso terms, theaverage price of corn flour increased 4% in 2003 compared to 2002.  Our sales volume increased 1% in 2003 to1,395,000 tons from 1,386,000 tons in 2002 due to higher sales volume toDICONSA resulting from a modification in GIMSA’s sales structure.

 

Net salesfrom our Venezuelan Operations increased 25% to Ps.3,357 million in 2003compared to Ps.2,676 million in 2002, reflecting an increase in salesvolume and higher prices due to:

 

•                  theimplementation of price increases related to the devaluation of the bolívar andhigher raw material costs; and

 

•                  the marketing ofproducts not subject to price controls, including new value-added productslaunched in 2003.

 

Sales volumefrom our Venezuelan Operations increased by 14% in 2003 to 518,000 tons from454,000 tons in 2002.  This increase insales volume was driven mainly by higher sales volume in most products,particularly wheat flour, as a result of:

 

•                  the ability ofour Venezuelan operations to secure product supplies in a difficult businessenvironment, thereby boosting customer confidence and enabling it to attractnew customers;

 

•                  improvedcoverage and increased distribution;

 

•                  the developmentof new value-added products; and

 

•                  increasedproduct promotion.

 

Molinera de México’s net sales increased 11% to Ps.1,992 million in 2003from Ps.1,789 million in 2002 reflecting a 7% increase in sales volume and, toa lesser extent, an increase in wheat flour prices implemented in connectionwith an increase in the cost of wheat. The increase in sales volume to 575,000 tons in 2003 from 536,000 tonsin 2002 reflected:

 

•                  increased salesto Mexico’s largest cookie maker;

 

•                  continuinginitiatives designed to enhance sales to supermarket in-store bakeries; and

 

•                  improved retailsales resulting from stronger wholesaler coverage in northern Mexico.

 

GrumaCentroamérica’s net sales decreased 1% to Ps.1,111 million in 2003 fromPs.1,118 million in 2002 reflecting lower corn flour prices that resultedfrom corn flour price discounts implemented to meet intensified competitionfrom the traditional cooked-corn method and other corn flour producers, and ashift in the corn flour 

 

38

 

product mix to cheaper brands and bulkpresentation.  Gruma Centroamérica’ssales volume increased 4% in 2003 to 144,000 tons from 139,000 tons in 2002 asa result of higher corn flour sales volume due to:

 

•                  GrumaCentroamérica’s reduction of corn flour prices to meet intensified competition;

 

•                  improvedcoverage in rural areas of Guatemala; and

 

•                  increasedpromotion of less expensive brands.

 

***PRODISA’s net sales increased 25%to Ps.243 million in 2003 from Ps.194 million in 2002 mainly as a result of a34% sales volume growth in sales of corn flour tortillas, which are pricedlower than wheat tortillas and corn chips which caused net sales to grow at alower rate than sales volume.  Salesvolume increased 34% in 2003 to 21,000 tons from 15,000 tons in 2002 as aresult of the introduction of warm corn flour tortillas and the expansion ofPRODISA’s product line to include different types of wheat tortillas based onregional consumers’ preferences.***

*** ***

***Cost of Sales***

*** ***

*Overview*:  Our total cost of sales increased 14%,primarily due to an increase in sales volume as well as higher corn and wheatcosts, toPs.14,672 million in 2003 from Ps.12,921 million in 2002.  As a percentage of net sales, our total costof sales increased to 63.7% from 62.5%, primarily as a result of GIMSA andMolinera de México not raising prices commensurate with higher corn and wheatcosts due to the competitive pricing environment in these markets.

 

*Cost ofSales by Subsidiary*:  GrumaCorporation’s cost of sales increased 11% to Ps.5,998 million in 2003 comparedto 5,399 million in 2002, commensuratewith the 9% increase insales volume.  Cost of sales as apercentage of net sales decreased to 53.5% from 54.1%, mainly as a result ofimproved manufacturing efficiencies and better absorption of fixed costsrelated to higher sales volume, which largely offset higher corn and naturalgas costs and the increasing cost of new products.

 

GIMSA’s cost ofsales as a percentage of net sales increased to 73.8% in 2003 from 70.4% in2002 because of GIMSA’s price increases, which were made gradually throughoutthe year in an effort to stimulate sales volume growth, did not fully reflecthigher corn costs.

 

In absoluteterms, GIMSA’s cost of sales increased 10% to Ps.3,840 million in 2003 fromPs.3,485 million in 2002 mainly as a result of higher corn costs and, to alesser extent, higher fuel, electricity and additive costs.

 

Cost of sales ofour Venezuelan Operations increased 27% to Ps.2,418 million in 2003 fromPs.1,903 million in 2002, as a result of sales volume growth and significantincreases in raw material costs.  Cost ofsales as a percentage of net sales increased to 72.0% from 71.1%.  The significant increases in the cost of rawmaterials (especially corn and wheat) were partially offset by improvedmanufacturing efficiencies, better absorption of fixed costs, a temporaryreduction in the number of products presentations sold and lower overheadexpenses.

 

Cost of sales ofMolinera de México increased 16% to Ps.1,662 million in 2003 compared toPs.1,432 million in 2002 due to sales volume growth and an increase in the costof wheat.  Cost of sales as a percentageof net sales increased to 83.5% from 80.0% due to a change in sales mixfavoring bulk presentation and a more competitive market environment thatprevented Molinera de México from raising the price of its bulk presentation tofully reflect higher wheat costs.

 

GrumaCentroamérica’s cost of sales increased 6% to Ps.767 million in 2003 comparedto Ps.721 million in 2002 as a result of the 4% increase in sales volume andthe increased cost of raw materials. Cost of sales as a percentage of net sales increased to 69.1% in 2003from 64.5% in 2002 primarily due to Gruma Centroamérica’s decision not to raisecorn flour prices to fully offset higher corn costs because of intensifiedcompetition from the traditional cooked-corn method and from other corn flourproducers and, to a lesser extent:

 

•                  a shift in the corn flour product mixtoward cheaper and lower-margin products; and

 

39

 

•                  higher costs in Gruma Centroamérica’s heartsof palm business due to local shortages of heart-of-palm stems, and lowerprices due to strong competition and a change in the sales mix.

 

PRODISA’s costof sales increased 20% to Ps.160 million in 2003 compared toPs.134 million in 2002 as a result of the 34% increase in salesvolume.  Cost of sales as a percentageof net sales improved to 66.0% in 2003 from 68.7% in 2002 due to betterabsorption of fixed costs resulting from the 34% growth in sales volume.

 

***Gross Profit***

 

As a result ofthe above factors, our gross profit increased by 8% to Ps.8,370 million in2003 compared with Ps.7,739 million in 2002 and our gross margin decreasedto 36.3% from 37.5%.

 

***Selling, General and Administrative Expenses***

 

Overview:  Our selling, general and administrativeexpenses, or SG&A expenses, increased 8% to Ps.6,622 million in 2003 fromPs.6,131 million in 2002 primarily due to the higher sales volume of GrumaCorporation.  SG&A expenses as apercentage of net sales decreased to 28.7% in 2003 from 29.7% in 2002.  The decrease in SG&A expenses as apercentage of net sales was driven by better expense absorption, especially inGruma Venezuela.

 

*SG&A Expenses by Subsidiary*:  SG&A expenses of Gruma Corporationincreased 12% to Ps.4,182 million in 2003 from Ps.3,729 million in 2002 as aresult of the 9% increase in sales volume. SG&A expenses as a percentage of net sales remained at 37.3% in2003.  The increase in net sales allowedGruma Corporation to improve its absorption of fixed selling expenses, whichwere offset by legal expenses related to the Company’s antitrust litigation.

 

GIMSA’sSG&A expenses as a percentage of net sales decreased to 18.6% in 2003 from19.0% in 2002 due to better expense absorption related to higher corn flourprices.  In absolute terms, SG&Aexpenses increased 3% to Ps.967 million in 2003 from Ps.939 million in 2002,mainly as a result of higher selling expenses due to improvements in thecommercialization and customer-service infrastructure.

 

SG&Aexpenses of our Venezuelan Operations increased 4% to Ps.503 million in 2003compared to Ps.484 million in 2002 as a result of the 14% increase in salesvolume.  SG&A expenses as apercentage of net sales decreased to 15.0% in 2003 from 18.1% in 2002 due tobetter absorption of fixed expenses and favorable advertising contracts securedby the Venezuelan Operations.

 

SG&A expensesof Molinera de México increased 4% to Ps.352 million in 2003 from Ps.338million in 2002 due to an increase in shipping costs in connection with theincrease in sales volume.  SG&Aexpenses as a percentage of net sales decreased to 17.7% in 2003 from 18.9% in 2002 as a result ofhigher net sales, which allowed for better expense absorption.

 

SG&A expensesof Gruma Centroamérica decreased 5% to Ps.347 million in 2003 from Ps.364million in 2002 due mainly to Gruma Centroamérica’s initiatives designed tooptimize operating expenses.  Thoseinitiatives included, among other things, a restructuring of the sales andmarketing departments, resulting in lower salary and administrative expenses,fewer distribution routes and logistical efficiencies.  For the same reason, along with betterexpense absorption related to higher sales volume, SG&A expenses as apercentage of net sales decreased to 31.2% in 2003 compared to 32.6% in 2002.

 

SG&A expensesfor PRODISA were flat at Ps.139 million. SG&A expenses as a percentage of net sales decreased to 57.4% in2003 from 71.7% in 2002 as a result of better expense absorption due to theincrease in sales volume.

 

***Operating Income***

*** ***

Operating incomeincreased 9% to Ps.1,748 million in 2003 compared to Ps.1,608 million in2002.  The improvement was driven byincreases in operating income in Gruma Corporation and Gruma Venezuela of 21%and 

 

40

 

50%,respectively, resulting from higher sales volume, improved manufacturing andtransportation efficiencies and better pricing.  Our consolidated operating margin decreased to 7.6% in 2003 from7.8% in 2002, however, due mainly to GIMSA’s higher corn costs not being fullyreflected in its corn flour prices throughout the year and, to a lesser extent,Molinera de México’s competitive pricing environment.

 

***Net Comprehensive Financing Cost***

*** ***

Netcomprehensive financing cost decreased 30% to Ps.461 million in 2003 comparedto Ps.658 million in 2002, as a result of lower foreign exchange losses andlower interest expenses related mostly to reduced debt.  The components of comprehensive financingcost, together with explanations of significant changes, are detailed below.

 

**Items**

 

**2002**

 

**2003**

 

**Change**

 

**Comments**

 

 

 

**(in millions of pesos of constant  purchasing power as of  December 31, 2003)**

 

 

 

Interest Expense

 

Ps.

611

 

Ps.

532

 

Ps.

(79

)

•                  Lower  debt and, to a lesser extent, lower interest rates

 

Interest Income

 

 

(62

)

 

(65

)

 

(3

)

 

 

Foreign Exchange Loss (Gain)

 

 

283

 

 

182

 

 

(101

)

•                  Lower  peso and bolivar devaluation in 2003; lower debt

 

Monetary Position Loss (Gain)

 

 

(174

)

 

(188

)

 

(14

)

 

 

Total

 

Ps.

658

 

Ps.

461

 

Ps.

(197

)

 

 

 

***Other Expenses, Net***

*** ***

Other expenses, netwas Ps.175 million in 2003 compared to income of Ps.130 million in 2002.  This is a result of a gain in 2002 from thesale of nonproductive assets and the amortization of negative goodwill related tothe acquisition of MONACA being completed in June 2002.  For a detailed description of items includedin other expenses, net, see Note 13 to our consolidated financial statements.

 

***Taxes and Employees’ ProfitSharing***

*** ***

Provisions forincome taxes and employee profit sharing increased to Ps.671 million in 2003from Ps.619 million in 2002.  Thisincrease corresponds to higher taxable income in 2003 compared to 2002.  Our effective tax rate (income tax andemployees profit sharing) for 2003 was 60% as compared to 57% in 2002.  For additional information, please refer tothe reconciliation of effective tax rates in Note 14 B of our financialstatements.

 

***Equity in Earnings of AssociatedCompanies, Net***

*** ***

Our share of netincome in unconsolidated associated companies represented Ps.235 million in2003, Ps.61 million more than in 2002, due mainly to the completion inJune 2002 of the amortization of the excess of cost of the acquisitionover book value of Banorte.

 

***Majority Net Income***

*** ***

As a result of theabove factors, our income before minority interest was Ps.676 million in 2003compared to Ps.635 million in 2002 and our majority net income was Ps.493million in 2003 compared to Ps.424 million in 2002.

 

**Year Ended December 31, 2002 Compared with Year EndedDecember 31, 2001**

** **

***Net Sales***

 

*Overview*:  Net sales increased by 0.4% to Ps.20,660million in 2002 compared to Ps.20,573 million in 2001.  The increase in net sales resulted fromhigher net sales associated with higher volume at Gruma Corporation andMolinera de México as well as higher net sales associated with price increasesat our Venezuelan Operations, partially offset by lower sales volume at GIMSA,Gruma Centroamérica and PRODISA (which, in the case of 

 

41

 

GrumaCentroamérica and PRODISA, resulted from the discontinuation of the breadoperations in 2001).  In 2002, 67% ofour consolidated net sales were derived from our non-Mexican operations.

 

*Net Sales bySubsidiary*: By major subsidiary, the percentages of consolidated netsales in 2002 and 2001 were as follows: 

 

 

 

**Percentage of Consolidated Net  Sales**

 

**Subsidiary**

 

**2002**

 

**2001**

 

Gruma Corporation

 

48.3

%

47.3

%

GIMSA

 

24.0

 

25.0

 

Venezuelan Operations

 

13.0

 

11.6

 

Molinera de México

 

8.7

 

7.8

 

Gruma Centroamérica

 

5.4

 

6.1

 

PRODISA

 

0.9

 

2.0

 

Others and eliminations

 

(0.3

)

0.1

 

 

Gruma Corporation’snet sales increased 2.7% to Ps.9,986 million in 2002 compared to Ps.9,724million in 2001 primarily reflecting higher sales volume and relatively stableprices.  Gruma Corporation’s combinedcorn flour and tortilla sales volume increased by 5.1% to 899,000 tons in 2002from 856,000 tons in 2001. Individually, corn flour sales volume increased 7.0% while tortillasales volume increased 3.9%.  The growthin corn flour and tortilla sales volume was partially due to GrumaCorporation’s resumed production in October 2001 of yellow-corn productsthat it had previously suspended the sale of due to the possible presence ofthe StarLinkTM protein.  Theresumption in production followed the implementation of a more rigorous programdesigned to identify genetically modified organisms in corn supplies in orderto ensure product safety.   In 2002, thecompany began to recover some of the yellow corn product sales it lost as aresult of the voluntary recall.  See“Item 8.  FinancialInformation—Legal Proceedings.”

 

Other factorscausing Gruma Corporation’s corn flour sales volume to increase included:

 

•                  strong demandfrom new and existing U.S. manufacturers of conventional products such astortillas and tortilla chips as well as new products such as snacks and bakeryproducts; and

 

•                  improvedretail sales coverage resulting from changes to Gruma Corporation’s wholesalerand distributor network.

 

Other factorscausing Gruma Corporation’s tortilla sales volume to increase included:

 

•                  increased salesto a major customer that expanded through recent acquisitions to whom GrumaCorporation is a preferred supplier;

 

•                  increasedexports; and

 

•                  newbusiness relationships with two restaurant chains based in the Midwest, whichbegan during the third quarter of 2002.

 

GIMSA’s netsales decreased by 3.7% to Ps.4,952 million in 2002 compared with Ps.5,143million in 2001.  The decrease in netsales resulted from lower sales volume. Sales volume decreased 3.5% in 2002 to 1,386,000 tons from 1,436,000tons in 2001 due to a combination of factors, including:

 

•                  a 3.1% decreasein bulk sales volume (which represented 85.1% of total sales volume in 2002)resulting from our efforts to limit our customers to those with low-risk creditprofiles; we are continuing to focus on increasing sales to these customers andare providing such customers with incentives to increase the percentage of cornflour used in their raw-material mix; and

 

•                  a 5.8% decreasein 2002 in sales volume of one-kilogram consumer retail packages of corn flour(which represented 14.9% of total sales volume in 2002) reflecting lower salesto DICONSA caused by DICONSA’s restructuring of operations, which resulted inan increase in the prices of goods DICONSA sells to the public and a reductionin DICONSA branches and regional coverage.

 

42

 

Net salesfrom our Venezuelan Operations increased 11.8% to Ps.2,676 million in 2002compared to Ps.2,394 million in 2001, reflecting significant price increasesimplemented throughout the year in order to offset sizeable increases in thecost of grains, particularly wheat. Sales volume from our Venezuelan Operations decreased by 0.9% in 2002 to454,000 tons from 458,000 tons in 2001, which decrease was driven mainly by a4.6% decline in wheat flour volume due primarily to a temporary suspension ofoperations in December 2002 due to the nation-wide general strike inVenezuela and, to a lesser extent, lower per-capita consumption stemming fromlower consumer purchasing power coupled with higher prices.  The decrease in sales volume from ourVenezuelan Operations was partially offset by a 3.4% increase in sales of cornflour to be repackaged and resold under private labels.

 

Molinera deMéxico’s net sales increased 11.2% to Ps.1,789 million in 2002 from Ps.1,609million in 2001 reflecting a 9.7% increase in sales volume and, to a lesserextent, an increase in wheat flour prices implemented in connection with anincrease in the cost of wheat.  Theincrease in sales volume to 536,000 tons in 2002 from 489,000 tons in 2001reflected:

 

•                  increased salesto Mexico’s largest cookie maker;

 

•                  continuinginitiatives designed to enhance sales to supermarket in-store bakeries; and

 

•                  new supplycontracts based on our commitment to customer service and quality.

 

GrumaCentroamérica’s net sales decreased 11.5% to Ps.1,118 million in 2002 fromPs.1,262 million in 2001 reflecting the discontinuation of its bread operationsin November 2001.  GrumaCentroamérica’s sales volume decreased 0.9% in 2002 to 139,000 tons from140,000 tons in 2001 for the same reason. Net sales declined more than sales volume because Gruma Centroamérica’sbread products sold at a much higher price per ton than corn flour, which isour main product line in Central America.

 

***PRODISA’s net sales decreased53.5% to Ps.194 million in 2002 from Ps.417 million in 2001.  Sales volume decreased 44.2% in 2002 to15,000 tons from 28,000 tons in 2001 reflecting the discontinuation of thebread operations in November 2001.***

*** ***

***Cost of Sales***

*** ***

*Overview*:  Our total cost of sales decreased 0.4% toPs.12,921 million in 2002 from Ps.12,974 million in 2001.  As a percentage of net sales, our total costof sales improved to 62.5% from 63.1%, resulting primarily from betterperformance of our Venezuelan Operations. Our Venezuelan Operations benefited from making most corn purchasesbefore industry-wide price increases associated with the devaluation of the bolívarand from increasing the price of corn flour throughout the year.  To a lesser extent, the discontinuation ofGruma Centroamérica’s bread operations also contributed to the consolidatedimprovement.

 

*Cost ofSales by Subsidiary*:  GrumaCorporation’s cost of sales increased 2.4% to Ps.5,399 million in 2002 comparedto Ps.5,272 million in 2001, commensuratewith the 5.1% increasein sales volume.  Cost of salesas a percentage of net sales decreased to 54.1% from 54.2% mainly as a resultof better absorption of fixed costs related to higher sales volume.

 

GIMSA’s cost ofsales as a percentage of net sales increased to 70.4% in 2002 from 69.9% in2001 due primarily to:

 

•                  lower absorptionof fixed costs as a result of lower sales volume; and

 

•                  an increase inexpenses associated with corn procurement, due to:

 

•                  insufficientcorn supplies in certain regions of Mexico in the fourth quarter of 2002; and

 

•                  higher corntransportation and warehousing costs due to the absence in 2002 of governmentalsupport GIMSA received in 2001 to compensate it for using domestic corn.

 

In absolute terms,GIMSA’s cost of sales decreased 3.0%, commensurate with the 3.5% decline insales volume, to Ps.3,485 million in 2002 from Ps.3,595 million in 2001.

 

43

 

Cost of sales of ourVenezuelan Operations increased 9.8% to Ps.1,903 million in 2002 fromPs.1,733 million in 2001, largely as a result of significant increases in rawmaterial costs.** **Cost of sales as apercentage of net sales improved to 71.1% from 72.4%.  Despite significant increases in the cost of raw materials(especially wheat, which is imported to Venezuela), our Venezuelan Operationsimproved gross margin as a result of making most corn purchases before industry-wideprice increases associated with the devaluation of the bolívar and byincreasing the price of corn flour throughout the year.

 

Cost of sales of Molinerade México increased 11.6% to Ps.1,432 million in 2002 compared to Ps.1,283million in 2001.  Cost of sales as apercentage of net sales increased to 80.0% from 79.8% due to a change in salesmix favoring bulk presentation and, consequently, lower prices.

 

Gruma Centroamérica’scost of sales decreased 12.7% to Ps.721 million in 2002 compared to Ps.826million in 2001 as a result of the 0.9% decrease in sales volume and thediscontinuation of the bread operations. Cost of sales as a percentage of net sales improved to 64.5% in 2002from 65.4% in 2001 in connection with the discontinuation of the breadoperations.

 

PRODISA’s cost of salesdecreased 52.1% to Ps.134 million in 2002 compared to Ps.279 million in 2001 asa result of the 44.2% decrease in sales volume due to the discontinuation ofthe bread operations.  Cost of sales asa percentage of net sales increased to 68.8% in 2002 from 66.8% in 2001reflecting the discontinuation of the bread operations.

 

***Gross Profit***

*** ***

As a result of the abovefactors, our gross profit increased by 1.8% to Ps.7,739 million in 2002compared with Ps.7,600 million in 2001 and our gross margin improved to 37.5%from 36.9%.

 

***Selling, General andAdministrative Expenses***

*** ***

*Overview*:  Our selling, general and administrativeexpenses, or SG&A expenses, decreased 6.2% to Ps.6,131 million in 2002compared to PS.6,538 million in 2001 due in large part to the discontinuationof the bread operations and, to a lesser extent, lower administrative expensesincurred by our corporate offices and lower expenses of GIMSA.  In constant pesos SG&A expenses of GrumaCorporation decreased 1.6% reflecting a higher level of peso depreciation.  SG&A expenses as a percentage of netsales decreased to 29.7% in 2002 from 31.8% in 2001.  The decrease in SG&A expenses as a percentage of net saleswas driven mainly by the discontinuation of the bread operations and, to alesser extent, better expense absorption and containment within GrumaCorporation and our Venezuelan Operations.

 

*SG&A Expenses by Subsidiary*:  In U.S. dollar terms, SG&A expenses ofGruma Corporation increased 0.7% in 2002 compared to 2001 mainly as a result of an increase invariable distribution expenses relating to the tortilla business and anincrease in expenses relating to the promotion of the corn flour business.  In constant pesos, SG&A expenses ofGruma Corporation decreased 1.6% reflecting a higher level of peso depreciation.  SG&A expenses as a percentage of netsales decreased to 37.3% in2002 from 39.0% in 2001, an improvement driven by an increase in sales volume.

 

GIMSA’s SG&A expensesas a percentage of net sales increased to 19.0% in 2002 from 18.8% in 2001 dueto lower sales volume.  In absoluteterms, SG&A expenses decreased 3.0% to Ps.939 million in 2002 from Ps.968million in 2001 due to the consolidation of administrative positions at ourplants and lower freight expenses as a result of decreased sales to DICONSA.

 

SG&A expenses of our Venezuelan Operations increased 1.2% to Ps.484million in 2002 compared to Ps.478 million in 2001.  SG&A expenses as a percentage of netsales decreased to 18.1% in 2002 from 20.0% in 2001 due to:

 

•                  increasednet sales;

 

•                  significantreductions in promotional and advertising expenses;

 

•                  thefact that distribution expenses increased at a slower rate than did inflation;and

 

44

----

 

•                  toa lesser extent, headcount reduction.

 

SG&A expenses ofMolinera de México increased 8.5% to Ps.338 million in 2002 from Ps.312 millionin 2001 due to an increase in selling expenses (especially shipping costs) andthe implementation of initiatives to increase both supermarket sales and supportfor distributors.  SG&A expenses asa percentage of net sales decreased to 18.9% in 2002 from 19.4% in 2001 as a result ofhigher net sales.

 

SG&A expenses ofGruma Centroamérica decreased 18.3% to Ps.364 million in 2002 from Ps.445million in 2001 due mainly to the discontinuation of the bread operations.  For the same reason, SG&A expenses as apercentage of net sales decreased to 32.5% in 2002 compared to 35.3% in 2001.

 

SG&A expenses forPRODISA decreased 62.9% to Ps.139 million in 2002 from Ps.376 million in 2001and SG&A expenses as a percentage of net sales decreased to 71.7% in 2002from 90.0% in 2001, each as a result of the discontinuation of the breadoperations.

 

***Operating Income***

*** ***

Operating incomeincreased 51.5% to Ps.1,608 million in 2002 compared to Ps.1,061 millionin 2001 and our consolidated operating margin improved to 7.8% in 2002 from5.2% in 2001 due primarily to:

 

•                  highersales volume with respect to, and better expense absorption within, GrumaCorporation;

 

•                  thediscontinuation of the bread operations;

 

•                  ourVenezuelan Operations’ improved performance resulting from increased corn flourprices and from having purchased most of its corn before industry-wide priceincreases followed the bolívar’s devaluation; and

 

•                  loweradministrative expenses at GRUMA’s corporate offices.

 

***Net ComprehensiveFinancing Cost***

*** ***

Net comprehensive financing cost increased 103.6% to Ps.658 million in2002 compared to Ps.323 million in 2001 due mainly to foreign exchangelosses associated with the devaluation of the peso, partially offset by lowerinterest expenses as a result of a reduction in our debt.  The components of comprehensive financingcost, together with explanations of significant changes, are detailed below.

 
| **Items**                      |   | **2001**                                                                                |   | **2002** |   | **Change** |   | **Comments** |   |
|--------------------------------|--------|-----------------------------------------------------------------------------------------|--------|----------|--------|------------|--------|--------------|--------|
|                           |   | **(in  millions of pesos of constant  purchasing power as of  December 31, 2003)** |   |     |   |
| Interest  Expense              |   | Ps.                                                                                     | 729    |     | Ps.    | 611        |   | Ps.          | (118   | ) | •                  Lower  debt and lower average interest rates |   |
| Interest  Income               |   |                                                                                    | (101   | )        |   | (62        | )      |         | 39     |   | •                  Lower average  interest rates and lower cash balances |   |
| Foreign  Exchange Loss (Gain)  |   |                                                                                    | (109   | )        |   | 283        |   |         | 392    |   | •                  Peso  devaluation in 2002 versus peso appreciation in 2001 |   |
| Monetary  Position Loss (Gain) |   |                                                                                    | (196   | )        |   | (174       | )      |         | 22     |   | •                  Lower net  monetary liability position resulting mainly from reduced debt |   |
| Total                          |   | Ps.                                                                                     | 323    |     | Ps.    | 658        |   | Ps.          | 335    |   |   |   |

 

***Other Income, Net***

*** ***

Other income, net, increased 72.0% in 2002 to Ps.130 million comparedto Ps.75 million in 2001, mostly because of the sale of certain nonproductiveassets.  For a detailed description ofitems included in other expenses, net, see Note 13 to our consolidatedfinancial statements.

 

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***Taxes and Employees’Profit Sharing***

*** ***

Provisions for incometaxes and employee profit sharing increased to Ps.619 million in 2002 fromPs.314 million in 2001, reflecting primarily:

 

•                  higherpre-tax income at Gruma Corporation resulting from better financialperformance; and

 

•                  higherdeferred taxes as a result of the disposal of certain subsidiaries during 2002.

 

***Equity in Earnings ofAssociated Companies, Net***

*** ***

Our share of net incomein unconsolidated associated companies represented Ps.175 million in 2002,Ps.105 million more than in 2001, due to:

 

•                  thecompletion by mid-2002 of the amortization of deferred assets related to excessof cost of the acquisition over book value of Banorte (previously reportedunder this item), and

 

•                  improvedresults of Banorte.

 

***Majority Net Income***

*** ***

As a result of the abovefactors, our income before minority interest was Ps.635 million in 2002compared to Ps.569 million in 2001 and our majority net income was Ps.424million in 2002 compared to Ps.361 million in 2001.

 

**CONTRACTUAL OBLIGATIONS ANDCOMMERCIAL COMMITMENTS**

 

As disclosed in Note 12 Cto the consolidated financial statements, over the past years, we have enteredinto various equity swap agreements indexed to the Company’s own stock.  Under Mexican GAAP, these agreements arerecognized at their fair value on the balance sheet, with the differencebetween the initial and the year-end fair value as a component of equity.  Under U.S. GAAP, the fair value of suchcontracts has been recognized in income due to the nature of the contractualsettlement provisions.  Details of thearrangements are as follows:

 

During 2003, we enteredinto five equity swap agreements with an international financial institutionwith respect to 22,200,000 of our own shares for a total amount of U.S.$24,3million.  At each maturity we arerequired to pay a financing cost at the LIBOR rate plus an average of spread of2.01% on the contractual amount.  Theagreements mature in January, September and December of 2004.  The agreement that matured inJanuary was closed with a gain of U.S.$0.5578 per share, resulting in atotal gain of U.S.$5.4 million.  One ofthe agreements that was set to mature in September was advanced to maturein February, which closed with a gain of U.S.$0.3806 per share, resulting in atotal gain of U.S.$0.9 million.  For theremaining agreements that mature in September and December, the Companywill pay or receive the difference between the agreed average price ofU.S.$1.3624 per share and the market price.

 

In addition to the abovearrangements, we have commitments under certain firm contractual arrangementsto make future payments for goods and services.  These firm commitments secure the future rights to various assetsto be used in the normal course of operations. For example, we are contractually committed to make certain minimumlease payments for the use of property under operating lease agreements.  In accordance with Mexican GAAP, the futurerights and obligations pertaining to such firm commitments are not reflected asassets and liabilities on the accompanying consolidated balance sheets.  Additionally, during 1996, Gruma Corporationentered into several sale-leaseback agreements for various production equipmentlocated in two of its U.S. plants. These agreements are accounted for as operating leases under MexicanGAAP.  Under U.S. GAAP these agreementswould have been accounted for as capital leases because a continuinginvolvement from the seller-lessee is present, and consequently, the risks andbenefits of the property are not transferred to the buyer-lessor.  The U.S. GAAP balance sheet as ofDecember 31, 2002 and 2003 would reflect an increase in the fixed assets,net, balance of Ps.161.5 million and Ps.139.0 million (net of accumulateddepreciation of Ps.57.1 million and Ps.65.7 million respectively),respectively, and an increase in the long-term debt balance of Ps.218.6 millionand Ps.204.7 million,

 

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respectively.  The average annual rental payments underthese leases, expiring in 2011, will be approximately U.S.$3.2 million,based upon the financial statements for the year ended December 31,2003.  Each agreement provides GrumaCorporation with a purchase option to acquire the equipment at fair marketvalue at the expiration of the leases, and also an early purchase option, whichpermits Gruma Corporation to acquire the equipment at fair market valueapproximately three-quarters through the lease term.

 

Thefollowing table summarizes separately our material firm commitments atDecember 31, 2003 and the timing and effect that such obligations areexpected to have on our liquidity and cash flow in the future periods.  In addition, the table reflects the timingof principal and interest payments on outstanding debt, which is discussed in“Item 5.  Operating and FinancialReview and Prospects—Liquidity and Capital Resources—Indebtedness.”  We expect to fund the firm commitments withoperating cash flow generated in the normal course of business.

 
| **Contractual Obligations                    and  Commercial Commitments** |   | **Less than  1 Year**              |   | **From 1 to  3  Years** |   | **From 3 to  5  Years** |   | **Over 5  Years** |   | **Total** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|-------------------------|--------|-------------------------|--------|-------------------|--------|-----------|--------|
|                                                                                                                                                                 |   | **(in  millions of U.S. dollars)** |   |
| Long-term  debt obligations                                                                                                                                          |   | —                             |   | 257.6                   |   | 274.4                   |   | —            |   | 532.0     |   |
| Operating  lease obligations(1)                                                                                                                                      |   | 37.0                               |   | 49.8                    |   | 37.2                    |   | 44.4              |   | 168.4     |   |
| Purchase  obligations(2)                                                                                                                                             |   | 68.3                               |   | —                  |   | —                  |   | —            |   | 68.3      |   |
| Other  long-term liabilities under Mexican GAAP(3)                                                                                                                   |   | 44.4                               |   | —                  |   | —                  |   | —            |   | 44.4      |   |
|                                                                                                                                                                 |   |                               |   |                    |   |                    |   |              |   |      |   |
| Total                                                                                                                                                                |   | 149.7                              |   | 307.4                   |   | 311.6                   |   | 44.4              |   | 813.1     |   |

 

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(1)                                  Operating lease obligations primarilyrelate to minimum lease rental obligations for our real estate and operatingequipment in various locations.

 

(2)                                  Purchase obligations relate to ourminimum commitments to purchase commodities, raw materials, machinery andequipment.

 

(3)                                  Other commercial commitments relate toshort-term bank loans and the current portion of long-term debt.

 

**OFF-BALANCESHEET ARRANGEMENTS**

** **

As disclosed inNote 12 C to the consolidated financial statements, we have entered into calloption agreements indexed to the Company’s own stock.  Under Mexican GAAP, we have accounted for these instruments asequity and consequently, these instruments are not reflected as liabilities orassets on our balance sheet.  Under U.S.GAAP, the fair value of such contracts has been recognized in income due tonature of the contractual settlement provisions. Details of the arrangementsare as follows:

 

During 2003, we entered into two call option agreements with a Europeaninternational financial institution with respect to 6,405,000 of our own sharesfor a total amount of U.S.$5.9 million, maturing in February and May of2004, with a zero strike price.  Theseagreements were closed with an average gain of U.S.$0.7444 per share, resultingin a total gain of U.S.$4.8 million.

 

**LIQUIDITYAND CAPITAL RESOURCES**

** **

Our liquidity and capitalresource requirements from 1998 to 2000 reflected a high level of capitalexpenditures in connection with the construction and acquisition of additionalfacilities in Mexico, the United States, Central America and Venezuela, as wellas significant working capital requirements. During 2001, 2002 and 2003, we decreased capital expenditures comparedto prior years and focused on improving operating efficiencies.  In 2003 most of our capital expenditureswere used for capacity expansion, especially in our U.S. operations andtechnology upgrades.

 

We fund our liquidity andcapital resource requirements through a variety of sources, including:

 

cash generated fromoperations;

 

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uncommitted short-termand long-term lines of credit;

 

committed medium-termfacilities;

 

offerings of medium- andlong-term debt; and

 

sales of our equitysecurities and those of our subsidiaries from time to time.

 

We believe that ouroverall sources of liquidity will continue to be sufficient during the next 12months to satisfy our foreseeable financial obligations and operationalrequirements.  The principal factorsthat could decrease our sources of liquidity are a significant decrease in thedemand for, or price of, our products, each of which could limit the amount ofcash generated from operations, and a lowering of our corporate credit ratingor any other downgrade, which could increase our costs with respect to new debtand cause our stock price to suffer. Our liquidity is also affected by factors such as the depreciation orappreciation of the peso and changes in interest rates.  As discussed below, Gruma, S.A. de C.V. issubject to financial covenants contained in some of its debt agreements whichrequire it to maintain certain financial ratios and balances on a consolidatedbasis and Gruma Corporation is subject to financial covenants contained in someof its debt and lease agreements which require it to maintain certain financialratios and balances on a consolidated basis. The interest that Gruma, S.A. de C.V. and Gruma Corporation pay on aportion of their debt may increase if they fail to comply with these and othercovenants.  An increase in the interestthat Gruma, S.A. de C.V. pays on its debt could limit its ability to fund itsliquidity and capital resource requirements. Similarly, an increase in the interest that Gruma Corporation pays ondebt could limit Gruma Corporation’s ability to help support our liquidity andcapital resource requirements.

 

Mr. González Barrera haspledged part of his shares in our company to secure some of hisborrowings.  If there is a default andthe lenders enforce their rights against any or all of these shares, Mr.González Barrera could lose control over us and a change of control couldresult.  In addition, this could triggera default in one of our credit agreements and have a material adverse effectupon our business, financial condition, results of operations andprospects.  For more information aboutthis pledge, see “Item 7.  MajorShareholders and Related Party Transactions.”

 

We intend to mitigateliquidity risks by increasing revenues through capitalizing on our existinginfrastructure and production capacity and pursuing moderate growth, but wecannot assure you that we will succeed in this regard.

 

**WorkingCapital**

** **

We define working capitalas current assets, excluding restricted cash, minus current liabilities,excluding short-term bank loans and current portion of long-term debt.  Our working capital as of the datesindicated was as follows:

 
| December 31, 2002 |   | Ps. | 3,866 million |   |
|------------------------|--------|-----|---------------|--------|
| December 31, 2003 |   | Ps. | 4,224 million |   |

 

**Indebtedness**

** **

In October 1997,GRUMA issued U.S.$250 million unsecured notes due 2007, which were rated“investment grade”, or triple-B- minus, by Standard & Poor’s and Ba2by Moody’s.  In November 1999, Standard &Poor’s lowered the rating on GRUMA’s U.S.$250 million unsecured notes due2007 from triple-B-minus to double-B-plus. In September 2000, Moody’s downgraded GRUMA’s debt from Ba1 to Ba2.  Additionally, in May 2001,Standard & Poor’s lowered our corporate credit rating to double-B fromdouble-B-plus.  AlthoughStandard & Poor’s and Moody’s changed GRUMA’s outlook from negative tostable in April 2002 and June 2002, respectively, Standard &Poor’s changed GRUMA’s outlook from stable to positive in December 2002 andStandard & Poor’s raised our corporate credit rating to double-B-plus inJune 2003, and Standard & Poor’s upgraded GRUMA to BBB- from BB+ witha stable outlook in June 2004, any downgrades or changes in outlook withnegative implications could cause GRUMA’s debt costs to fluctuate which couldultimately affect our stock price.

 

Our indebtedness bearsinterest at fixed and floating rates. At December 31, 2003, approximately 46% of our outstandingindebtedness bore interest at fixed rates and approximately 54% bore interestat floating rates, with 

 

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almost allfloating-rate indebtedness bearing interest based on LIBOR.  Although we hedge our interest rateexposure, we do not hedge our foreign exchange rate exposure because we believethat we have natural foreign exchange hedges incorporated in our balancesheet.  For more information about ourinterest rate and foreign exchange rate exposures, see “Item 11.  Quantitative and Qualitative DisclosuresAbout Market Risk.”

 

As of December 31,2003, we had committed U.S. dollar-denominated long-term lines of credittotaling Ps.787 million (approximately U.S.$70 million) available from banks inthe United States of which none had been drawn.  As of the same date, we also had uncommitted short-term lines ofcredit totaling Ps.3,402 million (approximately U.S.$303 million) availablefrom Mexican and international banks, of which we had drawn Ps.93 million.  As of December 31, 2003, long-termuncommitted revolving lines of credit totaling Ps.1,551 million (approximatelyU.S.$138 million) from Mexican banks were available to us, of which none hadbeen drawn.  Should we elect to utilizethe uncommitted lines of credit, we would have to negotiate the terms andconditions at the time of use.

 

At December 31,2003, we had total outstanding long-term debt aggregating approximatelyPs.5,980 million.  All of ourlong-term debt at such date was dollar-denominated.  Our long-term debt includes U.S.$250 million, or Ps.2,810 million,of principal amount of the 7.625% Notes due 2007, which we issued inOctober 1997.

 

On December 18,2002, we obtained a three-year term syndicated loan from a syndicate of banksfor which Bank of America, N.A. is acting as administrative agent for U.S.$300million at LIBOR plus a spread ranging from 87.5 to 162.5 basis points, basedon our consolidated debt-to-EBITDA ratio. Total proceeds were used to pay the remaining U.S.$300 million portionof our U.S.$400 million syndicated loan due February 2004.  In addition, we used available revolvingcredit facilities at year end to prepay the U.S.$50 million syndicated loan dueFebruary 2003.

 

The syndicated loan isdue in two installments:  U.S.$50million in December 2004 and U.S.$250 million in December 2005.  There is a committed revolving sub-limit ofup to U.S.$100 million which we can repay and reborrow and which will bereduced to U.S.$75 million in December 2004.  The committed revolving sub-limit gives us additional flexibilityto manage our debt.  The syndicated loanalso allowed us to extend average debt maturities and substantially improve ourdebt profile.  We have also achievedinterest expense reductions because interest rates on the new syndicated loan aremore competitive than were those on the previous syndicated loan.  Prepayments to date have been applied to theprincipal payment due in December 2004 and as of June 18, 2004, andwe have paid U.S.$40.0 million of that payment.  As of June 18, 2004, the applicable rate under this facilityis LIBOR plus 1.125%.

 

Some of our creditagreements contain covenants that require us to maintain:

 

a ratio of consolidatedtotal funded debt to EBITDA of not more than 3.5:1; and

 

a ratio of consolidatedEBITDA to consolidated interest charges of not less than 2.50:1.

 

In addition, we may notincur additional indebtedness and may not pay dividends if doing so wouldviolate the terms of these covenants.

 

Gruma Corporation is alsosubject to covenants which limit the amount of dividends that can be paid undercertain circumstances.  Both Gruma, S.A.de C.V. and Gruma Corporation are also subject to covenants which limit theamounts that may be advanced to, loaned to, or invested in, us under certaincircumstances.  In addition, both Gruma,S.A. de C.V. and Gruma Corporation are required to maintain certain financialratios and balances.  Upon theoccurrence of any default or event of default under its credit and leaseagreements, Gruma Corporation generally is prohibited from making any paymentsto us or our other subsidiaries or affiliates. The covenants described above and other covenants could limit our andGruma Corporation’s ability to help support our liquidity and capital resourcerequirements.  We and Gruma Corporationare currently in compliance with all of the covenants contained in the debt andlease agreements.

