**UNITED    STATES**

**SECURITIES    AND EXCHANGE COMMISSION**

Washington,    D.C. 20549

 

**Form    20-F/A**

Amendment    No. 2

 

ANNUAL    REPORT PURSUANT TO SECTION 13 OR 15(d)

OF    THE SECURITIES EXCHANGE ACT OF 1934

**For    the fiscal year ended December 31, 2004**

 

Commission    File Number: 1-10905

 

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

(Exact    name of Registrant as specified in its charter)

 
| Vitro,          S.A. de C.V.

(Translation          of Registrant's name into English) | United          Mexican States

(Jurisdiction          of incorporation or organization) |
|----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|

 

Ave.    Ricardo Margain Zozaya 400, Col. Valle del Campestre,

San    Pedro Garza Garcia, Nuevo Leon, 66265 Mexico

(Address    of principal executive offices)

 

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

 

| **Title          of Each Class** | **Name          of Each Exchange on Which Registered**
Shares          of Series "A" common stock, no par value 

Ordinary          Participation Certificate, each representing 

one share          of Series "A" common stock

American          Depositary Shares, evidenced by American Depositary Receipts, each representing          three Ordinary Participation Certificates 

New          York Stock Exchange*

New          York Stock Exchange*

 

New          York Stock Exchange

 

____________________

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

 

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

None

 

Securities    for which there is a reporting obligation pursuant to Section 15(d) of the    Act:

11    3/4 Guaranteed Senior Notes due 2007

 

The    number of outstanding shares of each of the Registrant's classes of capital    stock

as    of December 31, 2004:

295,727,910 shares    of Series "A" common stock, no par value

 

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

 

Yes  [X]          No [ ]

 

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

Item    17   [ ]     Item 18 [X]

 

 

 

 

**EXPLANATORY    NOTE**

 

 This Annual    Report on Form 20-F/A is being filed as a second amendment to our Annual    Report on Form 20-F for the fiscal year ended December 31, 2004, to incorporate    various changes and additional disclosures not previously contained in the    first amendment to our Form 20-F filed on July 7, 2005.

 

This amendment    includes additional disclosures within Item 5. Operating and Financial Review    and Prospectus and Item 18 - Financial Statements. We have also included in Item 18, Schedule I - Financial Information of Vitro, S.A. de C.V. and    Schedule II - Schedule of Valuation and Qualifying Accounts.

 

In addition,    we have restated our U.S. GAAP consolidated financial statements included    in Item 18, to reflect the following changes:

 

 
          • The application of the equity method of accounting for Empresas          Comegua S.A. in          accordance with EITF 96-16, "Investor's Accounting for an Investee          When the Investor Has a Majority of the Voting Interest but the Minority          Shareholder or Shareholders Have Certain Approval or Veto Rights."

 

• The recognition    of an obligation for severance indemnities and the related costs in accordance    with SFAS No. 112, "Employers' Accounting for Postemployment Benefits, an    amendment of FASB Statements No. 5 and 43".

 

• The presentation    of Vitro OCF, S.A. de C.V., Envases Cuautitlan, S.A. de C.V., Ampolletas,    S.A., Vitro America Inc.'s ("Vitro America") distribution and production facilities    in the Northwestern United States and the disposal of our Productos de Valor    Agregado ("PVA") facilities as discontinued operations in accordance with SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets".

 

• The reclassification    of the gain/loss on sale of assets not considered to be components of a business    into Operating Income in accordance with SFAS No. 144.

 

• The reversal    of an impairment charge, given that the asset was determined to be recoverable    based on an undiscounted cash flow analysis performed by the Company, as required    by SFAS No. 144.

 

• The recognition    of a valuation allowance related to a recoverable asset tax, as under U.S. GAAP contingent tax assets resulting from legal settlements generally cannot  be recognized until cash or other forms of payment are received.

 

As a    result of the restatement, we have made the corresponding changes in Item    3 - Key Information, to our Selected Consolidated Financial Information (U.S. GAAP) and our Chief Executive Officer, Chief Administrative Officer, and Chief    Financial Officer have reevaluated the effectiveness of our disclosure controls    within Item 15.Only those Items that have been affected have been included in this amended filing. In addition, our CEO, CFO and CAO have updated their    certifications included in Item 19.

 

Except as  otherwise expressly noted herein, this second amendment to our Annual Report  on Form 20-F does not reflect events occurring after the July 7, 2005 filing  of our first amendment to our Annual Report on Form 20-F in any way, except to  reflect the changes discussed in this second amendment. Accordingly, this  second amendment should be read in conjunction with the first amendment  thereto.

 

 

 

**PRESENTATION    OF CERTAIN INFORMATION**

 

Vitro, S.A. de C.V. is a corporation with variable capital (sociedad anonima de capital    variable) organized under the laws of the United Mexican States, or "Mexico,"    and is a holding company that conducts substantially all of its operations    through its subsidiaries. In this annual report, except when indicated or    the context otherwise requires, (a) the words "Vitro" and "our holding    company" refer to Vitro, S.A. de C.V. and not its consolidated subsidiaries    and (b) the words "we," "us," "our" and "ours" refer to Vitro, S.A. de C.V.    together with its consolidated subsidiaries. However, it should always be    understood that each subsidiary of Vitro and each other entity with which    Vitro consolidates is an independent legal entity with its own accounting,    corporate structure and records, executives and employees. References in this    annual report to business units are to combinations of various consolidated    entities that have been grouped together for management and presentation purposes.

 

References in  this annual report to "pesos" or "Ps." are to the lawful currency of Mexico.  References to "U.S. dollars," "dollars" or "$" are to dollars of the United  States of America.

 

Our    consolidated financial statements are expressed in Mexican pesos and are prepared    in accordance with accounting principles generally accepted in Mexico, which    we refer to as "Mexican GAAP," which differs in certain significant respects    from accounting principles generally accepted in the United States of America,    which we refer to as the "United States", which we refer to as "U.S. GAAP."    Note 22 to our consolidated financial statements for the year ended December 31,    2004 provides a description of the principal differences between Mexican GAAP    and U.S. GAAP as they relate to us. The U.S. GAAP figures presented in Note    22 to our consolidated financial statements have been restated as discussed    further in Note 22 to our consolidated financial statements.

 

All the peso  amounts contained in this annual report are restated in constant pesos as of  December 31, 2004, except where otherwise indicated.

 

This    annual report contains translations of certain constant peso amounts into    U.S. dollars at specified rates solely for the convenience of the reader.    These convenience translations should not be construed as representations    that the constant peso amounts actually represent such U.S. dollar amounts    or could be converted into U.S. dollars at the specified rate indicated or    at all. The exchange rate used in preparing our consolidated financial statements    and in preparing convenience translations of such information into U.S. dollars    is the exchange rate calculated and published by the Banco de Mexico, Mexico's    central bank, in the Diario Oficial de la Federacion for the conversion of    U.S. dollar-denominated amounts into pesos, which we refer to as the "Free    Exchange Rate." As of December 31, 2004, and March 31, and May 31, 2005,    the Free Exchange Rate was 11.1495 pesos per U.S. dollar, 11.1783 pesos    per U.S. dollar and 10.9160 pesos per U.S. dollar, respectively. As of    December 31, 2004, and March 31, and May 31, 2005, the noon buying    rate for Mexican pesos reported by the Federal Reserve Bank of New York, which    we refer to as the "Noon Buying Rate," was 11.15 pesos per U.S. dollar, 11.18    pesos per U.S. dollar and 10.91 pesos per U.S. dollar, respectively.

 

For    purposes of this annual report, we consider our "export sales" to be (i) sales    of products by our Mexican subsidiaries to third parties outside Mexico, (ii) sales    of products by our Mexican subsidiaries to our foreign subsidiaries that do    not act as our distributors (principally, Vitro America, Inc., which was formerly    known as VVP America, Inc. and which we refer to as "Vitro America") and (iii) sales    of products by our foreign distribution subsidiaries (principally Vitro Packaging,    Inc., which we refer to as "Vitro Packaging," Crisa Industrial, LLC, which    we refer to as "Crisa Industrial," and Crisa Texas Limited, which we refer    to as "Crisa Texas") to third parties outside Mexico. Sales of products manufactured    or processed by our subsidiaries outside Mexico (principally by Vitro America, Empresas Comegua, S.A., which we refer to as  "Comegua," and Vitro Cristalglass, S.L., which was formerly known as Cristalglass Vidrio Aislante S.A. and which    we refer to as "Cristalglass") are not considered "export sales."