 

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During 1996, GrumaCorporation entered into several sale-leaseback agreements for variousproduction equipment located in two of its U.S. plants.  These agreements are, under Mexican GAAP,accounted for as operating leases. Under U.S. GAAP, these arrangements would have been accounted for ascapital leases because a continuing involvement from the seller-lessee ispresent, and consequently, the risk and benefits of the property are nottransferred to the buyer-lessor. Average annual rental payments under these leases, expiring in 2011,will be approximately U.S.$3.2 million, based upon the financialstatements for the year ended December 31, 2003.  Each agreement provides Gruma Corporation with a purchase optionto acquire the equipment at fair market value at the expiration of the leases,and also an early purchase option, which permits Gruma Corporation to acquirethe equipment at fair market value approximately three-quarters of the leaseterm.

 

As of December 31,2003, we had total cash and cash equivalents of Ps.370 million, including Ps.1million in restricted cash (U.S. dollars currency).  Restricted cash is comprised primarily of undistributed proceedsfrom tax-exempt industrial development bonds issued by Gruma Corporation heldby a trustee available for future purchases of certain plants and equipment.

 

The following tablepresents our amortization requirements with respect to our total indebtednessas of June 18, 2004.

 
| **Year**             |   | **In  Millions of U.S. Dollars** |   |
|----------------------|--------|----------------------------------|--------|
| 2004                 |   | U.S.$                            | 28     |   |
| 2005                 |   |                             | 255    |   |
| 2006                 |   |                             | 3      |   |
| 2007                 |   |                             | 252    |   |
| 2008                 |   |                             | 2      |   |
| 2009  and thereafter |   |                             | 21     |   |
| Total                |   | U.S.$                            | 561    |   |

 

The following table setsforth our ratios of consolidated debt to total capitalization (i.e.,consolidated debt plus total stockholders’ equity) and consolidated liabilitiesto total stockholders’ equity as of the dates indicated.  For purposes of these ratios, consolidateddebt includes short-term debt.

 
| **Date**                |   | **Ratio of  Consolidated Debt  to Total Capitalization** |   | **Ratio of  Consolidated  Liabilities to Total  Stockholders’ Equity** |   |
|-------------------------|--------|----------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
| December 31,  2002 |   | 0.36                                                     |   | 0.84                                                                        |   |
| December 31,  2003 |   | 0.33                                                     |   | 0.81                                                                        |   |

 

**CapitalExpenditures**

** **

After years ofsignificant growth, we are pursuing a more moderate growth strategy, whichincludes lower levels of capital expenditures in property, plant and equipmentprimarily in connection with our expansion and technology upgrades atmanufacturing facilities.   In 2002, wespent U.S.$64 million on capital expenditures, primarily on technologicalupgrades for our production equipment. In 2003, we spent U.S.$75 million on capital expenditures, primarily oncapacity expansion and technology upgrades. We have budgeted approximately U.S.$100 million for capital expendituresin 2004.  This includes approximatelyU.S.$11 million spent during the first quarter of 2004 for the expansion ofcorn flour and tortilla capacity, as well as general facilities maintenance, inGruma Corporation; transportation equipment in GIMSA and PRODISA; andadditional corn tortilla capacity in PRODISA.

 

We expect to be able tofund our capital expenditures primarily from funds from operations.  We believe that funds from operations andour current bank lines of credit will be sufficient to meet our anticipatedcapital expenditures through the end of this year.

 

**U.S.GAAP RECONCILIATION**

** **

Our consolidatedfinancial statements are prepared in accordance with Mexican GAAP, which differin certain significant respects from U.S. GAAP.  See Note 20 to our audited consolidated financial statements for 

 

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informationrelating to the nature and effect of such differences.  Mexican GAAP financial statements recognizethe effects of inflation, whereas financial statements prepared under U.S. GAAPare presented on a historical cost basis. We are not required to reverse many of the Mexican inflation accountingadjustments when reconciling Mexican GAAP to U.S. GAAP, as these adjustmentsprovide a means of measuring the effects of price-level changes in theinflationary Mexican economy. Accordingly, these inflation-adjusted figures are considered a moremeaningful presentation than historical cost-based financial reporting for bothMexican and U.S. accounting purposes.

 

Net income under U.S.GAAP amounted to Ps.207.8 million in 2001, Ps.322.2 million in 2002 andPs.589.1 million in 2003, compared with majority net income under MexicanGAAP of Ps.361.0 million in 2001, Ps.423.7 million in 2002, and Ps.493.0million in 2003.

 

Stockholders’ equityunder U.S. GAAP amounted to Ps.8,920.4 million in 2002 andPs.9,243.2 million in 2003, compared with stockholders’ equity underMexican GAAP of Ps.12,965.6 million in 2002 and Ps.12,924.8 million in 2003.  See Note 20 to our audited consolidatedfinancial statements for a further discussion of the adjustments under U.S.GAAP.

 

**NewAccounting Standards**

** **

***New AccountingPronouncements under Mexican GAAP***

*** ***

In December 2002,the Mexican Institute of Public Accountants (“MIPA”) issued Bulletin C-15,“Impairment in the Value of Long-Lived Assets and their Disposal” (“BulletinC-15”), which is effective as of January 1, 2004. Bulletin C-15establishes guidance for the identification of certain events that represent evidenceof a potential impairment in long-lived assets, tangible and intangible.Additionally, it provides guidance for the estimation and recognition of lossesfor impairment and their reversal and establishes the requirements ofpresentation and disclosure of impairment losses and discontinued operations.Our management believes that the adoption of Bulletin C-15 will not have asignificant impact on our results of operations or financial condition.

 

In April 2003, theMIPA issued Bulletin C-12, “Financial Instruments with Characteristics ofLiabilities, Equity or Both” (“Bulletin C-12”), which is effective as ofJanuary 1, 2004. Bulletin C-12 establishes standards to classify andmeasure certain financial instruments with characteristics of both, liabilitiesand equity, as well as the disclosure requirements. Our management believesthat the adoption of Bulletin C-12 will not have a significant impact on ourresults of operations or financial condition.

 

In April 2004, theMIPA issued Bulletin C-10, “Derivative financial instruments and hedgeoperations,” which is effective on January 1, 2005, but early adoption isencouraged.  Bulletin C-10 establishes,among other things, the characteristics of derivative financial instruments,the definition and classification of accounting models for hedge operations,the conditions to consider a financial instrument as having hedging purposes,and the recognition, valuation and disclosure guidelines for derivativefinancial instruments.  Our managementis currently evaluating the effective date for the adoption of this standardand its effect on our results of operation and financial position.

 

In May 2004, the MIPAissued Bulletin B-7, “Business Acquisitions” (“Bulletin B-7”) which providesguidance for accounting of business acquisitions and investments in associatedentities. Bulletin B-7 requires that all business acquisitions and investmentsin associates be accounted for by the purchase method of accounting, andsupplements the accounting for the recognition of intangible assets as a partof a business acquisition. Upon adoption of Bulletin B-7, goodwill ceases to beamortized, and is rather tested for impairment at least annually. Bulletin B-7also provides guidance for the acquisition of a minority interest, and for assettransfers and business acquisitions among entities under common control.Bulletin B-7 is effective for periods beginning on January 1, 2005 withearly adoption encouraged. Our management is currently evaluating the effectsthat this Bulletin will have on our financial position and results ofoperations.

 

***Recently Issued U.S.Accounting Standards***

*** ***

In April 2003, theFinancial Accounting Standards Board**(“FASB”)******issued SFAS No. 149,“Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.”  SFAS No. 149 amends and clarifies financial 

 

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accounting andreporting for derivative instruments by requiring that contracts withcomparable characteristics be accounted for similarly.  In particular, this statement clarifies thecircumstances under which a contract with an initial net investment meets thecharacteristics of a derivative, clarifies when a derivative contains afinancing component, amends the definition of an underlying to conform it tothe language used in FIN No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” and amends certain other existing pronouncements.  SFAS No. 149 is effective for contracts enteredinto or modified after June 30, 2003, and for hedging relationshipsdesignated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on theCompany’s consolidated results of operations or financial condition.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity”. The statement requires issuersto classify as liabilities (or assets in some circumstances) three classes offreestanding financial instruments that embody obligations for the issuer.Generally, the statement is effective for financial instruments entered into ormodified after May 31, 2003 and is otherwise effective at the beginning of thefirst interim period beginning after June 15, 2003. The adoption of SFASNo. 150 did not have a material impact on the Company’s consolidated results ofoperations or financial condition.

 

In January 2003, theFASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of VariableInterest Entities, an interpretation of ARB 51”.  The primary objectives of FIN 46 are to provide guidance on theidentification of entities for which control is achieved through means otherthan through voting rights (“variable interest entities” or “VIE”) and how to determinewhen and which business enterprise should consolidate the VIE (the “primarybeneficiary”).  This new model forconsolidation applies to an entity which either (1) the equity investors (ifany) do not have a controlling financial interest or (2) the equity investmentat risk is sufficient to finance that entity’s activities without receivingadditional subordinated financial support from other parties.  In addition, FIN 46 requires that both theprimary beneficiary and all other enterprises with a significant variableinterest in a VIE make additional disclosures. FIN 46 applies immediately to variable interest entities created afterJanuary 31, 2003, and to variable interest entities in which an enterpriseobtains an interest after that date.  Itapplies in the first fiscal year or interim period beginning afterJune 15, 2003, to variable interest entities in which an enterprise holdsa variable interest that it acquired before February 1, 2003.  FIN 46 applies to public enterprises as ofthe beginning of the applicable interim or annual period, and it applies tononpublic enterprises as of the end of the applicable annual period. InDecember 2003, the FASB redeliberated certain proposed modifications andrevised FIN 46 (“FIN 46-R”). The revised provisions are applicable no laterthan the first reporting period ending after March 15, 2004. The Companydoes not expect that the adoption of FIN 46 and FIN 46-R will have a materialimpact on its financial statements.

 

**RESEARCHAND DEVELOPMENT**

** **

While our businessdoes not depend heavily on development of new technologies, we continuouslyengage in research and development activities that focus on, among otherthings: increasing the efficiency of our proprietary corn flour and tortillaproduction technology; maintaining high product quality; developing new andimproved products and manufacturing equipment; increasing the shelf life ofcertain corn and wheat products; improving and expanding our informationtechnology system; engineering, plant design and construction; and compliancewith environmental regulations.  We haveobtained 40 patents in the United States since 1968, five of which wereobtained during the last three years. We currently have four patents in registration.  Two of our patents are published.  Twenty-one of these patents are in force andeffect as of the date hereof and the rest have expired.

 

During the years endedDecember 31, 2001, 2002 and 2003, we spent Ps.23 million, Ps.10 million,and Ps.3 million, respectively, on research and development activities.  For more information about our research anddevelopment activities, see “Item 4. Information on the Company—Description of Business—Miscellaneous—INTASA—Technologyand Equipment Operations.”

 

**TRENDINFORMATION**

** **

Our financial results willlikely continue to be influenced by factors such as changes in the level ofconsumer demand for tortillas and corn flour, government policies regarding theMexican tortilla and corn flour industry, and the cost of corn and wheat.  In addition, we expect our financial resultsin 2004 to be influenced by:

 

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increased competitionfrom traditional tortilla manufacturers, which could limit our ability to grow;

 

exchange ratefluctuations, particularly increases and decreases in the value of the Mexicanpeso relative to the Venezuelan bolívar and U.S. dollar;

 

civil and politicalunrest in Venezuela which may negatively affect the profitability of ourVenezuelan Operations and our ability to repatriate dividends from ourVenezuelan Operations; and

 

increases in Mexican foodconsumption by the non-Hispanic population in the United States as well asprojected increases in Mexican food consumption in Europe and Asia, each ofwhich could increase sales.

 

## **ITEM 6**.                                                     Directors,Senior Management and Employees.

## ** **

**MANAGEMENTSTRUCTURE**

** **

Our management is vestedin our board of directors.  Our day today operations are handled by our executive officers.

 

**Directors**

** **

Our bylaws require thatour board of directors be composed of a minimum of five and a maximum of twentydirectors, as decided at our Ordinary General Shareholders’ Meeting. Pursuantto Mexican law, at least 25% of the members of the board of directors must beindependent.  Under our bylaws and theArcher-Daniels-Midland association, as long as Archer-Daniels-Midland owns atleast 20% of our capital stock, it will have the right to designate two of ourdirectors and their corresponding alternates. Archer-Daniels-Midland has designated Allen Andreas, its Chairman andChief Executive Officer, and Paul Mulhollem, its President and Chief OperatingOfficer, as members of our board of directors. Archer-Daniels-Midland has elected David J. Smith, its Senior VicePresident, Secretary, and General Counsel, and Douglas J. Schmalz, itsSenior Vice President and Chief Financial Officer, to serve as alternates forMr. Andreas and Mr. Mulhollem, respectively.  In addition, under Mexican law, any holder or group of holdersrepresenting 10% or more of our capital stock may elect one director and itscorresponding alternate.

 

The board of directors,which was elected at the Ordinary General Shareholders’ Meeting held onApril 30, 2004, currently consists of 14 directors, with each directorhaving a corresponding alternate director. The following table sets forth the current members of our board ofdirectors, their ages, years of service, principal occupations, outsidedirectorships, other business activities and experience, their directorshipclassifications as defined in the Code of Best Corporate Practices promulgatedby a committee formed by the Mexican Entrepreneur Coordinating Board (*ConsejoCoordinador Empresarial*), and their alternates.  The terms of their directorships are for oneyear or until their appointed successors take office. José de la Peña yAngelini, an alternate member of our board of directors, is also an employee ofGRUMA.  Under his service contract withGRUMA, if he is terminated without cause before September 1, 2005, he isentitled to receive as severance an amount not lower than 50% of his baseannual salary, including his Christmas bonus. Jairo Senise, another alternate member of our board of directors is anemployee of GRUMA as well.  Under hisservice contract with GRUMA, if he is terminated without cause beforecompleting thirty-six months of service, which period ends on August 12,2005, he is entitled to receive as severance, a lump sum payment equivalent towhat he would have received for the rest of such period if he would havecontinue working for GRUMA, but in no event, can such sum be lower than 12months of his monthly base salary.  Noother current director or alternate director has service contracts with usproviding for benefits upon termination of employment. 

 
| Roberto González  Barrera |   | Age:                   |   | 73                                                                                         |
|--------------------------------|--------|------------------------|--------|--------------------------------------------------------------------------------------------|
|                           |   | Years as Director:     |   | 22                                                                                         |
|                           |   | Principal Occupation:  |   | Chairman of the board  of directors and Chief Executive Officer of GRUMA and GIMSA         |
|                           |   | Outside Directorships: |   | Chairman of the board  of directors of Grupo Financiero Banorte, S.A. de C.V., since 1992. |
|                           |   | Directorship Type:     |   | Shareholder, related                                                                       |
|                           |   | Alternate:             |   | Juan A. Quiroga García                                                                |
|                           |   |                   |   |                                                                                       |
| Allen Andreas                  |   | Age:                   |   | 60                                                                                         |
|                           |   | Years as Director:     |   | 7                                                                                          |

 

53

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|                                |   | Principal Occupation:  |   | Chairman and Chief  Executive Officer of Archer-Daniels-Midland Company                                                                                                                                                                                                                                                                                                       |
|-------------------------------------|--------|------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |   | Outside Directorships: |   | Member of the  Supervisory Board of the A.C. Toepfer International Group, Agricore United,  the Trilateral Commission, and the International Council on Agriculture, Food  and Trade, Member of the European Advisory Board of the Carlyle Group and a  Member of advisory boards of various other business operations in Latin  America, Europe and the Asia-Pacific region. |
|                                |   | Business Experience:   |   | Chief Financial Officer  of European Operations and Vice President and Counsel to the Executive  Committee of Archer-Daniels-Midland Company. Attorney for the United States  Treasury Department, and member of the Bar of the State of Colorado and the  American Bar Association.                                                                                          |
|                                |   | Directorship Type:     |   | Shareholder,  independent                                                                                                                                                                                                                                                                                                                                                     |
|                                |   | Alternate:             |   | David J. Smith                                                                                                                                                                                                                                                                                                                                                                |
|                                |   |                   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| Juan Antonio González  Moreno  |   | Age:                   |   | 46                                                                                                                                                                                                                                                                                                                                                                            |
|                                |   | Years as Director:     |   | 1                                                                                                                                                                                                                                                                                                                                                                             |
|                                |   | Principal Occupation:  |   | Senior Vice President  of Special Projects at the tortilla business of Gruma Corporation                                                                                                                                                                                                                                                                                      |
|                                |   | Business Experience:   |   | Several management positions  within GRUMA, including President of the corn flour operations of Gruma  Corporation and Chief Operating Officer of GIMSA.                                                                                                                                                                                                                      |
|                                |   | Directorship Type:     |   | Related                                                                                                                                                                                                                                                                                                                                                                       |
|                                |   | Alternate:             |   | Jairo Senise                                                                                                                                                                                                                                                                                                                                                                  |
|                                |   |                   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| Roberto González Moreno        |   | Age:                   |   | 52                                                                                                                                                                                                                                                                                                                                                                            |
|                                |   | Years as Director:     |   | 17                                                                                                                                                                                                                                                                                                                                                                            |
|                                |   | Principal Occupation:  |   | Chairman of the board  of directors of Corporación Noble, S.A. de C.V., and Noble Marketing  International, Inc.                                                                                                                                                                                                                                                         |
|                                |   | Other Directorships:   |   | Member of the Board of  GIMSA and Banco Mercantil del Norte, S.A.                                                                                                                                                                                                                                                                                                             |
|                                |   | Business Experience:   |   | Several management  positions within GRUMA, including Chief Operating Officer of GIMSA and  Director of GRUMA’s former Fast Food Division. President of RGM Inc.,  Exportaciones El Parián, S.A.                                                                                                                                                                    |
|                                |   | Directorship Type:     |   | Related                                                                                                                                                                                                                                                                                                                                                                       |
|                                |   | Alternate:             |   | José de la Peña y  Angelini                                                                                                                                                                                                                                                                                                                                         |
|                                |   |                   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| Carlos Hank Rhon                    |   | Age:                   |   | 56                                                                                                                                                                                                                                                                                                                                                                            |
|                                |   | Years as Director:     |   | 10                                                                                                                                                                                                                                                                                                                                                                            |
|                                |   | Principal Occupation:  |   | Chairman of Grupo  Financiero Interacciones, S.A. de C.V.                                                                                                                                                                                                                                                                                                                     |
|                                |   | Outside Directorships: |   | Chairman of Grupo  Hermes, S.A. de C.V.                                                                                                                                                                                                                                                                                                                                       |
|                                |   | Business Experience:   |   | Grupo Financiero Interacciones,  S.A. de C.V., Grupo Hermes S.A. de C.V., The Laredo National Bank, South  Texas National Bank and Chairman of Mercedes Benz México, S.A. de C.V.                                                                                                                                                                                        |
|                                |   | Directorship Type:     |   | Related                                                                                                                                                                                                                                                                                                                                                                       |
|                                |   | Alternate:             |   | Gerardo S. Vargas Ateca                                                                                                                                                                                                                                                                                                                                                       |
|                                |   |                   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| Roberto Hernández Ramírez |   | Age:                   |   | 62                                                                                                                                                                                                                                                                                                                                                                            |
|                                |   | Years as Director:     |   | 9                                                                                                                                                                                                                                                                                                                                                                             |
|                                |   | Principal Occupation:  |   | Chairman of the board  of directors of Banco Nacional de México, S.A. and Acciones y Valores de  Mexico, S.A. de C.V.                                                                                                                                                                                                                                                    |
|                                |   | Outside Directorships: |   | Member of the board of  directors of Grupo Televisa, S.A. de C.V., Ingenieros Civiles Asociados, S.A.  (ICA), Grupo Modelo, S.A. de C.V.                                                                                                                                                                                                                                      |

 

54

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|                                 |   | Business Experience:   |   | Chief Executive Officer  of Banco Nacional de México, S.A. and Grupo Financiero Banamex-Accival, S.A.  de C.V., Chairman of the board of directors of Grupo Financiero  Banamex-Accival, S.A. de C.V., Chairman of the Mexican Stock Exchange,  Chairman of the Mexican Banking Association, Member of the board of directors  of Teléfonos de México, S.A. de C.V. |
|--------------------------------------|--------|------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                                                                                        |
|                                 |   | Alternate:             |   | Esteban Malpica  Fomperosa                                                                                                                                                                                                                                                                                                                                                         |
|                                 |   |                   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| Juan Manuel Ley López           |   | Age:                   |   | 71                                                                                                                                                                                                                                                                                                                                                                                 |
|                                 |   | Years as Director:     |   | 10                                                                                                                                                                                                                                                                                                                                                                                 |
|                                 |   | Principal Occupation:  |   | Chairman of Casa Ley,  S.A. de C.V.                                                                                                                                                                                                                                                                                                                                                |
|                                 |   | Outside Directorships: |   | Chairman of the Sinaloa-Baja  California Consultant Council of Grupo Financiero Banamex-Accival and the  National Association of Supermarket and Retail Stores (ANTAD), and member of  the board of directors of Grupo Financiero Banamex Accival, S.A. de C.V. and  Telefonos de Mexico, S.A. de C.V.                                                                             |
|                                 |   | Business Experience:   |   | Chief Executive Officer  of Casa Ley, S.A. de C.V., consultant and instructor for junior business  management at “Junior Business Management Institute” (ICAMI-SINALOA)                                                                                                                                                                                                  |
|                                 |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                                                                                        |
|                                 |   | Alternate:             |   | Francisco Villarreal  Vizcaíno                                                                                                                                                                                                                                                                                                                                                |
|                                 |   |                   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| Eduardo Livas Cantú             |   | Age:                   |   | 61                                                                                                                                                                                                                                                                                                                                                                                 |
|                                 |   | Years as Director:     |   | 18                                                                                                                                                                                                                                                                                                                                                                                 |
|                                 |   | Principal Occupation:  |   | Consultant on financial  and strategic issues and mergers and acquisitions, Member of the Board of  GIMSA, Chairman and Member of the audit committee of GRUMA and Member of the  audit committee and risk policy committee of Grupo Financiero Banorte, S.A.  de C.V.                                                                                                             |
|                                 |   | Outside Directorships: |   | Member of the board of  directors of Grupo Financiero Banorte, S.A. de C.V., and Banco Mercantil del  Norte, S.A., Bancentro, S.A. de C.V. and GIMSA.                                                                                                                                                                                                                              |
|                                 |   | Business Experience:   |   | Several positions  within GRUMA including Chief Financial Officer, President of Gruma  Corporation, Chief Executive Officer of GRUMA and GIMSA                                                                                                                                                                                                                                     |
|                                 |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                                                                                        |
|                                 |   | Alternate:             |   | Alfredo Livas Cantú                                                                                                                                                                                                                                                                                                                                                           |
|                                 |   |                   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| Román Martínez Méndez |   | Age:                   |   | 66                                                                                                                                                                                                                                                                                                                                                                                 |
|                                 |   | Years as Director:     |   | 2                                                                                                                                                                                                                                                                                                                                                                                  |
|                                 |   | Principal Occupation:  |   | President of Internal Auditing of Grupo Financiero Banorte, S.A. de  C.V.                                                                                                                                                                                                                                                                                                          |
|                                 |   | Outside Directorships: |   | Member of the board of directors of GIMSA, Grupo Calider, S.A. de  C.V., Operadora de Fondos de Inversión, S.A. de C.V.                                                                                                                                                                                                                                                       |
|                                 |   | Business Experience:   |   | Several management  positions within GRUMA, including Chief Internal Auditing Officer and  Vice-President of Controllership and Auditing                                                                                                                                                                                                                                           |
|                                 |   | Directorship Type:     |   | Related                                                                                                                                                                                                                                                                                                                                                                            |
|                                 |   | Alternate:             |   | Raúl Cavazos Morales                                                                                                                                                                                                                                                                                                                                                          |
|                                 |   |                   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| Paul B. Mulhollem                    |   | Age:                   |   | 54                                                                                                                                                                                                                                                                                                                                                                                 |
|                                 |   | Years as Director:     |   | 2                                                                                                                                                                                                                                                                                                                                                                                  |
|                                 |   | Principal Occupation:  |   | President and Chief  Operating Officer of Archer-Daniels-Midland Company.                                                                                                                                                                                                                                                                                                          |
|                                 |   | Outside Directorships: |   | Member of Agricore  United, A.C.Toepfer International, National Future Farmers of America and the  Carle Foundation                                                                                                                                                                                                                                                                |

 

55

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|                           |   | Business Experience:   |   | Several management  positions within Archer-Daniels-Midland Company, including Group Vice President  and Senior Vice President of Archer-Daniels-Midland Company’s Global Grain  Operations                                                                                                                   |
|--------------------------------|--------|------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |   | Directorship Type:     |   | Shareholder,  independent                                                                                                                                                                                                                                                                                          |
|                           |   | Alternate:             |   | Douglas J. Schmalz                                                                                                                                                                                                                                                                                                 |
|                           |   |                   |   |                                                                                                                                                                                                                                                                                                               |
| Bernardo Quintana Isaac        |   | Age:                   |   | 62                                                                                                                                                                                                                                                                                                                 |
|                           |   | Years as Director:     |   | 9                                                                                                                                                                                                                                                                                                                  |
|                           |   | Principal Occupation:  |   | Chairman of the board  of directors of Empresas ICA, Sociedad Controladora.                                                                                                                                                                                                                                        |
|                           |   | Outside Directorships: |   | Member of the board of  directors of Teléfonos de México, S.A. de C.V., Cementos Mexicanos, S.A. de  C.V., Grupo Carso, S.A. de C.V.                                                                                                                                                                     |
|                           |   | Business Experience:   |   | Executive Vice  President and Vice President of the Tourist and Urban Development Division  for Grupo ICA                                                                                                                                                                                                          |
|                           |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                        |
|                           |   | Alternate:             |   | Diego Quintana Kawage                                                                                                                                                                                                                                                                                              |
|                           |   |                   |   |                                                                                                                                                                                                                                                                                                               |
| Alfonso Romo Garza             |   | Age:                   |   | 53                                                                                                                                                                                                                                                                                                                 |
|                           |   | Years as Director:     |   | 10                                                                                                                                                                                                                                                                                                                 |
|                           |   | Principal Occupation:  |   | Chairman and Chief  Executive Officer of Savia, S.A. de C.V. and Seminis Inc., Chairman of ING  Mexico.                                                                                                                                                                                                            |
|                           |   | Outside Directorships: |   | Member of board of  Cementos Mexicanos, S.A. de C.V., Nacional de Drogas, Grupo Comercial  Chedraui, Member of World Bank’s External Advisory Board for Latin America  and the Caribbean, member of the board of directors of Donald Danforth Plant  Science Center.                                          |
|                           |   | Business Experience:   |   | Director of Strategic  Planning and Corporate Development of Visa-Femsa. Founder of Pulsar  International, S.A. de C.V.                                                                                                                                                                                            |
|                           |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                        |
|                           |   | Alternate:             |   | Adrián Rodríguez Macedo                                                                                                                                                                                                                                                                                  |
|                           |   |                   |   |                                                                                                                                                                                                                                                                                                               |
| Adrián Sada González |   | Age:                   |   | 59                                                                                                                                                                                                                                                                                                                 |
|                           |   | Years as Director:     |   | 10                                                                                                                                                                                                                                                                                                                 |
|                           |   | Principal Occupation:  |   | Chairman of the board  of directors of Vitro, S.A. de C.V.                                                                                                                                                                                                                                                         |
|                           |   | Outside Directorships: |   | Member of the board of  directors of ALFA, S.A. de C.V., Cydsa, S.A. de C.V., and Regio Empresas S.A.  de C.V., member of the Latin American Executive Board for the University of  Pennsylvania’s Wharton School of Finance.                                                                                 |
|                           |   | Business Experience:   |   | President of the  Administrative Board of Grupo Financiero Serfin, S.A. de C.V.                                                                                                                                                                                                                                    |
|                           |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                        |
|                           |   | Alternate:             |   | Manuel Güemes de la  Vega                                                                                                                                                                                                                                                                                     |
|                           |   |                   |   |                                                                                                                                                                                                                                                                                                               |
| Javier Vélez Bautista     |   | Age:                   |   | 47                                                                                                                                                                                                                                                                                                                 |
|                           |   | Years as Director:     |   | 2                                                                                                                                                                                                                                                                                                                  |
|                           |   | Principal Occupation:  |   | Managing Director of  Value Link Strategic Management.                                                                                                                                                                                                                                                             |
|                           |   | Outside Directorships: |   | Member of the board of  directors of GIMSA, Alternate member of Grupo Financiero Banorte, S.A. de  C.V. and Banco Mercantil del Norte, S.A. Member of the audit committees of  GIMSA and Grupo Financiero Banorte, S.A. de C.V. Member of the risk  management committee of Grupo Financiero Banorte, S.A. de C.V. |
|                           |   | Business Experience:   |   | Several management  positions within GRUMA including Director of Finance and Planning of Gruma Corporation,  Chief Financial Officer and Chief of Staff of GRUMA                                                                                                                                                   |
|                           |   | Directorship Type:     |   | Independent                                                                                                                                                                                                                                                                                                        |
|                           |   | Alternate:             |   | Sergio García Boulle                                                                                                                                                                                                                                                                                          |

 

56

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Mr. Roberto GonzálezMoreno and Mr. Juan Antonio González Moreno are the sons of Mr. RobertoGonzález Barrera.  Mr. Carlos Hank Rhonis the son-in-law of Mr. Roberto González Barrera.

 

**Secretary**

** **

The secretary of theboard of directors is Mr. Salvador Vargas Guajardo, and his alternate is Mr.Guillermo Elizondo Ríos.  Mr. VargasGuajardo is not a member of the board of directors.

 

**SeniorManagement**

** **

The following table setsforth our executive officers, their ages, years of service, current positions,and prior business experience:

 
| Roberto González  Barrera    |   | Age:                         |   | 73                                                                                                                                                                                                                                                                          |
|-----------------------------------|--------|------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              |   | Years as Executive  Officer: |   | 55                                                                                                                                                                                                                                                                          |
|                              |   | Years at GRUMA:              |   | 55                                                                                                                                                                                                                                                                          |
|                              |   | Current Position:            |   | Chairman of the board  of directors and Chief Executive Officer of GRUMA                                                                                                                                                                                                    |
|                              |   | Other Positions:             |   | Chief Executive Officer  and Chairman of the board of directors of GIMSA, Chairman of the board of  directors of Grupo Financiero Banorte, S.A. de C.V.                                                                                                                     |
|                              |   |                         |   |                                                                                                                                                                                                                                                                        |
| Rafael Abreu                      |   | Age:                         |   | 35                                                                                                                                                                                                                                                                          |
|                              |   | Years as Executive  Officer: |   | Since April 2004                                                                                                                                                                                                                                                       |
|                              |   | Years at GRUMA:              |   | 8                                                                                                                                                                                                                                                                           |
|                              |   | Current Position:            |   | President, Gruma  Centroamérica.                                                                                                                                                                                                                                       |
|                              |   | Business Experience:         |   | Several positions  within Gruma Centroamérica, including Vice President of the corn flour and  tortilla operations                                                                                                                                                     |
|                              |   |                         |   |                                                                                                                                                                                                                                                                        |
| Leonel Garza Ramírez         |   | Age:                         |   | 54                                                                                                                                                                                                                                                                          |
|                              |   | Years as Executive  Officer: |   | 5                                                                                                                                                                                                                                                                           |
|                              |   | Years at GRUMA:              |   | 18                                                                                                                                                                                                                                                                          |
|                              |   | Current Position:            |   | Chief Procurement  Officer.                                                                                                                                                                                                                                                 |
|                              |   | Business Experience:         |   | Manager of Quality and  Corn Procurement and Vice President of Corn Procurement at GRUMA.                                                                                                                                                                                   |
|                              |   |                         |   |                                                                                                                                                                                                                                                                        |
| Roberto González Alcalá |   | Age:                         |   | 40                                                                                                                                                                                                                                                                          |
|                              |   | Years as Executive  Officer: |   | 2                                                                                                                                                                                                                                                                           |
|                              |   | Years at GRUMA:              |   | 9                                                                                                                                                                                                                                                                           |
|                              |   | Current Position:            |   | Chief Operating Officer  of GRUMA’s Mexican Operations (GIMSA, Molinera de México and PRODISA).                                                                                                                                                                   |
|                              |   | Business Experience:         |   | Several positions  within GRUMA’s Central American operations, including Chief Operating  Officer, President of the Tortilla Division in Costa Rica. President of the  Corn Flour Division in Central America; experience in marketing sales and  manufacturing areas. |
|                              |   |                         |   |                                                                                                                                                                                                                                                                        |
| Homero Huerta Moreno              |   | Age:                         |   | 41                                                                                                                                                                                                                                                                          |
|                              |   | Years as Executive  Officer: |   | 2                                                                                                                                                                                                                                                                           |
|                              |   | Years at GRUMA:              |   | 19                                                                                                                                                                                                                                                                          |
|                              |   | Current Position:            |   | Chief Administrative  Officer.                                                                                                                                                                                                                                              |
|                              |   | Business Experience:         |   | Various positions  within GRUMA including finance and administrative vice president of GRUMA  Venezuela.                                                                                                                                                                    |
|                              |   |                         |   |                                                                                                                                                                                                                                                                        |
| Enrique Orjuela Rincón       |   | Age:                         |   | 54                                                                                                                                                                                                                                                                          |
|                              |   | Years as Executive  Officer: |   | 5                                                                                                                                                                                                                                                                           |
|                              |   | Years at GRUMA:              |   | 5                                                                                                                                                                                                                                                                           |
|                              |   | Current Position:            |   | Chief Operating Officer  of MONACA.                                                                                                                                                                                                                                         |

 

57

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|                                 |   | Business Experience:         |   | Vice President and  Chief Executive Officer of Coca-Cola Services in Venezuela, Chief Executive  Officer of Kellogg’s Venezuela and Andean Region, marketing positions at  Pepsi-Cola, Warner-Lambert and Quaker.                                   |
|--------------------------------------|--------|------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |   |                         |   |                                                                                                                                                                                                                                                     |
| José de la Peña y Angelini |   | Age:                         |   | 55                                                                                                                                                                                                                                                       |
|                                 |   | Years as Executive  Officer: |   | 1                                                                                                                                                                                                                                                        |
|                                 |   | Years at GRUMA:              |   | 1                                                                                                                                                                                                                                                        |
|                                 |   | Current Position:            |   | President of GRUMA’s  Latin American Operations.                                                                                                                                                                                                    |
|                                 |   | Business Experience:         |   | Executive Vice  President Sales and Marketing of GRUMA, top management positions at  Colgate-Palmolive, senior positions at Chrysler de México, President of the  Mexico office of FCB Worldwide.                                                   |
|                                 |   |                         |   |                                                                                                                                                                                                                                                     |
| Juan Antonio Quiroga García     |   | Age:                         |   | 54                                                                                                                                                                                                                                                       |
|                                 |   | Years as Executive  Officer: |   | 6                                                                                                                                                                                                                                                        |
|                                 |   | Years at GRUMA:              |   | 31                                                                                                                                                                                                                                                       |
|                                 |   | Current Position:            |   | Chief Corporate Officer                                                                                                                                                                                                                                  |
|                                 |   | Other Positions:             |   | Senior Corporate  Controller of GIMSA                                                                                                                                                                                                                    |
|                                 |   | Business Experience:         |   | Vice President of  Administration of Gruma Corporation, Chief Administrative and Internal  Auditing Officer of GRUMA.                                                                                                                                    |
|                                 |   |                         |   |                                                                                                                                                                                                                                                     |
| Felipe Rubio Lamas                   |   | Age:                         |   | 46                                                                                                                                                                                                                                                       |
|                                 |   | Years as Executive  Officer: |   | Since August 2003                                                                                                                                                                                                                                   |
|                                 |   | Years at GRUMA:              |   | 21                                                                                                                                                                                                                                                       |
|                                 |   | Current Position:            |   | Chief Technology  Officer.                                                                                                                                                                                                                               |
|                                 |   | Business Experience:         |   | Several managerial and  Vice President positions within GRUMA Corporation related to manufacturing  processes and design and construction of production facilities.                                                                                      |
|                                 |   |                         |   |                                                                                                                                                                                                                                                     |
| Jairo Senise                         |   | Age:                         |   | 48                                                                                                                                                                                                                                                       |
|                                 |   | Years as Executive  Officer: |   | 1                                                                                                                                                                                                                                                        |
|                                 |   | Years at GRUMA:              |   | 1                                                                                                                                                                                                                                                        |
|                                 |   | Current Position:            |   | President and Chief  Executive Officer of Gruma Corporation.                                                                                                                                                                                             |
|                                 |   | Business Experience:         |   | Regional Vice President  and Managing Director of Europe and Eurasia and Regional Vice President of  Latin America/South Africa for the Pillsbury Company/General Mills; positions  at CPC International/Best Foods, S.C. Johnson and Colgate-Palmolive. |
|                                 |   |                         |   |                                                                                                                                                                                                                                                     |
| Salvador Vargas Guajardo             |   | Age:                         |   | 51                                                                                                                                                                                                                                                       |
|                                 |   | Years as Executive  Officer: |   | 8                                                                                                                                                                                                                                                        |
|                                 |   | Years at GRUMA:              |   | 8                                                                                                                                                                                                                                                        |
|                                 |   | Current Position:            |   | General Counsel.                                                                                                                                                                                                                                         |
|                                 |   | Other Positions:             |   | General Counsel of  GIMSA.                                                                                                                                                                                                                               |
|                                 |   | Business Experience:         |   | Positions at Grupo Alfa, Protexa and Proeza, senior partner of two law  firms, including Rojas-González-Vargas-De la Garza y Asociados.                                                                                                             |

 

Mr. Oscar EnriqueUrdaneta Finol is the Chief Operating Officer of DEMASECA since he wasappointed based upon an agreement with our partners in DEMASECA.

 

Mr. Roberto GonzálezAlcalá is a son of Mr. Roberto González Barrera.

 

**StatutoryAuditor**

** **

Under Mexican law, astatutory auditor must be elected by our shareholders at the annual ordinarygeneral shareholders meeting for a term of one year.  At the subsequent annual ordinary general shareholders meeting,the statutory auditor is required to review our affairs and report as to theaccuracy of the financial information as 

 

58

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presented toshareholders by the board of directors. The statutory auditor is also authorized (i) to call ordinary generalshareholders meetings, extraordinary general shareholders meetings and board ofdirectors meetings; (ii) to place items on the agenda for general shareholdersmeetings and meetings of the board of directors; and (iii) to attend generalshareholders meetings, meetings of the board of directors, meetings of theaudit committee, and any other meetings of intermediate committees to which theboard of directors delegates any activities (without the right to vote).  At the General Ordinary Shareholders’Meeting held on April 30, 2004, Mr. Hugo Lara Silva was reelected to serveas our Statutory Auditor for one year. His alternate is Mr. Carlos Arreola Enríquez.

 

Mr. Hugo Lara Silva is 64years old.  He is a retired co-directorof and partner in PricewaterhouseCoopers and was a member of the board ofdirectors, the international executive audit committee and the general partnercounsel of that firm.  Mr. Hugo LaraSilva has experience with a wide variety of businesses in the public andprivate sectors and has been the statutory auditor for companies such as GrupoModelo, S.A. de C.V., Ciba-Geigy Mexicana, S.A. de C.V., El Puerto deLiverpool, S.A. de C.V., Grupo Financiero Bancomer, S.A. de C.V., GrupoMexicano Somex, S.N.C. and Aseguradora Cuauhtémoc, S.A., among others.

 

**AuditCommittee**

** **

As required by ourbylaws, an audit committee was appointed at the General Ordinary Shareholders’Meeting held on April 30, 2004. Members of the audit committee were selected from members of the boardof directors.  The current auditcommittee is comprised of three members, two of whom are independentdirectors.  Set forth below are thenames of our audit committee members, their positions within the committee, andtheir directorship type:

 
| Eduardo Livas Cantú             |   | Position:          |   | Chairman of the Audit  Committee         |
|--------------------------------------|--------|--------------------|--------|------------------------------------------|
|                                 |   | Directorship Type: |   | Independent                              |
|                                 |   |               |   |                                     |
| Javier Vélez Bautista           |   | Position:          |   | Financial Expert of the  Audit Committee |
|                                 |   | Directorship Type: |   | Independent                              |
|                                 |   |               |   |                                     |
| Román Martínez Méndez |   | Position:          |   | Member of the Audit  Committee           |
|                                 |   | Directorship Type: |   | Related                                  |

 

**Compensationof Directors and Senior Management**

** **

Members of the board ofdirectors are paid a fee of Ps.14,500 for each board meeting they attend.

 

For 2003, the aggregateamount of compensation paid to all directors, alternate directors, thestatutory auditor, executive officers and audit committee members wasapproximately Ps. 114.9 million (in nominal terms).  The contingent or deferred compensation reserved as ofDecember 31, 2003 was Ps. 15.7 million (in nominal terms).

 

We offer an ExecutiveBonus Plan that is based on individual performance and on the results of ouroperations.  This program applies tomanagers, vice presidents, and executive officers.  This variable compensation can range from 15% to 32% of annualbase compensation, depending upon the employee’s level.

 

**ShareOwnership**

** **

The following Directorsand Senior Managers have GRUMA shares which in each case represent less than 1%of our capital stock:   Mr. RaúlCavazos Morales, Mr. Homero Huerta, Mr. Román Martínez Méndez, Mr.Jairo Senise and Mr. Juan Antonio Quiroga García.  In addition, Mr. Roberto GonzálezBarrera owns directly and indirectly 212,401,460 shares representing approximately47.1% of our capital stock and Mr. Juan Antonio González Moreno owns 5,758,556shares representing approximately 1.3% of our capital stock.

 

**EMPLOYEES**

** **

As of December 31,2003, we had a total of approximately 15,104 employees, including unionized(5,089) and non-unionized (10,015), full- and part-time employees.  Of this total, we employed approximately6,585 persons

 

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in Mexico, 4,947in the United States, 1,415 in Central America, 1,898 in Venezuela and 259 inEngland.  Total employees for 2002 and2001 were 14,887 and 15,585, respectively. Of our total employees as of December 31, 2003, approximately 42%were white-collar and 58% were blue-collar.

 

In Mexico, workers ateach of our plants are covered by a separate contract, under which salaryrevisions take place once each year, usually in January or February.  Non-salary provisions of these contracts arerevised bi-annually.  We renewedagreements with the three unions that represent our workers in 2002 and2003.  In the United States, GrumaCorporation has four collective bargaining agreements that represent a total of461 workers at four separate facilities. We renewed and ratified one collective bargaining agreement in 2003 andwere in the process of negotiating a fifth contract in 2003, but an agreementcould not be reached with respect to the fifth contract.  Salary reviews are done once each year,usually in March, for Mission Foods and in September for Azteca MillingL.P.  Non-salary provisions of thesecontracts are revised according to the terms of the particular contract.  We believe our current labor relations aresatisfactory.

 

## **ITEM 7**.                                                     MajorShareholders And Related Party Transactions.

 

**MAJORSHAREHOLDERS**

** **

The following table setsforth certain information regarding the beneficial ownership of our capitalstock as of April 30, 2004 (which consists entirely of Series B Shares)with respect to Mr. González Barrera and Archer-Daniels-Midland and itsaffiliates, the only shareholders we know to own beneficially more than 5% ofour capital stock, as well as our directors and executive officers as a groupand other shareholders.  See“Item 9.  The Offer and Listing”for further discussion of our capital stock. With the exception of Archer-Daniels-Midland’s right to appoint twomembers of our board of directors, and their corresponding alternates, themajor shareholders do not have different or preferential voting rights withrespect to those shares they own. 

 
| **Name**                           |   | **Number of  Series B Shares** |   | **Percentage  of  Outstanding Shares** |   |
|------------------------------------|--------|--------------------------------|--------|----------------------------------------|--------|
| Roberto  González Barrera (1) |   | 212,401,460                    |   | 47.1                                   | %      |
| Archer-Daniels-Midland  (2)        |   | 130,901,630                    |   | 29.1                                   | %      |
| Directors  and Officers as a Group |   | 6,842,308                      |   | 1.5                                    | %      |
| Other  shareholders                |   | 100,314,345                    |   | 22.3                                   | %      |
|                               |   |                           |   |                                   |   |
| Total                              |   | 450,459,743                    |   | 100.0                                  | %      |

 

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(1)          The shares beneficially owned by Mr. González Barrerainclude:  182,375,664 shares helddirectly by Mr. González Barrera; and 30,025,796 shares held by him through aMexican corporation jointly owned with Archer-Daniels-Midland and controlled byhim.

 

(2)          Of the shares beneficially owned byArcher-Daniels-Midland, a portion are held through its Mexican subsidiary, and24,566,561 shares are held through a Mexican corporation jointly owned with Mr.González Barrera and controlled by Mr. González Barrera.  Mr. González Barrera has sole authority todetermine how these shares are voted, and the shares cannot be transferredwithout the consent of both Archer-Daniels-Midland and Mr. González Barrera.

 

Mr. González Barreracontrols approximately 52.6% of our capital stock and therefore has the powerto elect a majority of our 14 directors. In addition, under Mexican law, any holder or group of holdersrepresenting 10% or more of our capital stock may elect one Director.  Under our bylaws and theArcher-Daniels-Midland association, as long as Archer-Daniels-Midland owns atleast 20% of our capital stock, it will have the right to designate two membersof our board of directors and their corresponding alternates.

 

Under the terms of ouragreement, Archer-Daniels-Midland may not, without the consent of Mr. RobertoGonzález Barrera, the Chairman of our board of directors and Chief ExecutiveOfficer, or our board of directors, acquire additional shares of us.  On September 30, 1999, we completed arights offering to shareholders in Mexico and ADS holders in the UnitedStates.  With the authorization of Mr.González Barrera, Archer-Daniels-Midland directly and indirectly purchased atotal of 51,408,337 new shares, increasing its direct and indirect ownership ofour outstanding shares from approximately 22% to approximately 29% immediatelyafter that purchase.

 

We have been informedthat Mr. González Barrera has pledged or has been required to pledge part ofhis shares in our Company as collateral for loans made to him.  In the event of a default, should thelenders enforce their 

 

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rights withrespect to these shares, Mr. Gonzalez Barrera could lose his controllinginterest in us.  In addition, Mr. GonzálezBarrera must give Archer-Daniels-Midland a right of first refusal on any saleof his GRUMA shares if at the time of the sale, he owns, or as a result of thesale will own, less than 30% of our outstanding shares.  Should Archer-Daniels-Midland exercise itsright, then it could control us. Archer-Daniels-Midland must also give Mr. González Barrera a rightof first refusal on any sale of our shares.

 

With the exception of anumber of direct and indirect purchases of shares by Mr. González Barrera from2000 through 2003 which, in the aggregate, increased his ownership by 7,952,503shares, we are not aware of any significant changes in the percentage ownershipof any shareholders which held 5% or more of our outstanding shares during thepast three years.

 

**RELATEDPARTY TRANSACTIONS**

** **

**Transactions with Subsidiaries**

** **

The transactions setforth below were made in the ordinary course of business since we operate as acentral treasurer for our subsidiaries.

 

We periodically enterinto short-term credit arrangements with our subsidiaries, where we providethem with funds for working capital at market interest rates.

 

When GIMSA has excesscash, GIMSA makes loans to us.   Attheir peak on June 1, 2004, these loans reached the amount of Ps.1,097million in nominal terms.  As ofJune 18, 2004, we owed GIMSA Ps.801 million.  The average interest rate for this year hasbeen 7.5%.

 

MONACA has made loans tous which, at their peak on October 30, 2000, reached the amount ofU.S.$28.6 million.  As of June 18,2004, we did not have any outstanding balance with MONACA.

 

In September 2001,Gruma Corporation started to make loans to us which, at their peak onJuly 2, 2003, reached the amount of U.S.$60.3 million.  As of June 18, 2004, we owed GrumaCorporation U.S.$56.0 million.  Theaverage interest rate for this year has been 1.8%.

 

**Transactions with Archer-Daniels-Midland**

** **

We entered into anassociation with Archer-Daniels-Midland in September 1996.  As a result of this association, we receivedU.S.$258.0 million in cash, 80% ownership of our combined U.S. corn flouroperations and 60% of Archer-Daniels-Midland’s Mexican wheat millingoperations.  We also gained exclusivityrights from Archer-Daniels-Midland in specified corn flour and wheat flourmarkets.  In return, Archer-Daniels-Midlandreceived 74,696,314 of our newly issued shares, which represented approximately22% of our total outstanding shares, and 20% ownership of our combined U.S.corn flour operations, and retained 40% of the Mexican wheat milling operations.  Archer-Daniels-Midland also obtained theright to designate two of our 14 directors and their correspondingalternates.  Archer-Daniels-Midland hasdesignated Allen Andreas, its Chairman and Chief Executive Officer, and PaulMulhollem, its President and Chief Operating Officer, as members of our boardof directors.  Archer-Daniels-Midlandhas elected David J. Smith, its Senior Vice President, Secretary and GeneralCounsel, and Douglas J. Schmalz, its Senior Vice President and ChiefFinancial Officer, to serve as alternates for Mr. Andreas andMr. Mulhollem, respectively.

 

In December 1999, wesold 5% of the shares of MONACA to Archer-Daniels-Midland.

 

During 2001, 2002 and2003, we purchased U.S.$90 million, U.S.$84 million and U.S.$111 million,respectively, of inventory from Archer-Daniels-Midland Corporation, ashareholder, at market rates and terms.

 

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**Other Transactions**

** **

We have loans outstandingto the controlling shareholder and related parties which, at their peak onDecember 31, 2002, aggregated Ps.176.8 million.  These loans were made for personal purposes.  All of these loans bear interest at marketrates.  As of June 18, 2004, theaggregate amount outstanding under these loans was Ps.3.0 million.

 

We own approximately an10.86% interest in GFNorte, a Mexican financial institution.  In the normal course of business, we obtainfinancing from GFNorte’s subsidiaries at market rates and terms.  The highest outstanding loan amount indollars has been U.S.$36 million with an average interest rate of 7.7% inFebruary 2001.  The highestoutstanding amount in pesos has been Ps.162 million with an average interestrate of 8.9% in December 2003.  Asof June 18, 2004, we did not owe any amounts to GFNorte or itssubsidiaries.

 

## **ITEM 8**.                                                     FinancialInformation.

## ** **

See “Item 18.  Financial Statements.”  For information on our dividend policy, see“Item 3.  KeyInformation—Dividends.”  For informationon legal proceedings related to us, see “—Legal Proceedings.”

 

**LEGALPROCEEDINGS**

** **

In the ordinary course ofbusiness, we are party to various legal proceedings, none of which has had orwe reasonably expect will have a material adverse effect on us.

 

**StarLinkTMLitigation**

** **

***Background***

*** ***

StarLinkTM isa genetically modified variety of yellow corn created by Aventis CropScienceUSA Holding, Inc., or Aventis, and sold primarily through its licensee, AdvantaUSA Corp. f/k/a Garst Seed Company, or Garst. StarLinkTM was designed to be resistant to the European CornBorer.  Aventis first obtained theapproval of the Environmental Protection Agency, or EPA, to sell StarLinkTMon May 12, 1998.  This registrationlimited the use of StarLinkTM corn to animal feed and othernon-industrial uses.  This limitationarose out of the EPA’s concern over the possibility that the Cry9C proteincontained in StarLinkTM might be a human allergen.  The EPA required Aventis to undertake amanagement program designed to prevent the entry of StarLinkTM corninto the human food supply.  OnSeptember 18, 2000, a public interest organization called Friends of theEarth announced that it had detected traces of the DNA of the Cry9C protein inKraft Foods, Inc.’s “Taco Bell Home Originals” sold at supermarkets.  Following this announcement, Azteca Millingimmediately ceased the milling of yellow corn in its Plainview, Texas millbecause StarLinkTM corn is a yellow corn and Plainview, Texas wassuspected to be the involved location in the flour used in Kraft’s tacoshells.  Azteca Milling thereafterconducted tests on its inventory for StarLink’s presence.  Because these tests did not rule out thepossibility of StarLinkTM being present in its yellow corn flour,Azteca Milling initiated a voluntary recall of its yellow corn flour andMission Foods likewise initiated a voluntary recall of all of its yellow cornproducts.  Because of this, for a timeboth Azteca Milling and Mission Foods discontinued selling any yellow cornproducts.

 

***Consumer Litigation***

*** ***

Shortly after theSeptember 18, 2000 media announcement, Azteca Milling, Mission Foods andother unaffiliated companies were named in certain consumer lawsuits.  In general, these lawsuits allege thepurchase and consumption of yellow corn products possibly containing StarLinkTMcorn.  Further, the lawsuits generally seekunspecified damages arising out of the consumers’ purchase and consumption ofsuch products including, but not limited to, a return of the purchase price forsuch products to the consumers.  Each ofthese cases was filed as a putative class action.  Certain of the cases involve allegations of personal injuriesarising out of the alleged consumption of yellow corn products possiblycontaining StarLinkTM corn. Plaintiffs and defendants in all of these cases reached a settlement,and the settlement has been approved by the U.S. District Court for theNorthern District of Illinois.  A thirdparty has assumed full liability for these consumer lawsuits.

 

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***Taco Bell Claims***

*** ***

Taco Bell Corporation,its franchisees, and its parent company, have made claims against us andAventis CropScience USA, Inc. and its affiliates, and Advanta, USA, Inc.,alleging that they lost sales and profits because of consumer fears that theirproducts contained StarLinkTM. One lawsuit has been dismissed without prejudice.  Currently, there are three lawsuitspending.  Our insurance carrier hasaccepted coverage for these claims.

 

*Taco Bell Corporation; Tyson MexicanOriginal, Inc.; McClain Foods, Inc.; Russ Taco, Inc.; T.B. Barrett, Inc.;Dar-Taco, Inc.; Heartland Bells, Inc.; on their own behalf and on behalf ofsimilarly situated Taco Bell franchisees throughout the United States v.Aventis CropScience U.S.A. Holding, Inc.; Aventis CropScience USA, Inc.;Aventis CropScience USA, LP; Advanta, USA, Inc.; Gruma Corporation; AztecaMilling; et al.*  Thislawsuit was filed on September 14, 2001, in the Circuit Court ofWashington County, Arkansas, and was voluntarily dismissed on December 13,2001, without prejudice.  This lawsuitwas a national class action on behalf of all Taco Bell franchisees, Taco BellCorporation, and one of their suppliers seeking lost profits alleged to havebeen suffered because of the public’s fear that StarLinkTM corn mayhave been used in Taco Bell products. Without explanation, the plaintiffs voluntarily dismissed this casewithout prejudice to refiling.  OnJune 12, 2002, this lawsuit was refiled in a substantially similar form,as described in the following paragraph.

 

*K-MAC Enterprises, Inc.; Russ Taco,Inc.; Dar-Taco, Inc.; T.B. Barrett, Inc.; McLean Foods, Inc.; and HeartlandBells, Inc.; on their own behalf and on behalf of similarly situated Taco Bellfranchisees throughout the United States v. Aventis CropScience U.S.A. Holding,Inc.; Aventis CropScience USA, Inc.; Aventis CropScience USA, LP; Advanta, USA,Inc. (f/k/a Garst Seed Company); Gruma-ADM, Inc.; and Azteca Milling.*  This lawsuit was filed on June 12,2002, in the Circuit Court of Sebastian County, Arkansas, as a national classaction seeking to recover profits alleged to have been lost by all Taco Bellfranchisees in the United States because of the public’s fear that Taco Bellproducts may have contained StarLinkTM corn.  Plaintiffs also sought punitivedamages.  A settlement agreement hasbeen reached by the parties and has been approved by the court.

 

*Southern Multifoods, Inc.; MetroplexMultifoods, Inc.; Plaza Dine, Inc.; Kurani International, Inc.; and Mallen Co.v. Aventis CropScience USA Holding, Inc.; Aventis CropScience USA, Inc.; AventisCropScience USA, LP; Advanta USA, Inc./Garst Seed Company; Gruma Corporation;and Azteca Milling.* This lawsuit was filed on November 30, 2001, in the District Courtof Hidalgo County, Texas, 275th Judicial District.  This lawsuit is brought by Taco Bell franchisees in Texas seekingto recover lost profits allegedly suffered because of the public’s fear thatStarLinkTM corn may have been used in these franchisees’ tacoproducts made with ingredients furnished by Azteca Milling.  A settlement agreement has been reached bythe parties and has been approved by the court.

 

*Paradise Foods, Inc.; Paradise FoodsII, Inc.; Bayou Bells, LLC; Paradise-Byrne Corp.; Jaguar Bells, LLC; Bells andWhistles, LLC; Border Masters, Inc.; Carolina Coastal Foods, Inc.; John O’Brien;West Quality Food Service, Inc.; East More Tacos, Inc.; and Tricon GlobalRestaurants, Inc. v. Aventis CropScience USA Holding, Inc.; Aventis CropScienceUSA, LP; Aventis CropScience USA, Inc.; Advanta USA, Inc. (f/k/a Garst SeedCompany); Gruma Corporation; Azteca Milling and Archer-Daniels-Midland Company*.  This lawsuit was filed on October 15,2001, in the Circuit Court for Jones County, Mississippi, and subsequently wasremoved to the United States District Court for the Southern District of Mississippi,Hattiesburg Division.  The lawsuit isnow back in the Circuit Court for Jones County, Mississippi.  This suit is brought by Taco Bellfranchisees seeking to recover lost profits allegedly suffered because of thepublic’s fear that StarLinkTM corn may have found its way into theplaintiff’s taco products through ingredients furnished by Azteca Milling.  Plaintiffs have filed a motion to remand thecase to state court, and the motion to remand is pending.  A settlement agreement has been reached by theparties and has been approved by the court.

 

**AntitrustLawsuits**

** **

Eighteen manufacturers oftortillas and other processed food products have brought three relatedantitrust lawsuits against Gruma Corporation and Azteca Milling in the UnitedStates District Court for the Southern District of Texas, GalvestonDivision.  The three suits are:(1) El Aguila Food Products, Inc., et al. v.  Gruma Corporation, et al.; No. G-01-434, in the United StatesDistrict Court for the Southern District of Texas, Galveston Division;(2) Gilbert Moreno Enterprises, Inc., et al. v. Gruma Corporation, et al.;C.A. No. G-01-546, in the United States District Court for the SouthernDistrict of Texas, Galveston Division; and (3) Capistran, Inc., et al. v.Gruma

 

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Corporation, etal.; No. G-02-100, in the United States District Court for the SouthernDistrict of Texas, Galveston Division. These three lawsuits have been consolidated into El Aguila FoodProducts, Inc., et al. v.  GrumaCorporation, et al. which, on January 10, 2003, was transferred to theUnited States District Court for the Southern District of Texas, HoustonDivision.  The plaintiffs allege thatthe defendants, including Gruma Corporation and Azteca Milling, conspired withretailers to restrain trade in the retail sale of tortillas in Texas,California, Arizona and Michigan, used market power to exclude plaintiffs fromthe retail tortilla market, and otherwise competed unfairly.  The plaintiffs seek damages, includingtreble damages, “greatly in excess of U.S.$1 million per Plaintiff,” as well asinjunctive relief.  InDecember 2003, the trial court, after four weeks of trial, dismissed thesuit as being without merit.  Plaintiffshave filed an appeal.  We intend to continuevigorously defending this lawsuit.

 

On May 26, 2004, anindividual filed an antitrust lawsuit against Gruma Corporation and five namedretailers, asking that a consumer, indirect-purchaser class action be certifiedand alleging that Gruma and the retailers have violated the Californiaantitrust and unfair competition statutes by entering into contracts andconspiracies restraining competition in the sale of tortillas in SouthernCalifornia.  The plaintiff seeksequitable relief and an unspecified amount of total damages.  The suit, Diaz v. Gruma Corporation et al.,case no. BC 316086, was filed in California Superior Court in the County of LosAngeles.  The case is in the earlystages and no discovery has yet been pursued. We intend to continue vigorously defending this lawsuit.

 

**WaterDischarge Assessments**

 

Certain subsidiaries ofGIMSA have been notified by the Comisión Nacional del Agua (“Water NationalCommission” or “CNA”) of assessments due to CNA from different years amountingto Ps 24.9 million plus related penalties and surcharges of Ps 172.2 million. These assessments mainlyderive from CNA charges of sewage water being discharged underground throughthe sprinkler systems on the grounds of those subsidiaries. The subsidiarieshave asserted the legal defense allowed by law in order to annul theseassessments. The Company has received a favorable judicial resolution for oneof these assessments amounting to Ps 6.5 million plus its related penalties andsurcharges of Ps.32.7 million. According to the Company’s lawyers, a reasonable basis exists in orderto obtain a favorable resolution of the rest of the claimed assessments,because, among other things, the water was previously treated, it was notdischarged on public property of the Nation and does not contaminate aquiferouslayers or the underground soil.  SeeNote 11A to our consolidated financial statements.

 

**MexicanTax Claim**

** **

The Mexican taxauthorities have disallowed the asset tax reported in our 1995 and 1996 taxreturns.  The authorities claim we owePs.547.1 million, including related surcharges and penalties.  We have brought a proceeding for annulmentof such disallowance notice and are vigorously defending the claim.

 

**VenezuelanTax Claim**

** **

The Venezuelan taxauthorities have made certain assessments to Molinos Nacionales, C.A., one ofour Venezuelan subsidiaries related to income tax returns for 1998 and 1999which amounted to Ps.92.6 million plus tax credits presumable omitted forPs.0.5 million.  The resolution of theseclaims will be assumed by the previous shareholder from whom we brought thissubsidiary pursuant to the terms of the purchase agreement.

 

## **ITEM 9**.                                                     TheOffer And Listing.

## ** **

**TRADINGHISTORY**

** **

Our Series B Shares havebeen traded on the *Bolsa Mexicana de Valores, S.A. de C.V.*,or Mexican Stock Exchange, since 1994. The ADSs, each representing four Series B Shares, commenced trading onthe New York Stock Exchange in November 1998.  On December 31, 2003, there were 450,133,443 outstandingSeries B Shares, (of which 72,549,884 Series B Shares were represented by18,137,471 ADSs held by 5 record holders in the United States).

 

64

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**PRICEHISTORY**

** **

The following table setsforth, for the periods indicated, the annual high and low closing sale pricesfor the Series B Shares and the ADSs as reported by the Mexican Stock Exchangeand the New York Stock Exchange, respectively.

 
|                        |   | **Mexican  Stock Exchange** |   | **NYSE**             |   |
|-----------------------------|--------|-----------------------------|--------|----------------------|--------|
|                        |   | **Common  Stock**           |   | **ADS(2)**           |   |
|                        |   | **High**                    |   | **Low**              |   | **High** |   | **Low** |   |
|                        |   | **(Ps. per  share(1))**     |   | **(U.S.$ per  ADS)** |   |
| **Annual Price History**    |   |                        |   |                 |   |   |   |   |   |
| 1999                        |   | 25.60                       |   | 8.66                 |   | 10.33 |   | 3.86 |   |
| 2000                        |   | 14.20                       |   | 6.80                 |   | 6.25 |   | 2.88 |   |
| 2001                        |   | 8.50                        |   | 6.00                 |   | 3.60 |   | 2.60 |   |
| 2002                        |   | 13.00                       |   | 8.00                 |   | 5.70 |   | 3.50 |   |
| 2003                        |   | 15.30                       |   | 9.20                 |   | 5.62 |   | 3.20 |   |
| **Quarterly Price History** |   |                        |   |                 |   |   |   |   |   |
| 2002                        |   |                        |   |                 |   |   |   |   |   |
| 1st  Quarter                |   | 10.00                       |   | 8.00                 |   | 4.94 |   | 3.50 |   |
| 2nd  Quarter                |   | 13.00                       |   | 10.60                |   | 5.70 |   | 4.47 |   |
| 3rd  Quarter                |   | 11.15                       |   | 10.50                |   | 4.60 |   | 4.05 |   |
| 4th  Quarter                |   | 10.70                       |   | 9.60                 |   | 4.20 |   | 3.65 |   |
| 2003                        |   |                        |   |                 |   |   |   |   |   |
| 1st  Quarter                |   | 10.10                       |   | 9.20                 |   | 3.82 |   | 3.20 |   |
| 2nd  Quarter(3)             |   | 10.80                       |   | 9.38                 |   | 4.11 |   | 3.45 |   |
| 3rd  Quarter                |   | 15.05                       |   | 11.00                |   | 5.62 |   | 4.09 |   |
| 4th  Quarter                |   | 15.30                       |   | 14.20                |   | 5.59 |   | 4.80 |   |
| 2004                        |   |                        |   |                 |   |   |   |   |   |
| 1st  Quarter                |   | 18.90                       |   | 15.70                |   | 7.00 |   | 5.40 |   |
| 2nd  Quarter                |   | 19.70                       |   | 18.90                |   | 6.95 |   | 6.60 |   |
| **Monthly Price History**   |   |                        |   |                 |   |   |   |   |   |
| December 2003          |   | 15.30                       |   | 14.20                |   | 5.34 |   | 4.80 |   |
| January 2004           |   | 18.45                       |   | 15.70                |   | 6.60 |   | 5.40 |   |
| February 2004          |   | 18.75                       |   | 17.80                |   | 6.78 |   | 6.55 |   |
| March 2004             |   | 18.90                       |   | 18.00                |   | 7.00 |   | 6.60 |   |
| April 2004             |   | 19.70                       |   | 18.90                |   | 6.95 |   | 6.80 |   |
| May 2004                    |   | 19.70                       |   | 19.00                |   | 6.90 |   | 6.60 |   |
| June 2004(3)           |   | 19.34                       |   | 18.90                |   | 6.70 |   | 6.63 |   |

 

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(1)                                  Pesos per share reflect nominal price attrade date.(2)                                  Price per ADS in U.S.$; one ADSrepresents four Series B Shares.(3)                                  Through June 18, 2004.

 

On June 18, 2004,the reported last sale price of the B Shares on the Mexican Stock Exchange wasPs.19.0 per B Share and the reported last sale price of the ADSs on the NewYork Stock Exchange was U.S.$6.70 per ADS.

 

**MEXICANSTOCK EXCHANGE**

** **

The Mexican StockExchange, the *Bolsa Mexicana de Valores, S.A. de C. V.*, located in MexicoCity, is the only stock exchange in Mexico. Founded in 1907, it is organized as a corporation whose shares are heldby brokerage firms, which are exclusively authorized to trade on the exchange.  Trading on the Mexican Stock Exchange takesplace principally through automated systems and is open between the hours of8:30 a.m. and 3:00 p.m. Mexico City time, each business day.  Trades in securities listed on the MexicanStock Exchange can also be performed off the exchange.  The Mexican Stock Exchange operates a systemof automatic suspension of trading in shares of a particular issuer as a meansof controlling excessive price volatility, but under current regulations thissystem does not apply to securities such as the Series B Shares that aredirectly or indirectly (for example, through ADSs) quoted on a stock exchange(including for these purposes the New York Stock Exchange) outside Mexico.

 

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Settlement is effectedtwo business days after a share transaction on the Mexican Stock Exchange.  Deferred settlement, even by mutualagreement, is not permitted without the approval of the *Comisión Nacional Bancaria y de Valores*(the Mexican National Banking and Securities Commission, or CNBV).  Most securities traded on the Mexican StockExchange, including ours, are on deposit with *S.D. Indeval, S.A. de C.V.*,or Indeval, a privately owned securities depositary that acts as aclearinghouse for Mexican Stock Exchange transactions.

 

As of June 1, 2001,the Mexican Securities Law requires issuers to increase the protections offeredto minority shareholders and to impose corporate governance controls on Mexicanlisted companies in line with international standards.  The Mexican Securities Law expressly permitsMexican listed companies, with prior authorization from the CNBV, to include intheir bylaws antitakeover defenses such as shareholder rights plans, or poisonpills.  We amended our bylaws to includecertain of these protections at our Extraordinary Shareholders’ Meeting held onDecember 4, 2003.  See “AdditionalInformation—Bylaws—Antitakeover Protections.”

 

## **ITEM 10**.                                              AdditionalInformation.

## ** **

**BYLAWS**

** **

Set forth below is abrief summary of certain significant provisions of (1) our bylaws, as amendedby our Extraordinary Shareholders’ Meeting held on December 4, 2003 tocomply with recent changes to Mexican Securities regulations, and (2) Mexicanlaw.  This description does not purportto be complete and is qualified by reference to our bylaws, which have beenfiled as an exhibit to this Annual Report.

 

**Organizationand Register**

** **

We are a *sociedadanónima de capital variable*(a corporation) organized in Mexicounder the *LeyGeneral de Sociedades Mercantiles*, or the Mexican CompaniesLaw.  We were incorporated onDecember 24, 1971 and have a corporate life of 99 years.  Our corporate purpose, as fully described inArticle 2 of our bylaws, is to act as a holding company.  As such, our bylaws grant us the power to engagein various activities, which allow us to function as a holding company.  These powers include, but are not limitedto, the ability to (1) acquire, sell, import, export, and manufacture all typesof goods and products, (2) issue securities and take all actions with respectto securities of any kind, (3) create, organize and manage all types ofcompanies, (4) act as an agent or representative, (5) acquire, sell andmaintain real property, (6) perform or receive professional, technical orconsulting services, (7) establish branches, agencies or representativeoffices, (8) acquire, license or use intellectual property, (9) grant andreceive loans, (10) subscribe, issue and negotiate all types of creditinstruments, and (11) perform any acts necessary to accomplish the foregoing.

 

**Directors**

** **

Our bylaws provide thatour management shall be vested in the board of directors.  Each director is elected by a simplemajority of the shares and there are no provisions for cumulative voting.  Under Mexican law and our bylaws, any holderor group of holders owning 10% or more of our capital stock may elect onedirector and its corresponding alternate. The board of directors shall be comprised of a minimum of five and amaximum of twenty directors, as determined by the shareholders at the annualordinary general shareholders’ meeting. Under Mexican law, at least 25% of the members of the board of directorsmust be independent.  Currently, ourboard of directors consists of 14 members.

 

The board of directorsshall meet at least once every three months. These meetings can be called by the Chairman of the Board of Directors,by 25% of the members of the board of directors, or by our statutory auditors.  Under the terms of our association withArcher-Daniels-Midland, Archer-Daniels-Midland will have the right to appointtwo of our directors, and their corresponding alternates, as long as it owns atleast 20% of our capital stock.  Thedirectors serve for a one year term, or until their successors have takenoffice.  Directors receive compensationas determined by the shareholders at the annual ordinary general shareholders’meeting.  A majority of directors isneeded to constitute a quorum and board resolutions must be passed by a majorityof the votes present at any validly constituted meeting or by unanimous consentif no meeting is convened.

 

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Under Mexican law, anymember of the board of directors who has a conflict of interest with thecorporation in any transaction must disclose such fact to the other directorsand abstain from voting on that transaction. Any member of the board of directors who violates this provision may beliable for the resulting damages incurred by the company.  Members of the board of directors may notrepresent shareholders at any shareholders’ meeting.

 

Our bylaws provide thatthe board of directors is required to approve: (i) related party transactionsother than those occurring in the ordinary course of business; (ii) purchasesof 10% or more of our corporate assets; (iii) guarantees for more than 30% ofour corporate assets; (iv) any of the aforementioned transactions when they areto be carried out by any of our subsidiaries; and (v) any other transaction,different from the aforementioned, the value of which represents more than 1%of our corporate assets.  This approvalis non-delegable.

 

Under Mexican law,shareholders can initiate actions for civil liabilities against directorsthrough resolutions passed by a majority of the shareholders at a generalordinary shareholders’ meeting.  In theevent the majority of the shareholders decide to bring such action, thedirector against whom such action is brought will immediately cease to be amember of the board of directors. Additionally, shareholders representing not less than 15% of ouroutstanding shares may directly bring such action against directors.  Any recovery of damages with respect to suchaction will be for the benefit of us and not for the shareholders bringing theaction.

 

Under our bylaws and inaccordance with applicable law, we are required to have an audit committeecomprised of directors, of which at least the majority of whom must beindependent directors, including the Chairman. Members are appointed at the annual ordinary general shareholders’meeting, hold office for one year and will continue their duties until theirsuccessors take their positions. Members shall receive such compensation set at the ordinary generalshareholders’ meeting.  The auditcommittee is empowered to: (i) prepare an annual report of its activitiesand render it to the board of directors; (ii) issue opinions with respectto related party transactions that the Company intends to carry out outside ofits ordinary course of business as well as to issue opinions with respect to(a) related party transactions that the subsidiaries of the Company intend tocarry out outside of the ordinary course of business or (b) transactions thatmay imply a commitment of its assets under the terms of section IV, paragraph(d) of Article 14-Bis-3 of the Mexican Securities Law; (iii) makeproposals relating to the hiring of independent experts, if necessary, so thatsuch experts can issue their opinions with respect to related partytransactions; (iv) propose to the board of directors candidates for theexternal auditor position and the conditions pursuant to which they will behired; (v) revise our financial information and arrange the issuanceprocess for the same; (vi) contribute to the definition of the generalguidelines of the internal control system, assess its effectiveness, as well ascoordinate and evaluate the annual internal audits and the activities performedby our internal and external auditors and the statutory auditors;(vii) verify that we have the necessary mechanisms to ensure that we arein compliance with applicable laws and inform the board of directors in thisrespect; and (viii) perform other functions as set forth or deriving fromapplicable legal provisions to which the Company may be subject.  Our statutory auditors will be called to allmeetings held by the audit committee.

 

According to our bylaws,the board of directors is empowered to execute and negotiate any of our creditinstruments and agreements.  The boardof directors may delegate such power to any individual.

 

See also“Item 6.  Directors, SeniorManagement and Employees” for further information about the board of directors.

 

**VotingRights and Shareholders’ Meetings**

** **

Each share entitles theholder thereof to one vote at any general meeting of our shareholders.  Shareholders may vote by proxy.  At the ordinary general shareholders’meeting, any shareholder or group of shareholders representing 10% or more ofthe outstanding common stock has the right to appoint one regular director andits corresponding alternate, with the remaining directors being elected bymajority vote.  Holders of series Bshares do not have cumulative voting rights.

 

General shareholders’meetings may be ordinary meetings or extraordinary meetings.  Extraordinary general shareholders’ meetingsare called to consider matters specified in Article 182 of the MexicanCompanies Law, including, principally, changes in the authorized fixed sharecapital and other amendments to the bylaws, the 

 

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issuance ofpreferred stock, liquidation, mergers and spin-offs, changes in the rights ofsecurity holders, and transformation from one corporate form to another.  All other matters may be considered atordinary general shareholders’ meetings. Ordinary general shareholders’ meetings must be called to consider andapprove matters specified in Article 181 of the Mexican Companies Law,including, principally, the appointment of the members of the board ofdirectors and the statutory auditor, the compensation paid to the directors andstatutory auditor, the distribution of our profits for the previous year, andthe annual reports presented by the board of directors and the statutoryauditor.

 

A general ordinaryshareholders’ meeting must be held during the first four months after the endof each fiscal year.  In order to attenda general shareholders’ meeting, the day before the meeting shareholders mustdeposit the certificates representing their common stock or other appropriateevidence of ownership either with the secretary of our board of directors, witha credit institution, or with Indeval. The secretary, credit institution or Indeval will hold the certificatesuntil after the general shareholders’ meeting has taken place.

 

Our shareholdersestablish the number of members that will serve on our board of directors atthe ordinary general shareholders’ meeting. Under our bylaws, the board of directors shall be comprised of a minimumof five and a maximum of twenty directors. Pursuant to Mexican law, at least 25% of the members of the board ofdirectors must be independent.

 

Under our bylaws, thequorum for an ordinary general shareholders’ meeting is at least 50% of theoutstanding common stock, and action may be taken by the affirmative vote ofholders representing a majority of the shares present.  If a quorum is not present, a subsequentmeeting may be called at which the shareholders present, whatever their number,will constitute a quorum and action may be taken by a majority of the sharespresent.  A quorum for extraordinarygeneral shareholders’ meetings is at least 75% of the outstanding common stock,but if a quorum is not present, a subsequent meeting may be called.  A quorum for the subsequent meeting is atleast 50% of the outstanding shares. Action at an extraordinary general shareholders’ meeting may only betaken by a vote of holders representing at least 50% of the outstanding shares.

 

Shareholders’ meetingsmay be called by the board of directors, the statutory auditor or a court.  The board of directors or the statutoryauditor may be required to call a shareholders’ meeting if holders of at least10% of our outstanding share capital request a meeting in writing, at thewritten request of any shareholder if no shareholders’ meeting has been heldfor two consecutive years, or if, during a period of two consecutive years, theboard of directors’ annual report for the previous year and the company’sfinancial statements were not presented to the shareholders, or if the shareholdersdid not elect directors and the statutory auditor.

 

Notice of shareholders’meetings must be published in the Official Gazette of the State of Nuevo Léonor in a newspaper of general circulation in Monterrey, Nuevo Léon at least 15days prior to the meeting. Shareholders’ meetings may be held without such publication providedthat 100% of the outstanding shares are represented.  Shareholders’ meetings must be held in Monterrey, Nuevo Léon .

 

Under Mexican law,holders of 10% of our outstanding capital stock may have any shareholder actionset aside by filing a complaint with a Mexican court of competent jurisdictionwithin 15 days after the close of the meeting at which such action was taken,by showing that the challenged action violates Mexican law or our bylaws.  Relief under these provisions is onlyavailable to holders who were entitled to vote on the challenged shareholderaction and whose shares were not represented when the action was taken or, ifrepresented, were voted against it.

 

**DividendRights and Distribution**

** **

Within the first fourmonths of each year, the board of directors must submit our company’s financialstatements for the preceding fiscal year to the shareholders for their approvalat the ordinary general shareholders’ meeting. They are required by law to allocate five percent of any new profits toa legal reserve which is not thereafter available for distribution until theamount of the legal reserve equals 20% of our historical capital stock (beforeadjusting for inflation).  Amounts inexcess of those allocated to the legal reserve fund may be allocated to otherreserve funds as the shareholders determine, including a reserve for therepurchase of our shares.  The remainingbalance of new profits, if any, is available for distribution asdividends.  Cash dividends on the sharesheld through Indeval will be distributed by us through Indeval.  Cash dividends on the shares evidenced byphysical 

 

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certificates willbe paid when the relevant dividend coupon registered in the name of its holderis delivered to us.  No dividends may bepaid, however, unless losses for prior fiscal years have been paid up orabsorbed.  See “Item 3.  Key Information—Dividends.”

 

**Liquidation**

** **

Upon our dissolution, oneor more liquidators must be appointed by an extraordinary shareholders’ generalmeeting to wind up its affairs.  If theextraordinary general shareholders’ meeting does not make said appointment, aCivil or District Judge of the Federation can do so at the request of anyshareholder.  All fully paid andoutstanding common stock will be entitled to participate equally in anydistribution upon liquidation after the payment of the company’s debts, taxesand the expenses of the liquidation. Common stock that has not been paid in full will be entitled to theseproceeds in proportion to the paid-in amount.

 

If the extraordinarygeneral shareholders’ meeting does not give express instructions onliquidation, the bylaws stipulate that the liquidators will (i) conclude allpending matters they deem most convenient, (ii) prepare a general balance andinventory, (iii) collect all credits and pay all debts by selling assetsnecessary to accomplish this task, (iv) sell assets and distribute income, and(v) distribute the remnant, if any, pro rata among the shareholders.

 

**Changesin Capital Stock**

** **

Our outstanding capitalstock consists of Class I and Class II series B shares.  Class I shares are the fixed portion of ourcapital stock and have no par value.  Thefixed portion of our capital stock cannot be redeemed.  Class II shares are the variable portion ofour capital stock and have no par value. The issuance of variable capital shares, unlike the issuance of fixedcapital shares, does not require an amendment of the bylaws, although it doesrequire approval at an ordinary general shareholders’ meeting.  The fixed portion of our capital stock mayonly be increased or decreased by resolution of an extraordinary generalshareholders’ meeting and an amendment to our bylaws, whereas the variableportion of our capital stock may be increased or decreased by resolution of anordinary general shareholders’ meetings. Currently, our outstanding capital stock consists only of fixed capital.

 

An increase of capitalstock may generally be made through the issuance of new shares for payment incash or in kind, by capitalization of indebtedness or by capitalization ofcertain items of shareholders’ equity. An increase of capital stock generally may not be made until all previouslyissued and subscribed shares of capital stock have been fully paid.  A reduction of capital stock may be effectedto absorb losses, to redeem shares, to repurchase shares in the open market orto release shareholders from payments not made.

 

**PreemptiveRights**

** **

Except in certain limitedcircumstances, in the event of a capital increase through the issuance ofshares for payment in cash or in kind, a holder of existing shares of a givenseries at the time of the capital increase has a preferential right tosubscribe for a sufficient number of new shares of the same series to maintainthe holder’s existing proportionate holdings of shares of that series.  Preemptive rights must be exercised withinthe period and under the conditions established for such purpose by theshareholders at the corresponding shareholders’ meeting.  Under Mexican law and our bylaws, theexercise period may not be less than 15 days following the publication ofnotice of the capital increase in the Official Gazette of the State of NuevoLéon or following the date of the shareholders’ meeting at which the capitalincrease was approved if all shareholders were represented; otherwise suchrights will lapse.

 

Shareholders will nothave preemptive rights to subscribe for common stock issued in connection withmergers, upon the conversion of convertible debentures, in a public offering(if the majority of shareholders at a general extraordinary meeting approve theissuance of shares and waive their preemptive rights in accordance with theMexican securities market law and our bylaws) or in a resale of common stockheld in our treasury as a result of repurchases on the Mexican Stock Exchange.

 

Under Mexican law,preemptive rights may not be waived in advance by a shareholder, except underlimited circumstances, and cannot be represented by an instrument that isnegotiable separately from the 

 

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correspondingshare.  Holders of ADRs may berestricted in their ability to participate in the exercise of preemptiverights.  See “Item 3.  Key Information—Risk Factors—Risks Relatingto Our Controlling Shareholders and Capital Structure—Holders of ADSs May NotBe Able to Participate in Any Future Preemptive Rights Offering and as a ResultMay Be Subject to a Dilution of Equity Interest.”

 

**RestrictionsAffecting Non-Mexican Shareholders**

** **

Foreign investment incapital stock of Mexican corporations is regulated by the 1993 ForeignInvestment Law and by the 1998 Foreign Investment Regulations to the extentthey are not inconsistent with the Foreign Investment Law.  The Ministry of Economy and the NationalCommission on Foreign Investment are responsible for the administration of theForeign Investment Law and the Foreign Investment Regulations.

 

Our bylaws do notrestrict the participation of non-Mexican investors in our capital stock.  However, approval of the National ForeignInvestment Commission must be obtained for foreign investors to acquire adirect or indirect participation in excess of 49% of the capital stock of aMexican company that has an aggregate asset value that exceeds, at the time offiling the corresponding notice of acquisition, an amount determined annuallyby the National Foreign Investment Commission.

 

As required by Mexicanlaw, our bylaws provide that any non-Mexicans who acquire an interest orparticipation in our capital at any time will be treated as having Mexicannationality for purposes of their interest in us, and with respect to theproperty, rights, concessions, participations or interests that we may own orrights and obligations that are based on contracts to which we are a party withthe Mexican authorities.  Suchshareholders cannot invoke the protection of their government under penalty offorfeiting to the Mexican State the ownership interest that they may haveacquired.  See “Item 3.  Key Information—Risk Factors—Risks Relatingto Our Controlling Shareholders and Capital Structure—Our Bylaws Restrict theAbility of Non-Mexican Shareholders to Invoke the Protection of TheirGovernments with Respect to Their Rights as Shareholders.”