 

Under Mexican  corporate law, shares of our Series "A" common stock, which we refer to as "Shares," held by our Stock Option Trust are considered issued and outstanding  and therefore are entitled to receive dividends and vote on matters on which  other of our Shares are entitled to vote. However, for accounting purposes,  our Shares held by our Stock Option Trust are considered treasury stock and  therefore not outstanding. Thus, for purposes of calculating net income (loss)  from continuing operations per share, net income (loss) from discontinued  operations per share and diluted and basic net income (loss) per share, as  well as for purposes of determining shareholders' equity, we considered those  of our Shares held by our Stock Option Trust as treasury stock. In addition,  39,150,000 Shares are held by our pension plans in trust. Those Shares are  treated as outstanding for all purposes.

 

We use the  term "joint venture" to refer to companies which are not our wholly owned  subsidiaries and in which we, directly or indirectly, either have management  control or share management control with one or more third parties. We believe  that our use of the term "joint venture" is consistent with international  business practices. However, our "joint ventures" are not necessarily "Joint  Ventures" as defined in International Financial Reporting Standards.

 

References    in this annual report to "CNBV" are to the Comision Nacional Bancaria y de    Valores of Mexico.

 

References    in this annual report to "UDI" are to Unidades de Inversion, which is an inflation-indexed    monetary unit.

 

Certain  amounts included in this annual report may not sum due to rounding.

 

 

**Item 3.   Key  Information**

 

**RISK FACTORS**

 

You should  consider the risks described below and the other information appearing in this  annual report, including our consolidated financial statements and the notes  thereto. In general, investing in the securities of issuers in emerging market  countries such as Mexico involves certain risks not typically associated with  investing in the securities of issuers in the United States. The risks  described below are intended to highlight risks that are specific to us, but  are not the only risks that we face. Additional risks and uncertainties,  including those generally affecting the industries in which we operate, the  countries where we have a presence or risks that we currently deem immaterial,  may also impair our business.

 

The  information in this annual report includes forward-looking statements which  involve risks and uncertainties. Our actual results could differ materially  from those anticipated in these forward-looking statements as a result of  numerous factors, including, those described in this section, under the  sections entitled "Item 4.  Information on the Company" and "Item 5.  Operating and Financial Review and Prospects" and elsewhere in this  annual report. See "Forward-Looking Statements."

 

For purposes  of this section, when we state that a risk, uncertainty or problem may, could  or would have an "adverse effect" on us, we mean that the risk, uncertainty or  problem may, could or would have an adverse effect on our business, results of  operations, financial position, liquidity or prospects, except as otherwise  indicated or as the context may otherwise require.

 

**Factors Relating    to Us**

 

***We may  be unable to repay our debt, access credit or pursue business opportunities  because of our leverage and debt service requirements.***

 

We are highly  leveraged. As of December 31, 2004, our total consolidated indebtedness was  approximately Ps. 16,798 million ($1,507 million). As of such date, our  consolidated off-balance sheet financings were approximately Ps. 1,171 million  ($105 million). Our interest expense on debt for the year ended December 31,  2004, was approximately Ps. 1,628 million ($146 million), while our operating  income was approximately Ps. 1,570 million ($141 million).

 

In addition,  a significant portion of our indebtedness is short-term debt. See "-A  significant portion of our indebtedness is short-term debt."

 

Our leverage  adversely affects our ability to service, finance future operations, make  acquisitions and capital expenditures, compete effectively against  better-capitalized competitors and withstand downturns in our business. Our  level of indebtedness could increase our vulnerability to adverse general  economic and industry conditions, including increases in interest rates,  foreign currency exchange rate fluctuations and market volatility.

 

Our ability  to make scheduled payments on and refinance our indebtedness when due depends  on, and is subject to, our financial and operating performance, which is  subject to prevailing economic conditions and financial, business and other  factors, the availability of financing in the Mexican and international  banking and capital markets, our ability to sell assets and operating  improvements. We cannot assure you that we will be able to refinance our  indebtedness. 

 

In addition,    we operate in capital-intensive industries and require ongoing investments    in our capital assets and technology improvements. Over the past few years,    funds for such investments and for working capital needs, acquisitions and    dividends have been provided by a combination of cash generated from operations    and the incurrence of short- and long-term debt. To the extent that cash generated    from operations is insufficient, we may need to incur further indebtedness    for similar uses in the future. We cannot assure you that we will be able    to incur indebtedness on favourable terms to us or at all, which could impair    our ability to make capital investments, to maintain our capital assets or    to take advantage of significant business opportunities that may arise. 

 

***A  significant portion of our indebtedness is short-term debt.***

 

As of  December 31, 2004 and May 31, 2005, approximately Ps. 3,269 million ($293  million) and approximately Ps. 4,080 million ($374 million), respectively, of  our indebtedness was short-term debt, including the current portion of our  long term debt. Our lenders are not obligated to refinance this debt as it  matures during the course of the year. Our ability to refinance our short-term  debt depends on our ability to achieve an appropriate combination of financing  from third parties, access to capital markets, assets sales and operating  improvements. The failure to repay short-term indebtedness would trigger  acceleration and enforcement rights in respect of substantially all our  indebtedness. 

 

***Pricing  pressures by OEMs may affect our operating margins and results of operations;  the North American automotive industry is experiencing one of its worst crises  in recent years.***

 

Certain    of our flat glass products sold to original equipment manufacting, which we    refer to as "OEMs" in the automotive industry are sold under global purchase    agreements, which are entered into after completion of a bidding process.    Such automotive OEMs have significant buying power which, coupled with substantial    competition, puts pressure on prices and margins relating to products supplied    under the global purchase agreements. As a result, even if we were awarded    the right to sell to an automotive OEM under a global purchase agreement,    we may sell at operating margins that are lower than margins generally achievable    from sales to other flat glass customers.  The automotive OEM business    line represented approximately 12% of our consolidated net sales for the year    ended December 31, 2004.

 

The  automotive industry is currently facing difficult market conditions. North  American automobile manufactures have experienced slower demand and increased  pricing pressures on their products. The difficult market conditions in the  automotive industry could continue to lead to additional pricing pressure on  our products and loss of sales volume, either of which would have an adverse  effect on us.

 

***We face  lower operating margins and decreased profitability due principally to  increasing costs and competition.***

 

The gradual  reduction by the Mexican government over the past few years of import duties  and tariffs for glass and glass packaging products to historically low levels,  the investment by our competitors and vertically integrated customers in glass  manufacturing facilities in Mexico and increased imports of low-cost  competitive products into several of our important markets (principally the  United States and Mexico) have created severe competitive challenges for us.  These events have had an adverse effect on us by driving down our prices, and  in some cases sales volumes, and decreasing our operating margins and  profitability. For example, while in 1999 our gross margin and operating  margin were 33% and 16%, respectively, by 2004 our gross margin and operating  margin had decreased to 26% and 6%, respectively. See "-Item 5. Operating and  Financial Review and Prospects-Operating Results-Operating Income-Glass  Containers-Changes in Depreciation Methods." As market conditions continue to  deteriorate, we are faced with determined competitors that are financially  better positioned than us to withstand the ongoing and challenging economic  conditions. Loss of existing or future market share to competitors may  adversely affect our performance and, to the extent that one or more of our  competitors becomes more successful than us with respect to any key  competitive factor, our results of operations, financial position and  liquidity could be adversely affected.

 

Some of the  components of our cost of goods sold are subject to significant market price  variations. For instance, market prices of natural gas, which is an input that  represented approximately 6% of our consolidated cost of goods sold in 2004,  have experienced significant price increases since 2000. Since the price of  natural gas in Mexico is tied to the price of natural gas in southern Texas,  which in turn is fully exposed to market factors such as demand in the United  States or the amount of available natural gas reserves, we are fully exposed  to such price variations and we cannot assure you that market hedges will be  available at favorable conditions to us. In fact, as the price of natural gas  has significantly increased in recent years, we have not been able to raise  our products' prices to fully reflect those increases, which has adversely  affected our results of operations and liquidity. Other potential sources of  significant variations in our costs are electric power, labor, packaging and  freight costs.