 

Under this provision, anon-Mexican shareholder is deemed to have agreed not to invoke the protectionof his own government with respect to his rights as a shareholder, but is notdeemed to have waived any other rights it may have with respect to itsinvestment in us, including any rights under U.S. securities laws.  If a shareholder should invoke governmentalprotection in violation of this provision, its shares could be forfeited to theMexican government.  Mexican lawrequires that such a provision be included in the bylaws of all Mexicancompanies unless such bylaws prohibit ownership of shares by non-Mexicans.

 

**Registrationand Transfer**

** **

Our shares are evidencedby certificates in registered form.  Wemaintain a stock registry and, in accordance with Mexican law, only thosepersons whose names appear on the stock registry are recognized as owners ofthe series B shares.

 

**OtherProvisions**

** **

***Redemption Rights***

*** ***

Outstanding variablecapital shares, if any, may be fully or partially redeemed by the holdersthereof.  The minimum fixed portion ofour capital stock cannot be redeemed. Currently, we have no outstanding variable capital shares.  A holder of variable capital stock thatwishes to effect a total or partial redemption of such stock is required tonotify us in an authenticated written notice to that effect.  If notice of redemption is received prior tothe last quarter of the fiscal year, the redemption becomes effective at theend of the fiscal year in which the shareholder gives notice.  Otherwise, the redemption becomes effectiveat the end of the following fiscal year.

 

Redemption of ourvariable capital stock is made at the lower of (i) 95% of the weighted averageshare price as quoted on the Mexican Stock Exchange for the last 30 days inwhich our shares were traded, in a period not greater than six months, prior tothe effective date of the redemption, or (ii) the book value per variablecapital share, calculated from our balance sheet (as approved at an ordinarygeneral shareholders’ meeting) for the fiscal year immediately prior to thefiscal year in which the redemption is to become effective. If the number ofdays in which 

 

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our shares havetraded during the period referred to above is less than 30, then only theactual number of days in which our shares have traded during such period willbe taken into account.  If shares havenot been exchanged during such period, then the tender offer shall be made at aprice equal to at least the book value of the shares.  Any such amount to be paid by us would become due on the dayfollowing the ordinary general shareholders’ meeting referred to in clause (ii)above.

 

***Appraisal Rights***

*** ***

Under Mexican law,whenever the shareholders approve a change of corporate purpose, change of ournationality or transformation from one type of corporate form to another, anyshareholder entitled to vote on such change or transformation who has votedagainst it has the right to tender its shares and receive the amountattributable to its shares, provided such shareholder exercises its right towithdraw within 15 days following the adjournment of the meeting at which thechange or transformation was approved. Under Mexican law, the amount which a withdrawing shareholder isentitled to receive is equal to its proportionate interest in our capital stockaccording to our most recent balance sheet approved by an ordinary generalshareholders’ meeting.  The reimbursementmay have certain tax consequences.

 

***Share Repurchases***

*** ***

We may repurchase ourcommon stock on the Mexican Stock Exchange at any time at the then prevailingmarket price.  The repurchase of shareswill be made at the expense of our equity if the repurchased shares remainoutstanding, or at the expense of our capital stock if the repurchased sharesare placed in our treasury.  At theordinary general shareholders’ meeting, shareholders shall determine themaximum amount of funds to be allocated to the repurchase of shares, whichamount shall not exceed our total net profits, including retained earnings.

 

Repurchased common stockwill either be held by us or kept in our treasury, pending future sales thereofon the Mexican Stock Exchange.  If therepurchased shares are kept in our treasury, we may not exercise the economicand voting rights corresponding to them, and such shares are not deemed to beoutstanding for purposes of calculating any quorum or vote at any shareholders’meeting.  The repurchased shares held byus as outstanding shares may not be represented at any shareholdermeeting.  The decrease or increase ofthe capital stock as a consequence of the repurchase and sale by the company ofits shares does not require the approval of a shareholders’ meeting or of theboard of directors.

 

Under Mexican securitiesregulation, our directors, officers, statutory auditors, external auditors, andthe secretary of the board of directors and holders of 10% or more of ouroutstanding common stock may not sell common stock to us, or purchaserepurchased common stock from us, unless the sale or purchase is made through atender offer.  Mexican securitiesregulations under the Mexican Securities Market Law require that if we decideto repurchase common stock representing three percent or more of ouroutstanding share capital in any 20 trading-day period, these repurchases mustbe conducted by means of a public tender offer.

 

***Repurchase in the Eventof Delisting***

*** ***

If the registration ofour common shares in the Securities Section of the *Registro Nacional de Valores* (NationalRegistry of Securities, or RNV) is canceled, whether at our request or by theCNBV, under our bylaws and CNBV regulations the shareholders holding themajority of our common shares or who are otherwise able to impose, by anymeans, decisions at the general shareholders’ meetings or able to appoint themajority of the directors of our board of directors, shall be obligated to makea tender offer to purchase all of our shares prior to the cancellation.  Such tender offer shall be made at least atthe greater price of the following: (i) the closing sale price of such shareson the Mexican Stock Exchange, under the terms of the following paragraph, or(ii) the book value of the shares according to the most recent quarterly reportsubmitted to the CNBV and to the Mexican Stock Exchange prior to thecommencement of the offer.  As set forthin the last paragraph of this subsection below, the tendering shareholder(s)may request approval from the CNBV to use different criteria to determine theprice of the shares, in which case, the most recent financial information ofthe Company shall be taken into account.

 

The quoted share price onthe Mexican Stock Market referred to in the preceding paragraph shall be theweighted average share price as quoted on the Mexican Stock Exchange for thelast 30 days in which our shares were traded, in a period not greater than sixmonths, prior to the date of the offer. If the number of days in which 

 

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our shares have tradedduring the period referred to above is less than 30, then only the actualnumber of days in which our shares have traded during such period will be takeninto account.  If shares have not beenexchanged during such period, then the tender offer shall be made at a priceequal to at least the book value of the shares.

 

If the tender offerrefers to more than one series of stock, the weighted average price referred toin the preceding paragraph shall be calculated for each series of stock to becancelled, and the price for the tender offer of all of the series shall be thegreatest of such averages.

 

Within five business daysof the commencement of the tender offer, the board of directors shall discloseits opinion in connection with the reasonableness of the price of such offer,taking into consideration (i) the interests of the minority shareholders inorder to comply with the terms of the second paragraph of Article 16 ofthe Mexican Securities Law, and (ii) an opinion of the audit committee.  If the board of  directors’ and audit committee’s opinions are conflicting, thenthe audit committee’s opinion shall be disclosed.  If the board of directors has a potential conflict of interest,then the opinion of the board of directors shall be accompanied with an opinionissued by an independent expert selected by the audit committee in whichspecial emphasis is to be made to protect the interests of the minorityshareholders.

 

The holders of themajority of our common shares, or whoever is otherwise able to, by any means,(i) impose resolutions at the general shareholders’ meetings, or (ii) appointthe majority of the directors of our board of directors, shall be under noobligation to make the tender offer to purchase all of our shares prior to thecancellation of the registry if: (i) they have the consent of the holders of atleast 95% of our outstanding common shares, by a resolution at a shareholders’ meeting, and (ii) the aggregate amountoffered for the securities in the market is less than 300,000 investment units(UDIs); provided, however that, in order to obtain the cancellation from theRNV, (x) the trust referred to in the following paragraph must be executed, and(y) notice of such cancellation and of the execution of the trust shall be madethrough the appropriate means established by the CNBV.

 

In the event theshareholders making the tender offer are not able to purchase 100% of ouroutstanding common shares, then prior to the cancellation of our common sharesin the Securities Section of the RNV, they shall execute a trust, for aminimum term of six months, in order to provide sufficient monetary resourcesto purchase the remaining outstanding common shares at the same tender offerprice.

 

The shareholders requiredto make the tender offer referred to above may request the approval from theCNBV to use different criteria to determine the price of the shares. The CNBVshall take into account our financial situation in considering whether to grantsuch approval.  In requesting suchapproval, the following must be submitted to the CNBV:  (i) a resolution of the board of directorsapproving such request, (ii) a favorable opinion of the audit committeeaddressing the reasons why it deems appropriate the use of a different price,and (iii) a report from an independent expert indicating that the price isconsistent with the terms of Article 16 of the Mexican Securities Law.

 

***Shareholder Conflicts ofInterest***

*** ***

Under Mexican law, anyshareholder that has a direct or indirect conflict of interest with respect toany transaction must abstain from voting thereon at the relevant shareholders’meeting.  A shareholder that votes on abusiness transaction in which its interest conflicts with ours may be liablefor damages if the transaction would not have been approved without suchshareholder’s vote.

 

**Rightsof Shareholders**

** **

The protections affordedto minority shareholders under Mexican law are different from those in theUnited States and many other jurisdictions. The substantive law concerning duties of directors and controllingshareholders has not been the subject of extensive judicial interpretation inMexico, unlike many states in the United States where duties of care andloyalty elaborated by judicial decisions help to shape the rights of minorityshareholders.  Mexican civil proceduredoes not contemplate class actions or shareholder derivative actions, whichpermit shareholders in U.S. courts to bring actions on behalf of othershareholders or to enforce rights of the corporation itself.  Shareholders cannot challenge corporateaction taken at a shareholders’ meeting unless they meet certain proceduralrequirements.

 

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As a result of thesefactors, in practice it may be more difficult for our minority shareholders toenforce rights against us or our directors or controlling shareholders than itwould be for shareholders of a U.S. company. See “Item 3.  KeyInformation—Risk Factors—Risks Relating to Our Controlling Shareholders andCapital Structure—The Protections Afforded to Minority Shareholders in MexicoAre Different From Those in the United States.”

 

In addition, under theU.S. securities laws, as a foreign private issuer we are exempt from certainrules that apply to domestic U.S. issuers with equity securities registeredunder the Exchange Act, including the proxy solicitation rules, the rulesrequiring disclosure of share ownership by directors, officers and certainshareholders.  We are also exempt fromcertain of the corporate governance requirements of the New York StockExchange, including the requirements concerning audit committees andindependent directors.  A summary ofsignificant ways in which our corporate governance standards differ from thethose followed by U.S. domestic companies under NYSE listing standards isavailable on our website at www.gruma.com.

 

**Antitakeover Protections**

 

Our bylaws provide that,subject to certain exceptions as explained below, prior written approval fromthe board of directors shall be required for any person (as defined hereunder),or group of persons to acquire, directly or indirectly, any of our commonshares or rights to our common shares, by any means or under any title whetherin a single event or in a set of consecutive events, such that its total sharesor rights to shares would represent 5% or more of our outstanding shares.

 

Prior approval from theboard of directors must be obtained each time such ownership threshold (andmultiples thereof) is intended to be exceeded, except for persons who, directlyor indirectly, are competitors (as such term is defined below) of the Companyor of any of its subsidiaries, who must obtain the prior approval of the boardof directors for future acquisitions where a threshold of 2% (or multiplesthereof) of our common shares is intended to be exceeded.

 

Pursuant to our bylaws, a“person” is defined as any natural person, corporate entity, trust or similarform of venture, vehicle, entity, corporation or economic or mercantile associationor any subsidiaries or affiliates of any of the former or, as determined by theboard of directors, any group of persons who may be acting jointly, coordinatedor as a whole; and a “competitor” is defined as any person engaged, directly orindirectly, in (i) the business of production and/or marketing of corn or wheatflour, and/or (ii) any other activity carried on by the Company or by any ofits subsidiaries or affiliates.

 

Persons that acquire ourcommon shares in violation of these requirements will not be considered thebeneficial owners of such shares under our bylaws and will not be able to votesuch shares or receive any dividends, distributions or other rights in respectof these shares.  In addition, pursuantto our bylaws, these holders will be obligated to pay us a penalty in an amountequal to the greater of (i) the market value of the shares such party acquiredwithout obtaining the prior approval of the board of directors and (ii) themarket value of shares representing 5% of our capital stock.

 

***Board Notices,Meetings, Quorum Requirements and Approvals****.*  To obtain the prior approval of our board ofdirectors, a potential acquirer must properly deliver a written applicationcomplying with the applicable requirements set forth in our bylaws.  Such application shall state, among otherthings:  (i) the number and class of ourshares the person beneficially owns or to which such person has any right, (ii)the number and class of shares the Person intends to acquire, (iii) the numberand class of shares with respect to which such Person intends to acquire anyright, (iv) the percentage that the shares referred to in (i) represent of ourtotal outstanding shares and of the class or series to which such sharesbelong, (v) the percentage that the shares referred to in (ii) and (iii)represent of our total outstanding shares and of the class or series to whichsuch shares belong, (vi) the person’s identity, or in the case of an acquirorwhich is a corporation, trust or legal entity, its shareholders, partners orbeneficiaries as well as the identity and nationality of each personeffectively controlling such corporation, trust or legal entity, (vii) thereasons and purpose behind such acquisition, (viii) if such person is, directlyor indirectly, a competitor of the Company or any of its subsidiaries oraffiliates, and if such person has the authority to legally acquire the sharespursuant to our bylaws and Mexican law, (ix) its source of financing theintended acquisition, (x) if the Person is part of an economic group, formed byone or more of its related parties, which intends to acquire shares of our 

 

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common stock or rights tosuch shares, (xi) if the person has obtained any financing from one of itsrelated parties for the payment of the shares, (xii) the identity andnationality of the financial institution, if any, that will act as theunderwriter or broker in connection with any tender offer, and (xiii) theperson’s address for receiving notices.

 

Either the Chairman, theSecretary or the Alternate Secretary of our board of directors must call ameeting of the board of directors within 10 business days following the receiptof the written application.  The noticesfor the meeting of the board of directors shall be in writing and sent to eachof the directors and their alternates at least 45 calendar days prior to themeeting.  Action by unanimous writtenconsent is not permitted.

 

Any acquisition of commonshares representing at least 2% or 5%, as the case may be, of our outstandingcapital stock, must be approved by at least the majority of the members of ourboard of directors present at a meeting at which at least the majority of themembers is present. Such acquisitions must be resolved by our board ofdirectors within 60 calendar days following the receipt of the writtenapplication described above, unless the board of directors determines that itdoes not have sufficient information upon which to base its decision.  In such case, the board of directors shalldeliver a written request to the potential acquiror for any additionalinformation that it deems necessary to make its determination.  The 60 calendar days referred to above willcommence following the receipt of the additional information from the potentialacquiror.

 

***Mandatory TenderOffers in the Case of Certain Acquisitions****. *If our board of directors authorizes an acquisition ofcommon shares which increases the acquirer’s ownership to 30% or more, but notmore than 50%, of our capital stock, then the acquiror must effect itsacquisition by way of a cash tender offer for a specified number of sharesequal to the greater of (i) the percentage of common shares intended to beacquired or (ii) 10% of our outstanding capital stock, in accordance with theapplicable Mexican securities regulations.

 

No approval of the boardof directors will be required if the acquisition would increase the acquirer’sownership to more than 50% of our capital stock or results in a change ofcontrol, in which case the acquiror must effect its acquisition by way of atender offer for 100% minus one of our total outstanding capital stock, whichtender shall be made pursuant to applicable Mexican laws.

 

The aforementioned tenderoffers must be made simultaneously in the Mexican and US stock markets.Furthermore, an opinion issued by the board of directors regarding any suchtender offer must be made available to the public through the authorized meansof communication within 10 days after commencement of the tender offer.  In the event of any tender offer, theshareholders shall have the right to hear more competitive offers.

 

***Notices****. *In addition to the aforementionedapprovals, if a person increases its beneficial ownership by 1% in the case ofcompetitors, or 2% in the case of non-competitors, written notice must besubmitted to the board of directors within five days of reaching or exceedingsuch thresholds.

 

***Exceptions****. *The provisions of our bylaws summarized above will notapply to (a) transfers of shares by operation of the laws of succession; (b)acquisitions of shares by (i) any person who, directly or indirectly, has theauthority or possibility of appointing the majority of the directors of ourboard of directors, (ii) any company, trusts or similar form of venture,vehicle, entity, corporation or economic or mercantile association, which maybe under the control of the aforementioned person; (iii) the heirs of theaforementioned person, (iv) the aforementioned person when such person isrepurchasing  the shares of anycorporation, trust or similar form of venture, vehicle, entity, corporation oreconomic or mercantile association referred to in the item (ii) above; and (v)the Company or by trusts created by the Company; (c) any person(s) that as ofDecember 4, 2003 hold(s), directly or indirectly, more than 20% of theshares representing the Company’s capital stock; and (d) any other exceptionsprovided for in the Mexican Securities Law and other legal dispositions derivedfrom said law.

 

**MATERIALCONTRACTS**

** **

**Archer-Daniels-Midland**

** **

We entered into anassociation with Archer-Daniels-Midland in September 1996.  We believe that this association hasimproved our position in the U.S. corn flour market by combining ourproprietary corn flour

 

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technology, ourleading position in the corn flour industry in Mexico, the United States,Central America and Venezuela and our operational expertise withArcher-Daniels-Midland’s logistical resources and financial strength.

 

As a result of thisassociation, we received U.S.$258.0 million in cash, 80% ownership of ourcombined U.S. corn flour operations and 60% of Archer-Daniels-Midland’s Mexicanwheat milling operations.  We alsogained exclusivity rights from Archer-Daniels-Midland in specified corn flourand wheat flour markets.  In return,Archer-Daniels-Midland received 74,696,314 of our newly issued shares, whichrepresented approximately 22% of our total outstanding shares, and 20%ownership of our combined U.S. corn flour operations, and retained 40% of theMexican wheat milling operations. Archer-Daniels-Midland also obtained the right to designate two of the14 members of our board of directors and their corresponding alternates.

 

Under the terms of thisassociation, Archer-Daniels-Midland may not, without the consent of Mr. RobertoGonzález Barrera, the Chairman of our board of directors and Chief ExecutiveOfficer, or our board of directors, acquire additional shares of us.  In 1999, Mr. González Barrera authorizedArcher-Daniels-Midland to acquire additional shares of us issued as a result ofan increase in capital stock and subsequent rights offering to ourshareholders.  In connection with therights offering on August 19, 1999, Archer-Daniels-Midland directly andindirectly purchased a total of 51,408,337 new shares, increasing its ownershipof our outstanding shares to approximately 29.2%, directly and indirectly.  A total of 24,566,561 of these new sharesare held by Archer-Daniels Midland through a Mexican corporation jointly ownedwith Mr. González Barrera and controlled by him.  Furthermore, Archer-Daniels-Midland must give Mr. GonzálezBarrera a right of first refusal on any sale of our shares.  Mr. González Barrera must giveArcher-Daniels-Midland a similar right on any sale of his shares in us if atthe time of the sale, he owns, or as a result of the sale will own, less than30% of our outstanding shares.  See“Item 7.  Major Stockholders andRelated Party Transactions—Related Party Transactions.”

 

The documents whichdetail the terms of the association include the Shareholders Agreement by andamong us, Roberto González Barrera, Archer-Daniels-Midland and ADM Bioproducts,S.A. de C.V., the Asset Contribution Agreement among Gruma Corporation, GrumaHolding, Inc., ADM Milling Co., Valley Holding, Inc., GRUMA-ADM, and AztecaMilling, L.P., and the Investment Agreement by and between us andArcher-Daniels-Midland, all dated as of August 21, 1996, as well asAmendment No. 1 and Amendment No. 2 to the Shareholders Agreement, dated as ofSeptember 13, 1996 and August 18, 1999, respectively.  See “Item 19.  Exhibits.”

 

**Bankof America, N.A.**

** **

On December 18,2002, we obtained a U.S.$300,000,000 syndicated loan from a group of 15 localand foreign banks, led by Bank of America, N.A.  The three-year loan allowed us to pay our outstanding syndicatedloan.  The loan pays a spread rangingfrom 87.5 to 162.5 percentage points over LIBOR.  No single bank in the syndicate finances more than 9.8% of thetotal loan.  The U.S.$300,000,000 LoanAgreement among us, the lenders, Bank of America, N.A., as AdministrativeAgent, and Banc of America Securities, LLC, as Lead Arranger and Sole BookManager, dated December 18, 2002, details the terms of this loan.  See “Item 19.  Exhibits.”

 

**EXCHANGECONTROLS**

** **

Mexican law does notrestrict our ability to remit dividends and interest payments, if any, tonon-Mexican holders of our securities. Payments of dividends to equity-holders generally will not be subject toMexican withholding tax.  See “—Taxation—Mexican TaxConsiderations—Payment of Dividends.”  Mexicohas had a free market for foreign exchange since 1991, and the government hasallowed the peso to float freely against the U.S. dollar sinceDecember 1994.

 

Our ability to repatriatedividends from our Venezuelan Operations may be adversely affected by exchangecontrols and other recent events.  See“Item 3.  Risk Factors—RisksRelated to Venezuela—Venezuela Presents Significant Economic Uncertainty andPolitical Risk.”

 

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**TAXATION**

** **

The following summarycontains a description of certain Mexican federal and U.S. federal income taxconsequences of the acquisition, ownership and disposition of B Shares or BShare ADSs (which are evidenced by ADRs), but it does not purport to be acomprehensive description of all of the tax considerations that may be relevantto a decision to purchase or hold B Shares or ADSs, such as the tax treatmentof holders that are dealers or that own (actually or constructively under rulesprescribed in the Internal Revenue Code of 1986, as amended, or the Code), 10%or more of the voting shares of GRUMA.

 

The Convention for theAvoidance of Double Taxation and a Protocol thereto, or the Tax Treaty, betweenthe United States and Mexico entered into force on January 1, 1994.  The United States and Mexico have alsoentered into an agreement concerning the exchange of information with respectto tax matters.

 

The summary is based upontax laws of the United States and Mexico as in effect on the date of thisdocument, which are subject to change, including changes that may haveretroactive effect.  Holders of B Sharesor ADSs should consult their own tax advisers as to the Mexican, U.S. or othertax consequences of the purchase, ownership and disposition of shares or ADSs,including, in particular, the effect of any foreign, state or local tax laws.

 

**MexicanTax Considerations**

** **

The following is ageneral summary of the principal consequences under the *Ley del Impuesto sobre la Renta*(the Mexican Income Tax Law) and rules and regulations thereunder, as currentlyin effect, of an investment in Shares or ADSs by a holder that is not aresident of Mexico and that will not hold shares or ADSs or a beneficialinterest therein in connection with the conduct of a trade or business througha permanent establishment or fixed base in Mexico.

 

For purposes of Mexicantaxation, a natural person is a resident of Mexico for tax purposes if he hasestablished his home in Mexico, unless he has resided in another country formore than 183 days, whether consecutive or not, in any one calendar year andcan demonstrate that he has become a resident of that country for tax purposes,and a legal entity is a resident of Mexico if it was incorporated in Mexico ormaintains the principal administration of its business or the effectivelocation of its management in Mexico.  AMexican citizen is presumed to be a resident of Mexico unless such person candemonstrate the contrary.  If anon-resident of Mexico is deemed to have a permanent establishment or fixedbase in Mexico for tax purposes, all income attributable to such permanentestablishment or fixed base will be subject to Mexican taxes, in accordancewith applicable tax laws.

 

***Tax Treaties***

*** ***

Provisions of the TaxTreaty that may affect the taxation of certain U.S. holders are summarizedbelow.  The United States and Mexicohave also entered into an agreement that covers the exchange of informationwith respect to tax matters.

 

Mexico has also enteredinto and is negotiating several other tax treaties that may reduce the amountof Mexican withholding tax to which payment of dividends on shares or ADSs maybe subject.  Holders of shares or ADSsshould consult their own tax advisors as to the tax consequences, if any, ofsuch treaties.

 

Under the Mexican IncomeTax Law, in order for any benefits from the Tax Treaty or any other taxtreaties to be applicable, residence for tax purposes must be demonstrated.

 

***Payment of Dividends***

* *

Under the Mexican IncomeTax Law, dividends, either in cash or in kind, paid with respect to sharesrepresented by ADSs are not subject to Mexican withholding tax.  A Mexican corporation will not be subject toany tax if the amount of dividends does not exceed the net tax profit account (*cuenta deutilidad fiscal neta,*or**CUFIN).

 

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If we pay a dividend in2004 in an amount greater than our CUFIN balance (which may occur in a yearwhen net profits exceed the balance in such accounts), then we are required topay a 33% income tax on an amount equal to the product of the portion of thegrossed-up amount which exceeds such balance multiplied by 1.4925.

 

After 2005, theapplicable income tax rate and factor are expected to be 32% and 1.4706,respectively.

 

***Taxation of Dispositions***

*** ***

The sale or otherdisposition of ADSs by a non-resident holder will not be subject to Mexicantax.  Deposits of shares in exchange forADSs and withdrawals of shares in exchange for ADSs will not give rise to Mexicantax or transfer duties.

 

The sale of shares by anon-resident holder will not be subject to any Mexican tax if the transactionis carried out through the Mexican Stock Exchange or other securities marketsapproved by the Mexican Ministry of Finance. Sales or other dispositions of shares made in other circumstancesgenerally would be subject to Mexican tax, regardless of the nationality orresidence of the transferor.

 

Under the Mexican IncomeTax Law, gains realized by a nonresident holder of shares on the sale ordisposition of shares not conducted through a recognized stock exchangegenerally are subject to a Mexican tax at a rate of 20% of the gross saleprice.  However, if the holder is aresident of a country which is not considered to be a low tax rate country (byreference to a list of low rate countries published by the Mexican Ministry ofFinance and Public Credit), the holder may elect to designate a resident ofMexico as its representative, in which case taxes would be payable at a 34% rateon the gain on such disposition of shares in 2003 (33% in 2004 and 32% in 2005and thereafter).

 

Pursuant to the TaxTreaty, gains realized by qualifying U.S. holders from the sale or otherdisposition of shares, even if the sale is not conducted through a recognizedstock exchange, will not be subject to Mexican income tax except that Mexicantaxes may apply if:

 

50% or more of our assetsconsist of fixed assets situated in Mexico;

 

such U.S. holder owned25% or more of the shares representing the capital stock of GRUMA (includingADSs), directly or indirectly, during the 12-month period preceding suchdisposition; or

 

the gain is attributableto a permanent establishment or fixed base of the U.S. holder in Mexico.

 

***Other Mexican Taxes***

*** ***

A non-resident holderwill not be liable for estate, inheritance or similar taxes with respect to itsholdings of shares or ADSs; provided, however, that gratuitous transfers ofshares may in certain circumstances result in imposition of a Mexican tax uponthe recipient.  There are no Mexicanstamp, issue registration or similar taxes payable by a non-resident holderwith respect to shares or ADSs.

 

Reimbursement of capitalpursuant to a redemption of shares will be tax exempt up to an amountequivalent to the adjusted contributed capital corresponding to the shares thatwill be redeemed.  Any excessdistribution pursuant to a redemption will be considered a dividend for taxpurposes and we may be taxed as described above.

 

**U.S.Federal Income Tax Considerations**

** **

The following is asummary of certain U.S. federal income tax consequences to U.S. holders (asdefined below) of the acquisition, ownership and disposition of B Shares orADSs.  This summary is based upon thefederal income tax laws of the United States as in effect on the date of thisAnnual Report, including the provisions of the Tax Treaty, all of which aresubject to change, possibly with retroactive effect in the case of U.S. federalincome tax law.

 

The summary does notpurport to be a comprehensive description of all of the tax consequences of theacquisition, ownership or disposition of B Shares or ADSs.  The summary applies only to U.S. holdersthat will hold their B Shares or ADSs as capital assets and does not apply to specialclasses of holders such as dealers in securities 

 

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or currencies,holders with a functional currency other than the U.S. dollar, holders of 10%or more of our voting shares (whether held directly or through ADSs or both),tax-exempt organizations, financial institutions, holders liable for thealternative minimum tax, securities traders electing to account for theirinvestment in their B Shares or ADSs on a mark-to-market basis, and personsholding their B Shares or ADSs in a hedging transaction or as part of astraddle or conversion transaction.

 

For purposes of thisdiscussion, a “U.S. holder” is a beneficial owner of B Shares or ADSs that is:

 

a citizen or resident ofthe United States of America;

 

a corporation orpartnership organized in or under the laws of the United States of America orany state thereof or the District of Columbia;

 

an estate the income ofwhich is subject to United States federal taxation regardless of its source;

 

a trust if a court withinthe U.S. is able to exercise primary supervision over the administration andone or more U.S. persons have the authority to control all substantialdecisions of the trust; or

 

otherwise subject to U.S.federal income taxation on a net income basis with respect to the shares or ADSs.

 

A holder of B Shares orADSs that is a partnership, and partners in such partnership, should consulttheir tax advisors about the United States federal income tax consequences ofholding and disposing of the B Shares or the ADSs, as the case may be.

 

Prospective investors inthe B Shares or ADSs should consult their own tax advisors as to the U.S.federal, Mexican or other tax consequences of the purchase, ownership anddisposition of the B Shares or ADSs, including, in particular, the effect ofany foreign, state or local tax laws and their entitlement to the benefits, ifany, afforded by the Tax Treaty.

 

***Treatment of ADSs***

*** ***

In general, a U.S. holderof ADSs will be treated as the beneficial owner of the B Shares represented bythose ADSs for U.S. federal income tax purposes.  Deposits or withdrawals of B Shares by U.S. holders in exchangefor the ADSs will not result in the realization of gain or loss for U.S.federal income tax purposes.  U.S.holders that withdraw any shares should consult their own tax advisorsregarding the treatment of any foreign currency gain or loss on any pesosreceived in respect of such shares.

 

***Taxation of Distributions***

*** ***

In this discussion, theterm “dividends” is used to mean distributions paid out of our current oraccumulated earnings and profits (calculated for U.S. federal income taxpurposes) with respect to B Shares or ADSs. In general, the gross amount of any dividends will be includible in thegross income of a U.S. holder as ordinary income on the day on which thedividends are received by the U.S. holder in the case of shares, or by thedepositary in the case of ADSs. Dividends paid by us will not be eligible for the dividends-receiveddeduction allowed to corporations under the Code.  To the extent that a distribution exceeds the amount of ourearnings and profits (calculated for U.S. federal income tax purposes), it willbe treated as a non-taxable return of capital to the extent of the U.S.holder’s basis in the B Shares or ADSs, and thereafter as capital gain (providedthat the B Shares or ADSs are held as capital assets).  Distributions will be paid in pesos and willbe includible in the income of a U.S. holder in a U.S. dollar amount calculatedby reference to the exchange rate in effect on the day that they are receivedby the U.S. holder in the case of shares, or by the depositary in the case ofADSs.  U.S. holders should consult theirown tax advisors regarding the treatment of foreign currency gain or loss, ifany, on any pesos received by a U.S. holder or depositary that are convertedinto U.S. dollars on a date subsequent to receipt.

 

Distributions ofadditional shares or ADSs to U.S. holders with respect to their shares or ADSsthat are made as part of a pro rata distribution to all of our shareholders generallywill not be subject to U.S. federal income tax.

 

Dividends paid on sharesor ADSs generally will be treated for U.S. foreign tax credit purposes asforeign source passive income, or, in the case of certain U.S. holders, asforeign source financial services income. In the 

 

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event Mexicanwithholding taxes are imposed on such dividends, any such withheld taxes wouldbe treated as part of the gross amount of the dividend includible in income ofa U.S. holder for U.S. federal income tax purposes (to the extent of current oraccumulated earnings and profits), and such taxes may be treated as a foreignincome tax eligible, subject to generally applicable limitations and conditionsunder U.S. federal income tax law, for credit against a U.S. holder’s U.S.federal income tax liability or, at the U.S. holder’s election, for deductionfrom gross income in computing the U.S. holder’s taxable income.  The calculation and availability of foreigntax credits and, in the case of a U.S. holder that elects to deduct foreigntaxes, the availability of deductions, involves the application of rules thatdepend on a U.S. holder’s particular circumstances.  In the event Mexican withholding taxes are imposed, U.S. holdersshould consult their own tax advisors regarding the availability of foreign taxcredits.

 

***Qualified Dividend Income***

*** ***

Notwithstanding theforegoing, certain dividends received by individual U.S. holders thatconstitute “qualified dividend income” will be subject to a reduced maximummarginal U.S. federal income tax rate. Qualified dividend income generally includes, among other dividends,dividends received during the taxable year from “qualified foreign corporations.”  In general, the term “qualified foreigncorporation” includes a foreign corporation that is eligible for the benefitsof a comprehensive income tax treaty with the United States which the U.S.Treasury Department determines to be satisfactory, and which includes anexchange of information program.  Inaddition, a foreign corporation is treated as a qualified foreign corporationwith respect to any dividend paid by the corporation with respect to stock ofthe corporation that is readily tradable on an established securities market inthe United States.  For this purpose, ashare is treated as readily tradable on an established securities market in theUnited States if an ADR backed by such share is so traded.

 

Notwithstanding theprevious rule, dividends received from a foreign corporation that is a foreigninvestment company (as defined in section 1246(b) of the Code), a passiveforeign investment company (as defined in section 1297 of the Code), or aforeign personal holding company (as defined in section 552 of the Code)in either the taxable year of the corporation in which the dividend was paid orthe preceding taxable year will not constitute qualified dividend income.  In addition, the term “qualified dividendincome” will not include, among other dividends, any (i) dividends on any shareof stock or ADS which is held by a taxpayer for 60 days or less during the120-day period beginning on the date which is 60 days before the date on whichsuch share or the shares backing the ADS become ex-dividend with respect tosuch dividends (as measured under section 246(c) of the Code) or (ii)dividends to the extent that the taxpayer is under an obligation (whetherpursuant to a short sale or otherwise) to make related payments with respectsto positions in substantially similar or related property.  Moreover, special rules apply in determininga taxpayer’s foreign tax credit limitation under section 904 of the Codein the case of qualified dividend income.

 

Individual U.S. holdersshould consult their own tax advisors to determine whether or not amountsreceived as dividends from us will constitute qualified dividend income subjectto a reduced maximum marginal U.S. federal income tax rate and, in such case,the effect, if any, on the individual U.S. holder’s foreign tax credit.

 

***Taxation of Dispositions***

*** ***

Gain or loss realized bya U.S. holder on the sale, redemption or other disposition of B Shares or ADSswill be subject to U.S. federal income taxation as capital gain or loss in anamount equal to the difference between such U.S. holder’s adjusted basis in theB Shares or the ADSs and the amount realized on the disposition (including anyamounts withheld in respect of Mexican withholding tax).  Gain (including gain that arises because theU.S. holder’s basis in the B Shares or ADSs has been reduced because adistribution is treated as a return of capital rather than as a dividend) andloss realized by a U.S. holder on a sale, redemption or other disposition of BShares or ADSs generally will be treated as U.S. source income or loss for U.S.foreign tax credit purposes.

 

The availability of U.S.foreign tax credits for any Mexican taxes imposed on the sale, redemption orother disposition is subject to certain limitations and involves theapplication of rules that depend on a U.S. holder’s particular circumstances.  U.S. holders should consult their own taxadvisors regarding the application of the foreign tax credit rules to theirinvestment in, and disposition of, B Shares or ADSs.

 

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***Tax Return DisclosureRegulations***

*** ***

Pursuant to U.S.Treasury regulations (the “Disclosure Regulations”), any taxpayer that hasparticipated in a “reportable transaction” and who is required to file a U.S.Federal income tax return must generally attach a disclosure statementdisclosing such taxpayer’s participation in the reportable transaction to thetaxpayer’s tax return for each taxable year for which the taxpayer participatesin the reportable transaction.  TheDisclosure Regulations provide that, in addition to certain other transactions,“loss transactions” and “transactions involving a brief asset holding period”constitute “reportable transactions.” “Loss transactions” include transactionsthat produce a foreign currency exchange loss in an amount equal to or in excessof certain threshold amounts. “Transactions involving a brief asset holding period” are generallytransactions resulting in the taxpayer claiming a tax credit in excess of$250,000 if the underlying asset giving rise to the credit is held by thetaxpayer for 45 days or less.  U.S.holders should consult their own advisors concerning the implications of thetax return disclosure requirements in light of their particular circumstances.

 

***Information Reporting andBackup Withholding***

*** ***

Dividends on, and proceedsfrom the sale or other disposition of, the B Shares or ADSs paid to a U.S.holder generally may be subject to the information reporting requirements ofthe Code and may be subject to backup withholding at the applicable rate unlessthe holder:

 

establishes that it is acorporation or other exempt holder; or

 

provides an accuratetaxpayer identification number on a properly completed Internal Revenue ServiceForm W-9 and certifies that no loss of exemption from backup withholding hasoccurred.

 

The amount of any backupwithholding from a payment to a holder will be allowed as a credit against theU.S. holder’s U.S. federal income tax liability and may entitle such holder toa refund, provided that certain required information is furnished to theInternal Revenue Service.

 

***U.S. Tax Consequences forNon-U.S. Holders***

*** ***

*Distributions:*

* *

A holder of shares orADSs that is, with respect to the United States, a foreign corporation or anon-resident alien individual (a “non-U.S. holder”) generally will not besubject to U.S. federal income or withholding tax on dividends received onshares or ADSs, unless such income is effectively connected with the conduct bythe holder of a U.S. trade or business.

 

*Dispositions:*

* *

A non-U.S. holder ofshares or ADSs will not be subject to U.S. federal income or withholding tax ongain realized on the sale of shares or ADSs, unless:

 

such gain is effectivelyconnected with the conduct by the holder of a U.S. trade or business, or

 

in the case of gainrealized by an individual holder, the holder is present in the United Statesfor 183 days or more in the taxable year of the sale and certain otherconditions are met.

 

*InformationReporting and Backup Withholding:*

* *

Although non-U.S. holdersgenerally are exempt from backup withholding, a non-U.S. holder may be requiredto comply with certification and identification procedures in order toestablish its exemption from information reporting and backup withholding.

 

**DOCUMENTSON DISPLAY**

** **

We are subject to theinformation requirements of the Exchange Act and, in accordance therewith, weare required to file reports and other information with the SEC.  These materials, including this Form 20-Fand the 

 

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exhibits thereto,may be inspected and copied at the SEC’s Public Reference Room at 450 FifthStreet, NW, Washington, D.C. 20549.  Thepublic may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330.

 

## **ITEM 11**.                                              QuantitativeAnd Qualitative Disclosures About Market Risk.

## ** **

The following informationincludes “forward-looking statements” that involve risk and uncertainties.  Actual results could differ from thosepresented.  All information below ispresented on a Mexican GAAP basis in pesos of constant purchasing power as ofDecember 31, 2003.

 

We are exposed to marketrisks arising from changes in interest rates, foreign exchange rates, equityprices and commodity prices.  We usederivative instruments, on a selective basis, to manage these risks.  We do not use derivative instruments fortrading or speculative purposes.  Wemaintain and control our treasury operations and overall financial risk throughpolicies approved by senior management.

 

**INTERESTRATE RISKS**

** **

We depend upon debtfinancing transactions, including debt securities, bank and vendor creditfacilities and leases, to finance our operations.  These transactions expose us to interest rate risk, with theprimary interest-rate risk exposure resulting from changes in the relevant baserates (CETES, TIIE, LIBOR and/or prime rate) which are used to determine theinterest rates that are applicable to borrowings under our creditfacilities.  We are also exposed tointerest rate risk in connection with refinancings of maturing debt.  We had approximately U.S.$267 million(Ps.3,006 million) of fixed rate debt and approximately U.S.$309 million(Ps.3,473 million) in floating rate debt at December 31, 2003.  For a description of our debt, see Note 9 toour financial statements.

 

The following table sets forth,as of December 31, 2003, the interest rate and maturity profile of ourdebt portfolio.

 
|                 |   | **Maturity  Dates**                                                                                        |   |
|----------------------|--------|------------------------------------------------------------------------------------------------------------|--------|
|                 |   | **2004**                                                                                                   |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
|                 |   | **(in  millions of pesos of constant purchasing power  as of December 31, 2003, except percentages)** |   |
| Liabilities          |   |                                                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt                 |   |                                                                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed  Rate (Ps.)    |   | 13                                                                                                         |   | 14 |   | 15 |   | 2,827 |   | 18 |   | 119 |   | 3,006 |   | 3,145 |   |
| Average  Rate        |   | 7.96                                                                                                       | %      | 7.96 | % | 7.96 | % | 7.625 | % | 7.96 | % | 7.96 | % | — |   | — |   |
| Floating  Rate (Ps.) |   | 485                                                                                                        |   | 2,852 |   | 15 |   | 1 |   | 1 |   | 119 |   | 3,473 |   | 3,380 |   |
| Average  Rate        |   | 3.594                                                                                                      | %      | 2.3579 | % | 3.388 | % | 7.000 | % | 7.000 | % | 1.2487 | % | — |   | — |   |

 

In the case of our cashand short-term investments, declines in interest rates decrease the interestreturn on floating rate cash deposits and short-term investments.  A hypothetical 100 basis point (1.0%)decrease in interest rates would not have a significant effect on our resultsof operations.  We use derivativefinancial instruments such as interest rate swaps for purposes of hedging a portionof our long-term debt, in order to reduce the risk from interest ratefluctuations.

 

**FOREIGNEXCHANGE RATE RISKS**

** **

Our net sales aredenominated in U.S. dollars, Mexican pesos and other currencies.  During 2003, 48% of our revenues weregenerated in U.S. dollars.  In addition,as of December 31, 2003, 52% of our total assets were denominated incurrencies other than Mexican pesos, particularly U.S. dollars.  A significant portion of our operations isfinanced through U.S. dollar-denominated debt.

 

We believe that we havenatural foreign exchange hedges incorporated in our balance sheet, insignificant part because we have subsidiaries outside Mexico, and thepeso-denominated value of our equity in these subsidiaries is also exposed tofluctuations in exchange rates.  Changesin the peso value of equity in our 

 

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subsidiariescaused by movements in foreign exchange rate are recognized as a component ofequity.  See Note 12 to our financialstatements.

 

Fluctuations in exchangerates relative to the Mexican peso expose us to foreign-currency exchange raterisk.  In the near term, theforeign-currency exchange rate exposure associated with our debt repaymentobligations is primarily limited to our short-term debt.  We have not established any hedge to ourforeign-currency exchange rate exposure.

 

Our primary foreignexchange rate risk relates to our substantial U.S. dollar-denominated debt forour non-U.S. subsidiaries.  As ofDecember 31, 2003, 99% of our debt obligations was denominated in U.S.dollars.  The following table sets forthinformation concerning our U.S. dollar-denominated debt as of December 31,2003.  The table does not address ourU.S. dollar sales and our U.S. dollar-denominated assets.

 
|                              |   | **Expected  Maturity or Transaction Date**                                             |   |
|-----------------------------------|--------|----------------------------------------------------------------------------------------|--------|
|                              |   | **2004**                                                                               |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Fair Value** |   |
|                              |   | **(in  millions of pesos of constant purchasing power  as of December 31, 2003)** |   |
| **U.S.  dollar-denominated debt** |   |                                                                                   |   |
| Yankee  bond                      |   |                                                                                   |   |   |   |   |   | 2,810 |   |   |   |   |   | 2,810 |   | 2,949 |   |
| Syndicated  loan                  |   | 337                                                                                    |   | 2,810 |   |   |   |   |   |   |   |   |   | 3,147 |   | 3,147 |   |
| Private  Placement                |   |                                                                                   |   | 14 |   | 15 |   | 17 |   | 18 |   | 119 |   | 183 |   | 183 |   |
| Bank  loans                       |   | 161                                                                                    |   | 42 |   | 15 |   | 1 |   | 1 |   | 119 |   | 339 |   | 339 |   |

** **

** **

**COMMODITYPRICE RISKS**

** **

The availability andprice of corn and other agricultural commodities are subject to widefluctuations due to factors outside our control, such as weather, plantings,government (domestic and foreign) farm programs and policies, changes in globaldemand created by population growth and global production of similar andcompetitive crops.  We hedge a portionof our production requirements through commodity futures contracts in order toreduce the risk created by price fluctuations and supply of corn, wheat, naturalgas and soy oils which exist as part of ongoing business operations.  The open positions for hedges of purchasesdo not exceed the maximum production requirements for a one-year period.

 

During 2003, we enteredinto short-term hedge transactions through commodities futures contracts for aportion of our corn requirements.  Theseshort-term hedge transactions were completed prior to December 31,2003.  At June 25, 2004, we hadopen positions for corn.

 

As of December 31,2003, the nominal value of our outstanding swap contracts for natural gas wasU.S.$738,000.  These swap contractsrelate to GIMSA exclusively.

 

**EQUITYPRICE RISKS**

** **

We classify our equityinvestments, consisting primarily of shares of Grupo Financiero Banorte, S.A.de C.V., a Mexican financial services holding company, as long-termassets.  Since these investments areaccounted for using the equity method, we do not believe our exposure to ahypothetical 10% decrease in these equity investments would have any materialeffect on our results.  For additionalinformation concerning our investment in Grupo Financiero Banorte, see“Item 4.  Information on theCompany—Description of Business—Miscellaneous—Banorte Investment.”

 

As disclosed in Note 12 Cto the consolidated financial statements, over the past years, we have enteredinto various equity swap agreements indexed to the Company’s own stock. UnderMexican GAAP, these agreements are recognized at their fair value on thebalance sheet, with the difference between the initial and the year-end fairvalue as a component of equity. Under U.S. GAAP, the fair value of suchcontracts has been recognized in income due to the nature of the contractualsettlement provisions. Details of the arrangements are as follows:

 

82

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During 2003, we enteredinto five equity swap agreements with an international financial institutionwith respect to 22,200,000 of our own shares for a total amount of U.S.$24.3million.  At each maturity we arerequired to pay a financing cost at the LIBOR rate plus an average of spread of2.01% on the contractual amount.  Theagreements mature in January, September and December of 2004. Theagreement that matured in January was closed with a gain of U.S.$0.5578per share, resulting in a total gain of U.S.$5.4 million. One of the agreementsthat was set to mature in September was advanced to mature in February,which closed with a gain of U.S.$0.3806 per share, resulting in a total gain ofU.S.$0.9 million. For the remaining agreements that mature inSeptember and December, the Company will pay or receive the differencebetween the agreed average price of U.S.$1.3624 per share and the market price.

 

As disclosed in Note 12 Cto the consolidated financial statements, we have entered into call optionagreements indexed to the Company’s own stock. Under Mexican GAAP, we haveaccounted for these instruments as equity and consequently, these instrumentsare not reflected as liabilities or assets on our balance sheet. Under U.S.GAAP, the fair value of such contracts has been recognized in income due tonature of the contractual settlement provisions. Details of the arrangementsare as follows: during 2003, we entered into two call option agreements with aEuropean international financial institution with respect to 6,405,000 of our ownshares for a total amount of U.S.$5.9 million, maturing in February andMay of 2004, with a zero strike price. These agreements were closed with anaverage gain of U.S.$0.7444 per share, resulting in a total gain of U.S.$4.8million.

 

**COUNTERPARTYRISKS**

** **

We maintain centralizedtreasury operations in Mexico for our Mexican operations and in the UnitedStates for our U.S. operations.  Liquidassets are invested primarily in government bonds and short-term debt instrumentswith a minimum “A1/P1” rating for our U.S. operations and “A” for our Mexicanoperations.  We face credit risk fromthe potential non-performance by the counterparties in respect of the financialinstruments that we utilize. Substantially all of these financial instruments are unsecured.  We do not anticipate non-performance by thecounterparties, which are principally licensed commercial banks and investmentbanks with long-term credit ratings. For our Central American operations and Venezuelan Operations, we onlyinvest cash reserves with well-known local banks and local branches ofinternational banks.

 

The above discussion ofthe effects on us of changes in interest rates, foreign exchange rates,commodity prices and equity prices is not necessarily indicative of our actualresults in the future.  Future gains andlosses will be affected by actual changes in interest rates, foreign exchangerates, commodity prices, equity prices and other market exposures, as well aschanges in the actual derivative instruments employed during any period.

 

## **ITEM 12**.                                              DescriptionOf Securities Other Than Equity Securities.

## ** **

Not applicable.

 

# **PARTII**

# ** **

## **ITEM 13**.                                              Defaults,Dividend Arrearages And Delinquencies.

## ** **

None.

 

## **ITEM 14**.                                              MaterialModifications To The Rights Of Security Holders And Use Of Proceeds.

## ** **

None.

 

## **ITEM 15**.                                              Controlsand Procedures.

## ** **

**EVALUATION OF DISCLOSURE CONTROLS ANDPROCEDURES**

 

The conclusions ofour Chief Executive Officer and Chief Corporate Officer about the effectivenessof our disclosure controls and procedures, based on their evaluation of thesecontrols and procedures as of December 31, 2003, are as follows:

 

Our disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by us is recorded, processed, summarized and reported within requiredtimeframes.  Our disclosure controls and

 

83

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procedures includecontrols and procedures designed to ensure that information required to bedisclosed is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Corporate Officer, as appropriate to allow timelydecisions regarding required disclosure. Based on their assessments of our disclosure controls and procedures,our Chief Executive Officer and Chief Corporate Officer have concluded that thedisclosure controls and procedures have functioned effectively and that theconsolidated financial statements fairly present our consolidated financialposition and the results of our operations for the periods presented.

 

**CHANGES IN INTERNAL CONTROLS**

 

There has been nochange in our internal control over financial reporting during 2003 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

### **ITEM 16A**.                                     Financial Expert

### ** **

At our annual ordinaryshareholders’ meeting in April 2004, our shareholders elected thefollowing three members of the Audit Committee:  Eduardo Livas Cantú, Javier Vélez Bautista and Román MartínezMéndez and designated Javier Vélez Bautista as an “audit committee financialexpert” within the meaning of this Item 16A. Although under Mexican law the determination of the shareholders isbinding on our company, our board of directors will confirm this designation atits next board meeting.

 

### **ITEM 16B**.                                     Code of Ethics

### ** **

We have adopted a code ofethics, as defined in Item 16B of Form 20-F under the Securities Exchange Actof 1934, as amended.  Our code of ethicsapplies to our Chief Executive Officer, Chief Financial Officer and personsperforming similar functions as well as to our directors and other officers andemployees.  Our code of ethics isavailable on our web site at www.gruma.com. If we amend the provisions of our code of ethics that apply to our ChiefExecutive Officer, Chief Financial Officer and persons performing similarfunctions, or if we grant any waiver of such provisions, we will disclose suchamendment or waive on our web site at the same address.

 

### **ITEM 16C**.                                     Principal Accountant Fees and Services

### ** **

**Auditand Non-Audit Fees**

 

The following table summarizesthe aggregate fees billed to us by PricewaterhouseCoopers, during the fiscalyears ended December 31, 2002 and 2003:

 
|                |   | **Year ended  December 31,** |   |
|---------------------|--------|-----------------------------------|--------|
|                |   | **2003**                          |   | **2002** |   |
|                |   | **(thousands  of Mexican pesos)** |   |
| Audit  fees         |   | Ps.                               | 20,484 |   | Ps. | 15,809 |   |
| Audit-related  fees |   |                              | — |   |   | — |   |
| Tax  fees           |   |                              | 5,547  |   |   | 6,402 |   |
| Other  fees         |   |                              | 601    |   |   | 3,914 |   |
| Total  fees         |   | Ps.                               | 26,632 |   | Ps. | 26,125 |   |

 

*Auditfees*.  Audit fees inthe above table are the aggregate fees billed by PricewaterhouseCoopers, inconnection with the audit of our annual financial statements and statutory andregulatory audits.

 

*Audit-relatedFees*.  Audit-relatedfees in the above table are the aggregate fees billed byPricewaterhouseCoopers, for financial accounting and reporting consultations.

 

*TaxFees*.  Tax fees in theabove table are fees billed by PricewaterhouseCoopers, for services based uponexisting facts and prior transactions in order to document, compute, and obtaingovernment approval for amounts 

 

84

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included in tax filingssuch as value-added tax return assistance, transfer pricing documentation andrequests for technical advice from taxing authorities.

 

*OtherFees*.  Other fees inthe above table are fees billed by PricewaterhouseCoopers, for non-audit services.  As a percentage of total fees billed toGRUMA, other fees represent 2% and 15% for 2003 and 2002, respectively.

 

**AuditCommittee Pre-Approval Policies and Procedures**

 

We have adoptedpre-approval policies and procedures under which all audit and non-auditservices provided by our external auditors must be pre-approved by the auditcommittee.  Any service proposalssubmitted by external auditors need to be discussed and pre-approved by theaudit committee during its meetings, which take place at least four times ayear.  Once the proposed service isapproved, we or our subsidiaries formalize the engagement of services.  The approval of any audit and non-auditservices to be provided by our external auditors is specified in the minutes ofour audit committee.  In addition, themembers of our board of directors are briefed on matters discussed in themeetings of the audit committee.

 

### **ITEM 16D**.                                     Not Applicable

### ** **

### **ITEM 16E**.                                       Not Applicable

 

85

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# **PARTIII**

# ** **

## **ITEM 17**.                                              FinancialStatements.

## ** **

Not applicable.

 

## **ITEM 18**.                                              FinancialStatements.

## ** **

See pages F-1 through F-49, incorporated herein byreference.

 

## **ITEM 19**.                                              Exhibits.

 
| **Exhibit No.** |   |                                                                                                                                                                                                                                                                                         |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                         |
| 1               |   | Our bylaws (*estatutos  sociales*) as amended through December 4, 2003, together with  an English translation.                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                         |
| 2(a)(1)         |   | Deposit Agreement,  dated as of September 18, 1998, by and among us, Citibank, N.A. as  Depositary and the Holders and Beneficial Owners of American Depositary  Shares Evidenced by American Depositary Receipts Issued Thereunder (including  form of American Depositary Receipt).** |
|            |   |                                                                                                                                                                                                                                                                                         |
| 2(b)(1)         |   | Indenture, dated as of  October 9, 1997, between us and The Chase Manhattan Bank, as Indenture  Trustee representing up to U.S.$250,000,000 of our 7.625% Notes due 2007.***                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                         |
| 2(b)(2)         |   | Registration Rights  Agreement by and among us, Lehman Brothers Inc., Bear Stearns International  Limited, and AFIN Securities International Ltd., dated October 9,  1997.***                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                         |
| 2(b)(3)         |   | U.S.$300 million Loan  Agreement among us, the Lenders party thereto, Bank of America, N.A., as  Administrative Agent, and Banc of America Securities, LLC, as Lead Arranger  and Sole Book Manager, dated as of December 18, 2002.****                                                 |
|            |   |                                                                                                                                                                                                                                                                                         |
| 4(a)(1)         |   | Shareholders Agreement  by and among us, Roberto González Barrera, Archer Daniels-Midland Company and  ADM Bioproducts, S.A. de C.V., dated August 21, 1996. ***                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                         |
| 4(a)(2)         |   | Amendment No. 1 to  Shareholders Agreement by and among us, Roberto González Barrera, Archer  Daniels-Midland Company and ADM Bioproducts, S.A. de C.V., dated September 13,  1996.*                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                         |
| 4(a)(3)         |   | Amendment No. 2 to  Shareholders Agreement by and among us, Roberto González Barrera, Archer  Daniels-Midland Company and ADM Bioproducts, S.A. de C.V., dated  August 18, 1999.*                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                         |
| 4(a)(4)         |   | Asset Contribution  Agreement among Gruma Corporation, Gruma Holding, Inc., ADM Milling Co.,  Valley Holding, Inc., GRUMA-ADM, and Azteca Milling, L.P., dated as of  August 21, 1996.***                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                         |
| 4(a)(5)         |   | Investment Agreement by  and between us and Archer-Daniels-Midland Company, dated as of August 21,  1996. ***                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                         |
| 7               |   | Statement of  Computation of Ratio of Earnings to Fixed Charges (Mexican GAAP and U.S.  GAAP).                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                         |
| 8               |   | List of Principal  Subsidiaries.                                                                                                                                                                                                                                                             |

 

86

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| **Exhibit No.** |   |                                                                                                               |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                               |
| 12(a)(1)        |   | CEO Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002, dated June 28,  2004.      |
|            |   |                                                                                                               |
| 12(a)(2)        |   | CFO Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated  June 28, 2004.      |
|            |   |                                                                                                               |
| 13              |   | Officer Certifications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated  June 28, 2004. |

 

----

| *    | Previously filed in  Annual Report on Form 20-F (File No. 1-14852), originally filed with the SEC  on July 1, 2002. Incorporated herein by reference.              |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **   | Previously filed in  Registration Statement on Form F-6 (File No. 333-9282), originally filed with  the SEC on August 13, 1998. Incorporated herein by reference.  |
| ***  | Previously filed in  Registration Statement on Form F-4 (File No. 333-8266), originally filed with  the SEC on January 28, 1998. Incorporated herein by reference. |
| **** | Previously filed in  Annual Report on Form 20-F (File No. 1-14852), originally filed with the SEC  on June 30, 2003. Incorporated herein by reference.             |

 

87

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**SIGNATURE**

** **

The registrant, Gruma,S.A. de C.V., hereby certifies that it meets all of the requirements for filingon Form 20-F and that it has duly caused and authorized the undersigned tosign this annual report on its behalf.

 
|                       | GRUMA, S.A. de C.V.                                                                                                                                     |
|----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |                                                                                                                                                    |
|                       |                                                                                                                                                    |
|                       | /s/ Juan Antonio Quiroga  García                                                                                                                   |
|                       | Name:               Juan Antonio  Quiroga García                             |
|                       | Title:                     Chief  Corporate Officer |
|                       |                                                                                                                                                    |
|                       |                                                                                                                                                    |
| Dated: June 28,  2004 |                                                                                                                                                    |

 

88

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**GRUMA, S.A. DE C.V.AND SUBSIDIARIES**

** **

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

** **
| Report  of Independent Registered Public Accounting Firm                                                                    |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated  balance sheets as of December 31, 2002 and 2003                                                          |   |
| Consolidated  statements of income for the years ended December 31, 2001, 2002 and  2003                               |   |
| Consolidated  statements of changes in stockholders’ equity for the years ended  December 31, 2001, 2002 and 2003 |   |
| Consolidated  statements of changes in financial position for the years ended  December 31, 2001, 2002 and 2003        |   |
| Notes to  consolidated financial statements                                                                                 |   |

 

F-1

----

 

Report of Independent Registered PublicAccounting Firm

 

To the Stockholders ofGruma, S.A. de C.V.:

 

In our opinion,the accompanying consolidated balance sheets and the related consolidatedstatements of income,  changes instockholders’ equity and changes in financial position present fairly, in allmaterial respects, the financial position of Gruma, S.A. de C.V. andsubsidiaries at December 31, 2002 and 2003, and the results of theiroperations and changes in their financial position for each of the three yearsin the period ended December 31, 2003, in conformity with accountingprinciples generally accepted in Mexico. These consolidated financialstatements are the responsibility of management of Gruma, S.A. de C.V.; ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States) and generallyaccepted auditing standards in Mexico, which require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for theopinion expressed above.

 

Accountingprinciples generally accepted in Mexico vary in certain significant respectsfrom accounting principles generally accepted in the United States ofAmerica.  The application of accountingprinciples generally accepted in the United States of America would haveaffected the determination of the consolidated net income and comprehensiveincome, expressed in Mexican pesos, for each of the three years in the periodended December 31, 2003, and the determination of the total consolidatedstockholders’ equity, also expressed in Mexican pesos, as of December 31,2002 and 2003. Information related to the nature and effect of such differencesis presented in Note 20 to the consolidated financial statements.

 

** **

**PricewaterhouseCoopers**

** **

 

February 20, 2004

Monterrey, N.L., Mexico

 

F-2

----

 

**GRUMA, S.A. DE C.V. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS****AS OF DECEMBER 31,2002 AND 2003(Expressed in thousands of Mexican pesos of constant purchasing power as ofDecember 31, 2003)(Notes 1 and 2)**

 
|                                                                                                                              |   | **2002**    |       | **2003**    |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
| **ASSETS**                                                                                                                        |   |        |       |        |   |
| Current:                                                                                                                          |   |        |       |        |   |
| Cash                                                                                                                              |   | Ps.         | 202,904    |        | Ps.    | 148,913 |   |
| Temporary  investments (Note 2-F)                                                                                                 |   | 283,405     |       | 220,332     |   |
| Restricted  cash (Note 11-B)                                                                                                      |   | 1,485       |       | 1,124       |   |
| Accounts  receivable, net (Note 3)                                                                                                |   | 2,972,753   |       | 2,733,736   |   |
| Refundable  taxes (Note 3)                                                                                                        |   | 300,830     |       | 294,630     |   |
| Inventories  (Note 4)                                                                                                             |   | 2,740,504   |       | 3,377,888   |   |
| Prepaid  expenses                                                                                                                 |   | 122,203     |       | 227,214     |   |
| Total  current assets                                                                                                             |   | 6,624,084   |       | 7,003,837   |   |
| Investment  in common stock of associated companies (Note 5)                                                                      |   | 1,464,535   |       | 1,579,195   |   |
| Property,  plant and equipment, net (Note 6)                                                                                      |   | 13,557,299  |       | 13,029,626  |   |
| Intangible  assets, net (Note 7)                                                                                                  |   | 931,109     |       | 812,191     |   |
| Excess  of cost over book value of subsidiaries acquired, net                                                                     |   | 994,632     |       | 890,039     |   |
| Other  assets (Note 8)                                                                                                            |   | 287,723     |       | 66,794      |   |
| **Total assets**                                                                                                                  |   | Ps.         | 23,859,382 |        | Ps.    | 23,381,682 |   |
| **LIABILITIES**                                                                                                                   |   |        |       |        |   |
| Current:                                                                                                                          |   |        |       |        |   |
| Bank  loans (Note 9)                                                                                                              |   | Ps.         | 838,688    |        | Ps.    | 93,327 |   |
| Current  portion of long-term debt (Note 9)                                                                                       |   | 13,127      |       | 406,002     |   |
| Trade  accounts payable                                                                                                           |   | 1,216,673   |       | 967,845     |   |
| Accrued  liabilities and other accounts payable                                                                                   |   | 1,521,275   |       | 1,791,028   |   |
| Income  taxes payable                                                                                                             |   | 4,654       |       | 5,091       |   |
| Employees’  statutory profit sharing payable                                                                                 |   | 14,104      |       | 14,265      |   |
| Total  current liabilities                                                                                                        |   | 3,608,521   |       | 3,277,558   |   |
| Long-term  debt (Note 9)                                                                                                          |   | 6,522,038   |       | 5,980,269   |   |
| Deferred  income taxes (Note 14)                                                                                                  |   | 673,266     |       | 1,037,896   |   |
| Deferred  employees’ statutory profit sharing (Note 14)                                                                      |   | 51,645      |       | 30,631      |   |
| Other  liabilities                                                                                                                |   | 38,339      |       | 130,515     |   |
| Total  long-term liabilities                                                                                                      |   | 7,285,288   |       | 7,179,311   |   |
| **Total liabilities**                                                                                                             |   | 10,893,809  |       | 10,456,869  |   |
| Contingencies  and commitments (Note 11)                                                                                          |   |        |       |        |   |
| **STOCKHOLDERS’  EQUITY**                                                                                                    |   |        |       |        |   |
| Majority  interest (Note 12):                                                                                                     |   |        |       |        |   |
| Common  stock                                                                                                                     |   | 4,209,347   |       | 4,401,973   |   |
| Restatement  of common stock                                                                                                      |   | 6,498,065   |       | 6,501,793   |   |
|                                                                                                                              |   | 10,707,412  |       | 10,903,766  |   |
| Additional  paid-in capital                                                                                                       |   | 3,096,934   |       | 3,219,200   |   |
|                                                                                                                              |   | 13,804,346  |       | 14,122,966  |   |
| Deficit  from restatement                                                                                                         |   | (11,413,750 | )          | (11,765,282 | )      |
| Cumulative  effect of a change in an accounting principle for deferred income taxes and  employees’ statutory profit sharing |   | (192,849    | )          | (192,849    | )      |
| Retained  earnings (Note 12-B):                                                                                                   |   |        |       |        |   |
| Prior  years                                                                                                                      |   | 8,239,223   |       | 8,023,612   |   |
| Net  income for the year                                                                                                          |   | 423,662     |       | 492,974     |   |
| Foreign  currency translation adjustments (Note 12-D)                                                                             |   | (679,933    | )          | (618,936    | )      |
| Total  majority interest                                                                                                          |   | 10,180,699  |       | 10,062,485  |   |
| Minority  interest                                                                                                                |   | 2,784,874   |       | 2,862,328   |   |
| **Total stockholders’ equity**                                                                                               |   | 12,965,573  |       | 12,924,813  |   |
|                                                                                                                              |   | Ps.         | 23,859,382 |        | Ps.    | 23,381,682 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-3

----

 

**GRUMA, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FORTHE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003**

**(Expressedin thousands of Mexican pesos of constant purchasing power as of December 31, 2003, except share and per share amounts) (Notes 1 and 2)**

 
|                                                                                                                                     |   | **2001**    |       | **2002**    |   | **2003**    |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|-------------|--------|
|                                                                                                                                     |   |        |       |        |   |        |   |
| Net  sales                                                                                                                               |   | Ps.         | 20,573,402 |        | Ps.    | 20,660,420  |   | Ps. | 23,041,522 |   |
| Cost  of sales                                                                                                                           |   | (12,973,861 | )          | (12,921,388 | )      | (14,671,572 | )      |
| Gross  profit                                                                                                                            |   | 7,599,541   |       | 7,739,032   |   | 8,369,950   |   |
|                                                                                                                                     |   |        |       |        |   |        |   |
| Selling,  general and administrative expenses                                                                                            |   | (6,538,275  | )          | (6,131,105  | )      | (6,621,626  | )      |
| Operating  income                                                                                                                        |   | 1,061,266   |       | 1,607,927   |   | 1,748,324   |   |
|                                                                                                                                     |   |        |       |        |   |        |   |
| Comprehensive  financing cost, net:                                                                                                      |   |        |       |        |   |        |   |
| Interest  expense                                                                                                                        |   | (728,899    | )          | (610,566    | )      | (531,858    | )      |
| Interest  income                                                                                                                         |   | 101,179     |       | 62,147      |   | 64,680      |   |
| Monetary  position gain, net                                                                                                             |   | 195,607     |       | 173,407     |   | 188,073     |   |
| Foreign  exchange gain (loss), net (Note 15-A)                                                                                           |   | 108,722     |       | (283,483    | )      | (181,667    | )      |
|                                                                                                                                     |   | (323,391    | )          | (658,495    | )      | (460,772    | )      |
| Other  income (expense), net (Note 13)                                                                                                   |   | 75,486      |       | 129,860     |   | (175,018    | )      |
| Income  before income taxes, employees’ statutory profit sharing, equity in earnings  of associated companies and minority interest |   | 813,361     |       | 1,079,292   |   | 1,112,534   |   |
| Income  taxes  (Note 14):                                                                                                           |   |        |       |        |   |        |   |
| Current                                                                                                                                  |   | (200,173    | )          | (310,675    | )      | (312,172    | )      |
| Deferred                                                                                                                                 |   | (99,752     | )          | (294,051    | )      | (363,805    | )      |
|                                                                                                                                     |   | (299,925    | )          | (604,726    | )      | (675,977    | )      |
| Employees’  statutory profit sharing  (Note 14):                                                                               |   |        |       |        |   |        |   |
| Current                                                                                                                                  |   | (15,597     | )          | (14,116     | )      | (14,020     | )      |
| Deferred                                                                                                                                 |   | 1,469       |       | 175         |   | 18,718      |   |
|                                                                                                                                     |   | (14,128     | )          | (13,941     | )      | 4,698       |   |
| Income  before equity in earnings of associated companies and minority interest                                                          |   | 499,308     |       | 460,625     |   | 441,255     |   |
| Equity  in earnings of associated companies, net                                                                                         |   | 69,628      |       | 174,573     |   | 235,151     |   |
| Income  before minority interest                                                                                                         |   | 568,936     |       | 635,198     |   | 676,406     |   |
| Minority  interest                                                                                                                       |   | (207,861    | )          | (211,536    | )      | (183,432    | )      |
| Majority  net income for the year                                                                                                        |   | Ps.         | 361,075    |        | Ps.    | 423,662     |   | Ps. | 492,974 |   |
| Earnings  per share (pesos)                                                                                                              |   | Ps.         | 0.83       |        | Ps.    | 0.95        |   | Ps. | 1.11 |   |
| Weighted  average shares outstanding (thousands)                                                                                         |   | 433,235     |       | 446,202     |   | 445,098     |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-4

----

 

**GRUMA, S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FORTHE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003**

**(Expressedin thousands of Mexican pesos of constant purchasing power as ofDecember 31, 2003, except number of shares)**

**(Notes1 and 2)**

 
|                                                        |   | **Common  stock (Note 12-A)** |   | **Additional** |       |                 |   | **Cumulative  effect  of deferred income  taxes and  employee’s** |   | **Retained  earnings (Note 12-B)** |        | **Foreign  currency  translation** |   | **Total**                    |   |                         |      | **Total**              |   |
|-------------------------------------------------------------|--------|-------------------------------|--------|----------------|------------|----------------------|--------|------------------------------------------------------------------------|--------|------------------------------------|-------------|------------------------------------|--------|------------------------------|--------|------------------------------|-----------|------------------------|--------|
|                                                        |   | **Number of  shares**         |   | **Amount**     |       | **paid-in  capital** |   | **Deficit  from  restatement**                                         |   | **statutory  profit  sharing**     |        | **Prior  years**                   |   | **Net income  for the year** |   | **adjustments  (Note 12-D)** |      | **majority  interest** |   | **Minority  interest** |   | **stockholders’  equity** |   |
|                                                        |   | **(thousands)**               |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   |   |   |   |   |
| **Balances  at December 31, 2000**                     |   | 438,776                       |   | 10,771,607     |       | 3,039,528            |   | (11,296,724                                                            | )      | (192,849                           | )           | 7,513,489                          |   | 268,009                      |   | 222,801                      |      | 10,325,861             |   | 2,799,296 |   | 13,125,157 |   |
|                                                        |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   |   |   |   |   |
| Appropriation of prior year net income                      |   |                          |   |           |       |                 |   |                                                                   |   |                               |        | 268,009                            |   | (268,009                     | )      |                         |      |                   |   |   |   |   |   |
| Minority interest dividends                                 |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   | (301,950 | ) | (301,950 | ) |
| Net purchases and sales of Company’s common stock      |   | 2,949                         |   | 39,189         |       | 15,169               |   |                                                                   |   |                               |        | (45,562                            | )      |                         |   |                         |      | 8,796                  |   |   |   | 8,796 |   |
| Executive stock purchase plan                               |   |                          |   | (76,087        | )          | 42,992               |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      | (33,095                | )      |   |   | (33,095 | ) |
| Derivative financial operations in Company’s own stock |   |                          |   |           |       | (13,238              | )      |                                                                   |   |                               |        | (42,789                            | )      |                         |   |                         |      | (56,027                | )      |   |   | (56,027 | ) |
|                                                        |   | 2,949                         |   | (36,898        | )          | 44,923               |   | —                                                                 |   | —                             |        | 179,658                            |   | (268,009                     | )      | —                       |      | (80,326                | )      | (301,950 | ) | (382,276 | ) |
| Comprehensive income (loss):                                |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   |   |   |   |   |
| Recognition of inflation effects for the year               |   |                          |   |           |       |                 |   | (89,491                                                                | )      |                               |        | 301,375                            |   |                         |   |                         |      | 211,884                |   | (2,586 | ) | 209,298 |   |
| Foreign currency translation adjustments                    |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   | (627,098                     | )         | (627,098               | )      | 7,693 |   | (619,405 | ) |
| Net income for the year                                     |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   | 361,075                      |   |                         |      | 361,075                |   | 205,929 |   | 567,004 |   |
| Comprehensive income of the year                            |   | —                        |   | —         |       | —               |   | (89,491                                                                | )      | —                             |        | 301,375                            |   | 361,075                      |   | (627,098                     | )         | (54,139                | )      | 211,036 |   | 156,897 |   |
| **Balances  at December 31, 2001**                     |   | 441,725                       |   | 10,734,709     |       | 3,084,451            |   | (11,386,215                                                            | )      | (192,849                           | )           | 7,994,522                          |   | 361,075                      |   | (404,297                     | )         | 10,191,396             |   | 2,708,382 |   | 12,899,778 |   |
|                                                        |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   |   |   |   |   |
| Appropriation of prior year net income                      |   |                          |   |           |       |                 |   |                                                                   |   |                               |        | 361,075                            |   | (361,075                     | )      |                         |      |                   |   |   |   |   |   |
| Minority interest dividends                                 |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   | (102,175 | ) | (102,175 | ) |
| Net purchases and sales of Company’s common stock      |   | (323                          | )      | (16,474        | )          | (6,586               | )      |                                                                   |   |                               |        | (56,129                            | )      |                         |   |                         |      | (79,189                | )      |   |   | (79,189 | ) |
| Executive stock purchase plan                               |   |                          |   | (10,823        | )          | (14,628              | )      |                                                                   |   |                               |        |                               |   |                         |   |                         |      | (25,451                | )      |   |   | (25,451 | ) |
| Derivative financial operations in Company’s own stock |   |                          |   |           |       | 33,697               |   |                                                                   |   |                               |        | (19,812                            | )      |                         |   |                         |      | 13,885                 |   |   |   | 13,885 |   |
|                                                        |   | (323                          | )      | (27,297        | )          | 12,483               |   | —                                                                 |   | —                             |        | 285,134                            |   | (361,075                     | )      | —                       |      | (90,755                | )      | (102,175 | ) | (192,930 | ) |
| Comprehensive income (loss):                                |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   |   |   |   |   |
| Recognition of inflation effects for the year               |   |                          |   |           |       |                 |   | (27,535                                                                | )      |                               |        | (40,433                            | )      |                         |   |                         |      | (67,968                | )      | (46,972 | ) | (114,940 | ) |
| Foreign currency translation adjustments                    |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   | (275,636                     | )         | (275,636               | )      | 14,103 |   | (261,533 | ) |
| Net income for the year                                     |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   | 423,662                      |   |                         |      | 423,662                |   | 211,536 |   | 635,198 |   |
| Comprehensive income for the year                           |   | —                        |   | —         |       | —               |   | (27,535                                                                | )      | —                             |        | (40,433                            | )      | 423,662                      |   | (275,636                     | )         | 80,058                 |   | 178,667 |   | 258,725 |   |
| **Balances  at December 31, 2002**                     |   | 441,402                       |   | 10,707,412     |       | 3,096,934            |   | (11,413,750                                                            | )      | (192,849                           | )           | 8,239,223                          |   | 423,662                      |   | (679,933                     | )         | 10,180,699             |   | 2,784,874 |   | 12,965,573 |   |
|                                                        |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   |   |   |   |   |
| Appropriation of prior year net income                      |   |                          |   |           |       |                 |   |                                                                   |   |                               |        | 423,662                            |   | (423,662                     | )      |                         |      |                   |   |   |   |   |   |
| Contributions by minority interest                          |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   | 140,220 |   | 140,220 |   |
| Decrease of minority interest                               |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   | (7,835 | ) | (7,835 | ) |
| Dividends paid                                              |   |                          |   |           |       |                 |   |                                                                   |   |                               |        | (293,785                           | )      |                         |   |                         |      | (293,785               | )      | (194,951 | ) | (488,736 | ) |
| Net purchases and sales of Company’s common stock      |   | 8,731                         |   | 196,354        |       | 82,992               |   |                                                                   |   |                               |        | (164,461                           | )      |                         |   |                         |      | 114,885                |   |   |   | 114,885 |   |
| Derivative financial operations in Company’s own stock |   |                          |   |           |       | 39,274               |   |                                                                   |   |                               |        | 116,512                            |   |                         |   |                         |      | 155,786                |   |   |   | 155,786 |   |
|                                                        |   | 8,731                         |   | 196,354        |       | 122,266              |   | —                                                                 |   | —                             |        | 81,928                             |   | (423,662                     | )      | —                       |      | (23,114                | )      | (62,566 | ) | (85,680 | ) |
| Comprehensive income (loss):                                |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   |                         |      |                   |   |   |   |   |   |
| Recognition of inflation effects for the year               |   |                          |   |           |       |                 |   | (351,532                                                               | )      |                               |        | (297,539                           | )      |                         |   |                         |      | (649,071               | )      | (75,656 | ) | (724,727 | ) |
| Foreign currency translation adjustments                    |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   |                         |   | 60,997                       |      | 60,997                 |   | 32,244 |   | 93,241 |   |
| Net income for the year                                     |   |                          |   |           |       |                 |   |                                                                   |   |                               |        |                               |   | 492,974                      |   |                         |      | 492,974                |   | 183,432 |   | 676,406 |   |
| Comprehensive income for the year                           |   | —                        |   | —         |       | —               |   | (351,532                                                               | )      | —                             |        | (297,539                           | )      | 492,974                      |   | 60,997                       |      | (95,100                | )      | 140,020 |   | 44,920 |   |
| **Balances  at December 31, 2003**                     |   | 450,133                       |   | Ps.            | 10,903,766 |                 | Ps.    | 3,219,200                                                              |   | Ps.                                | (11,765,282 | )                                  | Ps.    | (192,849                     | )      | Ps.                          | 8,023,612 |                   | Ps.    | 492,974 |   | Ps. | (618,936 | ) | Ps. | 10,062,485 |   | Ps. | 2,862,328 |   | Ps. | 12,924,813 |   |
|                                                             |        |                               |        |                |            |                      |        |                                                                        |        |                                    |             |                                    |        |                              |        |                              |           |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

F-5

----

 

**GRUMA,S.A. DE C.V. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN FINANCIAL POSITION**

**FORTHE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003**

** (Expressed in thousands of Mexican pesos ofconstant purchasing power as of**

**December 31,2003)**

**(Notes1 and 2)**

 
|                                                                                         |   | **2001**   |    | **2002**   |   | **2003**   |   |
|----------------------------------------------------------------------------------------------|--------|------------|---------|------------|--------|------------|--------|
| Operating  activities:                                                                       |   |       |    |       |   |       |   |
| Majority  net income for the year                                                            |   | Ps.        | 361,075 |       | Ps.    | 423,662    |   | Ps. | 492,974 |   |
| Minority  interest                                                                           |   | 207,861    |    | 211,536    |   | 183,432    |   |
| Consolidated  net income                                                                     |   | 568,936    |    | 635,198    |   | 676,406    |   |
|                                                                                         |   |       |    |       |   |       |   |
| Adjustments  to reconcile net income to net resources provided by operating activities:      |   |       |    |       |   |       |   |
| Depreciation  and amortization                                                               |   | 900,855    |    | 1,063,336  |   | 1,142,941  |   |
| Equity  in earnings of associated companies, net                                             |   | (69,628    | )       | (114,815   | )      | (196,323   | )      |
| Deferred  income taxes and employees’ statutory profit sharing                          |   | 98,283     |    | 293,876    |   | 345,087    |   |
| Net  loss for shut-down of bread operations                                                  |   | 216,777    |    | —     |   | —     |   |
| Seniority  premiums                                                                          |   | 7,743      |    | 9,642      |   | 7,950      |   |
|                                                                                         |   | 1,722,966  |    | 1,887,237  |   | 1,976,061  |   |
| Changes  in working capital:                                                                 |   |       |    |       |   |       |   |
| Restricted  cash                                                                             |   | 4,361      |    | 1,473      |   | 361        |   |
| Accounts  receivable, net                                                                    |   | 248,071    |    | (419,997   | )      | 94,894     |   |
| Inventories                                                                                  |   | (40,627    | )       | (321,146   | )      | (812,602   | )      |
| Prepaid  expenses                                                                            |   | 15,615     |    | 28,823     |   | (108,220   | )      |
| Trade  accounts payable                                                                      |   | (370,410   | )       | 370,816    |   | (182,244   | )      |
| Accrued  liabilities and other accounts payable                                              |   | 47,575     |    | 40,460     |   | 364,225    |   |
| Income  taxes and employees’ statutory profit sharing payable                           |   | 47,823     |    | (30,139    | )      | 1,826      |   |
|                                                                                         |   | (47,592    | )       | (329,710   | )      | (641,760   | )      |
| Net resources  provided by operating activities                                              |   | 1,675,374  |    | 1,557,527  |   | 1,334,301  |   |
|                                                                                         |   |       |    |       |   |       |   |
| Financing  activities:                                                                       |   |       |    |       |   |       |   |
| Proceeds  from bank loans and long-term debt                                                 |   | 2,880,108  |    | 1,679,849  |   | 1,798,750  |   |
| Repayment  of bank loans and long-term debt                                                  |   | (3,469,983 | )       | (2,289,524 | )      | (2,770,365 | )      |
| Contributions  by minority interest                                                          |   | —     |    | —     |   | 140,220    |   |
| Decrease  of minority interest                                                               |   | —     |    | —     |   | (7,835     | )      |
| Net  purchases and sales of Company’s common stock and derivative financial  operations |   | (80,326    | )       | (90,755    | )      | 270,671    |   |
| Dividends  paid                                                                              |   | (301,950   | )       | (102,175   | )      | (488,736   | )      |
| Other                                                                                        |   | (101,413   | )       | (69,844    | )      | 2,562      |   |
| Net  resources used in financing activities                                                  |   | (1,073,564 | )       | (872,449   | )      | (1,054,733 | )      |
|                                                                                         |   |       |    |       |   |       |   |
| Investing  activities:                                                                       |   |       |    |       |   |       |   |
| Purchases  of property, plant and equipment                                                  |   | (750,684   | )       | (599,609   | )      | (610,896   | )      |
| Proceeds  from the shut-down of bread operations                                             |   | 583,839    |    | —     |   | —     |   |
| Excess  of book value over cost of subsidiaries acquired                                     |   | 5,551      |    | (13,456    | )      | —     |   |
| Deferred  assets                                                                             |   | (85,872    | )       | (52,335    | )      | (15,214    | )      |
| Trust  funds for research and development of technology                                      |   | —     |    | 8,324      |   | 213,714    |   |
| Investment  in common stock                                                                  |   | (2,397     | )       | (2,360     | )      | —     |   |
| Other                                                                                        |   | (44,519    | )       | 19,055     |   | 15,764     |   |
| Net  resources used in investing activities                                                  |   | (294,082   | )       | (640,381   | )      | (396,632   | )      |
| Net  increase (decrease) in cash and temporary investments                                   |   | 307,728    |    | 44,697     |   | (117,064   | )      |
| Cash  and temporary investments at beginning of year                                         |   | 133,884    |    | 441,612    |   | 486,309    |   |
| Cash  and temporary investments at end of year                                               |   | Ps.        | 441,612 |       | Ps.    | 486,309    |   | Ps. | 369,245 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-6

----

 

**GRUMA, S.A. DE C.V. AND SUBSIDIARIES**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FORTHE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003**

**(Expressedin thousands of Mexican pesos of constant purchasing power of December 31,2003,except where otherwise indicated)**

 

**1.****                                      ENTITYAND NATURE OF BUSINESS**

 

Gruma, S.A. de C.V., aMexican corporation, is a holding company whose subsidiaries are located inMexico, the United States of America, Central and South America and Europe.These subsidiaries are primarily engaged in manufacturing and distributing cornflour, tortillas, wheat flour and other related products. Gruma, S.A de C.V.and its subsidiaries are herein collectively referred to as “the Company”.