 

***We may  not comply with covenants in the debt instruments governing a substantial  portion of our indebtedness.***

 

Under    the terms of the debt instruments governing a substantial portion of our indebtedness,    we are and some of our subsidiaries separately are required to comply with    various financial covenants, including debt to EBITDA ratio, leverage ratio,    interest coverage ratio and liquidity ratio covenants. In addition, the debt    instruments governing a substantial portion of our indebtedness also contain    various restrictive covenants including limitations on our ability to pay    dividends, make certain investments, sell or pledge assets and incur additional    indebtedness. The restrictions on our debt instruments could:
-    limit our flexibility in planning for, or reacting to, changes in our business  and the industries in which we operate; 
-    limit our ability to access cash from our subsidiaries and, thus, repay our  debt or satisfy other holding company obligations; and 
-    limit our ability to fund future operations, acquisitions or meet  extraordinary capital needs. 

The    failure to comply with the covenants contained in a debt instrument could    result in the relevant lender or noteholders having the right to declare the    indebtedness governed by that debt agreement or instrument to be in default,    to accelerate the maturity of such indebtedness or to take other enforcement    action against us, as well as triggering acceleration and enforcement rights    under our other debt agreements or instruments. Any such default, acceleration    or other action would have an adverse effect on us.

 

As a result  of the deterioration in our results of operations and the increase in our  leverage, it has been difficult for us to maintain compliance with such  financial and other covenants contained in our debt agreements and  instruments. During 2001, 2002 and 2003 we and some of our subsidiaries were  required to seek amendments and waivers with respect to several of our  financial and other covenants contained in our debt agreements and instruments  and in one of our accounts receivable factoring programs. During 2005, we and  some of our subsidiaries have continued to need amendments and waivers with  respect to our debt agreements and instruments. We expect that we will need  additional amendments and waivers in the future. Our ability to obtain such  amendments and waivers will depend upon our results of operations and our  ability to sell assets to reduce our leverage. There can be no assurance  that we will be able to obtain such future amendments or waivers or be  successful in taking other actions to avoid potential defaults under such  covenants. The failure to obtain such amendments or waivers would have an  adverse effect on us.

 

Certain of  our and our subsidiaries' indentures and credit facilities restrict our  ability to incur additional debt, other than debt which refinances existing  debt among others, if we or our subsidiaries fail to comply with certain  financial ratios. As of December 31, 2004 and March 31, 2005, we did not meet  certain of those financial ratios. At no time has the Company failed to make  required capital or interest payments. The failure to meet certain of the  covenants related to financial ratios discussed above as of December 31, 2004  and March 31, 2005 did not allow the lender to accelerate the maturity of the  debt under the indentures and credit facilities discussed above.

 

At the    time of the original filing, we expected not to meet a more restrictive financial    ratio as of June 30, 2005. Such non-compliance, although subject to waiver,    would allow the lender to accelerate the maturity of one of our credit facilities. As we met the current covenant requirements related to this ratio as of December    31, 2004, the outstanding debt is classified as noncurrent.

 

***We have  customers that are significant to us and the loss of all or a portion of their  business would have an adverse effect on us.***

 

Because of  the relative importance of our largest customers, our business is exposed to a  certain degree of risk related to customer concentration. Although no single  customer accounted for more than 4% of our consolidated net sales in 2004, we  have customers that are significant to our business units and us. Our three  largest customers accounted for approximately 10% of our consolidated net  sales in 2004. Given that our profitability depends on our maintenance of a  high capacity utilization rate, the loss of all or a portion of the sales  volume from a significant customer would have an adverse effect on us. Among  our most significant customers are automotive OEMs and beer bottlers. 

 

***At our  holding company level, we depend on interest, fees, dividends and tax refunds.***

 

Our holding  company derives substantially all of its revenue from interest, fees and  dividends paid to it by our subsidiaries, as well as consolidated tax refunds.  In the year ended December 31, 2004, a majority of the revenue received by our  holding company was derived from interest and management, administrative and  other fees paid to it by our subsidiaries. Our holding company's remaining  revenue was derived from dividends paid to it by our subsidiaries and from tax  refunds resulting from the tax consolidation of Vitro and our subsidiaries  under Mexican tax law. Accordingly, in paying the principal of, premium, if  any, interest on, and additional amounts, if any, with respect to our  indebtedness, we will rely on income from interest, fees and dividends from  our subsidiaries, as well as tax refunds and income from the disposition of  one or more of our subsidiaries, interests therein or assets thereof.

 

Our    subsidiaries' ability to pay such dividends or make such distributions will    be subject to (i) the cash flows generated by their operations and borrowings,    (ii) in certain circumstances, restrictions contained in their debt instruments    and joint venture agreements, (iii) such subsidiaries' shareholders'    (including our joint venture partners, when applicable) approval of the payment    of such dividends at such subsidiaries' general ordinary shareholders' meetings,    (iv) such subsidiaries having net income and the requisite amount of    paid-in capital required under Mexican law and their estatutos sociales, which    we refer to as "by-laws" and (iv) applicable laws. During 2001, 2002, 2003    and 2004, our principal subsidiaries were restricted from paying dividends    to us by their credit facilities or indentures. See "-We may not comply with    covenants in the debt instruments governing a substantial portion of our indebtedness."    Certain of our joint venture agreements require the consent of all joint venture    participants for certain significant operating and management decisions, including    the payment of dividends. For additional information with respect to dividend    payment limitations under our debt instruments and joint venture agreements,    see "Item 5.  Operating and Financial Review and Prospects-Liquidity and  Capital Resources."

 

***Downturns in the economies in which we operate may negatively affect the  demand for our products and our results of operations.***

 

Demand for  our flat glass, glass containers and glassware products is affected by general  economic conditions in the markets in which we operate, principally Mexico,  the United States and Europe. As a result, demand for our products and,  consequently, our results of operations have been and may be negatively  affected by the downturn in the economies in which we operate.

 

A downturn in  the Mexican economy, from which we derived approximately 44% of our  consolidated net sales in the year ended December 31, 2004, would reduce the  demand for our products and negatively impact our results of operations.  Similarly, a prolonged economic downturn in the United States, from which we  derived approximately 45% of our consolidated net sales in 2004, would have an  adverse impact on the export and foreign subsidiary sales of our Flat Glass,  Glassware and Glass Containers business units.

 

Economic  downturns in Mexico and the United States may also subject us to increased  foreign currency exchange rate and interest rate risks and impair our results  of operations and our ability to raise capital or service our debt.

 

***Changes  in the relative value of the peso to the U.S. dollar may have an adverse  effect on us.***

 

Changes in  the relative value of the peso to the U.S. dollar have an effect on our  results of operations. In general, as described more fully in the following  paragraphs, a real devaluation of the peso will likely result in an increase  of our operating margins and a real appreciation of the peso will likely  result in a decrease in our operating margins, in each case, when measured in  pesos. This is so because the aggregate amount of our consolidated net sales  denominated in or affected by U.S. dollars exceeds the aggregate amount of our  costs of goods sold and our general, administrative and selling expenses  denominated in or affected by U.S. dollars.

 

A substantial  portion of the sales generated by our Mexican and U.S. subsidiaries are either  denominated in or affected by the value of the U.S. dollar. The prices of a  significant number of the products we sell in Mexico, in particular those of  flat glass for automotive uses, capital goods, certain glassware products and  most chemical and packaging products, are linked to the U.S. dollar. In  addition, substantially all of our export sales are invoiced in U.S. dollars  and subsequently translated into pesos using the exchange rate in effect at  the time of the transaction. The translated U.S. dollar sales of our Mexican  subsidiaries are then restated into constant pesos using the Mexican Consumer  Price Index, which we refer to as "INPC," as of the date of the most recent    balance sheet included in those financial statements. As a result, when the    peso devalues in real terms against the U.S. dollar, as was the case in 2002    and 2003, the same level of U.S. dollar sales as in a prior period will result    in higher constant peso revenues in the more recent period. Conversely, when    the peso appreciates in real terms against the U.S. dollar, as was the case    in 2004, the same level of U.S. dollar sales as in a prior period will result    in lower constant peso revenues in the more recent period. Moreover, because    a material portion of our cost of goods sold, including labor costs, and general,    administrative and selling expenses are invoiced in pesos and are not directly    affected by the relative value of the peso to the U.S. dollar, the real appreciation    or devaluation of the peso relative to the U.S. dollar has a significant effect    on our operating margins at least in the short term.