 

**2.****                                      SIGNIFICANTACCOUNTING POLICIES**

 

The consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles in Mexico (“Mexican GAAP”) as promulgated by the MexicanInstitute of Public Accountants (“MIPA”). A reconciliation from Mexican GAAP toUnited States generally accepted accounting principles (“U.S. GAAP”) isincluded in Note 20.

 

A)               BASIS OFCONSOLIDATION

 

The consolidatedfinancial statements include the accounts of Gruma, S.A. de C.V. and all of itssubsidiaries. All significant intercompany balances and transactions have beeneliminated from the consolidated financial statements.

 

As of December 31,the principal subsidiaries included in the consolidation are the following:

 
|                                                                           |   | **% of  ownership** |   |
|--------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                           |   | **2002**            |   | **2003** |   |
| Gruma  Corporation and subsidiaries                                            |   | 100.00              |   | 100.00 |   |
| Grupo Industrial Maseca, S.A. de C.V. and  subsidiaries                        |   | 83.18               |   | 83.18 |   |
| Molinos Nacionales, C.A (Note 17-C)                                            |   | 95.00               |   | 95.00 |   |
| Derivados de Maíz Seleccionado, C.A (Note  17-C)                          |   | 50.00               |   | 50.00 |   |
| Molinera de México, S.A. de C.V. and  subsidiaries                        |   | 60.00               |   | 60.00 |   |
| Gruma Centro América, S.A. and subsidiaries                               |   | 100.00              |   | 100.00 |   |
| Productos y Distribuidora Azteca, S.A. de  C.V. and subsidiaries               |   | 100.00              |   | 100.00 |   |
| Investigación de Tecnología Avanzada, S.A. de  C.V. and subsidiaries |   | 100.00              |   | 100.00 |   |
| Asesoría de Empresas, S.A. de C.V                                         |   | 100.00              |   | 100.00 |   |
| Transporte Aéreo Técnico Ejecutivo, S.A. de  C.V                     |   | 100.00              |   | 54.67 |   |
| Inmobiliaria Residencial San Pedro, S.A. de  C.V. and subsidiaries             |   | 100.00              |   | 100.00 |   |

 

B)                 USE OF ESTIMATES

 

Thepreparation of the financial statements in conformity with generally acceptedaccounting principles requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the dates of the financialstatements, and reported amounts of revenues, costs and expenses for thereporting years. Actual results could differ from those estimates.

 

F-7

----

 

C)                 FOREIGN CURRENCYTRANSLATION

 

Financialstatements of foreign subsidiaries have been restated to recognize the effectsof inflation and translated to Mexican pesos of constant purchasing power as ofDecember 31, 2003, as follows:

 

•                  Financial statements are restated toyear-end constant local currencies following the provisions of Bulletin B-10,applying the General Consumer Price Index (“GCPI”) of the foreign country,which reflects the change in purchasing power of the local currency in whichthe subsidiary operates.

 

•                  Assets, liabilities, income andexpenses are translated to Mexican pesos applying the exchange rate in effectat each period end. Stockholders’ equity balances are translated by applyingthe exchange rates in effect at the dates in which the contributions were madeand the income was generated. The effects of translation are recognized as acomponent of equity entitled “Foreign Currency Translation Adjustments” (Note12-D).

 

D)                RECOGNITION OF THEEFFECTS OF INFLATION

 

The consolidatedfinancial statements have been restated to recognize the effects of inflationand are expressed in thousands of Mexican pesos of constant purchasing power asof December 31, 2003, determined as follows:

 

•                  Forcomparability purposes, the financial statements as of and for the year endedDecember 31, 2001 and 2002 have been restated by utilizing a weightedaverage restatement factor, which considers the relative total salescontribution by country for the year ended December 31, 2001 and 2002 andthe corresponding inflation and exchange rate fluctuations during those years.

 

•                  Theconsolidated statements of income and of stockholders’ equity for the yearended December 31, 2003 were restated applying GCPI factors from thecountry in which the subsidiary operates and applied to periods in which thetransactions occurred and year-end.

 

•                  Theconsolidated statements of changes in financial position present, in Mexicanpesos of constant purchasing power, the resources provided by or used inoperating, financing and investing activities.

 

•                  Thefactors used to recognize the effects of inflation were the following:

 

| **Year** |   | **Mexican  national  consumer  price index** |   | **Weighted -  average  restatement  factor** |   |
|----------|--------|----------------------------------------------|--------|----------------------------------------------|--------|
| 2001     |   | 4.46                                         | %      | 0.41                                         | %      |
| 2002     |   | 5.70                                         | %      | 6.15                                         | %      |
| 2003     |   | 3.98                                         | %      | 7.75                                         | %      |

 

F-8

----

 

The methodology used torestate financial statement items is as follows:

 

•                  Restatementof non-monetary assets

 

Inventory and cost ofsales are restated using the estimated replacement cost method. As set forth inNote 2-I, property, plant and equipment, net, is restated using the NationalConsumer Price Index (“NCPI”) factors, except for machinery and equipment offoreign origin which are restated on the basis of a specific index composed ofthe GCPI factor from the country of origin, to the related foreign currencyamounts, and then translated to Mexican pesos using the year-end exchange rate.

 

•                  Restatementof common stock, additional paid-in capital and retained earnings

 

This restatement reflectsthe amounts necessary to maintain the stockholder’s investment at the originalpurchasing power amounts, and it is determined by applying NCPI factors fromthe dates on which capital stock and additional paid-in capital werecontributed and earnings were generated or losses incurred, and is includedwithin the related stockholders’ equity captions.

 

•                  Deficitfrom restatement

 

Deficit from restatementprimarily represents the difference between the replacement cost values ofnon-monetary assets or specific index restatement of machinery and equipment offoreign origin, as described above, and the historical cost of those assetsrestated for inflation, as measured by NCPI and GCPI factors for foreign subsidiaries.

 

•                  Monetaryposition gain

 

Monetary position gainrepresents the inflationary effect, measured by NCPI and GCPI factors, on thenet balance of monetary assets and liabilities at the beginning of each monthas expressed in local currency. The monetary gain recognized on the netmonetary position of foreign subsidiaries is based on the inflation rate of therespective country, as measured by the relevant GCPI factor in its net monetaryposition, prior to the translation to Mexican pesos.

 

E)                  FOREIGN CURRENCYTRANSACTIONS

 

Foreign currencytransactions are recorded at the exchange rate in effect on the dates thetransactions are entered into and settled. Monetary assets and liabilitiesdenominated in foreign currencies are translated into Mexican pesos at theexchange rate in effect at the balance sheet dates. Currency exchangefluctuations from valuation and liquidation of these balances are credited orcharged to income, except for the effects of translation arising from foreigncurrency denominated liabilities, which are accounted for as a hedge of theCompany’s net investment in foreign subsidiaries, and are recognized as acomponent of equity under “Foreign currency translation adjustments”.

 

F)                  TEMPORARYINVESTMENTS

 

Temporary investments arehighly liquid investments with maturities of less than a year from the date ofthe financial statements and are stated at cost, which approximates marketvalue. At December 31, 2002, temporary investments include shares quotedin the Mexican Stock Exchange for an amount of Ps.207,043 which were soldduring 2003.

 

F-9

----

 

G)                 INVENTORIES ANDCOST OF SALES

 

Inventories are stated atthe lower of estimated replacement cost or market. Estimated replacement costis determined by the last purchase price, the first-in, first-out method andthe last production cost. Cost of sales is determined from replacement costscalculated for the month in which inventories are sold.

 

H)                INVESTMENT INCOMMON STOCK

 

Investments in common stockwith ownership between 10% and 50% of the investees’ voting stock, or where theCompany exercises significant influence, are accounted for by the equitymethod.

 

I)                     PROPERTY,PLANT AND EQUIPMENT, NET

 

Property, plant andequipment are restated utilizing NCPI factors, except for machinery andequipment of foreign origin which are restated on the basis of a specific indexcomposed of the GCPI from the foreign country and the change in value of theMexican peso against the foreign currency.

 

Depreciation expense iscomputed based on the net book value less salvage value, using thestraight-line method over the estimated useful lives of the assets.  Useful lives of the assets are as follows:

 

|                       |   | **Years**   |   |
|----------------------------|--------|-------------|--------|
| Buildings                  |   | 50          |   |
| Machinery  and equipment   |   | 3 – 27 |   |
| Software  for internal use |   | 7           |   |
| Leasehold  improvements    |   | 10          |   |

 

Maintenance and repairsare expensed as incurred. Costs of major replacements and improvements arecapitalized. Comprehensive financing cost, including interest expense, foreigncurrency exchange fluctuations, and monetary position gain of the related debtfor major construction projects, are capitalized as part of the assets duringthe construction period. When assets are retired, sold or otherwise disposedof, the restated value and accumulated depreciation are removed from theappropriate accounts and any resulting gain or loss is included in “Otherincome (expense), net”.

 

Direct internal andexternal costs related to the development of internal use software arecapitalized and amortized over the estimated useful life beginning when suchsoftware is ready for its intended use.

 

J)                    INTANGIBLEASSETS, NET

 

Preoperatingexpenses are restated using NCPI factors.

 

Priorto January 1, 2003, preoperating expenses were amortized using thestraight-line method over an estimated useful life not to exceed 12 years.

 

EffectiveJanuary 1, 2003, the Company adopted the provisions established by revisedBulletin C-8 “Intangible Assets” (“Bulletin C-8”), issued by the MIPA. Thisbulletin provides guidance and specific criteria for the deferral of researchand development costs and certain preoperating expenses. Additionally, BulletinC-8 establishes that certain intangible assets can be considered as havingindefinite lives and, therefore, should no longer be amortized.

 

F-10

----

 

Uponthe application of Bulletin C-8, expenses incurred only during the developmentstage are capitalized as preoperating expenses. The development stage concludesupon the commencement of commercial operations. Research and developmentexpenses are expensed as incurred. Amortization expense of intangible assetswith finite lives is computed on the restated values using the straight-linemethod, over a period of 5 to 20 years. Estimated useful lives of intangibleassets with finite lives are determined based on the analysis of contractual,economic, legal or regulatory factors that may limit the useful lives.Indefinite-lived intangible assets are no longer amortized startingJanuary 1, 2003. The adoption of Bulletin C-8 did not have a materialimpact on the Company’s financial position and results of operation.

 

The excess of cost overbook value of subsidiaries and associated companies acquired is restated usingNCPI factors. Amortization expense is computed based in the restated valuesusing the straight-line method over a period not to exceed 20 years.

 

Debt issuance costs arecapitalized and restated using NCPI factors. Amortization expense is computedbased on the restated values, using the straight-line method over the term ofthe related debt.

 

K)                EMPLOYEERETIREMENT BENEFITS

 

Seniority premium towhich Mexican employees are entitled after 15 years of service are charged toincome as determined by annual actuarial valuations.  Indemnities to which Mexican employees may be entitled in thecase of dismissal or death, under certain circumstances established by MexicanLabor Law, are expensed when they become payable.

 

L)                  FINANCIALINSTRUMENTS

 

Derivative financialinstruments held for hedging purposes are recognized utilizing the samevaluation criteria used for the assets and liabilities being hedged. Theeffects of this valuation are recognized in income, net of costs, expenses orearnings from the assets or liabilities being hedged. The cost of the financialinstrument is recognized in income using the straight-line method during thecontract term.

 

Derivative financialinstruments held for purposes other than hedging are recognized at their fairvalue. The difference between the initial and year-end fair value of thederivative assets and liabilities is recognized in income, except for thosefinancial instruments related with the Company’s own shares, which are recordedas a component of equity.

 

M)             REVENUE RECOGNITION

 

Revenue on product sales isrecognized upon shipment to, and acceptance by the Company’s customers or whenthe risk of ownership has passed to the customers. Provisions for discounts andrebates to customers, returns and other adjustments are recognized in the sameperiod the related sales are recorded and are based upon either historicalestimates or actual terms.

 

N)                INCOME TAXES ANDEMPLOYEES’ STATUTORY PROFIT SHARING

 

Income taxes andemployees’ statutory profit sharing are recorded based on the comprehensiveasset and liability method for all temporary differences arising between thecarrying values for financial reporting and tax values of assets andliabilities at the date of the financial statements. Valuation allowances areprovided if based upon the weight of available evidence it is more likely thannot that some or all the deferred tax assets will not be realizable.

 

F-11

----

 

O)                EARNINGS PER SHARE

 

Earnings per share arecomputed by dividing majority net income for the year by the weighted averagenumber of common shares outstanding during the year.

 

P)                  COMPREHENSIVEINCOME (LOSS)

 

Thedifferent components that constitute earned (lost) capital for the year arepresented in the statement of changes in stockholders’ equity as comprehensiveincome (loss).

 

**3.****                                      ACCOUNTSRECEIVABLE, NET AND REFUNDABLE TAXES**

 

Accounts receivable, netare comprised of the following as of December 31:

 
|                                          |   | **2002**  |      | **2003**  |   |
|-----------------------------------------------|--------|-----------|-----------|-----------|--------|
| Trade  accounts receivable                    |   | Ps.       | 2,577,964 |      | Ps.    | 2,546,411 |   |
| Allowance  for doubtful accounts              |   | (100,190  | )         | (107,932  | )      |
|                                          |   | 2,477,774 |      | 2,438,479 |   |
| Related  parties (Note 18)                    |   | 116,658   |      | 6,129     |   |
| Financial  instruments at fair value          |   | —    |      | 60,089    |   |
| Account  receivable for disposed subsidiaries |   | 157,315   |      | 56,000    |   |
| Employees                                     |   | 28,401    |      | 27,868    |   |
| Other  debtors                                |   | 192,605   |      | 145,171   |   |
|                                          |   | Ps.       | 2,972,753 |      | Ps.    | 2,733,736 |   |

 

Refundable taxes arecomprised of the following as of December 31:

 
|                         |   | **2002** |    | **2003** |   |
|------------------------------|--------|----------|---------|----------|--------|
| Production  and services tax |   | Ps.      | 90,706  |     | Ps.    | 37,187 |   |
| Value-added  tax             |   | 108,956  |    | 121,968  |   |
| Income  tax                  |   | 101,168  |    | 135,475  |   |
|                         |   | Ps.      | 300,830 |     | Ps.    | 294,630 |   |

 

F-12

----

 

**4.****                                      INVENTORIES**

 

Inventories consisted ofthe following as of December 31:

 
|                                  |   | **2002** |      | **2003** |   |
|---------------------------------------|--------|----------|-----------|----------|--------|
| Raw  materials, mainly corn and wheat |   | Ps.      | 2,100,444 |     | Ps.    | 2,627,695 |   |
| Finished  products                    |   | 222,781  |      | 319,986  |   |
| Materials  and spare parts            |   | 281,382  |      | 327,446  |   |
| Production  in process                |   | 58,314   |      | 45,774   |   |
| Advances  to suppliers                |   | 9,544    |      | 52,583   |   |
| Inventory  in transit                 |   | 68,039   |      | 4,404    |   |
|                                  |   | Ps.      | 2,740,504 |     | Ps.    | 3,377,888 |   |

 

**5.****                                      INVESTMENTIN COMMON STOCK OF ASSOCIATED COMPANIES**

 

Investment in commonstock of associated companies consists of the investment in common stock ofGrupo Financiero Banorte, S.A. de C.V. and subsidiaries (“GFNorte”) andHarinera de Monterrey, S.A. de C.V. which produces wheat flour and relatedproducts in Mexico.

 

These investments,accounted for by the equity method, are comprised of the following as ofDecember 31:

 
|                               |   | **2002** |      | **2003** |   | **Ownership** |   |
|------------------------------------|--------|----------|-----------|----------|--------|---------------|--------|
|                               |   |     |      |     |   |          |   |
| GFNorte                            |   | Ps.      | 1,338,529 |     | Ps.    | 1,463,218     |   | 10.8557 | % |
| Harinera de Monterrey, S.A de C.V. |   | 126,006  |      | 115,977  |   | 40            | %      |
|                               |   | Ps.      | 1,464,535 |     | Ps.    | 1,579,195     |   |   |   |

 

**6.****                                      PROPERTY,PLANT AND EQUIPMENT, NET**

 

Property, plant andequipment, net consisted of the following as of December 31:

 
|                                       |   | **2002**   |       | **2003**   |   |
|--------------------------------------------|--------|------------|------------|------------|--------|
| Land                                       |   | Ps.        | 1,090,820  |       | Ps.    | 1,080,419 |   |
| Buildings                                  |   | 4,258,166  |       | 4,246,198  |   |
| Machinery  and equipment                   |   | 14,251,518 |       | 14,443,666 |   |
| Construction  in progress                  |   | 349,772    |       | 266,873    |   |
| Software  for internal use                 |   | 654,174    |       | 708,435    |   |
| Leasehold  improvements.                   |   | 227,418    |       | 230,529    |   |
| Other                                      |   | 29,262     |       | 31,329     |   |
|                                       |   | 20,861,130 |       | 21,007,449 |   |
| Accumulated  depreciation and amortization |   | (7,303,831 | )          | (7,977,823 | )      |
|                                       |   | Ps.        | 13,557,299 |       | Ps.    | 13,029,626 |   |

 

For the years endedDecember 31, 2001, 2002 and 2003, depreciation expense amounted toPs.1,042,721, Ps.996,113 and Ps.952,460, respectively.

 

F-13

----

 

As of December 31,2003, property, plant and equipment include temporarily idled assets with acarrying value of approximately Ps.522,905, resulting from the temporaryshut-down of the productive operation of various plants in Mexico andVenezuela. These assets are not being depreciated since the carrying value isexpected to be recovered and the remaining useful life is maintained. TheCompany’s management expects that during the fourth quarter of 2004, one of theplants currently idled, located in Mexico, will start operations. The carryingvalue of this plant amounted to Ps.421,879 as of December 31, 2003. Forthe years ended December 31, 2001, 2002 and 2003 the Company recognized anidle assets impairment loss of Ps.16,163, Ps.67,244 and Ps.6,744, respectively.As of December 31, 2003 the Company also had assets at net realizablevalue of Ps.42,525 which are available for sale.

 

**7.****                                      INTANGIBLEASSETS, NET**

 

Intangible assets, netare comprised of the following as of December 31:

 
|                                     |   | **Remaining  useful life  (years)** |   | **2002**  |    | **2003**  |   |
|------------------------------------------|--------|-------------------------------------|--------|-----------|---------|-----------|--------|
| Intangible  assets with finite lives     |   |                                |   |      |    |      |   |
| Acquired:                                |   |                                |   |      |    |      |   |
| Covenants  not to compete                |   | 13                                  |   | Ps.       | 803,682 |      | Ps.    | 773,605 |   |
| Debt  issuance costs                     |   | 2 – 13                         |   | 232,918   |    | 224,616   |   |
| Patents  and trade names                 |   | 11 – 15                        |   | 14,180    |    | 20,239    |   |
| Generated:                               |   |                                |   |      |    |      |   |
| Preoperating  expenses                   |   | 2 – 12                         |   | 92,742    |    | 77,786    |   |
| Research  of new projects                |   | 12                                  |   | 67,534    |    | 32,540    |   |
| Other                                    |   | 2 – 10                         |   | 55,297    |    | 62,326    |   |
| Intangible  assets with indefinite lives |   |                                |   |      |    |      |   |
| Trade  names                             |   |                                |   | 161,617   |    | 201,144   |   |
|                                     |   |                                |   | 1,427,970 |    | 1,392,256 |   |
| Accumulated  amortization                |   |                                |   | (496,861  | )       | (580,065  | )      |
|                                     |   |                                |   | Ps.       | 931,109 |      | Ps.    | 812,191 |   |

 

TheCompany’s management determined based on the provisions of Bulletin C-8 thatsome trade names have indefinite lives since their future cash flow generationis expected to be indefinite. Therefore, the Company ceased the amortization ofthese assets starting January 1, 2003 amounting to Ps.8,119 annually.

 

Researchand development costs charged to income amounted to Ps.23,262, Ps.9,959 andPs.2,736 for the years ended December 31, 2001, 2002 and 2003,respectively.

 

Theamortization of preoperating expenses charged to income for the years endedDecember 31, 2001, 2002 and 2003 amounted to Ps.37,743, Ps.8,790 andPs.15,412, respectively. Additionally, during 2001 the Company wrote-offcertain capitalized preoperating expenses of Ps.354,850 due to the shut-down ofthe bread manufacturing operation, which were recognized in other income(expense), net (Note 13).

 

Asof December 31, 2002 and 2003, the excess of cost over book valueis presented net of accumulated amortization of Ps. 825,826 and Ps.904,080,respectively.

 

F-14

----

 

**8.****                                      OTHERASSETS**

 

Other assets consisted ofthe following, as of December 31:

 
|                                                    |   | **2002** |    | **2003** |   |
|---------------------------------------------------------|--------|----------|---------|----------|--------|
| Trust  funds for research and development of technology |   | Ps.      | 230,292 |     | Ps.    | — |   |
| Long-term  notes receivable                             |   | 9,932    |    | 34,854   |   |
| Club  memberships                                       |   | 21,840   |    | 15,498   |   |
| Guarantee  deposits                                     |   | 15,197   |    | 16,442   |   |
| Refundable  taxes                                       |   | 10,462   |    | —   |   |
|                                                    |   | Ps.      | 287,723 |     | Ps.    | 66,794 |   |

 

During 2003 the Companydecided to liquidate the research and development trust fund established tofinance these activities. The Company will fund its research and developmentinitiatives using the operating resources generated during each year.

 

**9.****                                      SHORT-TERMBANK LOANS AND LONG-TERM DEBT**

 

Short-term bank loans andlong-term debt as of December 31 are summarized as follows:

 
|                                                                                                                                                                              |   | **2002**  |      | **2003**  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Syndicated  loan in U.S. dollars, maturing in December 2004 and 2005, bearing  interest at an annual rate of LIBOR plus 1.00% to 1.625% payable quarterly  (2.1125% in 2003) |   | Ps.       | 3,374,730 |      | Ps.    | 3,147,200 |   |
| Senior  unsecured notes in U.S. dollars, maturing in October 2007 and bearing  interest at an annual rate of 7.625% payable semiannually                                     |   | 2,812,275 |      | 2,810,000 |   |
| Loans  in U.S. dollars, bearing interest at annual rates from 1.20% to 7.96% in  2003, payable quarterly, and due in annual payments from 2004 through 2009                       |   | 348,168   |      | 429,071   |   |
| Loans  in Venezuelan bolivars payable in 2004 and bearing interest at variable  annual rates from 17% to 18%  in 2003                                                        |   | 129,481   |      | 64,103    |   |
| Loans  in U.S. dollars, due in 2004, bearing interest at an annual rate of LIBOR  plus 2.5% (3.09% in 2003), payable monthly                                                      |   | 709,199   |      | 29,224    |   |
|                                                                                                                                                                              |   | 7,373,853 |      | 6,479,598 |   |
| Short-term  bank loans                                                                                                                                                            |   | (838,688  | )         | (93,327   | )      |
| Current  portion of long-term debt                                                                                                                                                |   | (13,127   | )         | (406,002  | )      |
| Long-term  debt                                                                                                                                                                   |   | Ps.       | 6,522,038 |      | Ps.    | 5,980,269 |   |

 

Short-term bank loans inU.S. dollars for U.S.$2.6 million bear interest at an average rate of 3.3% asof December 31, 2003. Short-term bank loans in Venezuelan bolivars for9,125 million bolivars bear interest at an average rate of 25.7% and 17.5% asof December 31, 2002 and 2003, respectively.

 

The Company has creditline agreements for U.S.$70 million (Ps.786,800), all of which were availableas of December 31, 2003. These credit line agreements require the paymentof an annual commitment fee of 0.15% to 0.30% on the unused amounts.

 

Various credit agreementscontain covenants requiring the Company to maintain certain financial ratios.The Company’s ability to pay dividends is restricted upon the failure tomaintain such financial ratios. At December 31, 2003, the Company was incompliance with these covenants.

 

F-15

----

 

 

At December 31,2003, the annual maturities of long-term debt outstanding were as follows:

 

| **Year**             |   | **Amount** |      |
|----------------------|--------|------------|-----------|
| 2005                 |   | Ps.        | 2,865,286 |   |
| 2006                 |   | 30,445     |      |
| 2007                 |   | 2,827,524  |      |
| 2008  and thereafter |   | 257,014    |      |
|                 |   | Ps.        | 5,980,269 |   |

 

The Company has enteredinto an interest rate swap agreement covering a portion of its long term debtmaturing in October 2007. See Note 17.

 

**10.****                               EMPLOYEERETIREMENT BENEFITS**

 

Seniority premium costand other employee retirement benefits balance as of December 31, 2002 and2003 amounted to Ps.34,235 and Ps.39,126, respectively, and are included inother liabilities.

 

Seniority premium costand other employee retirement benefits in Mexico are determined by independentactuaries and are principally based on the employees’ years of service, age andsalaries. The Company has established trust funds to meet these obligations.The Company uses a December 31 measurement date for its plans.

 

The components of the netseniority premium cost for the years ended December 31, were thefollowing:

 
|                     |   | **2001** |   | **2002** |   | **2003** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|
| Service  cost            |   | Ps.      | 3,048  |     | Ps.    | 3,075    |   | Ps. | 2,855 |   |
| Interest  cost           |   | 804      |   | 870      |   | 797      |   |
| Return  on plan assets   |   | (1,913   | )      | (1,626   | )      | (1,846   | )      |
| Curtailment  loss (gain) |   | 216      |   | (335     | )      | 39       |   |
| Settlement  loss         |   | 274      |   | —   |   | 6        |   |
| Net  amortization        |   | 1,315    |   | 1,273    |   | 1,276    |   |
| Net  cost for the year   |   | Ps.      | 3,744  |     | Ps.    | 3,257    |   | Ps. | 3,127 |   |

 

F-16

----

 

As of December 31,the status of the plan was as follows:

 
|                                                                        |   | **2002** |   | **2003** |   |
|-----------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Actuarial  present value of accumulated benefit obligations:                |   |     |   |     |   |
| Vested  benefit obligation                                                  |   | Ps.      | (9,505 | )        | Ps.    | (10,540 | ) |
| Non-vested  benefit obligation                                              |   | (8,830   | )      | (9,485   | )      |
|                                                                        |   | (18,335  | )      | (20,025  | )      |
| Excess  of projected benefit obligation over accumulated benefit obligation |   | (6,940   | )      | (7,059   | )      |
| Projected  benefit obligation                                               |   | (25,275  | )      | (27,084  | )      |
| Plan  assets at fair value (trust funds)                                    |   | 18,144   |   | 18,554   |   |
| Shortfall  of plan assets over projected benefit obligation                 |   | (7,131   | )      | (8,530   | )      |
| Unrecognized  amounts to be amortized over 17 years:                        |   |     |   |     |   |
| Cumulative  net gain                                                        |   | 2,471    |   | 1,579    |   |
| Net  transition liability                                                   |   | (429     | )      | (138     | )      |
| Prior  service cost                                                         |   | (220     | )      | (182     | )      |
| Adjustment  required to recognize minimum liability                         |   | (1,409   | )      | (1,154   | )      |
| Seniority  premium liability                                                |   | Ps.      | (6,718 | )        | Ps.    | (8,425 | ) |

 

For the years endedDecember 31, 2002 and 2003, the changes in projected benefit obligationand plan assets are summarized as follows:

 
|                                               |   | **2002** |       | **2003** |       |
|----------------------------------------------------|--------|----------|------------|----------|------------|
| Projected  benefit obligation at beginning of year |   | Ps.      | 24,030     |     | Ps.        | 25,275 |   |
| Effect  of inflation on beginning balance          |   | (710     | )          | (1,163   | )          |
| Service  cost                                      |   | 3,075    |       | 2,855    |       |
| Interest  cost                                     |   | 870      |       | 797      |       |
| Benefits  paid                                     |   | (2,911   | )          | (784     | )          |
| Actuarial  loss                                    |   | 921      |       | 104      |       |
| Projected  benefit obligation at end of year       |   | Ps.      | 25,275     |     | Ps.        | 27,084 |   |
|                                               |   |     | ** ** |     | ** ** |
|                                               |   | **2002** |       | **2003** | ** ** |
| Fair  value of plan assets at beginning of year    |   | Ps.      | 18,718     |     | Ps.        | 18,144 |   |
| Effect  of inflation on beginning balance          |   | (79      | )          | (635     | )          |
| Return  on plan assets                             |   | 1,626    |       | 1,846    |       |
| Benefits  paid                                     |   | (2,121   | )          | (801     | )          |
| Fair  value of plan assets at end of year          |   | Ps.      | 18,144     |     | Ps.        | 18,554 |   |

 

The weighted averageassumptions (net of expected inflation) used to determine benefit obligationsat December 31 were as follows:

 
|                                            |   | **2002** |   | **2003** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|
| Discount  rate                                  |   | 3.5      | %      | 3.5      | %      |
| Rate  of increase in future compensation levels |   | 1.5      | %      | 1.5      | %      |

 

F-17

----

 

The weighted averageassumptions (net of expected inflation) used to determine net periodic benefitcost for the years ended December 31 were as follows:

 
|                                              |   | **2001** |   | **2002** |   | **2003** |   |
|---------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Discount  rate                                    |   | 4.0      | %      | 3.5      | %      | 3.5      | %      |
| Rate  of increase in future compensation levels   |   | 2.0      | %      | 1.5      | %      | 1.5      | %      |
| Expected  long-term rate of return on plan assets |   | 5.0      | %      | 4.0      | %      | 4.0      | %      |

 

The long-term assetreturn rate is based on the annual recommendations of the Actuarial Commissionin the Mexican Association of Consulting Actuaries. These recommendationsconsider historical information and future expectations.

 

The Company’s weightedaverage asset allocation by asset category as of December 31 was asfollows:

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
| Equity  securities      |   | 30       | %      | 22       | %      |
| Fixed  rate instruments |   | 70       | %      | 78       | %      |
| Total                   |   | 100      | %      | 100      | %      |

 

The Company has a policyof maintaining at least 30% of the trust assets in Mexican Federal Governmentinstruments. Objective portfolio guidelines have been established for theremaining 70% and investment decisions are being made to comply with thoseguidelines to the extent that market conditions and available funds allow.

 

The Company estimatesthat it will not have to contribute to the plan during 2004.

 

In the United States, theCompany has a saving and investment plan that incorporates voluntary employee401(K) contributions with Company contributions. For the years endedDecember 31, 2001, 2002 and 2003, total expenses related to this plan wereU.S.$2,212,000 (Ps.24,863), U.S.$2,324,000 (Ps.26,122) and U.S.$2,670,000(Ps.30,011), respectively.

 

In Venezuela, the Companyrecognizes a liability for seniority premiums and indemnities for dismissalestablished by the local Labor Law, which amounted Ps.15,161 and Ps.16,049 asof December 31, 2002 and 2003, respectively.

 

In Central America, thelabor legislation of Costa Rica, Nicaragua, El Salvador, Honduras and Guatemalaestablishes that the accumulated payments to which workers may be entitled,based on the years of services, must be paid in the case of death, retirementor dismissal. The Company records a liability at 10% over salaries paid, whichamounted to Ps.12,356 and Ps.14,673 as of December 31, 2002 and 2003,respectively.

 

**11.****                               CONTINGENCIESAND COMMITMENTS**

 

A)              CONTINGENCIES

 

The Mexican taxauthorities have made certain observations to asset tax declarations for theyears 1995, 1996 and 1997, which amounted to Ps.547,170 including the relatedsurcharges and penalties. The resolution of these matters is not expected tohave a material adverse effect on the Company’s consolidated financial positionor results of operations.

 

The Venezuelan taxauthorities have made certain observations to one of our Venezuelansubsidiaries, related to the income tax returns for the years 1998 and 1999,which amounted to Ps.92,675, plus tax credits presumably omitted for Ps.491.The resolutions of these claims will be assumed by the previous shareholder, inaccordance with the purchase agreement of our subsidiary, Molinos Nacionales,C.A.

 

F-18

----

 

At the date of issuanceof the financial statements, certain subsidiaries of the Company have beennotified by the Comisión Nacional del Agua (“Water National Commission” or“CNA”) of assessments due from different years amounting to Ps 24,623 plusrelated penalties and surcharges. These assessments mainly derive from theCNA’s determination of sewage water discharged to the underground through thesprinkler system of those subsidiaries in its gardens. The subsidiaries haveasserted the legal defense allowed by law in order to annul these assessments.At the date of issuance of the financial statements, the Company received afavorable judicial resolution for one of these assessments amounting to Ps6,504. According to the Company’s lawyers, a reasonable basis exist in order toobtain a favorable resolution of the rest of the claimed assessments, because,among other things, the water is previously treated, it is not discharged onpublic property of the Nation and does not contaminate aquiferous layers northe underground soil.

 

The Company has beeninvolved in an anti-trust lawsuit filed by 18 tortilla manufacturers againsttwo of its subsidiaries in the United States. The plaintiffs alleged that thesesubsidiaries had monopolized shelf space in grocery stores by paying slottingallowances. During December 2003, a U.S. Federal Judge dismissed thelawsuit without prejudice for the Company. At the date of issuance of thesefinancial statements, the plaintiffs appealed this resolution.

 

The Company is alsoinvolved in a number of claims arising in the ordinary course of business whichhave not been finally adjudicated. The resolution of these matters is notexpected to have a material adverse effect on the Company’s consolidatedfinancial position or results of operations.

 

B)                 COMMITMENTS

 

The Company entered intosale-leaseback agreements for various production equipment located in its U.S.plants. The Company has a purchase option at fair market value at theexpiration of the leases and an early purchase option, which permits theCompany to acquire the equipment at fair market value at approximatelythree-fourths of the lease term. These agreements are accounted for asoperating leases.

 

As of December 31,2003, the Company is leasing certain equipment under long-term operating leaseagreements expiring through 2011. Future minimum lease payments under suchleases amount to approximately U.S.$168,483,000 (Ps.1,893,749), as follows:

 
|                 |   | **U.S.  dollars (thousands)** |    |
|----------------------|--------|-------------------------------|---------|
| **Year**             |   | **Facilities**                |    | **Equipment** |   | **Total** |   |
| 2004                 |   | U.S.$                         | 12,145  |   | U.S.$ | 24,898 |   | U.S.$ | 37,043 |   |
| 2005                 |   | 10,985                        |    | 16,845 |   | 27,830 |   |
| 2006                 |   | 9,581                         |    | 12,434 |   | 22,015 |   |
| 2007                 |   | 8,381                         |    | 11,885 |   | 20,266 |   |
| 2008                 |   | 8,198                         |    | 8,741 |   | 16,939 |   |
| 2009  and thereafter |   | 8,965                         |    | 35,425 |   | 44,390 |   |
|                 |   | U.S.$                         | 58,255  |   | U.S.$ | 110,228 |   | U.S.$ | 168,483 |   |
|                 |   | Ps.                           | 654,786 |   | Ps. | 1,238,963 |   | Ps. | 1,893,749 |   |

 

Rental expense wasapproximately Ps.410,442, Ps.395,125 and Ps.361,157 for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

At December 31,2003, the Company has various outstanding commitments in the United States topurchase commodities and raw materials of approximately U.S.$66,588,000(Ps.748,449), which will be delivered during 2004.

 

F-19

----

 

As of December 31,2003, the Company has outstanding commitments to purchase machinery andequipment amounting to U.S.$1,686,000 (Ps.18,951).

 

As of December 31,2002 and 2003, restricted cash of Ps.1,485 and Ps.1,124, respectively, includedundisbursed proceeds from the issuance of tax-exempt industrial developmentrevenue bonds in the United States amounting to Ps.1,304 (U.S.$116,000) andPs.1,124 (U.S.$100,000) for the years 2002 and 2003, respectively, which areavailable to pay interest expense on outstanding balances on these bonds.

 

As of December 31,2003 the Company has irrevocable letters of credit in the amount ofapproximately U.S.$5,381,000 serving as collateral for claims pursuant to theCompany’s self-insured worker’s compensation retention program.

 

**12.****                               STOCKHOLDERS’EQUITY**

 

A)               COMMONSTOCK

 

At December 31,2003, Gruma’s outstanding common stock consisted of 450,133,443 shares ofSeries “B”, with no par value, fully subscribed and paid, which can only bewithdrawn with stockholders’ approval, and 2,416,509 authorized shares held inTreasury. At December 31, 2002, the Company’s outstanding common stockconsisted of 441,402,386 shares and 11,147,566 shares held in Treasury.

 

B)                 RETAINEDEARNINGS

 

In accordance with MexicanCorporate Law, the legal reserve must be increased annually by 5 % of annualnet profits until it reaches 20 % of the fully paid capital stock amount.

 

Dividends paid fromretained earnings which have not been previously taxed are subject to an incometax payable by the Company equal to 49.25% in 2004 and 47.06% in 2005. Theapplicable tax may be credited against income tax the Company is subject to inthe following two fiscal years. Effective January 1, 2002, dividends paidby the Company from the net tax income account are not subject to any tax.

 

C)                 PURCHASEOF COMMON STOCK

 

The Stockholders’ Meeting approved a Ps.650,000 reserve to repurchasethe Company’s own shares. The total amount of repurchased shares cannot exceedeither the reserve amount or 5% of total equity. As of December 31, 2003,the Company has repurchased 2,416,509 of its own shares with a market value ofPs.36,793.

 

The Company has entered into several agreementsinvolving its own shares, as follows:

 

•                  During 2003, the Company entered intofive equity swap agreements with a financial institution under which theCompany sold 22,200,000 of its own shares for a total amount ofU.S.$24,327,000. At each maturity, the Company is subject to pay a financialcost at the LIBOR rate plus an average spread of 2.01% on the contractualamount. The agreement matures in January, September andDecember 2004, when the Company will pay or receive the difference betweenthe agreed average price of U.S.$ 1.0958 per share and the market price.

 

•                  During 2003, theCompany entered into two call option agreements with a European financialinstitution, selling 6,405,000 of its own shares for a total amount ofU.S.$5,928,000, maturing in February and May 2004, with a zero strikeprice.

 

F-20

----

 

D)               FOREIGNCURRENCY TRANSLATION ADJUSTMENTS

 

Foreign currencytranslation adjustments as of December 31 consisted of the following:

 
|                                                                                                                                                                |   | **2002** |     | **2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Foreign  currency translation at beginning of year                                                                                                                  |   | Ps.      | (404,297 | )        | Ps.    | (679,933 | ) |
| Effect  of translating net investment in foreign subsidiaries                                                                                                       |   | 321,700  |     | 397,561  |   |
| Exchange  differences arising from foreign currency liabilities accounted for as a  hedge of the Company’s net investments in foreign subsidiaries, net of tax |   | (597,336 | )        | (336,564 | )      |
|                                                                                                                                                                |   | Ps.      | (679,933 | )        | Ps.    | (618,936 | ) |

 

As of December 31,2002 and 2003, the accumulated effect of translating net investment in foreignsubsidiaries in the minority interest amounted to Ps.21,796 and Ps.54,040,respectively.

 

E)                  INFLATIONEFFECTS

 

As of December 31,2003, the majority stockholders’ equity is comprised of the following:

 
|                                                                                                                              |   | **Nominal** |      | **Restatement** |   | **Total**   |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-----------|-----------------|--------|-------------|--------|
| Common  stock                                                                                                                     |   | Ps.         | 4,401,973 |            | Ps.    | 6,501,793   |   | Ps. | 10,903,766 |   |
| Additional  paid-in capital                                                                                                       |   | 1,170,605   |      | 2,048,595       |   | 3,219,200   |   |
| Deficit  from restatement                                                                                                         |   | —      |      | (11,765,282     | )      | (11,765,282 | )      |
| Cumulative  effect of a change in an accounting principle for deferred income taxes and  employees’ statutory profit sharing |   | (185,474    | )         | (7,375          | )      | (192,849    | )      |
| Retained  earnings from prior years                                                                                               |   | 2,675,651   |      | 5,347,961       |   | 8,023,612   |   |
| Net  income for the year                                                                                                          |   | 500,403     |      | (7,429          | )      | 492,974     |   |
| Foreign  currency translation adjustments                                                                                         |   | (618,936    | )         | —          |   | (618,936    | )      |
|                                                                                                                              |   | Ps.         | 7,944,222 |            | Ps.    | 2,118,263   |   | Ps. | 10,062,485 |   |

 

F)                  TAX VALUES OF COMMON STOCK AND RETAINEDEARNINGS

 

As of December 31, 2003, tax amounts of common stock and retainedearnings were Ps.8,918,975 and Ps.1,394,294, respectively.

 

F-21

----

 

**13.****                               OTHERINCOME (EXPENSE), NET**

 

Other income (expense),net is comprised of the following:

 
|                                                                                                           |   | **Year ended  December 31,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                           |   | **2001**                          |   | **2002** |   | **2003** |   |
| Disposal  of subsidiaries                                                                                      |   | Ps.                               | — |   | Ps. | 140,751 |   | Ps. | — |   |
| Amortization  of excess of cost over book value and excess of book value over cost, net                        |   | 351,300                           |   | 142,982 |   | (33,816 | ) |
| Amortization  of other deferred costs                                                                          |   | (82,248                           | )      | (62,789 | ) | (61,421 | ) |
| Write-off  of preoperating expenses not related with shut-down of the bread  manufacturing operation and other |   | (23,905                           | )      | — |   | — |   |
| Impairment  loss on assets (Note 6)                                                                            |   | (16,163                           | )      | (67,244 | ) | (17,087 | ) |
| Net  loss from the shut-down of the bread operations                                                           |   | (216,777                          | )      | — |   | — |   |
| Voluntary  product recall                                                                                      |   | 70,063                            |   | — |   | — |   |
| Net  loss in sale of fixed assets and other assets                                                             |   | —                            |   | — |   | (52,105 | ) |
| Other.                                                                                                         |   | (6,784                            | )      | (23,840 | ) | (10,589 | ) |
|                                                                                                           |   | Ps.                               | 75,486 |   | Ps. | 129,860 |   | Ps. | (175,018 | ) |

 

During 2002, the Companysold the shares of one of its subsidiaries and recognized a gain of Ps.140,751.

 

During 2001, the Companydetermined that the carrying value of certain goodwill was impaired;consequently, goodwill was reduced by Ps.23,905.

 

The net loss from theshut-down of the bread operations includes in 2001 a provision of approximatelyPs.37,277, mainly for fixed asset impairment losses and others.

 

**14.****                               INCOMETAXES, ASSET TAX AND EMPLOYEES’ STATUTORY PROFIT SHARING**

 

A)               INCOMETAX AND ASSET TAX

 

Gruma files aconsolidated income tax return for Mexican income tax purposes, consolidatingtaxable income and losses of Gruma and its controlled Mexican subsidiaries.Filing a consolidated tax return had the effect of reducing income tax expensefor the years ended December 31, 2001, 2002 and 2003 by Ps.93,887,Ps.56,997 and Ps.67,813, respectively, as compared to filing a tax return on anunconsolidated basis. Tax regulations limit the income tax consolidation to 60%of the ownership interest of controlled Mexican subsidiaries.

 

In accordance with theapplicable tax law, Mexican corporations must pay the higher of either incometax or asset tax (1.8%). Asset tax is determined on the average value ofsubstantially all of the Company’s Mexican assets less certain liabilities.Payments of asset tax are recoverable against the excess of income tax overasset tax of the three prior years and the ten subsequent years.

 

For the years endedDecember 31, 2001, 2002 and 2003, asset tax amounted to Ps.136,095,Ps.60,796 and Ps.62,190, respectively.

 

F-22

----

 

B)                 RECONCILIATIONOF FINANCIAL AND TAXABLE INCOME

 

For the years 2001, 2002and 2003, the reconciliation between statutory income tax amounts and theeffective income tax amounts is summarized as follows:

 
|                                                                                    |   | **Year ended  December 31,** |    |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                    |   | **2001**                          |    | **2002** | ** ** | **2003** | ** ** |
| Statutory  federal income tax (35% for 2001 and 2002 and 34% for 2003)                  |   | Ps.                               | 284,677 |   | Ps. | 377,756 |   | Ps. | 378,262 |   |
| Foreign  income tax differences                                                         |   | (87,575                           | )       | (95,937 | ) | (17,398 | ) |
| Effect  of disposed and merged subsidiaries                                             |   | —                            |    | 267,358 |   | 113,130 |   |
| Foreign  dividends                                                                      |   | 183,066                           |    | 156,068 |   | 261,117 |   |
| Effect  due to change in income tax rate                                                |   | —                            |    | (28,752 | ) | — |   |
| Withdrawal  of investments from other assets                                            |   | —                            |    | — |   | (68,118 | ) |
| Financing  cost and income, net and other income statement effects related to inflation |   | 16,416                            |    | (52,188 | ) | (37,723 | ) |
| Amortization  of excess of cost over book value and excess of book value over cost, net |   | (83,491                           | )       | (28,511 | ) | 11,291 |   |
| Restatement  of tax loss carryforwards                                                  |   | (257,307                          | )       | (36,265 | ) | (24,311 | ) |
| Losses  of Mexican subsidiaries which cannot be utilized for income tax consolidation   |   | 284,261                           |    | 41,289 |   | 44,069 |   |
| Other                                                                                   |   | (40,122                           | )       | 3,908 |   | 15,658 |   |
| Effective  income tax (37% for 2001, 56% for 2002 and 61% for 2003)                     |   | Ps.                               | 299,925 |   | Ps. | 604,726 |   | Ps. | 675,977 |   |

 

As a result of theamendments to the Income Tax Law approved on January 1, 2002, beginning in2003 the income tax rate of 35% will be reduced annually to a nominal rate of32% in 2005.

 

According toBulletin D-4, “Accounting Treatment of Income Tax, Asset Tax and Employees’Statutory Profit Sharing”, deferred income taxes should be determined using thestatutory tax rate effective when the deferred tax assets and liabilities willbe recovered or settled.

 

The modificationof the tax rate mentioned above, reduced the net deferred tax liability byPs.28,752 in 2002 and resulted in a benefit to income for the same amount.

 

At December 31, 2002and 2003, the tax effects of main differences that give rise to significantportions of the deferred tax assets and liabilities, are as follows:

 

F-23

----

 
|                                                     |   | **2002**  |      | **2003**  |   |
|----------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Deferred  tax assets:                                    |   |      |      |      |   |
| Net  operating loss carryforwards and other tax credits  |   | Ps.       | 1,045,415 |      | Ps.    | 919,725 |   |
| Accrued  liabilities                                     |   | 117,911   |      | 256,344   |   |
| Recoverable  asset tax                                   |   | 371,905   |      | 283,531   |   |
| Intangible  asset resulting from intercompany operation. |   | 200,932   |      | 161,114   |   |
| Other                                                    |   | 200,326   |      | 142,679   |   |
|                                                     |   | 1,936,489 |      | 1,763,393 |   |
| Deferred  tax liabilities:                               |   |      |      |      |   |
| Property,  plant and equipment, net                      |   | 1,959,696 |      | 2,082,615 |   |
| Inventories                                              |   | 426,119   |      | 486,966   |   |
| Intangible  assets and other                             |   | 6,090     |      | 14,034    |   |
| Investment  in partnership and equity method investee    |   | 217,850   |      | 217,674   |   |
|                                                     |   | 2,609,755 |      | 2,801,289 |   |
| Net  deferred tax liability                              |   | Ps.       | 673,266   |      | Ps.    | 1,037,896 |   |

 

The Company has valuationallowances for its loss carryforwards amounting to Ps.114,054 from Mexicansubsidiaries and Ps.61,325 from foreign subsidiaries as of December 31,2001 and Ps.48,607 from foreign subsidiaries as of December 31, 2002. Inmanagement’s opinion, the realization of these assets is less likely than notbecause of the dependency on the generation of sufficient taxable income at thesubsidiary level.

 

Additionally, the Companyhas a deferred liability relating to employees’ statutory profit sharing ofPs.51,645 and Ps.30,631 as of December 31, 2002 and 2003, respectively.

 

C)                 TAXLOSS CARRYFORWARDS AND RECOVERABLE ASSET TAX

 

At December 31,2003, in Mexico, the Company has tax loss carryforwards of approximatelyPs.2,120,116 available to offset its taxable income in subsequent years, andasset tax of Ps.177,888 available to offset the excess of income tax over assettax in future years, as shown below:

 
| **Expiration year** |   | **Tax loss  carryforwards** |      | **Recoverable  asset tax** |   |
|---------------------|--------|-----------------------------|-----------|----------------------------|--------|
| 2010                |   | Ps.                         | —    |                       | Ps.    | 56,080 |   |
| 2012                |   | 2,120,116                   |      | 57,946                     |   |
| 2013                |   | —                      |      | 63,862                     |   |
|                |   | Ps.                         | 2,120,116 |                       | Ps.    | 177,888 |   |

 

Additionally, atDecember 31, 2003, certain Company’s foreign subsidiaries have tax losscarryforwards of approximately Ps.25,523 (950 million Costa Rican colons) whichwill expire in 2004 to 2005.

 

F-24

----

 

D)                EMPLOYEES’STATUTORY PROFIT SHARING

 

In Mexico, employees’statutory profit sharing is determined for each subsidiary on an unconsolidatedbasis, applying 10% of taxable income determined on a basis similar to incometax, except that the employee’s statutory profit sharing does not considerinflation effects, depreciation and amortization expense is based on thehistorical cost, and a foreign exchange gain or loss is recognized when amonetary asset or liability is contractually due.

 

**15.****                               FOREIGNCURRENCY**

 

A)               EXCHANGEDIFFERENCES

 

For the years endedDecember 31, 2001, 2002 and 2003, the effects of exchange ratefluctuations on the Company’s monetary assets and liabilities were recognizedas follows:

 

 
|                                                                                                                                                                                                                                                             |   | **2001** |    | **2002** |   | **2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Exchange  differences arising from foreign currency liabilities accounted for as a  hedge of the Company’s net investment in foreign subsidiaries recorded  directly to stockholders’ equity as an effect of foreign currency translation  adjustments |   | Ps.      | 153,059 |     | Ps.    | (597,336 | )      | Ps. | (336,564 | ) |
| Exchange  differences arising from foreign currency transactions credited (charged) to  income                                                                                                                                                                   |   | 108,722  |    | (283,483 | )      | (181,667 | )      |
|                                                                                                                                                                                                                                                             |   | Ps.      | 261,781 |     | Ps.    | (880,819 | )      | Ps. | (518,231 | ) |

 

B)                 FOREIGNCURRENCY POSITION

 

As of December 31,2002 and 2003, monetary assets and liabilities held or payable in U.S. dollarsare summarized below:

 
|                            |   | **Thousands  of U.S. dollars** |     |
|---------------------------------|--------|--------------------------------|----------|
|                            |   | **2002**                       |     | **2003** |   |
| In companies located in Mexico: |   |                           |     |   |   |
| Assets:                         |   |                           |     |   |   |
| Current                         |   | U.S.$                          | 33,204   |   | U.S.$ | 3,897 |   |
| Non-current                     |   | 11                             |     | 14 |   |
| Liabilities:                    |   |                           |     |   |   |
| Current                         |   | (71,342                        | )        | (47,661 | ) |
| Long-term                       |   | (550,000                       | )        | (500,000 | ) |
|                            |   | U.S.$                          | (588,127 | ) | U.S.$ | (543,750 | ) |

 

F-25

----

 
|                   |   | **Thousands  of U.S. dollars** |       |
|------------------------|--------|--------------------------------|------------|
|                   |   | **2002**                       | ** ** | **2003** |   |
| In  foreign companies: |   |                           |       |   |   |
| Assets:                |   |                           |       |   |   |
| Current                |   | U.S.$                          | 146,594    |   | U.S.$ | 144,501 |   |
| Non-current            |   | 1,059                          |       | 1,736 |   |
| Liabilities:           |   |                           |       |   |   |
| Current                |   | (199,654                       | )          | (188,278 | ) |
| Long-term              |   | (88,785                        | )          | (124,990 | ) |
|                   |   | U.S.$                          | (140,786   | ) | U.S.$ | (167,031 | ) |

 

At December 31, 2002and 2003, the exchange rates used to translate U.S. dollar assets andliabilities were Ps.10.44 and Ps.11.24, respectively. On February 20,2004, date of issuance of these financial statements, the exchange rate for theU.S. dollar was Ps.10.94.

 

For the years endedDecember 31, the Company’s Mexican subsidiaries had transactions in U.S.dollars as follows :

 
|                                  |   | **Thousands  of U.S. dollars** |    |
|---------------------------------------|--------|--------------------------------|---------|
|                                  |   | **2001**                       |    | **2002** |   | **2003** |   |
| Corn  purchases and other inventories |   | U.S.$                          | 104,117 |   | U.S.$ | 147,927 |   | U.S.$ | 110,675 |   |
| Interest  expense                     |   | 52,162                         |    | 43,278 |   | 29,991 |   |
| Equipment  purchases                  |   | 88                             |    | 404 |   | 321 |   |
| Services                              |   | 194                            |    | 321 |   | 532 |   |
|                                  |   | U.S.$                          | 156,561 |   | U.S.$ | 191,930 |   | U.S.$ | 141,519 |   |

 

As of December 31,consolidated non-monetary assets of foreign origin, which are restated on thebasis of the GCPI from the foreign country of origin are summarized as follows:

 
|                |   | **2002**                           |   | **2003**                     |   |
|---------------------|--------|------------------------------------|--------|------------------------------|--------|
|                |   | **Foreign  currency  (thousands)** |   | **Year-end  exchange  rate** |   | **Foreign  currency  (thousands)** |   | **Year-end  exchange  Rate** |   |
| U.S.  dollars       |   | 574,686                            |   | 10.44                        |   | 573,893 |   | 11.24 |   |
| Swiss  francs       |   | 23,008                             |   | 7.55                         |   | 522 |   | 9.08 |   |
| Euros               |   | 17,275                             |   | 10.9519                      |   | 13,938 |   | 14.1645 |   |
| Venezuelan bolivars |   | 256,511,893                        |   | 0.0074                       |   | 358,934,520 |   | 0.0070 |   |
| Costa Rican colons  |   | 35,464,477                         |   | 0.0276                       |   | 32,470,369 |   | 0.0269 |   |

 

F-26

----

 

**16.****                               SEGMENTINFORMATION**

 

The Company’s reportablesegments are strategic business units that offer different products indifferent geographical regions. These business units are managed separatelybecause each business segment requires different technology and marketingstrategies.

 

The Company’s reportablesegments are as follows:

 

•             Corn flour and packaged tortilla division(United States) – manufactures and distributes over 20 varieties of corn flourthat are used mainly to produce and distribute different types of tortillas andtortilla chip products in the United States and Europe. The main brands areMASECA for corn flour and MISSION and GUERRERO for packaged tortillas.

 

•             Corn flour division (Mexico) – engagedprincipally in the production, distribution and sale of corn flour in Mexicounder MASECA brand. Corn flour produced by this division is used mainly in thepreparation of tortillas and other related products.

 

•             Corn flour, wheat flour and other productsdivision (Venezuela) – engaged mainly in producing and distributing corn andwheat flour, used principally for industrial and human consumption.

 

•             Packaged tortilla division (Mexico) –produces and distributes packaged tortillas. In 2001, this division alsoproduced and distributed bread in Mexico.

 

•             Wheat flour division (Mexico) – engaged inthe production and marketing of wheat flour in Mexico.

 

•             Corn flour and other products division(Central America) – manufactures, distributes and sells corn flour, tortillasand snacks; cultivates and sells hearts of palm.

 

•             “Other” division – this segment representsthe technology and equipment division located in Mexico, which conducts researchand development regarding flour and tortilla manufacturing equipment, producesmachinery for corn flour and tortilla production and is engaged in theconstruction of the Company’s corn flour manufacturing facilities.

 

•             The “Other reconciling items” row includesthe corporate expenses and the elimination of inter-business unit transactions.

 

During 2001 the Companydecided to terminate the bread operations in Mexico and Central America.

 

All intersegment salesprices are market based. The Company evaluates performance based on operatingincome of the respective business units.

 

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing tables.

 

F-27

----

 

Segment information as ofand for the year ended December 31, 2001:

 
| **Segment**                                                 |   | **Net sales  to  external  customers** |       | **Inter-  segment  net sales** |   | **Operating  income  (loss)** |   | **Depreciation  and  amortization** |      |
|-------------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------|--------|-------------------------------|--------|-------------------------------------|-----------|
| Corn  flour and packaged tortilla division (United States). |   | Ps.                                    | 9,724,487  |                           | Ps.    | —                        |   | Ps.                                 | 660,725   |   | Ps. | 611,774 |   |
| Corn  flour division (Mexico)                               |   | 5,106,639                              |       | 36,836                         |   | 580,491                       |   | 271,854                             |      |
| Corn  flour, wheat flour and other products (Venezuela)     |   | 2,394,394                              |       | —                         |   | 183,340                       |   | 67,959                              |      |
| Packaged  tortilla (Mexico)                                 |   | 381,536                                |       | 35,494                         |   | (237,059                      | )      | 87,921                              |      |
| Wheat  flour (Mexico)                                       |   | 1,580,149                              |       | 28,695                         |   | 14,008                        |   | 62,179                              |      |
| Corn  flour and other products (Central America)            |   | 1,262,359                              |       | —                         |   | (8,575                        | )      | 97,443                              |      |
| Other                                                       |   | 100,934                                |       | 372,762                        |   | (14,104                       | )      | 8,935                               |      |
| Other  reconciling items                                    |   | 22,904                                 |       | (473,787                       | )      | (117,560                      | )      | (307,210                            | )         |
| Total                                                       |   | Ps.                                    | 20,573,402 |                           | Ps.    | —                        |   | Ps.                                 | 1,061,266 |   | Ps. | 900,855 |   |

 
| **Segment**                                                |   | **Total  assets** |       | **Total  liabilities** |   | **Expenditures  for  long-lived assets** |   |
|------------------------------------------------------------|--------|-------------------|------------|------------------------|--------|------------------------------------------|--------|
| Corn  flour and packaged tortilla division (United States) |   | Ps.               | 8,301,164  |                   | Ps.    | 2,290,347                                |   | Ps. | 484,774 |   |
| Corn  flour division (Mexico)                              |   | 7,015,312         |       | 1,453,623              |   | 3,888                                    |   |
| Corn  flour, wheat flour and other grains (Venezuela)      |   | 2,469,642         |       | 786,788                |   | 71,255                                   |   |
| Packaged  tortilla (Mexico)                                |   | 773,354           |       | 102,270                |   | 25,502                                   |   |
| Wheat  flour (Mexico)                                      |   | 2,003,055         |       | 215,336                |   | 19,244                                   |   |
| Corn  flour and other products (Central America)           |   | 1,236,826         |       | 183,315                |   | 90,812                                   |   |
| Other                                                      |   | 538,662           |       | 86,562                 |   | (14,764                                  | )      |
| Other  reconciling items                                   |   | 1,462,304         |       | 5,782,300              |   | 69,973                                   |   |
| Total                                                      |   | Ps.               | 23,800,319 |                   | Ps.    | 10,900,541                               |   | Ps. | 750,684 |   |

 

F-28

----

 

Segment information as ofand for the year ended December 31, 2002:

 
| **Segment**                                                |   | **Net sales  to  external  customers** |       | **Inter-  segment  net sales** |   | **Operating  income  (loss)** |   | **Depreciation  and  amortization** |      |
|------------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------|--------|-------------------------------|--------|-------------------------------------|-----------|
| Corn  flour and packaged tortilla division (United States) |   | Ps.                                    | 9,986,276  |                           | Ps.    | —                        |   | Ps.                                 | 858,224   |   | Ps. | 519,086 |   |
| Corn  flour division (Mexico)                              |   | 4,921,842                              |       | 30,270                         |   | 527,593                       |   | 268,589                             |      |
| Corn  flour, wheat flour and other products (Venezuela)    |   | 2,676,353                              |       | —                         |   | 289,584                       |   | 77,261                              |      |
| Packaged  tortilla (Mexico)                                |   | 154,480                                |       | 39,868                         |   | (78,610                       | )      | 60,388                              |      |
| Wheat  flour (Mexico)                                      |   | 1,784,542                              |       | 4,611                          |   | 19,036                        |   | 65,643                              |      |
| Corn  flour and related products (Central America)         |   | 1,117,750                              |       | —                         |   | 33,363                        |   | 65,987                              |      |
| Other                                                      |   | 1,645                                  |       | 303,615                        |   | (47,625                       | )      | 8,269                               |      |
| Other  reconciling items                                   |   | 17,532                                 |       | (378,364                       | )      | 6,362                         |   | (1,887                              | )         |
| Total                                                      |   | Ps.                                    | 20,660,420 |                           | Ps.    | —                        |   | Ps.                                 | 1,607,927 |   | Ps. | 1,063,336 |   |

 
| **Segment**                                                |   | **Total  assets** |       | **Total  liabilities** |   | **Expenditures  for  long-lived assets** |   |
|------------------------------------------------------------|--------|-------------------|------------|------------------------|--------|------------------------------------------|--------|
| Corn  flour and packaged tortilla division (United States) |   | Ps.               | 8,296,195  |                   | Ps.    | 2,460,731                                |   | Ps. | 528,569 |   |
| Corn  flour division (Mexico)                              |   | 7,303,297         |       | 1,539,685              |   | 31,205                                   |   |
| Corn  flour, wheat flour and other products (Venezuela)    |   | 2,809,650         |       | 815,877                |   | —                                   |   |
| Packaged  tortilla (Mexico)                                |   | 553,904           |       | 77,856                 |   | —                                   |   |
| Wheat  flour (Mexico)                                      |   | 2,088,611         |       | 272,975                |   | 37,204                                   |   |
| Corn  flour and related products (Central America)         |   | 1,200,659         |       | 376,342                |   | 7,618                                    |   |
| Other                                                      |   | 396,401           |       | 86,118                 |   | 7,362                                    |   |
| Other  reconciling items                                   |   | 1,210,665         |       | 5,264,225              |   | 392,038                                  |   |
| Total                                                      |   | Ps.               | 23,859,382 |                   | Ps.    | 10,893,809                               |   | Ps. | 1,003,996 |   |

 

F-29

----

 

Segment information as ofand for the year ended December 31, 2003:

 
| **Segment**                                                |   | **Net sales  to  external  customers** |       | **Inter-  segment  net sales** |   | **Operating  income  (loss)** |   | **Depreciation  and  amortization** |      |
|------------------------------------------------------------|--------|----------------------------------------|------------|--------------------------------|--------|-------------------------------|--------|-------------------------------------|-----------|
| Corn  flour and packaged tortilla division (United States) |   | Ps.                                    | 11,216,744 |                           | Ps.    | —                        |   | Ps.                                 | 1,037,249 |   | Ps. | 518,063 |   |
| Corn  flour division (Mexico)                              |   | 5,161,853                              |       | 38,958                         |   | 393,845                       |   | 261,371                             |      |
| Corn  flour, wheat flour and other products (Venezuela)    |   | 3,357,127                              |       | —                         |   | 435,700                       |   | 89,323                              |      |
| Packaged  tortilla (Mexico)                                |   | 199,180                                |       | 43,530                         |   | (56,733                       | )      | 18,257                              |      |
| Wheat  flour (Mexico)                                      |   | 1,978,548                              |       | 13,412                         |   | (22,673                       | )      | 68,692                              |      |
| Corn  flour and related products (Central America)         |   | 1,108,193                              |       | 2,515                          |   | (3,431                        | )      | 67,072                              |      |
| Other                                                      |   | 1,155                                  |       | 374,717                        |   | (40,736                       | )      | 7,544                               |      |
| Other  reconciling items                                   |   | 18,722                                 |       | (473,132                       | )      | 5,103                         |   | 112,619                             |      |
| Total                                                      |   | Ps.                                    | 23,041,522 |                           | Ps.    | —                        |   | Ps.                                 | 1,748,324 |   | Ps. | 1,142,941 |   |

 
| **Segment**                                                |   | **Total  assets** |       | **Total  liabilities** |   | **Expenditures  for  long-lived assets** |   |
|------------------------------------------------------------|--------|-------------------|------------|------------------------|--------|------------------------------------------|--------|
| Corn  flour and packaged tortilla division (United States) |   | Ps.               | 8,286,443  |                   | Ps.    | 2,735,074                                |   | Ps. | 429,199 |   |
| Corn  flour division (Mexico)                              |   | 7,123,356         |       | 1,320,867              |   | 81,003                                   |   |
| Corn  flour, wheat flour and other products (Venezuela)    |   | 2,863,481         |       | 973,807                |   | 39,046                                   |   |
| Packaged  tortilla (Mexico)                                |   | 454,250           |       | 66,580                 |   | 27,635                                   |   |
| Wheat  flour (Mexico)                                      |   | 2,293,993         |       | 454,565                |   | 40,437                                   |   |
| Corn  flour and related products (Central America)         |   | 1,048,209         |       | 265,132                |   | —                                   |   |
| Other                                                      |   | 367,378           |       | 116,687                |   | —                                   |   |
| Other  reconciling items                                   |   | 944,572           |       | 4,524,157              |   | 150,456                                  |   |
| Total                                                      |   | Ps.               | 23,381,682 |                   | Ps.    | 10,456,869                               |   | Ps. | 767,776 |   |

 

Thefollowing table presents the details of “Other reconciling items” for operating income:

 
| **Other reconciling items**                      |   | **2001** |     | **2002** |   | **2003** |   |
|--------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Corporate  expenses                              |   | Ps.      | (117,587 | )        | Ps.    | (35,587  | )      | Ps. | (56,885 | ) |
| Elimination  of inter-business unit transactions |   | 27       |     | 41,949   |   | 61,988   |   |
|                                             |   | Ps.      | (117,560 | )        | Ps.    | 6,362    |   | Ps. | 5,103 |   |

 

F-30

----

 

Additionally, a summaryof information by geographic segment is as follows:

 
|                                 |   | **2001**   |       | **%**  |   | **2002**   |   | **%**      |   | **2003**   |   | **%**  |       |
|--------------------------------------|--------|------------|------------|--------|--------|------------|--------|------------|--------|------------|--------|--------|------------|
| **NET SALES TO EXTERNAL CUSTOMERS:** |   |       |       |   |   |       |   |       |   |       |   |   |       |
| United  States                       |   | Ps.        | 9,806,385  |   | 48     |       | Ps.    | 9,986,276  |   | 49         |   | Ps.    | 11,216,744 |   | 49 |   |
| Mexico                               |   | 7,088,682  |       | 34     |   | 6,880,041  |   | 33         |   | 7,356,943  |   | 32     |       |
| Venezuela                            |   | 2,415,976  |       | 12     |   | 2,676,353  |   | 13         |   | 3,357,127  |   | 14     |       |
| Central America                      |   | 1,262,359  |       | 6      |   | 1,117,750  |   | 5          |   | 1,110,708  |   | 5      |       |
|                                 |   | Ps.        | 20,573,402 |   | 100    |       | Ps.    | 20,660,420 |   | 100        |   | Ps.    | 23,041,522 |   | 100 |   |
|                                 |   |       |       |   |   |       |   |       |   |       |   |   |       |
| **IDENTIFIABLE ASSETS:**             |   |       |       |   |   |       |   |       |   |       |   |   |       |
| United  States                       |   | Ps.        | 8,301,164  |   | 35     |       | Ps.    | 8,296,195  |   | 35         |   | Ps.    | 8,286,443  |   | 35 |   |
| Mexico                               |   | 11,792,687 |       | 50     |   | 11,552,878 |   | 48         |   | 11,183,549 |   | 48     |       |
| Venezuela                            |   | 2,469,642  |       | 10     |   | 2,809,650  |   | 12         |   | 2,863,481  |   | 12     |       |
| Central America                      |   | 1,236,826  |       | 5      |   | 1,200,659  |   | 5          |   | 1,048,209  |   | 5      |       |
|                                 |   | Ps.        | 23,800,319 |   | 100    |       | Ps.    | 23,859,382 |   | 100        |   | Ps.    | 23,381,682 |   | 100 |   |
|                                 |   |       |       |   |   |       |   |       |   |       |   |   |       |
| **CAPITAL EXPENDITURES:**            |   |       |       |   |   |       |   |       |   |       |   |   |       |
| United  States                       |   | Ps.        | 484,774    |   | 65     |       | Ps.    | 528,569    |   | 53         |   | Ps.    | 429,199    |   | 56 |   |
| Mexico                               |   | 103,843    |       | 14     |   | 467,809    |   | 46         |   | 299,531    |   | 39     |       |
| Venezuela                            |   | 71,255     |       | 9      |   | —     |   | 0          |   | 39,046     |   | 5      |       |
| Central  America                     |   | 90,812     |       | 12     |   | 7,618      |   | 1          |   | —     |   | 0      |       |
|                                 |   | Ps.        | 750,684    |   | 100    |       | Ps.    | 1,003,996  |   | 100        |   | Ps.    | 767,776    |   | 100 |   |

 

**17.****                               FINANCIALINSTRUMENTS**

 

A)               FAIR VALUE OFFINANCIAL INSTRUMENTS

 

The carrying amounts ofcash and temporary investments, accounts receivable, refundable taxes, tradeaccounts payable, short-term bank loans, current portion of long-term debt andaccrued liabilities and other payables approximate their fair value, due totheir short maturity. In addition, the net book value of accounts receivableand refundable taxes represent the expected cash flow to be received.

 

The estimated fair value of the Company’s long-termdebt and derivative financial instruments is as follows:

 
|                                                                                            |   | **Carrying  amount** |      | **Fair value** |   |
|-------------------------------------------------------------------------------------------------|--------|----------------------|-----------|----------------|--------|
| **At December 31, 2002:**                                                                  |   |                 |      |           |   |
|                                                                                            |   |                 |      |           |   |
| Liabilities:  Senior unsecured notes in U.S. dollars bearing interest at annual rate of  7.625% |   | Ps.                  | 2,812,275 |           | Ps.    | 2,713,845 |   |
| Interest  rate swap                                                                             |   | 48,589               |      | 48,589         |   |
| Equity  swap                                                                                    |   | 29,135               |      | 25,030         |   |
| Call  option                                                                                    |   | 148,978              |      | 151,270        |   |
|                                                                                                 |        |                      |           |                |        |  |  |

 

F-31

----

 
| **At  December 31, 2003:**                                                                      |   |    |      |    |   |
|-------------------------------------------------------------------------------------------------|--------|---------|-----------|---------|--------|
|                                                                                            |   |    |      |    |   |
| Liabilities:  Senior unsecured notes in U.S. dollars bearing interest at annual rate of  7.625% |   | Ps.     | 2,810,000 |    | Ps.    | 2,948,533 |   |
| Interest rate  swap                                                                             |   | 52,816  |      | 52,816  |   |
| Equity swap                                                                                     |   | 273,437 |      | 339,660 |   |
| Call option                                                                                     |   | 66,130  |      | 97,996  |   |
|                                                                                                 |        |         |           |         |        |  |  |

 

Fair values were determined as follows:

 

•             The fair value ofdebt is estimated based on quoted market prices for similar issues or oncurrent rates available to the Company for debt of the same maturity andsimilar terms.

 

•             The fair value of theequity swap and the call option is estimated based on quoted market prices ofthe share and on the agreement terms.

 

•             The carrying value ofthe remainder of the long-term debt was similar to its fair value.

 

B)                 HEDGES

 

In Mexico, the Company has entered into futurescontracts to minimize the risk in price fluctuations of corn and gas. Thesecontracts are short-term and do not exceed the maximum production requirementsfor a one-year period. The effect of these contracts was recognized in incomewhen they were settled and was not significant.

 

The Company uses derivative financial instruments suchas interest rate swaps to hedge its long term debt which matures in 2007 andbears interest at an annual rate of 7.625%. This hedge considers the riskcreated by changes in the market value conferred to interest rate fluctuations,converting the debt from a fixed rate (7.625%) to a variable rate (LIBOR plus2.035%). Additionally, the Company entered into an agreement to receive a fixedinterest rate of 5.1525% through 2004 and 5.485% from 2004 through 2007 and topay LIBOR rate.

 

C)                 CONCENTRATION OFCREDIT RISK

 

The financial instruments which are potentiallysubject to a concentration of risk are principally cash, temporary investmentsand trade accounts receivable. The Company deposits its cash and temporaryinvestments in recognized financial institutions. The concentration of thecredit risk with respect to trade receivables is limited since the Companysells its products to a large number of customers located in different parts ofMexico, United States, Central America and South America. The Company maintainsreserves for potential credit losses.

 

Operations in Venezuela represented 14.6% of sales in2003. The severe political and economic situation in Venezuela presents a riskto business that we cannot control and that cannot be accurately measured orestimated. The April 2002 coup, which ousted President Hugo Chávez from officefor two days, marked the climax of the political instability that continuedthroughout 2002 and 2003. In addition, a nationwide general strike that beganin early December 2002 and lasted for approximately two months caused asignificant reduction on oil production in Venezuela, and has had a materialadverse effect on Venezuela’s oil-dependent economy. Inflation in Venezuelareached 31.2% and 27.08% in 2002 and 2003, respectively. The Venezuelan bolivardepreciated 85.1% and 14.01% against the U.S. dollar during 2002 and 2003,respectively.

 

F-32

----

 

In February 2003, in response to the general strikeand in an effort to shore up the economy and control inflation, Venezuelanauthorities imposed foreign exchange and price controls on certain products. OnFebruary 6, 2003, the Venezuelan government set a single fixed exchange ratefor the bolivar against the U.S. dollar of 1,600 bolivars to U.S. $1.00. OnFebruary 11, 2003, the Venezuelan government established price controls onproducts such as corn flour and wheat flour. The Company’s financial conditionand results of operations have not had an important unfavorable effect,nevertheless, a portion of our sales are denominated in bolivars and that ouroperations in Venezuela manufacture products that are subject to foreignexchange controls.

 

On February 9, 2004 the Venezuelan government set asingle fixed exchange rate of 1,920 bolivars to U.S. $1.00. At the same time,an adjustment was made to the prices of some food products subject to pricecontrols, including products manufactured and distributed by our operations inVenezuela.

 

**18.          RELATED PARTY TRANSACTIONS**

 

The Company owns an 10.8557% interest in GFNorte, aMexican financial institution. In the normal course of business, the Companyobtains long-term financing from GFNorte and other subsidiaries of thisinstitution at market rates and terms. The highest outstanding loan amount in2003 has been Ps. 162,000 at an average interest rate of 8.9%. The interestpaid to GFNorte’s subsidiaries for the years ended December 31, 2001, 2002 and2003 was Ps.6,003, Ps.79 and Ps.41, respectively.

 

As of December 31, 2002 and 2003, the Company madeloans to its controlling shareholders, bearing interest at market rates. As ofDecember 31, 2002 and 2003, accounts receivable from these transactions totaledPs.116,658 and Ps.6,129, respectively.

 

As of December 31, 2002 and 2003, the Company hadaccounts payable to a shareholder of Ps.85,791 and Ps.53,212, respectively, andare included in trade accounts payable. During 2001, 2002 and 2003, the Companypurchased inventory ingredients from a shareholder, amounting to U.S.$90million (Ps.902,325), U.S.$84 million (Ps.940,518) and U.S.$111 million(Ps.1,248,363), respectively.

 

**19.          RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2002, theMIPA issued Bulletin C-15, “Impairment in the Value of Long-Lived Assets andtheir Disposal” (“Bulletin C-15”), which is effective as of January 1, 2004.Bulletin C-15 establishes guidance for the identification of certain eventsthat represent evidence of a potential impairment in long-lived assets,tangible and intangible. Additionally, it provides guidance for the estimationand recognition of losses for impairment and their reversal and establishes therequirements of presentation and disclosure of impairment losses anddiscontinued operations. The Company’s management believes that the adoption ofBulletin C-15 will not have a significant impact on the Company’s results ofoperation and financial position.

 

In April 2003, the MIPAissued Bulletin C-12, “Financial Instruments with Characteristics ofLiabilities, Equity or Both” (“Bulletin C-12”), which is effective as ofJanuary 1, 2004. Bulletin C-12 establishes standards to classify and measurecertain financial instruments with characteristics of both, liabilities andequity, as well as the disclosure requirements. The Company’s managementbelieves that the adoption of Bulletin C-12 will not have a significant impacton the Company’s results of operation and financial position.

 

F-33

----

 

**20.          DIFFERENCES BETWEEN MEXICAN GAAP ANDU.S. GAAP**

 

The Company’s consolidated financial statements areprepared in accordance with Mexican GAAP, which differ in certain significantrespects from U.S. GAAP. The Mexican GAAP consolidated financial statementsinclude the effects of inflation as provided for under Bulletin B-10 (see Note2-D), including the Fifth Amendment to Bulletin B-10 and Bulletin B-15, whereasfinancial statements prepared under U.S. GAAP are presented on a historicalcost basis. The reconciliation to U.S. GAAP includes a reconciling item for theeffect of applying the Fifth Amendment to Bulletin B-10 and Bulletin B-15restatement to Mexican pesos of constant purchasing power as of December 31,2003 because, as described below, these provisions of inflation accountingunder Mexican GAAP do not meet the consistent reporting currency requirementsof Regulation S-X. The U.S. GAAP adjustments have been determined based onMexican NCPI factors. The reconciliation does not include the reversal of otherMexican GAAP inflation accounting adjustments as they represent a comprehensivemeasure of the effects of price-level changes in the inflationary Mexicaneconomy and, as such, are considered a more meaningful presentation thanhistorical cost-based financial reporting for both Mexican and U.S. accountingpurposes.

 

The principal differences, other than inflationaccounting, between Mexican GAAP and U.S. GAAP and the effect on consolidatednet income and consolidated stockholders’ equity are presented below, with anexplanation of the adjustments.

 

F-34

----

 
|                                                                     |   | **Year ended  December 31,** |    |
|--------------------------------------------------------------------------|--------|------------------------------|---------|
| **Reconciliation of net income:**                                        |   | **2001**                     |    | **2002** |   | **2003** |   |
| **Net  majority income under Mexican GAAP**                              |   | Ps.                          | 361,075 |   | Ps. | 423,662 |   | Ps. | 492,974 |   |
| U.S. GAAP  adjustments:                                                  |   |                         |    |   |   |   |   |
| Depreciation  expense (See C)                                            |   | (59,798                      | )       | (62,316 | ) | (55,164 | ) |
| Preoperating  expenses and other deferred costs (See D)                  |   | 36,956                       |    | 2,855 |   | 17,027 |   |
| Capitalized  comprehensive financing costs (See E)                       |   | 2,995                        |    | 2,956 |   | 2,852 |   |
| Sale-leaseback  transaction (See F):                                     |   |                         |    |   |   |   |   |
| Interest expense                                                         |   | (16,995                      | )       | (17,293 | ) | (17,006 | ) |
| Rental and  depreciation expense, net                                    |   | 8,815                        |    | 8,652 |   | 8,374 |   |
| Amortization of  excess of cost over book value (See G)             |   | 19,352                       |    | 19,090 |   | 18,420 |   |
| Deferred income  taxes (See H)                                           |   | (151,976                     | )       | 28,405 |   | (12,262 | ) |
| Deferred  employees’ statutory profit sharing (See H)               |   | (17                          | )       | 508 |   | (362 | ) |
| Effect of U.S.  GAAP adjustments on equity method investee (See L)       |   | (19,510                      | )       | (67,170 | ) | (87,656 | ) |
| Negative  goodwill (See I):                                              |   |                         |    |   |   |   |   |
| Amortization of  excess of book value over cost                          |   | (383,320                     | )       | (178,230 | ) | — |   |
| Depreciation  expense                                                    |   | 40,322                       |    | 52,873 |   | 52,655 |   |
| Derivative  financial instruments (See J)                                |   | —                       |    | — |   | 85,403 |   |
| Adjustment to  net loss from shutdown of bread operations (See D)        |   | 354,850                      |    | — |   | — |   |
| Amortization of  goodwill and indefinite-lived intangible assets (See K) |   | —                       |    | 112,932 |   | 76,427 |   |
| Monetary position  gain resulting from U.S. GAAP adjustments             |   | 5,485                        |    | 390 |   | (87 | ) |
| Effects of  Bulletin B-15 restatement (See A)                            |   | (9,528                       | )       | (11,461 | ) | — |   |
| Total U.S. GAAP  adjustments                                             |   | (172,369                     | )       | (107,809 | ) | 88,621 |   |
| Minority  interest (See B)                                               |   | 19,104                       |    | 6,361 |   | 7,455 |   |
| **Net  income under U.S. GAAP**                                          |   | Ps.                          | 207,810 |   | Ps. | 322,214 |   | Ps. | 589,050 |   |
| **Basic  and diluted earnings per share** (in pesos)                     |   | Ps.                          | 0.48    |   | Ps. | 0.72 |   | Ps. | 1.32 |   |
| **Weighted  average shares outstanding**(thousands)                      |   | 433,235                      |    | 446,202 |   | 445,098 |   |

 

F-35

----

 
|                                                                      |   | **As of  December 31,** |       |
|---------------------------------------------------------------------------|--------|-------------------------|------------|
| **Reconciliation of stockholders’  equity:**                         |   | **2002**                |       | **2003** |   |
| **Stockholders’  equity under Mexican GAAP**                         |   | Ps.                     | 12,965,573 |   | Ps. | 12,924,813 |   |
| U.S. GAAP  adjustments:                                                   |   |                    |       |   |   |
| Property, plant  and equipment (See C)                                    |   | 458,246                 |       | 361,346 |   |
| Preoperating  expenses and other deferred costs   (See D)            |   | (43,376                 | )          | (24,257 | ) |
| Capitalized  comprehensive financing cost (See E)                         |   | (17,730                 | )          | (14,258 | ) |
| Sale-leaseback  transaction (See F)                                       |   | (57,123                 | )          | (65,709 | ) |
| Excess of cost  over book value (See G)                                   |   | (171,815                | )          | (147,376 | ) |
| Deferred income  taxes (See H)                                            |   | (39,440                 | )          | (50,084 | ) |
| Deferred  employees’ statutory profit sharing (See H)                |   | 2,562                   |       | 2,024 |   |
| Effect of U.S.  GAAP adjustments  on equity method  investee (See L) |   | (218,226                | )          | (290,186 | ) |
| Negative  goodwill (See I)                                                |   | (911,122                | )          | (826,587 | ) |
| Derivative  financial instruments (See J)                                 |   | 19,405                  |       | 111,348 |   |
| Goodwill and  indefinite-lived intangible assets (See K)                  |   | 112,059                 |       | 176,812 |   |
|                                                                      |   |                    |       |   |   |
| U.S. GAAP  adjustments attributable to minority interest                  |   | (69,649                 | )          | (52,378 | ) |
| Minority  interest under Mexican GAAP (See B)                             |   | (2,784,874              | )          | (2,862,328 | ) |
| Effects of  Bulletin B-15 restatement (See A)385,37                       |   | (324,081                | )          | — |   |
| Total U.S. GAAP  adjustments                                              |   | (4,045,164              | )          | (3,681,633 | ) |
| **Stockholders’  equity under U.S. GAAP**                            |   | Ps.                     | 8,920,409  |   | Ps. | 9,243,180 |   |

 

A summary of the Company’s statement of changes instockholders’ equity with balances determined under U.S. GAAP is as follows:

 
| Balance at  December 31, 2002                  |   | Ps.      | 8,920,409 |   |
|------------------------------------------------|--------|----------|-----------|--------|
| Net purchases of  Company’s common stock  |   | 114,885  |      |
| Dividends paid                                 |   | (293,785 | )         |
| Operation with  Company’s own shares      |   | 163,061  |      |
| Deferred loss on  hedging activity             |   | (54      | )         |
| Recognition of  inflation effects for the year |   | (311,383 | )         |
| Foreign currency  translation adjustments      |   | 60,997   |      |
| Net income for  the year                       |   | 589,050  |      |
| Balance at  December 31, 2003                  |   | Ps.      | 9,243,180 |   |

 

A summary of the Company’s stockholders’ equity afterthe U.S. GAAP adjustments described above as of December 31, 2002 and 2003 isas follows:

 
|                                             |   | **2002**    |       | **2003**    |   |
|--------------------------------------------------|--------|-------------|------------|-------------|--------|
| Capital stock                                    |   | Ps.         | 10,707,412 |        | Ps.    | 10,903,766 |   |
| Additional  paid-in capital                      |   | 3,096,934   |       | 3,219,200   |   |
| Retained  earnings                               |   | 6,826,098   |       | 7,080,689   |   |
| Accumulated  other comprehensive loss            |   | (11,710,035 | )          | (11,960,475 | )      |
| Total  stockholders’ equity under U.S. GAAP |   | Ps.         | 8,920,409  |        | Ps.    | 9,243,180 |   |

 

F-36

----

 

A)               EFFECTS OF BULLETINB-15 RESTATEMENT

 

As disclosed in Note 2-C, the Company adopted theprovisions of Bulletin B-15, which allows the restatement of information forprior periods for comparison purposes to information of the most current periodpresented, based on a weighted average restatement factor that reflects therelative inflation and currency exchange movements of the countries in whichthe Company operates. The restatement provisions of Bulletin B-15 do not meetthe Regulation S-X requirement that the financial statements be stated in thesame currency for all periods, because changes in foreign currency exchangerates are included in the restatement factor. The U.S. GAAP adjustments to net income and stockholders’ equity reflectthe difference between restating these prior periods, including the U.S. GAAPadjustments, to December 31, 2003 constant pesos utilizing the Mexican NCPI andthe weighted average restatement factor. See Note 20-Q for summarized financial information prepared on a U.S.GAAP basis restated to December 31, 2003 constant pesos utilizing the MexicanNCPI.