 

Further, a  strong peso relative to the U.S. dollar makes the Mexican market more  attractive for importers and competitors that might not otherwise sell in the  Mexican market. A strong peso relative to the U.S. dollar also makes those of  our products whose prices are denominated in or are affected by the value of  the U.S. dollar less competitive or profitable. When the peso appreciates in  real terms, with respect to such products, we must either increase our prices  in U.S. dollars, which makes our products less price-competitive, or bear  reduced operating margins when measured in pesos. Given the competitive nature  of the industries in which we operate, in the past we have had to reduce our  operating margins for such products in response to appreciation of the peso  relative to the U.S. dollar. In the year ended December 31, 2004, the  appreciation of the peso in real terms had an adverse effect on our operating  margins and may continue to do so in the future.

 

***Inflation and foreign currency exchange rate fluctuations may have an adverse  effect on our total financing cost.***

 

Our    total financing cost includes (i) net interest expense, (ii) the net effect    of inflation on our monetary assets and liabilities and (iii) the net effect    of changes in nominal foreign currency exchange rates on monetary assets and    liabilities denominated in foreign currencies. Net interest expense is calculated    as the nominal amount of interest expense incurred by us with respect to our    short- and long-term debt and off-balance sheet financings minus the nominal    amount of interest income generated by us with respect to our monetary assets.

 

  Inflation affects our total financing cost. During periods of inflation, the  principal amount of our monetary debt will generally be reduced in real terms  by the rate of inflation. The amount of such reduction will result in a gain  from monetary position. This gain is offset by the reduction in real terms in  the value of the monetary assets we held during such period. Historically, our  monetary liabilities have exceeded our monetary assets and, thus, we have  tended to experience monetary gains during periods of inflation. Declining  levels of inflation since 1999 have resulted in lower monetary gains.

 

In addition,    our total financing cost is impacted by changes in the nominal value of the    peso relative to the U.S. dollar. Foreign currency exchange gains or losses    included in our total financing cost result primarily from the impact of nominal    changes in the U.S. dollar-peso exchange rate on our and our Mexican subsidiaries'    U.S. dollar-denominated monetary liabilities (such as U.S. dollar-denominated    debt and accounts payable arising from imports of raw materials and equipment)    and assets (such as U.S. dollar-denominated cash, cash equivalents and accounts    receivable from exports). Because our U.S. dollar-denominated monetary liabilities    have historically been significantly in excess of our U.S. dollar-denominated    monetary assets, the nominal devaluation or appreciation of the peso relative    to the U.S. dollar has historically resulted in foreign currency exchange    losses and gains, respectively. Accordingly, in 2002 and 2003, the nominal    devaluation of the peso relative to the U.S. dollar resulted in foreign currency    exchange losses. The nominal appreciation of the peso relative to the U.S.    dollar would have resulted in a foreign currency exchange gain in 2004, but    with the unwind of the currency exchange swaps in May 2004, we recorded a    net exchange loss.

 

***We may be adversely affected by increases in interest rates.***

 

Interest    rate risk exists primarily with respect to our floating-rate peso- and dollar-denominated    debt, which debt generally bears interest based on the Mexican equilibrium interbank interest rate, which we refer to as the "TIIE," or the London interbank    offered rate, which we refer to as "LIBOR." As of May 31, 2005, our floating-rate    peso- and dollar-denominated debt amounted to approximately Ps. 1,469 million    and $520 million. If TIIE or LIBOR rates increase, our ability to service    our debt will be adversely affected.

 

***Substitution trends in the glass containers industry may continue to adversely  affect our business.***

 

  Glass containers have been, and continue to be, subject to competition from  alternate forms of packaging, including plastic containers, aluminum cans and  laminated paper containers. In mature glass containers markets, such as in the  United States, demand for glass containers began a sustained long-term decline  in the 1970s. In connection with such decline, the glass containers industry  experienced a reduction in capacity and consolidation among glass containers  producers. The remaining glass containers producers in mature markets have  faced, and continue to face, pricing pressures as a result of competition from  other forms of packaging. In Mexico, which is becoming a mature market,  increased competition from alternate forms of packaging, particularly plastic,  aluminum cans and laminated paper containers, has adversely affected, and may  continue to adversely affect, our prices and operating margins, principally  with respect to glass containers for the beer, soft drinks and food  industries. The Glass Containers business unit represented approximately 41%  of our consolidated net sales in 2004.

 

***Because certain of our subsidiaries conduct all or a portion of their business  through joint ventures and partially depend on our partners for new  technology, the loss of our joint venture agreements may adversely affect our  business.***

 

  Sales attributable to our joint ventures represented approximately 61% of our  consolidated net sales for the year ended December 31, 2004. In the future,  certain of our partners may prefer to conduct business in Mexico directly (as  opposed through our joint venture) and to terminate their relationships with  us. In particular, the easing of limitations on foreign investment in Mexico  and the reduction of import duties and tariffs by the Mexican government have  reduced barriers to entry to the Mexican market for non-Mexican companies.

 

Although    a number of our joint venture agreements contain non-competition provisions    that restrict, subject to certain exceptions and limitations, our joint venture    partners from engaging in the production and distribution of the joint venture's    products in specific markets during the term of the agreement and for a limited    period following the termination of such agreement (other than through the    joint venture vehicle), our joint venture agreements generally contain provisions    for termination under certain circumstances. If a termination were to occur,    we cannot assure you we could find an equivalent partner or achieve the affected    joint venture's objective on our own. Such events could have an adverse effect    on us.

 

Additionally,    notwithstanding that our business units conduct certain limited research and    development activities, we generally do not develop our own proprietary technology.    Although our business units' products and manufacturing processes are not    in constant need of technological improvements and innovations, they do, from    time to time, require access to new technology necessary to improve their    manufacturing processes and product lines to more effectively compete in both    the Mexican and other markets. The main portion of such technological needs    is satisfied through the acquisition of technology from third parties through    joint ventures, technology licenses, technology transfers, technical assistance    or similar arrangements.

 

  We could be unsuccessful in renewing or maintaining our joint ventures,  technology licenses or other agreements or arrangements on terms equivalent to  the existing ones, in forming similar alliances with other partners or in  developing equivalent technologies independently. The failure to continue some  of our joint ventures or to acquire technology from third parties may have an  adverse effect on us.

 

**Factors Relating    to Mexico and the Global Economy**

 

***Economic developments in Mexico and the United States affect our business.***

 

Starting    in 2001, amid concerns of a global economic slowdown and a recession in the    United States, Mexico experienced an economic slowdown. The economic slowdown    in the Mexican economy continued through 2002 and 2003. In 2002 and 2003,    real GDP grew by 0.8% and 1.4%, respectively, annual inflation was 5.7% and    4.0%, respectively, and the peso experienced a nominal devaluation relative    to the U.S. dollar of 13.8% and 7.6%, respectively. In 2004, economic activity    in Mexico grew at a faster rate. Mexico's real GDP grew by 4.4% in 2004, while    inflation was 5.2% and the peso experienced a nominal appreciation relative    to the U.S. dollar of 0.8%. According to Mexico's Instituto Nacional de Estadistica,    Geografia e Informatica, Mexico's real GDP grew by 2.4% in the first quarter    of 2005, on an annualized basis.

 

In 2001,    the United States' real GDP growth rate also showed a marked slowdown. During    2002, 2003 and 2004, the United States' real GPD growth rates recovered steadily    to 1.9%, 3.0% and 4.4%, respectively. The U.S. Bureau of Economic Analysis    estimates that the annualized real GDP growth rate in the United States was    3.5% during the first quarter of 2005. For 2002, 2003 and 2004, respectively,    inflation in the United States was 2.4%, 1.9% and 3.3%.