 

B)                 MINORITY INTEREST

 

Under Mexican GAAP, the minority interest inconsolidated subsidiaries is presented as a separate component withinstockholders’ equity in the consolidated balance sheet. For U.S. GAAP purposes,the minority interest is not included in stockholders’ equity.

 

C)                 PROPERTY, PLANTAND EQUIPMENT

 

Mexican GAAP allows companies the option of using aspecific index, which contemplates inflation and currency exchange movements inthe restatement of machinery and equipment and the related depreciation expenseif such machinery and equipment is of foreign origin. The Company has electedto apply a specific index to fixed assets of foreign origin for the purposes ofdetermining the restated balances under Mexican GAAP.  For U.S. GAAP purposes, the use of a specific index, whichcontemplates currency exchange changes, is not in accordance with thehistorical cost concept nor does it present financial information in a constantreporting currency. The impact on the net carrying value of fixed assets ofrestating fixed assets of foreign origin utilizing the Mexican NCPI for U.S.GAAP purposes increases stockholders’ equity as of December 31, 2002 and 2003by Ps. 555,724 and Ps. 481,409, respectively.

 

Under Mexican GAAP, depreciation on idle equipment isnot required if the carrying value is expected to be recovered. Under U.S.GAAP, those assets should continue be depreciated and subject to an impairmentreview. Therefore, the adjustment to property, plant and equipment decreasesstockholder’s equity as of December 31, 2002 and 2003 by Ps.97,478 andPs.120,063, respectively.

 

D)                PREOPERATINGEXPENSES AND OTHER DEFERRED COSTS

 

As of December 31, 2002, under Mexican GAAP,preoperating expenses incurred were permitted to be capitalized and amortizedby the Company over the period of time estimated to generate the incomenecessary to recover such expenses. The Company defined this period as 12 yearsbased on prior experience. Starting January 1, 2003, under Mexican GAAP, onlypreoperating expenses incurred during the development stage are capitalized,whereas preoperating expenses identified as research are expensed as incurred.Additionally, the preoperating expenses capitalized until January 1, 2003 areamortized using the straight-line method over a 12-year period. Under US GAAP,such expenses should be treated as period expenses.

 

F-37

----

 

In 2001, as disclosed in Note 13, the Company shutdownits bread operations and recognized a loss of Ps.216,777, which includes thewrite-off of preoperating expenses. Under U.S. GAAP, these expenses have beenpreviously written off.

 

The U.S. GAAP equity adjustments of Ps.43,376 andPs.24,257 decrease intangible assets presented in the balance sheets as ofDecember 31, 2002 and 2003, respectively.

 

E)                  COMPREHENSIVEFINANCING COSTS

 

Under Mexican GAAP, comprehensive financing costs,including interest expense, foreign exchange gains or losses and monetaryposition of the related debt for major construction projects, are capitalizedas part of the assets during the construction period.  Under U.S. GAAP, monetary position and foreign exchange gains andlosses on U.S. dollar or other stable currency borrowings are excluded fromcapitalized interest.

 

F)                  SALE-LEASEBACKTRANSACTION

 

Under Mexican GAAP, a sale-leaseback transaction thatinvolves real estate is recognized with the use of the general criteriaestablished for capital and operating lease transactions.  Based upon these criteria, a sale-leasebackof real estate was recorded by the Company as an operating lease.  Under U.S. GAAP, Statement of FinancialAccounting Standards (“SFAS”) No. 98, such a transaction would be recognized asa capital lease because a continuing involvement from the seller-lessee ispresent, and consequently, the risks and benefits of the property are nottransferred to the buyer-lessor.  TheU.S. GAAP balance sheet as of December 31, 2002 and 2003 would reflectincreases in fixed assets, net, of Ps.161,526 and Ps.138,960 (net ofaccumulated depreciation of Ps. 57,123 and Ps.65,709, respectively),respectively, and long-term debt increases of Ps.218,649 and Ps.204,669, respectively.

 

The capital lease under U.S. GAAP has a 15-year termwith an effective date of May 1, 1996. It requires minimum annual payments ofapproximately U.S.$3.2 million (Ps.35.968) for the year 2004, 2005 and 2006,and approximately U.S.$14.4 million (Ps.161,856) thereafter.

 

G)                 AMORTIZATION OFEXCESS OF COST OVER BOOK VALUE

 

Under Mexican GAAP, the excess of the purchase priceover the proportionate book value of net assets acquired is recorded as “Excessof cost over book value” for all of the Company’s acquisitions. Under U.S.GAAP, transfers and exchanges between enterprises under common control areaccounted for on a carry-over basis, and therefore, no such assets would berecorded.  The U.S. GAAP equity adjustmentsof Ps.171,815 and Ps.147,376 decrease the excess of cost over book valuepresented in the balance sheet as of December 31, 2002 and 2003, respectively.

 

H)                DEFERRED INCOMETAXES AND EMPLOYEES’ STATUTORY PROFIT SHARING

 

Under Mexican GAAP, the Company adopted the provisionsof revised Bulletin D-4 for the recognition of deferred tax assets andliabilities. The accounting treatment of Bulletin D-4 is in accordance with thecomprehensive asset and liability method of SFAS No. 109 “Accounting for IncomeTaxes”. The U.S. GAAP adjustments to net income and stockholders’ equityreflect only the deferred income taxes and employees’ statutory profit sharinggenerated by the other U.S. GAAP adjustments discussed in this document.

 

F-38

----

 

Under the comprehensive asset and liability method ofSFAS No. 109, deferred tax assets and liabilities are recognized for the futuretax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be reversed.

 

For both Mexican and U.S. GAAP purposes, the financialstatement carrying amounts utilized in the determination of the deferred taxassets and liabilities included the inflation adjustments described in Note2-D, and their respective tax bases also included the effects of inflationbased on tax regulations.

 

The amounts of deferred income taxes charged orcredited to net income for each year under SFAS No. 109 and as set forth inIssued 93-9 of the U.S. Financial Accounting Standards Board’s  Emerging Issues Task Force was determinedbased on the differences between the beginning and ending balances of thedeferred tax assets or liabilities for each period, expressed in Mexican pesosof constant purchasing power.

 

Income tax expense:

 

The domestic and foreign components of income beforetaxes, employees’ statutory profit sharing, equity in earnings of associatedcompanies, extraordinary item and minority interest reported under Mexican GAAPare as follows:

 
|     |   | **Year ended  December 31,** |    |
|----------|--------|------------------------------|---------|
|     |   | **2001**                     |    | **2002** |   | **2003** |   |
| Domestic |   | Ps.                          | (77,518 | ) | Ps. | 112,699 |   | Ps. | (257,100 | ) |
| Foreign  |   | 890,879                      |    | 966,593 |   | 1,369,634 |   |
|     |   | Ps.                          | 813,361 |   | Ps. | 1,079,292 |   | Ps. | 1,112,534 |   |

 

Provisions for domestic federal, foreign federal andstate income taxes in the Mexican GAAP consolidated statements of incomeconsist of the following components:

 
|                |   | **Year ended  December 31,** |    |
|---------------------|--------|------------------------------|---------|
|                |   | **2001**                     |    | **2002** |   | **2003** |   |
| Current:            |   |                         |    |   |   |   |   |
| Domestic federal    |   | Ps.                          | 109,945 |   | Ps. | 232,586 |   | Ps. | 47,787 |   |
| Foreign federal     |   | 81,981                       |    | 71,268 |   | 242,467 |   |
| Foreign state       |   | 8,247                        |    | 6,821 |   | 21,918 |   |
|                |   | Ps.                          | 200,173 |   | Ps. | 310,675 |   | Ps. | 312,172 |   |
| Deferred:           |   |                         |    |   |   |   |   |
| Domestic federal    |   | Ps.                          | (70,923 | ) | Ps. | 37,230 |   | Ps. | 199,259 |   |
| Foreign federal     |   | 163,297                      |    | 212,967 |   | 151,609 |   |
| Foreign state       |   | 7,378                        |    | 43,854 |   | 12,937 |   |
|                |   | Ps.                          | 99,752  |   | Ps. | 294,051 |   | Ps. | 363,805 |   |
| Total income  taxes |   | Ps.                          | 299,925 |   | Ps. | 604,726 |   | Ps. | 675,977 |   |

 

F-39

----

 

The tax effects of temporary differences that giverise to significant portions of the deferred tax assets and liabilities atDecember 31, 2002 and 2003, are as follows:

 
|                                                    |   | **2002**  |      | **2003**  |   |
|---------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| **Deferred tax assets:**                                |   |      |      |      |   |
| Net operating  loss carryforwards and other tax credits |   | Ps.       | 1,417,320 |      | Ps.    | 1,203,256 |   |
| Customer  advances and accrued liabilities              |   | 117,911   |      | 256,344   |   |
| Intangible  assets (c)                                  |   | 200,932   |      | 161,114   |   |
| Other                                                   |   | 212,916   |      | 142,679   |   |
| Total gross  deferred tax assets                        |   | 1,949,079 |      | 1,763,393 |   |
|                                                    |   |      |      |      |   |
| **Deferred tax liabilities:**                           |   |      |      |      |   |
|                                                    |   |      |      |      |   |
| Property, plant  and equipment, net (a)                 |   | 2,079,555 |      | 2,174,360 |   |
| Inventories (b)                                         |   | 433,656   |      | 494,002   |   |
| Investment in  partnership and equity method investee   |   | 142,484   |      | 147,729   |   |
| Other assets                                            |   | 6,090     |      | 35,282    |   |
| Total gross  deferred tax liabilities                   |   | 2,661,785 |      | 2,851,373 |   |
|                                                    |   |      |      |      |   |
| Net deferred tax  liability under U.S. GAAP             |   | 712,706   |      | 1,087,980 |   |
| Net deferred tax  liability under Mexican GAAP          |   | 673,266   |      | 1,037,896 |   |
| Adjustment for  U.S. GAAP                               |   | Ps.       | 39,440    |      | Ps.    | 50,084 |   |

 

----

(a)          Principally due to thedifferences between restated book and tax basis, including depreciation andcapitalized interest.

(b)         Principally due to theexpensing of purchases for Mexican tax purposes.

(c)          Reflects a prepaid assetresulting from an intercompany transaction.

 

A summary of the deferred tax liability (asset)balances on a U.S. GAAP basis are as follows:

 
|                    |   | **2002**   |     | **2003**   |   |
|-------------------------|--------|------------|----------|------------|--------|
| Current:                |   |       |     |       |   |
| Deferred tax  asset     |   | Ps.        | (330,827 | )          | Ps.    | (399,023 | ) |
| Deferred tax  liability |   | 433,656    |     | 523,039    |   |
|                    |   | 102,829    |     | 124,016    |   |
| Non-current:            |   |       |     |       |   |
| Deferred tax  asset     |   | (1,618,252 | )        | (1,364,370 | )      |
| Deferred tax  liability |   | 2,228,129  |     | 2,328,334  |   |
|                    |   | 609,877    |     | 963,964    |   |
| Total                   |   | Ps.        | 712,706  |       | Ps.    | 1,087,980 |   |

 

F-40

----

 

The provision for income tax on a U.S. GAAP basis isas follows:

 
|     |   | **2001** |     | **2002** |   | **2003** |   |
|----------|--------|----------|----------|----------|--------|----------|--------|
|     |   |     |     |     |   |     |   |
| Current  |   | Ps.      | (200,173 | )        | Ps.    | (310,675 | )      | Ps. | (312,172 | ) |
| Deferred |   | (251,728 | )        | (265,646 | )      | (376,067 | )      |
|     |   | Ps.      | (451,901 | )        | Ps.    | (576,321 | )      | Ps. | (688,239 | ) |

 

In addition, the Company has established a deferredliability for U.S. GAAP purposes of Ps.49,083 and Ps.28,607, at December 31,2002 and 2003, respectively, relating to employees’ statutory profit sharing.

 

I)                     NEGATIVEGOODWILL

 

Under Mexican GAAP, the excess of the net book valueof identifiable assets acquired over their purchase price, is recorded as“Excess of book value over cost of subsidiaries acquired, net” and is permittedto be amortized over a period of time not to exceed 5 years.

 

Under U.S. GAAP, the excess of the fair value over thenet book value of acquired identifiable assets is allocated to the book valueof the non-monetary assets acquired. Once the book value has been reduced tozero, any unallocated amounts are recorded as negative goodwill.

 

As of December 31, 2002 and 2003, the U.S. GAAP equityadjustment of Ps.911,122 and Ps.826,587 respectively, decrease the net fixedassets in the same amounts.

 

J)                    DERIVATIVEFINANCIAL INSTRUMENTS

 

Under Mexican GAAP, when a company is engaged in hedgeactivities, the corresponding derivative financial instruments must be valuedutilizing the same criteria used for the assets or liabilities that are beinghedged. Changes in the fair value of derivatives are recognized in the incomestatement, net of costs, expenses or earnings from the assets or liabilitiesbeing hedged and the gain or loss is recognized when the hedge item isrealized. Derivative financial instruments held for purposes other than hedgingare recognized at their fair value. The difference between the initial andyear-end fair value of the derivative assets and liabilities is recognized inincome, except for those financial instruments related with the Company’s ownshares, which are recorded as a component of equity.

 

Under U.S. GAAP, all derivative instruments must berecorded on the balance sheet at fair value. On the date the derivativecontracts are entered into, the Company designates the derivative as either (a)a fair value hedge or (b) a cash flow hedge. For cash-flow hedge transactions,changes in the fair value of the derivative instrument are reported in othercomprehensive income. The gains and losses on cash flow hedge transactions thatare reported in other comprehensive income are reclassified to earnings in theperiods in which earnings are affected by the variability of the cash flows ofthe hedged item. Derivative instruments not designated as hedge are marked tomarket and the impact of such is recognized in current period earnings.

 

At December 31, 2003, the Company realized gains ofPs. 18,724 from cash flow hedges related to corn futures contracts; these gainsare deferred and reported in other comprehensive income. The Company expectsthese deferred gains related to cash flow hedges will be recognized within thenext 12 months.

 

F-41

----

 

As stated in Note 17-B, the Company entered into twointerest rate swap contracts to hedge its long-term debt, which matures in2007. SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities” does not permit synthetic instrument accounting, consequently, forU.S. GAAP purposes, both contracts have been treated as speculative contractsand have been recorded at fair value, with the offsetting changes in their fairvalue reported in earnings and therefore the impact under U.S. GAAP and MexicanGAAP was similar.

 

As described in Note 12-C, during 2003 the Company hasentered into various equity swap and call option agreements indexed to theCompany’s own stock. Under Mexican GAAP, the Company has recorded the fairvalue of these financial instruments on the balance sheet with the differencebetween the initial and year-end fair value as a component of equity. Under U.S.GAAP, the fair value of such contracts has been recognized in income due to thenature of the contractual settlement provisions.

 

K)                GOODWILL ANDINDEFINITE-LIVED INTANGIBLE ASSETS

 

Under U.S. GAAP, effective January 1, 2002, theCompany adopted the provisions of SFAS No. 142, “Goodwill and Other IntangibleAssets” (“SFAS No. 142”). Under SFAS No. 142, goodwill and indefinite-livedintangible assets are no longer amortized but are reviewed for impairment on anannual basis at the reporting unit level.

 

Goodwill impairment test is performed in two phases.The first step of the goodwill impairment test compares the fair value of thereporting unit with its carrying value, including goodwill. If the fair valueof the reporting unit exceeds its carrying value, goodwill of the reportingunit is considered not impaired; however if the carrying value of the reportingunit exceeds its fair value, an additional procedure must be performed. Theadditional procedure compares the implied fair value of the reporting unit (asdefined by SFAS No. 142) with the carrying amount of that goodwill. Animpairment loss is recorded to the extent that the carrying amount of goodwillexceeds its implied fair value. The Company estimates fair values based on thediscounted cash flows approach. Considerable management judgment is necessaryto estimate discounted future cash flows. Assumptions used for these cash flowsare consistent with internal forecasts.

 

Intangible assets that are not subject to amortizationshall be tested for impairment annually or more frequently if events or changesin circumstances indicate that the asset might be impaired. The impairment testconsists of a comparison of the fair value of an intangible asset with itscarrying amount. If the carrying amount of an intangible asset exceeds its fairvalue, an impairment loss is recognized in an amount equal to that excess.After an impairment loss is recognized, the adjusted carrying amount of theintangible asset shall be its new accounting basis.

 

As mentioned in Note 2-J, under Mexican GAAP, untilJanuary 1, 2003 all intangible assets were amortized over their estimateduseful life. Bulletin C-8 was adopted starting January 1, 2003, andconsequently, certain intangible assets (excluding goodwill) were recognized ashaving indefinite lives and were not longer amortized. Accordingly,amortization of indefinite-lived intangible assets ceased in 2002 for US GAAPand in 2003 for Mexican GAAP.

 

For U.S. GAAP purposes, the reversal of goodwillamortization under Mexican GAAP increased the balance sheet item “Excess ofcost over book value of subsidiaries acquired, net”.

 

Under Mexican GAAP, the amortization of goodwill forthe year 2001 was recognized as a non-operating expense. Under U.S. GAAP, suchitem would be included in the determination of operating income. For the yearsended December 31, 2001, this item amounted to Ps.12,668.

 

F-42

----

 

The impact of adopting SFAS No. 142 on net income andearnings per share adjusted to exclude amortization expense (net of taxes)related to goodwill and indefinite-lived intangible assets is as follows:

 
|                                                                   |   | **2001** |    | **2002** |   | **2003** |   |
|------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Net income  attributable to common stockholders’ equity           |   | Ps       | 207,810 |     | Ps     | 322,214  |   | Ps | 589,050 |   |
| Amortization of  goodwill and indefinite-lived intangible assets       |   | 128,109  |    | —   |   | —   |   |
| Pro forma net  income attributable to common stockholders’ equity |   | Ps       | 335,919 |     | Ps     | 322,214  |   | Ps | 589,050 |   |
|                                                                   |   |     |    |     |   |     |   |
| Basic and  diluted earnings per share:                                 |   |     |    |     |   |     |   |
| Reported  earnings per share                                           |   | Ps       | 0.48    |     | Ps     | 0.72     |   | Ps | 1.32 |   |
| Amortization of  goodwill and indefinite-lived intangible assets       |   | 0.30     |    | —   |   | —   |   |
| Pro forma basic  and diluted earnings per share                        |   | Ps       | 0.78    |     | Ps     | 0.72     |   | Ps | 1.32 |   |

 

L)                  SUPPLEMENTALBALANCE SHEET INFORMATION

 

•                       Long-livedassets

 

The Company evaluates the carrying value of long-livedassets to be held and used, primarily property, plant and equipment and anyassets to be disposed of, when events or circumstances suggest that thecarrying value may not be recoverable. Any impairment of these assets isincluded in income of the year, for the difference between the carrying valueand the fair market value of long-lived assets to be held and used, and thedifference between the carrying value and the fair market value less costs to sellfor long-lived assets to be disposed of. As of December 31, 2003 the Company’smanagement believes there is no impairment in the carrying value of long-livedassets.

 

•                       Securitiesof related parties:

 

The investment in common stock of GFNorte is accountedfor under the equity method, because the Company has significant influence overthe investee due to its representation on the Board of Directors of GFNorte andthe equity interest of GRUMA’s principal shareholder in GFNorte.  The effect of applying U.S. GAAP adjustmentsto the equity investment has been included in the Company’s U.S. GAAPreconciliation, and principally result from differences in accounting for loanloss reserves, deferred start-up costs, and deferred income taxes.

 

F-43

----

 

Condensed financial information for GF Banorte as ofand for the years ended December 31:

 
|                                           |   | **2002**    |       | **2003**    |   |
|------------------------------------------------|--------|-------------|------------|-------------|--------|
| Cash and cash  equivalents                     |   | Ps.         | 24,558,586 |        | Ps.    | 30,743,161 |   |
| Investment  securities                         |   | 12,342,618  |       | 18,855,028  |   |
| Net loan  portfolio                            |   | 154,957,040 |       | 148,182,470 |   |
| Property,  furniture and equipment, net        |   | 5,945,483   |       | 5,712,902   |   |
| Total assets                                   |   | 207,473,422 |       | 213,186,593 |   |
| Deposits                                       |   | 148,888,069 |       | 162,444,457 |   |
| Bank and other  entity loans – current    |   | 27,973,162  |       | 18,205,553  |   |
| Bank and other  entity loans – noncurrent |   | 11,057,919  |       | 11,110,915  |   |
| Total  liabilities                             |   | 195,013,353 |       | 198,825,975 |   |
| Majority  interest                             |   | 11,612,759  |       | 13,469,628  |   |
| Minority  interest                             |   | 847,310     |       | 890,990     |   |
|                                                |        |             |            |             |        |  |  |

 
|                               |   | **2001**    |       | **2002**    |   | **2003**    |   |
|------------------------------------|--------|-------------|------------|-------------|--------|-------------|--------|
| Interest income                    |   | Ps.         | 24,770,459 |        | Ps.    | 25,268,679  |   | Ps. | 22,409,578 |   |
| Interest expense                   |   | (17,738,259 | )          | (16,490,024 | )      | (13,755,434 | )      |
| Income from  continuing operations |   | 2,061,746   |       | 2,042,007   |   | 2,405,804   |   |
| Net income                         |   | 1,650,022   |       | 2,094,744   |   | 2,218,490   |   |
|                                    |        |             |            |             |        |             |        |  |  |  |

 

•                       Othercurrent liabilities:

 

Included within accrued liabilities and other payablesas of December 31, 2002 and 2003 are accrued compensation costs (Ps.310,445 andPs. 401,118 in 2002 and 2003, respectively) and accrued advertising costs(Ps.174,218 and Ps.191,221 in 2002 and 2003, respectively).

 

•                       Otherstockholders’ equity:

 

Included within retained earnings as of December 31,2002 and 2003 are undistributed earnings of GF Banorte amounting toapproximately Ps.1,328,189 and Ps.1,479,994, respectively.

 

•                       Computersoftware:

 

Depreciation expense for the years ended December 31,2001, 2002 and 2003 amounted to Ps.73,609, Ps.79,938 and Ps.91,652respectively, on capitalized computer software cost.

 

M)             SUPPLEMENTAL INCOMESTATEMENT INFORMATION

 

•                       Advertisingcosts:

 

Advertising costs, included in selling, general andadministrative expenses, are expensed when the advertising first takes place.Advertising expense was Ps.600,932, Ps.537,734 and Ps.634,438 for the yearsended December 31, 2001, 2002 and 2003, respectively. The Company had Ps.2,918and Ps.6,452 of prepaid advertising costs reported as prepaid expenses as ofDecember 31, 2002 and 2003, respectively.

 

F-44

----

 

•                       Shipping and handling costs:

 

Shipping and handling costs are included in selling,general and administrative expenses and amounted to Ps.1,122,841, Ps.1,089,957and Ps.1,151,753 for the years ended December 31, 2001, 2002 and 2003.

 

•                       Operatingincome:

 

Under U.S. GAAP, certain other income items includedin the Mexican GAAP financial statements of the Company, such as softwareimplementation expenses, ESPS, reorganization expenses and amortization ofother deferred costs would be included in the determination of operatingincome. For the years ended December 31, 2001, 2002 and 2003, these itemsamounted to Ps. 106,056, Ps. 76,730 and Ps. 56,723, respectively.

 

•                       Earnings per share data

 

For U.S. GAAP purposes, the equity swap transactionthat took place in September 2000 is accounted under the Emerging Issue TaskForce (“EITF”) Issue No. 98-12 “Application of Issue No. 00-19 to ForwardEquity Sales Transactions” which observes that any common shares actuallyissued and outstanding should be considered in the weighted-average sharescalculation, and additionally, the payment of 10.25% over the contractualamount should be treated as a reduction of income available to shareholders.This operation had no effect on the fully diluted earnings per share.

 

•                       Consumer and trade sales promotionexpenses

 

Under U.S. GAAP, the Company has classified certainconsumer and trade sales promotion expenses, such as coupon redemption costs,cooperative advertising programs, new product introduction fees, feature pricediscounts and in-store display incentives as a reduction of revenue. For theyears ended December 31, 2001, 2002 and 2003 these items amounted to Ps.212,445, Ps. 157,566 and Ps. 200,724, respectively.

 

N)                SUPPLEMENTAL CASHFLOW INFORMATION

 

Mexican GAAP Bulletin B-12 issued by the MIPAspecifies the appropriate presentation of the statements of changes infinancial position. Under Bulletin B-12, the sources and uses of resources aredetermined based upon the differences between beginning and ending financialstatement balances in Mexican pesos of constant purchasing power. Under U.S. GAAP,a statement of cash flow is required, which presents only cash movements andexcludes non-cash items.

 

The following presents a price-level adjustedstatement of cash flows, after considering the impact of U.S. GAAP adjustmentsin conformity with the AICPA SEC Regulations Committees’ International PracticeTask Force recommendation.

 

F-45

----

 
|                                                                                        |   | **Year ended  December 31,** |    |
|---------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                        |   | **2001**                     |    | **2002** |   | **2003** |   |
| Operating  activities:                                                                      |   |                         |    |   |   |   |   |
| Net income                                                                                  |   | Ps.                          | 207,810 |   | Ps. | 322,214 |   | Ps. | 589,050 |   |
| Minority  interest                                                                          |   | 178,757                      |    | 197,791 |   | 175,977 |   |
| Consolidated  income                                                                        |   | 386,567                      |    | 520,005 |   | 765,027 |   |
| Adjustments to  reconcile net income to resources provided by operating activities:         |   |                         |    |   |   |   |   |
| Monetary  position gain                                                                     |   | (191,425                     | )       | (167,719 | ) | (187,986 | ) |
| Depreciation and  amortization                                                              |   | 1,187,382                    |    | 1,077,077 |   | 1,033,576 |   |
| Allowance for  doubtful accounts                                                            |   | 55,856                       |    | 36,137 |   | 54,143 |   |
| Account  receivable for disposed subsidiaries                                               |   | —                       |    | (151,811 | ) | — |   |
| Equity in  earnings of associated companies’, less dividends received                  |   | (47,709                      | )       | (103,645 | ) | (108,667 | ) |
| Seniority  premium                                                                          |   | 7,371                        |    | 9,304 |   | 7,950 |   |
| Loss on sale of  fixed assets and other assets                                              |   | —                       |    | — |   | 52,105 |   |
| Gain from  shutdown in bread operations                                                     |   | (131,435                     | )       | — |   | — |   |
| Deferred income  taxes and employees’ statutory profit sharing                         |   | 238,246                      |    | 255,693 |   | 357,711 |   |
|                                                                                        |   | 1,504,853                    |    | 1,475,041 |   | 1,973,859 |   |
|                                                                                        |   |                         |    |   |   |   |   |
| Changes in  working capital:                                                                |   |                         |    |   |   |   |   |
| Restricted cash                                                                             |   | 4,151                        |    | 1,421 |   | 361 |   |
| Accounts  receivable, net                                                                   |   | 53,799                       |    | (587,355 | ) | (78,203 | ) |
| Inventories                                                                                 |   | (38,674                      | )       | (309,908 | ) | (812,602 | ) |
| Prepaid expenses                                                                            |   | 14,864                       |    | 27,816 |   | (108,220 | ) |
| Trade accounts  payable                                                                     |   | (334,937                     | )       | 368,223 |   | (175,645 | ) |
| Accrued  liabilities and other payable                                                      |   | 80,625                       |    | 61,002 |   | 380,086 |   |
| Income taxes and  employees’ statutory profit sharing payable                          |   | 49,988                       |    | (31,862 | ) | 5,180 |   |
|                                                                                        |   | (170,184                     | )       | (470,663 | ) | (789,043 | ) |
|                                                                                        |   |                         |    |   |   |   |   |
| Net cash  provided by operating activities                                                  |   | 1,334,669                    |    | 1,004,378 |   | 1,184,816 |   |
|                                                                                        |   |                         |    |   |   |   |   |
| Investing  activities:                                                                      |   |                         |    |   |   |   |   |
| Purchases of  property, plant and equipment                                                 |   | (726,928                     | )       | (727,358 | ) | (767,776 | ) |
| Sales of  property, plant and equipment                                                     |   | 14,764                       |    | 145,881 |   | 132,849 |   |
| Trust funds for  research and development of technology                                     |   | —                       |    | — |   | 213,714 |   |
| Resources  received from shutdown of bread operations                                       |   | 555,772                      |    | — |   | — |   |
| Deferred assets                                                                             |   | (81,744                      | )       | (63,490 | ) | (46,140 | ) |
| Investments in  common stock                                                                |   | (2,281                       | )       | 55,392 |   | — |   |
| Sale of  temporary investments                                                              |   | —                       |    | — |   | 199,799 |   |
| Other                                                                                       |   | (42,378                      | )       | 26,419 |   | 15,764 |   |
| Net cash used in  investing activities                                                      |   | (282,795                     | )       | (563,156 | ) | (251,790 | ) |
|                                                                                        |   |                         |    |   |   |   |   |
| Financing  activities:                                                                      |   |                         |    |   |   |   |   |
| Proceeds from  bank loans and long-term debt                                                |   | 3,017,024                    |    | 1,879,464 |   | 2,006,500 |   |
| Repayment of  bank loans and long-term debt                                                 |   | (3,303,171                   | )       | (2,209,417 | ) | (2,770,365 | ) |
| Contibutions by  minority interest                                                          |   | —                       |    | — |   | 140,220 |   |
| Decrease of  minority interest                                                              |   | —                       |    | — |   | (7,835 | ) |
| Net  purchases-sales of Company’s common stock and  derivate financial operations |   | (80,323                      | )       | (90,759 | ) | 277,946 |   |
| Dividends paid                                                                              |   | (287,435                     | )       | (98,600 | ) | (488,736 | ) |
| Other                                                                                       |   | (89,656                      | )       | (64,220 | ) | 2,562 |   |
| Net cash used in  financing activities                                                      |   | (743,561                     | )       | (583,532 | ) | (839,708 | ) |
|                                                                                        |   |                         |    |   |   |   |   |
| Effect of  inflation on cash and temporary investments                                      |   | (17,507                      | )       | (12,552 | ) | 6,432 |   |
| Net increase  (decrease) in cash and temporary investments                                  |   | 290,806                      |    | (154,862 | ) | 99,750 |   |
| Cash and  temporary investments at beginning of year                                        |   | 133,551                      |    | 424,357 |   | 269,495 |   |
| Cash and  temporary investments at end of year                                              |   | Ps.                          | 424,357 |   | Ps. | 269,495 |   | Ps. | 369,245 |   |
|                                                                                             |        |                              |         |  |  |  |  |  |  |  |  |  |

 

F-46

----

 

During 2002, the Company had a noncash activity inwhich it received temporary investments to settle a note receivable for anamount of Ps. 199,799.

 

Net cash flow from operating activities reflects cashpayments and receipts for interest and income taxes as follows:

 
|                         |   | **Year ended  December 31,** |    |
|------------------------------|--------|------------------------------|---------|
|                         |   | **2001**                     |    | **2002** |   | **2003** |   |
| Interest paid                |   | Ps.                          | 731,758 |   | Ps. | 545,507 |   | Ps. | 520,693 |   |
| Interest  received           |   | 85,037                       |    | 59,498 |   | 61,056 |   |
| Income and asset  taxes paid |   | 154,710                      |    | 408,770 |   | 349,422 |   |
| Interest  incurred           |   | 693,859                      |    | 589,202 |   | 531,858 |   |
|                              |        |                              |         |  |  |  |  |  |  |  |

 

F-47

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O)                COMPREHENSIVEINCOME

 

Comprehensive income (loss) is as follows:

 
|                                         |   | **Year ended  December 31,** |     |
|----------------------------------------------|--------|------------------------------|----------|
|                                         |   | **2001**                     |     | **2002** |   | **2003** |   |
| Net income under  U.S. GAAP                  |   | Ps.                          | 207,810  |   | Ps. | 322,214 |   | Ps. | 589,050 |   |
| Other comprehensive  loss, net of taxes:     |   |                         |     |   |   |   |   |
|                                         |   |                         |     |   |   |   |   |
| Deficit from  restatement                    |   | 113,472                      |     | (303,406 | ) | (311,383 | ) |
|                                         |   |                         |     |   |   |   |   |
| Deferred (loss)  gain on hedge activity      |   | (3,584                       | )        | 22,309 |   | (54 | ) |
|                                         |   |                         |     |   |   |   |   |
| Foreign currency  translation adjustments    |   | (613,756                     | )        | (259,179 | ) | 60,997 |   |
| Comprehensive  (loss) income under U.S. GAAP |   | Ps.                          | (296,058 | ) | Ps. | (218,062 | ) | Ps. | 338,610 |   |

 

Foreign currency translation adjustments are presentednet of tax benefits of Ps.76,402, Ps.116,354 and Ps.58,541 for the years endedDecember 31, 2001, 2002 and 2003, respectively.

 

The components of accumulated other comprehensive lossare as follows as of December 31, 2002 and 2003:

 
|                          |   | **Foreign  currency  translation  adjustments** |    | **Deferred  (loss)  gain on  hedging  activity** |   | **Deficit  from  restatement** |   | **Accumulated  other  comprehensive  loss** |        |
|-------------------------------|--------|-------------------------------------------------|---------|--------------------------------------------------|--------|--------------------------------|--------|---------------------------------------------|-------------|
| Balance at  December 31, 2001 |   | Ps.                                             | 832,309 |                                             | Ps.    | (3,585                         | )      | Ps.                                         | (12,039,600 | ) | Ps. | (11,210,876 | ) |
| Current period  changes       |   | (218,062                                        | )       | 22,309                                           |   | (303,406                       | )      | (499,159                                    | )           |
| Balance at  December 31, 2002 |   | 614,247                                         |    | 18,724                                           |   | (12,343,006                    | )      | (11,710,035                                 | )           |
| Current period  changes       |   | 60,997                                          |    | (54                                              | )      | (311,383                       | )      | (250,440                                    | )           |
| Balance at  December 31, 2003 |   | Ps.                                             | 675,244 |                                             | Ps.    | 18,670                         |   | Ps.                                         | (12,654,389 | ) | Ps. | (11,960,475 | ) |

 

P)                  VALUATION ANDQUALIFYING ACCOUNTS

 

The valuation and qualifying accounts are as follows:

 

Allowance for doubtful accounts:

 
| **For the year  ended  December 31,** |   | **Balance at  beginning of  year** |    | **Additions  charged to costs  and expenses** |   | **Deductions** |   | **Balance  at year-end** |    |
|---------------------------------------|--------|------------------------------------|---------|-----------------------------------------------|--------|----------------|--------|--------------------------|---------|
| 2001                                  |   | Ps.                                | 144,558 |                                          | Ps.    | 58,677         |   | Ps.                      | (85,330 | ) | Ps. | 117,905 |   |
| 2002                                  |   | 117,905                            |    | 37,447                                        |   | (55,162        | )      | 100,190                  |    |
| 2003                                  |   | 100,190                            |    | 54,143                                        |   | (46,401        | )      | 107,932                  |    |
|                                       |        |                                    |         |                                               |        |                |        |                          |         |  |  |  |  |

 

F-48

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Q)                RESTATEMENT TOCONSTANT PESOS

 

The following presents condensed financial informationprepared on a U.S. GAAP basis restated to December 31, 2003 constant pesosutilizing the Mexican NCPI. As disclosed in Note 2-D, under Bulletin B-15, theCompany restated prior year balances utilizing weighted average restatementfactors. The difference in the factors applied to restate prior yearinformation to December 31, 2003 constant pesos utilizing the Mexican NCPIwere:

 

| **Year** |   | **Factor** |   |
|----------|--------|------------|--------|
| 2001     |   | 0.9519     |   |
| 2002     |   | 0.9650     |   |

 

Condensed consolidated balance sheets as of December 31:

 
|                             |   | **Expressed  in Thousands of  Constant Mexican Pesos  as of December 31, 2003** |      |
|----------------------------------|--------|---------------------------------------------------------------------------------|-----------|
|                             |   | **2002**                                                                        |      | **2003** |   |
| Total current  assets            |   | Ps.                                                                             | 6,418,895 |   | Ps. | 7,117,050 |   |
| Property, plant  and equipment   |   | 12,784,252                                                                      |      | 12,689,086 |   |
| Total assets                     |   | 22,442,234                                                                      |      | 22,869,349 |   |
| Short-term debt                  |   | 835,314                                                                         |      | 520,685 |   |
| Long-term debt                   |   | 6,491,291                                                                       |      | 6,163,582 |   |
| Total  liabilities               |   | 10,767,261                                                                      |      | 10,711,463 |   |
| Minority  interest               |   | 2,754,564                                                                       |      | 2,914,706 |   |
| Total  stockholders’ equity |   | 8,920,409                                                                       |      | 9,243,180 |   |
|                                  |        |                                                                                 |           |  |  |  |  |

 

Condensed consolidatedstatements of income for the years ended December 31:

 
|                 |   | **Expressed  in Thousands of  Constant Mexican Pesos  as of December 31, 2003** |       |
|----------------------|--------|---------------------------------------------------------------------------------|------------|
|                 |   | **2001**                                                                        |       | **2002** |   | **2003** |   |
| Net sales            |   | Ps.                                                                             | 19,381,846 |   | Ps. | 19,784,829 |   | Ps. | 22,840,798 |   |
| Gross profit         |   | 7,024,020                                                                       |       | 7,318,050 |   | 8,177,943 |   |
| Operating income     |   | 1,262,922                                                                       |       | 1,486,344 |   | 1,778,014 |   |
| Majority net  income |   | 207,810                                                                         |       | 322,214 |   | 589,050 |   |
|                      |        |                                                                                 |            |  |  |  |  |  |  |  |

 

F-49

----

 

R)                 RECENTLY ISSUEDACCOUNTING STANDARDS

 

In April 2003, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instrumentsand Hedging Activities”. SFAS No. 149 amends and clarifies financial accountingand reporting for derivative instruments by requiring that contracts withcomparable characteristics be accounted for similarly. In particular, thisstatement clarifies the circumstances under which a contract with an initialnet investment meets the characteristics of a derivative, clarifies when aderivative contains a financing component, amends the definition of anunderlying to conform it to the language used in FIN No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” and amends certain other existingpronouncements. SFAS No. 149 is effective for contracts entered into ormodified after June 30, 2003, and for hedging relationships designated afterJune 30, 2003. The adoption of SFAS No. 149 did not have a material impact onthe Company’s consolidated results of operations or financial condition.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity”. The statement requires issuers to classify as liabilities (or assetsin some circumstances) three classes of freestanding financial instruments thatembody obligations for the issuer. Generally, the statement is effective forfinancial instruments entered into or modified after May 31, 2003 and isotherwise effective at the beginning of the first interim period beginningafter June 15, 2003. The adoption of SFAS No. 150 did not have a materialimpact on the Company’s consolidated results of operations or financialcondition.

 

In January 2003, the FASB issued Interpretation No. 46(“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation ofARB 51”.  The primary objectives of FIN 46 are to provide guidance on theidentification of entities for which control is achieved through means otherthan through voting rights (“variable interest entities” or “VIE”) and how todetermine when and which business enterprise should consolidate the VIE (the“primary beneficiary”).  This new model for consolidation applies to anentity which either (1) the equity investors (if any) do not have a controllingfinancial interest or (2) the equity investment at risk is sufficient tofinance that entity’s activities without receiving additional subordinatedfinancial support from other parties.  In addition, FIN 46 requires thatboth the primary beneficiary and all other enterprises with a significantvariable interest in a VIE make additional disclosures.  FIN 46 appliesimmediately to variable interest entities created after January 31, 2003, andto variable interest entities in which an enterprise obtains an interest afterthat date.  It applies in the first fiscal year or interim periodbeginning after June 15, 2003, to variable interest entities in which anenterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicableinterim or annual period, and it applies to nonpublic enterprises as of the endof the applicable annual period.  In December 2003, the FASB redeliberatedcertain proposed modifications and revised FIN 46 (“FIN 46-R”).  Therevised provisions are applicable no later than the first reporting periodending after March 15, 2004.  The Company does not expect that theadoption of FIN 46 and FIN 46-R will have a material impact on its financialstatements.

 

F-50

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