 

  Although recent economic activity seems to be increasing in Mexico and the  United States, the Mexican and United States economies may not continue to  grow at similar rates as they have grown in the past, and the economic  slowdown described above, which had a significant impact on our results of  operations in the past, may continue to adversely affect our results of  operations and liquidity.

 

The    majority of our manufacturing facilities are located in Mexico. For each of    the years ended December 31, 2002, 2003 and 2004, approximately 46%, 45% and    44%, respectively, of our consolidated net sales resulted from sales to parties    located within Mexico. In the past, inflation has led to high interest rates    on peso-denominated obligations and devaluations of the peso. During the 1980s,    government control over foreign currency exchange rates adversely affected    our consolidated net sales and operating margins. Inflation itself, as well    as governmental efforts to reduce inflation, has had significant negative    effects on the Mexican economy in general and on Mexican companies, including    us. Inflation in Mexico decreases the real purchasing power of the Mexican    population, and the Mexican government's efforts to control inflation by tightening    the monetary supply have historically resulted in higher financing costs,    as real interest rates have increased. Such policies have had and could have    an adverse effect on us.

 

  Future economic developments in or affecting Mexico or the United States could  adversely affect us and our ability to obtain financing.

 

***Political events in Mexico could affect Mexican economic policy and adversely  affect us.***

 

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

 

Mexican    political events may also significantly affect our operations and the performance    of Mexican securities, including our securities. In the Mexican national elections    held on July 2, 2000, Vicente Fox of the Partido Accion Nacional, which    we refer to as the "PAN," won the presidency. His victory ended more than    70 years of presidential rule by the Partido Revolucionario Institucional,    which we refer to as the "PRI." Neither the PRI nor the PAN secured a majority    in either house of the Mexican Congress.

 

President    Fox assumed office on December 1, 2000. While the transition from the    previous administration was smooth, since assuming office, President Fox has    encountered strong opposition to some of his proposed reforms from both houses    of Congress, where opposition parties such as the PRI and the Partido de la    Revolucion Democratica have frequently joined forces to block PAN initiatives.    Further, on July 6, 2003, Mexican Congressional elections were held. The results    of such elections were a reduction in the number of Congressional seats held    by the PAN and an increase in the number of Congressional seats held by the    PRI, among others. These events intensified the legislative gridlock in the    Mexican Congress and led to a further slowdown in the progress of political    reforms in Mexico. This gridlock could have an adverse effect on us. 

 

  Presidential and Federal Congressional elections in Mexico are scheduled for  July 2006. Those elections could cause additional political and economic  instability as has occurred in the past. Also, once the President and the  representatives are elected, there could be significant changes in laws,  public policies and/or regulations that could adversely affect Mexico's  political and economic situation, which could adversely affect our business.

 

  Social and political instability in Mexico or other adverse social or  political developments in or affecting Mexico could adversely affect us and  our ability to obtain financing. It is also possible that political  uncertainty may adversely affect Mexican financial markets.

 

***Developments in other emerging market countries may adversely affect our  business or the market price of our securities.***

 

The    market price of securities of Mexican companies is, to varying degrees, affected    by economic and market conditions in other emerging market countries. Although    economic conditions in such countries may differ significantly from economic    conditions in Mexico, investors' reactions to developments in such countries    may have an adverse effect on the market price of securities of Mexican companies,    including ours. In late October 1997, prices of Mexican securities dropped    substantially, precipitated by a sharp drop in the price of securities traded    in Asian markets. Similarly, prices of Mexican securities were adversely affected    by the economic crises in Russia and Brazil in the second half of 1998 and,    to a lesser extent, the economic crisis in Argentina in 2002. The market price    of our securities could be adversely affected by future events elsewhere,    especially in other emerging market countries.

 

***If foreign currency exchange controls and restrictions are imposed, we may not  be able to service our debt in U.S. dollars, which exposes investors to  foreign currency exchange risk.***

 

  In the past, the Mexican economy has experienced balance of payments deficits,  shortages in foreign currency reserves and other problems that have affected  the availability of foreign currencies in Mexico. The Mexican government does  not currently restrict or regulate the ability of persons or entities to  convert pesos into U.S. dollars. However, it has done so in the past and could  do so again in the future. We cannot assure you that the Mexican government  will not institute a restrictive foreign currency exchange control policy in  the future. Any such restrictive foreign currency exchange control policy  could prevent or restrict access to U.S. dollars and limit our ability to  service our U.S. dollar-denominated debt.

 

***Our financial statements may not give you the same information as financial  statements prepared under United States accounting rules.***

 

Mexican    companies listed on the Bolsa Mexicana de Valores, which we refer to as the    "Mexican Stock Exchange," including us, must prepare their financial statements    in accordance with Mexican GAAP. Mexican GAAP differs in certain significant    respects from U.S. GAAP, including the treatment of minority interests, workers'    profit sharing, capitalization of interest and consolidation of subsidiaries.    In addition, under Mexican GAAP, the effects of inflation must be reflected    in accounting records and in published financial statements. Moreover, the    effects of inflation accounting under Mexican GAAP, except for the restatement    of fixed assets purchased outside Mexico and the restatement of prior period    financial statements as they relate to foreign subsidiaries, are not eliminated    in the reconciliation to U.S. GAAP. For this and other reasons, the presentation    of financial statements and reported earnings prepared in accordance with    Mexican GAAP may differ materially from the presentation of financial statements    and reported earnings prepared in accordance with U.S. GAAP. Note 22 to our    consolidated financial statements for the year ended December 31, 2004, provides    a description of the principal differences between Mexican GAAP and U.S. GAAP    as they relate to us. The U.S. GAAP figures presented in Note 22 to our consolidated    financial statements have been restated as discussed further in Note 22 to    our consolidated financial statements.

 

 

**EXCHANGE RATES**

 

  The following table sets forth, for each year in the five year period ended  December 31, 2004, the high, low, average and annual period-end Noon Buying  Rates, all expressed in pesos per U.S. dollar. No representation is made that  the peso or U.S. dollar amounts referred to in this annual report could have  been or could be converted into U.S. dollars or pesos, as the case may be, at  the rates indicated, at any particular rate or at all.

 

 

**Noon Buying Rate(1)**

**Year ended December 31,**

**High**

**Low**

**Average**

**Period-End**

2000

Ps. 9.84

Ps. 9.20

Ps. 9.47

Ps. 961

2001

9.97

9.00

9.35

9.16

2002

10.43

9.00

9.75

10.43

2003

11.41

10.11

10.79

11.24

2004

11.64

10.81

11.29

11.15

 

(1) Source:    Federal Reserve Bank of New York

 

  The following table sets forth, for each month in the six-month period ended  on May 31, 2005 and the first 24 days of June 2005, the high and low Noon  Buying Rates, all expressed in pesos per U.S. dollar.

 

 

**Noon            Buying Rate**(1)

 

**High**

**Low**

December          2004 

Ps. 11.328

Ps. 11.111

January          2005  

11.411

11.171

February

11.206

11.043

March

11.329

10.975

April

11.229

11.036

May

11.033

10.885

June          (through June 24, 2005)

10.883

10.759

____________

(1) Source:    Federal Reserve Bank of New York

 

 

**SELECTED CONSOLIDATED    FINANCIAL INFORMATION**

 

The    following table presents selected consolidated financial information and other    data for each of the periods presented. This information and data should be    read in conjunction with, and is qualified in its entirety by reference to,    our consolidated financial statements and the notes thereto included elsewhere    in this annual report and the information under the section entitled "Item 5.    Operating and Financial Review and Prospects." Our consolidated financial    statements are prepared in accordance with Mexican GAAP, which differs in    certain significant respects from U.S. GAAP. Note 22 to our consolidated financial    statements for the year ended December 31, 2004 provides a description    of the principal differences between Mexican GAAP and U.S. GAAP as they relate    to us. The U.S. GAAP figures presented below for all periods presented have    been restated as discussed further in Note 22 to our consolidated financial    statements.

 

  We have completed a number of dispositions recently. See "Item 4. Information  on the Company-Business-Divestitures."

 

  Financial data expressed in pesos and set forth in the following table for  each year in the five year period ended December 31, 2004 has been restated in  millions of constant pesos as of December 31, 2004.

 

 

**As of or for                  the year ended December 31,**

 

**2000**

**2001**

**2002**

**2003**

**2004**

**2004**

 

**(Ps. millions)1**

**($ millions)(1)(2)**

**Income Statement              Data:**

** **

** **

** **

** **

** **

** **

**Mexican GAAP:**

 

 

 

 

 

 

Net sales  

Ps. 27,634

Ps. 27,317

Ps. 26,901

Ps. 26,238

Ps. 26,181

$ 2,348

Cost of sales  

18,958

19,222

19,150

18,969

19,261

1,728

Gross profit  

8,676

8,095

7,751

7,269

6,920

620

Selling, general              and administrative expenses 

5,265

5,473

5,479

5,309

5,350

479

Operating income  

3,411

2,622

2,272

1,960

1,570

141

Financing cost:  

 

 

 

 

 

 

Interest expense,              net 

2,482

2,027

1,647

1,882

2,057

184

Exchange loss (gain),              net 

122

(633)

1,687

822

78

7

Gain from monetary              position 

1,425

715

851

599

730

65

Total financing              cost 

1,179

675

2,483

2,105

1,405

126

Other expenses,              net(4)

476

890

454

156

141

13

Income (loss) before taxes and workers' profit sharing 

1,756

1,053

(665)

(301)

24

2

Income and asset              tax 

639

391

(504)

54

(52)

(5)

Workers' profit              sharing 

355

104

52

40

120

11

Net income (loss)              from continuing operations 

762

558

(213)

(395)

(44)

(4)

Net income (loss)              from discontinued operations(5)

231

207

(128)

0

0

0

Gain on disposal              of discontinued operations(5)

0

0

506

0

0

0

Net income (loss)(5)

993

765

165

(395)

(44)

(4)

Net income (loss)              of majority interest(5)

416

235

(5)

(596)

(267)

(24)

Net income (loss)              from continuing operations per share 

2.74

1.95

(0.77)

(1.44)

(0.16)

(0.02)

Net income (loss)              from discontinued operations per share(5)

0.83

0.72

1.37

0.00

0.00

0.00

Diluted and basic              net income (loss) of majority interest per share(5)

1.49

0.83

(0.01)

(2.17)

(0.98)

(0.09)

** **

** **

** **

** **

** **

** **

** **

**U.S. GAAP:**

** **

** **

** **

** **

** **

** **

Net sales  

Ps. 25,051

Ps. 22,645

Ps. 23,398

Ps. 23,577

Ps. 24,285

$ 2,178

Operating income  

 2,054  

 1,393  

  1,134  

  1,206  

 761  

 68  

Net income (loss)              from continuing operations 

 275  

 (246)

 (839)

 (893)

 (672)

 (60)

Net income (loss)(5)

721  

 226  

 (578)

 (752)

 (221)

 (20)

Net income (loss)              from continuing operations per share 

 0.99  

 (0.86)

 (3.05)

 (3.24)

 (2.47)

  (0.22)

Net income (loss)              from discontinued operations per share(5)

 1.59  

 1.64  

 0.94  

 0.52  

 1.66  

 

Diluted and basic              net income (loss) per share(5)

 2.59  

 0.79  

  (2.10)

 (2.73)

 (0.81)

 

 

 

 

 

 

 

 

**Balance              Sheet Data:**

** **

** **

** **

** **

** **

** **

**Mexican              GAAP:**

** **

** **

** **

** **

** **

** **

Continuing operations:  

 

 

 

 

 

 

Cash and cash equivalents  

Ps. 936

Ps. 1,205

Ps. 2,484

Ps. 1,474

Ps. 2,828

$ 254

Current assets  

8,593

8,197

10,231

9,299

10,517

943

Total assets  

34,018

32,590

33,430

32,412

31,231

2,801

Current liabilities  

8,785

10,599

10,084

9,402

7,773

697

Total debt  

17,903

15,956

16,692

16,649

16,798

1,507

Total liabilities  

25,777

23,742

23,675

23,366

23,078

2,070

Stockholders' equity(5)

10,357

11,050

9,755

9,046

8,153

731

Minority interest              in consolidated subsidiaries(5)

3,882

4,171

3,056

3,023

2,804

251

Majority stockholders'              equity(5)

6,475

6,879

6,699

6,023

5,349

480

 

 

 

 

 

 

 

Discontinued Operations:(5)

 

 

 

 

 

 

Total assets  

Ps. 4,995

Ps. 4,862

Ps. 0

Ps. 0

Ps. 0

$ 0

Total liabilities  

2,879

2,660

0

0

0

0

 

 

 

 

 

 

 

**U.S. GAAP:**

** **

** **

** **

** **

** **

** **

Total assets  

Ps. 38,728  

Ps. 36,727  

Ps. 31,921  

Ps. 31,305  

Ps. 30,244  

$ 2,713  

Total liabilities  

 28,099  

 26,611  

 23,603  

 23,350  

 23,214  

 2,082  

Net assets  

 10,629  

 10,116  

 8,318  

 7,955  

 7,030  

 631  

Capital stock  

 6,784  

 6,784  

 6,784  

 6,784  

 6,784  

 608  

Stockholders' equity  

 7,513  

 6,841  

 6,095  

 5,548  

 4,818  

 432  

** **

** **

** **

** **

** **

** **

** **

**Other              Data:**

** **

** **

** **

** **

** **

** **

**Mexican GAAP:**

** **

** **

** **

** **

** **

** **

Capital expenditures  

Ps. 1,046

Ps. 940

Ps. 1,136

Ps. 1,871

Ps. 1,453

$ 130

Depreciation and              amortization 

2,136

2,150

2,122

2,062

2,247

202

 

 

 

 

 

 

 

Total Shares issued              at end of period(6)

 324.0

 324.0

 324.0

 324.0

 324.0

 

Total Shares held              in Stock Option Trust at end of period(6)

 1.8

 24.7

 24.7

 24.7

 22.8
 
Total Shares held              as treasury stock at end of period(6)

 25.6

 25.6

 23.3

 28.3

 28.3

 

Total Shares issued              and outstanding at end of period(6)

 296.6

 273.7

 276.0

 271.1

 273.0

 

Average total Shares              outstanding during period(6)

 278.4

 286.1

 275.4

 275.2

 271.8

 

 

 

 

 

 

 

 

**Inflation              and Foreign Currency Exchange Rate Data:**

** **

** **

** **

** **

** **

 

Percentage of change              in INPC(7)

 9.0%

 4.4%

 5.7%

 4.0%

 5.2%

 

Peso/dollar exchange              rate at the end of period(8)

Ps. 9.6098

Ps. 9.1695

Ps. 10.4393

Ps. 11.2372

Ps. 11.1495

 

Average exchange              rate(9)

Ps. 9.4673

Ps. 9.3274

Ps. 9.7455

Ps. 10.8251

Ps. 11.3091

____________

(1) Except    per share amounts, number of shares and inflation and foreign currency exchange    rate data.

 

(2) Peso    amounts have been translated into U.S. dollars, solely for the convenience    of the reader, at the rate of 11.1495 pesos per one U.S. dollar, the Free    Exchange Rate on December 31, 2004.

 

(3) The gain    (loss) from monetary position reflects the result of holding monetary assets    and liabilities during periods of inflation. Values stated in current monetary    units decrease in purchasing power over time. This means that losses are    incurred by holding monetary assets over time, whereas gains are realized    by maintaining monetary liabilities.

 

(4) Other    expenses, net, reflects, among others, (i) write-off and loss from sale    of assets in the amount of Ps. 447 million, Ps. 129 million    and Ps. 329 million for the years ended December 31, 2002, 2003    and 2004, respectively, (ii) gains from the sale of subsidiaries and    associated companies in the amount of Ps.72 million, Ps.37 million    and Ps.488 million for the years ended December 31, 2002, 2003 and    2004, respectively, and (iii) restructuring charges in the amount of    Ps.103 million, Ps.98 million and Ps.243 million for the years ended    December 31, 2002, 2003 and 2004, respectively. The restructuring charges    relate to the downsizing and streamling of corporate services and organization    at some of our business units.

 

  (5) On July    3, 2002, we sold our controlling 51% interest in Vitromatic, our joint venture    with Whirlpool that engaged in the production and distribution of household    appliances, to Whirlpool for $148.3 million in cash. At the time of the transaction,    approximately $67 million of our consolidated debt and approximately $97 million    of our consolidated off-balance sheet financings were obligations of Vitromatic.    Consequently, upon the consummation of the sale of our interest in Vitromatic,    our consolidated debt and off-balance sheet financings were reduced by approximately    $67 million and approximately $97 million, respectively. Our consolidated    financial statements and all other financial and statistical data included    in this annual report have been restated to reflect Vitromatic as a discontinued    operation for all periods presented in this annual report, unless otherwise    indicated. Therefore, Vitromatic's results of operations are reflected in    the line item entitled "Net income (loss) from discontinued operations" in    our consolidated statement of operations. Financial data included in this    annual report have been restated to present as a discontinued operation the    assets of Vitromatic in the line items entitled "Total assets of discontinued    operations" and the liabilities of Vitromatic in the line items entitled "Total    liabilities of discontinued operations". Financial and statistical data for    all periods presented in this annual report do not include the results of    operations of discontinued operations, except (i) for financial and statistical    data relating to discontinued operations, (ii) net income and net income    of majority interest and (iii) as otherwise specified.

 

(6) Millions    of shares.

 

(7) Calculated    using year-end INPC of the most recent year divided by the year-end INPC    of the previous year. 

 

(8) Based    on the Free Exchange Rate at the end of the period.

 

(9) Calculated    using the average of Free Exchange Rates on the last day of each month during    the period.

 

 

**Dividends per    Share**

 

  The following table sets forth, for each year in the five year period ended  December 31, 2004, the dividends and dividends per share Vitro declared and  paid with respect to such year, expressed in pesos and U.S. dollars. All peso  amounts contained in the table below are stated in nominal pesos.

 

**Fiscal Year with Respect to Which Dividend was Declared**

**Month Dividend was Declared**

**Total Dividend Amount(1)**

**Dividends per Share**

**Dividend per Share(2)**

**Month Dividend was Paid**

 

 

**(Ps. millions)**

 

 

 

2000

April 2001

Ps. 149

Ps. 0.50

$0.0539

May 2001

2000

April 2001

149

0.50

0.0539

--(3)

2001

March 2002

75

0.25

0.0256

June 2002

2002

March 2003

108

0.36

0.0338

April 2003

2003

March 2004

89

0.30

0.0267

April 2004

2004

March 2005

90

0.30

0.0268

April 2005

_________________

(1)For purposes    of calculating the dividends per Share, we considered our total dividend amount.    Shares held by the Stock Option Trust are not treated as treasury stock. Therefore,    the total dividend amount includes dividends paid with respect to the Shares    held by the Stock Option Trust. 

(2)For purposes    of calculating the dividends paid in U.S. dollars per Share, we divided the    dividends paid in Mexican peso per share by the Free Exchange Rate as of the    date on which such dividend was declared. 

(3)On March    17, 2005, the shareholders of Vitro revoked the payment of this dividend.    

 

 

**Item 5.   Operating and Financial Review and Prospects**

 

You    should read this discussion in conjunction with, and this discussion is qualified    in its entirety by reference to, our consolidated financial statements and    notes thereto and other financial information included elsewhere in this annual    report. Our consolidated financial statements are prepared in accordance with    Mexican GAAP, which differs in certain significant respects from U.S. GAAP.    Note 22 to our consolidated financial statements for the year ended December    31, 2004 provides a description of the principal differences between Mexican    GAAP and U.S. GAAP as they relate to us. The U.S. GAAP figures presented in    Note 22 to our consolidated financial statements have been restated as discussed    further in Note 22 to our consolidated financial statements.This section contains    forward-looking statements that involve risks and uncertainties. Our actual    results may differ materially from those discussed in the forward-looking    statements as a result of various factors, including without limitation those    set forth in "Item 3. Key Information-Risk Factors" and the other matters    set forth in this annual report. See "Forward-Looking Statements."

 

 

**OPERATING RESULTS**

 

**Factors Affecting    Our Results of Operations**

 

Our    statement of operations is affected by, among other factors, (i) the    level of demand for our products in the countries in which we operate, (ii)    our costs of production, which principally consist of costs of raw materials,    labor, energy and depreciation, of which raw materials and labor are sensitive    to inflation, (iii) the relationship between the peso and the U.S. dollar,    (iv) financing costs, which are incurred in both pesos and U.S. dollars    and (v) increased competition in our domestic market and abroad. See    "Item 3. Key Information-Risk Factors-Pricing pressures by OEMs may affect  our operating margins and results of operations; the North American automotive  industry is experiencing one of its worst crises in recent years," "Item 3.  Key Information-Risk Factors-We face lower operating margins and decreased  profitability due principally to increasing costs and competition," "Item 3.  Key Information-Risk Factors-We have customers that are significant to us and  the loss of all or a portion of their business would have an adverse effect on  us," "Item 3. Key Information-Risk Factors-Downturns in the economies in which  we operate may negatively affect the demand for our products and our results  of operations," "Item 3. Key Information-Risk Factors-Changes in the relative  value of the peso to the U.S. dollar may have an adverse effect on us,"  "Item 3. Key Information-Risk Factors-Inflation and foreign currency exchange  rate fluctuations may have an adverse effect on our total financing cost," "Item 3. Key Information-Risk Factors-We may be adversely affected    by increases in interest rates," and "Item 3. Key Information-Risk  Factors-Substitution trends in the glass containers industry may continue to  adversely affect our business."

 

  We have completed a number of dispositions recently. See "Item 4. Information  on the Company-Business-Divestitures."

 

**Trend Information**

 

  Stronger growth in the Mexican and U.S. economies had a positive impact on our  sales in 2004. Although the Mexican and U.S. economies continued to grow in  the first half of 2005, we cannot predict how those economies will continue to  perform. See "Item 3. Key Information-Risk Factors-Downturns in the economies  in which we operate may negatively affect the demand for our products and our  results of operations," and "Item 3. Key Information-Risk Factors- Economic  developments in Mexico and the United States affect our business." At the same  time, our Flat Glass business unit has continued to face pricing pressures in  recent months in its Mexican markets, particularly in the construction  markets, as well as reduced volumes in the Mexican construction market. We  anticipate that these pricing pressures will continue. In 2004, reduced sales  prices in the construction segment of the Flat Glass business unit were offset  by higher sales volume in the automotive segment of the market. However, the  North American automotive industry is experiencing one of its worst crises in  recent years. See "Item 3. Key Information-Risk Factors-Pricing pressures by  OEMs may affect our operating margins and results of operations; the North  American automotive industry is experiencing one of its worst crises in recent  years." As a result, our sales to automobile manufacturers could lead to  additional price pressures and a loss of sales volume. Additionally, the  increase in the price of certain of our raw materials, in particular natural  gas, and the services we use could have a negative impact on our results of  operations. In particular, if the natural gas prices remain at current levels  our results of operations will be negatively affected.

 

***Economic developments    in Mexico and the United States affect our business***

 

  A substantial portion of our operations are in Mexico and a substantial  majority of our consolidated net sales are made in Mexico and the United  States. Therefore, economic conditions in Mexico and the United States have a  significant effect on our business, results of operations and financial  position.

 

*General*

 

In 2001,    amid concerns of a global economic slowdown and a recession in the United    States, Mexico started experiencing an economic slowdown. In 2001, Mexico's    real GDP declined by 0.3%, although inflation declined to 4.4% and the peso    appreciated, in nominal terms, 4.6% relative to the U.S. dollar. The economic    slowdown in the Mexican economy continued through 2002 and 2003. In 2004,    GDP growth rates recovered. In 2002, 2003 and 2004, real GDP grew by 0.8%,    1.4% and 4.4%, respectively, annual inflation was 5.7%, 4.0% and 5.2%, respectively    and the peso experienced a nominal devaluation relative to the U.S. dollar    of 13.8% and 7.6% in 2002 and 2003, respectively, and a nominal appreciation    of 0.8% in 2004. According to Mexico's Instituto Nacional de Estadistica,    Geografia e Informatica, Mexico's real GDP grew by 2.4% on an annualized basis    in the first quarter of 2005.

 

In 2001,    the United States' real GDP growth rate showed a marked slowdown, growing    by only 0.5%. During 2002, 2003 and 2004, the United States' real GPD growth    rates recovered steadily to 1.9%, 3.0% and 4.4%, respectively. The U.S. Bureau    of Economic Analysis estimates that the annualized real GDP growth rate in    the United States was 3.5% during the first quarter of 2005. For 2002, 2003    and 2004, respectively, inflation in the United States was 2.4%, 1.9% and    3.3%.

 

  Although recent economic activity seems to be increasing in Mexico and the  United States, the Mexican and United States economies may not continue to  grow slower growth rates or a general economic decline would negatively impact  our business and our results of operations.

 

The    majority of our manufacturing facilities are located in Mexico. For each of    the years ended December 31, 2002, 2003 and 2004, approximately 46%, 45% and    44%, respectively, of our consolidated net sales resulted from sales to parties    located within Mexico. In the past, inflation has led to high interest rates    on peso-denominated obligations and devaluations of the peso. During the 1980s,    government control over foreign currency exchange rates adversely affected    our net sales and operating margins. Inflation itself, as well as governmental    efforts to reduce inflation, has had significant negative effects on the Mexican    economy in general and on Mexican companies, including us. Inflation in Mexico    decreases the real purchasing power of the Mexican population, and the Mexican    government's efforts to control inflation by tightening the monetary supply    have historically resulted in higher financing costs, as real interest rates    have increased. Such policies have had and could continue to have an adverse    effect on us.

 

*Trade Liberalization*

 

Steps    taken by Mexico since the 1980s to reduce import barriers and open its economy    to foreign competition, such as becoming a signatory to the General Agreement    on Tariffs and Trade, which we refer to as "GATT," and a member of the North    American Free Trade Agreement, which we refer to as "NAFTA," led to a substantial    increase in imports into Mexico. During 2000 and 2001, as the peso continued    to appreciate in real terms, the trade balance of Mexico reached deficits    of $8.0 billion and $9.7 billion, respectively. During 2002 and    2003, despite the real devaluation of the peso, the trade balance of Mexico    reached a deficit of $7.9 billion and $ 8.6 billion. During 2004, as the peso    appreciated in real terms against the dollar, the trade balance of Mexico    reached a deficit of $8.7 billion. We cannot predict the behavior of the Mexican    trade balance in the future or the country's ability to finance a trade deficit,    if any. With the liberalization of the Mexican economy and the implementation    of NAFTA, other free trade agreements entered into by Mexico with the European    Union, Chile, Costa Rica, Nicaragua, Colombia, Venezuela, Bolivia and Israel    and a multilateral free trade agreement which became effective on January 1,    2001 with Guatemala, El Salvador and Honduras, manufacturers, such as us and    certain of our domestic customers, have come under increased competitive pressure    from imported goods. The reduction and phase-out of import duty rates has    generally limited our flexibility to adjust pricing levels to offset the effects    of devaluation and inflation in Mexico. 

 

  On the other hand, the trade liberalization seen in the past few years between  Mexico and its trading partners has reduced the import duties and tariffs our  exported products pay upon entry to foreign countries that are signatories to  free trade agreements with Mexico and the amount of regulation and delay  experienced in connection with the exports of our products to such countries.  In addition, the lower tariffs paid by goods imported into Mexico, has reduced  the cost of the raw materials that we import for our operations. We believe  that implementation of the free trade agreements will enhance our ability and  the ability of certain of our domestic customers to increase the exports of  our and their respective products to the countries that are signatories to  these agreements.

 

*Inflation and    Foreign Currency Exchange Rate Fluctuations*

 

  The following table sets forth, for the periods presented, certain information  relating to inflation and foreign currency exchange rates.

 

 

 

**For the year ended**

**December 31,**

 

**2002**

**2003**

**2004**

Nominal peso devaluation (appreciation) relative to the U.S. dollar(1)  

13.8%

7.6%

(0.8%)

Mexican inflation (based on changes in INPC)   (1)

5.7%

4.0%

5.2%  

U.S. inflation (based on changes in Consumer Price Index)(2) 

2.4%

1.9%

3.3%  

Inflation differential (Mexican vs. United States)(1)(2)(3)

3.2%

2.1%

1.8%  

Real peso devaluation (appreciation) relative to the U.S. dollar(4)

10.3%

5.4%

(2.6%)

Free Exchange Rate as of year end(1) 

Ps. 10.4393

Ps. 11.2372

Ps. 11.1495

Mexican GDP growth rate(5)  

0.8%

1.4%

4.4%

______________

(1) Source: Banco de Mexico

(2) Source:    U.S. Bureau of Labor Statistics

(3) Compounded

(4) Peso devaluation    (appreciation) in real terms = - ((Nominal peso devaluation +1) / (Inflation    differential +1)) - 1

(5)  Source: Instituto Nacional de Estadistica, Geografia e Informatica

 

*Effects of    Inflation and Foreign Currency Exchange Rate Fluctuations on Operating Margins*

 

  Changes in the relative value of the peso to the U.S. dollar have an effect on  our results of operations. In general, as described more fully in the  following paragraphs, a real devaluation of the peso will likely result in an  increase of our operating margins and a real appreciation of the peso will  likely result in a decrease in our operating margins, in each case, when  measured in pesos. This is so because the aggregate amount of our consolidated  net sales denominated in or affected by U.S. dollars exceeds the aggregate  amount of our costs of goods sold and our general, administrative and selling  expenses denominated in or affected by U.S. dollars.

 

A substantial    portion of the sales generated by our Mexican and U.S. subsidiaries are either    denominated in or affected by the value of the U.S. dollar. The prices of    a significant number of the products we sell in Mexico, in particular those    of flat glass for automotive uses, capital goods, certain glassware products    and most chemical and packaging products, are linked to the U.S. dollar. In    addition, substantially all of our export sales are invoiced in U.S. dollars    and subsequently translated into pesos using the exchange rate in effect at    the time of the transaction. The translated U.S. dollar sales of our Mexican    subsidiaries are then restated into constant pesos using INPC, as of the date    of the most recent balance sheet included in those financial statements. As    a result, when the peso devalues in real terms against the U.S. dollar, as    was the case in 2002 and 2003, the same level of U.S. dollar sales as in a    prior period will result in higher constant peso revenues in the more recent    period. Conversely, when the peso appreciates in real terms against the U.S.    dollar, as was the case in 2004, the same level of U.S. dollar sales as in    a prior period will result in lower constant peso revenues in the more recent    period. Moreover, because a material portion of our cost of goods sold, including    labor costs, and general, administrative and selling expenses are invoiced    in pesos and are not directly affected by the relative value of the peso to    the U.S. dollar, the real appreciation or devaluation of the peso relative    to the U.S. dollar has a significant effect on our operating margins at least    in the short term.

 

Further,    a strong peso relative to the U.S. dollar makes the Mexican market more attractive    for importers and competitors that might not otherwise sell in the Mexican    market. A strong peso relative to the U.S. dollar also makes those of our    products whose prices are denominated in or are affected by the value of the    U.S. dollar less competitive or profitable. When the peso appreciates in real    terms, with respect to such products, we must either increase our prices in    U.S. dollars, which makes our products less price-competitive, or bear reduced    operating margins when measured in pesos. Given the competitive nature of    the industries in which we operate, in the past we have chosen to reduce our    operating margins for such products in response to appreciation of the peso    relative to the U.S. dollar. In the year ended December 31, 2004, the    appreciation of the peso in real terms had an adverse effect on our operating    margins and may continue to do so in the future. Sales of products manufactured,    processed or sold by us outside Mexico (principally, by Vitro America, Vitro    Packaging, Comegua, and Cristalglass), as well as such subsidiaries' expenses,    are restated during a financial reporting period by adjusting such amount    for the inflation observed in the country in which the subsidiary operates    and then translated into pesos at the exchange rate in effect at the end of    the period. Since such subsidiaries' revenues and expenses are generally both    earned and incurred in the same currency the devaluation or appreciation of    the peso has a much more limited effect on the operating margins of such subsidiaries.    However, profits, as reported in real peso terms, are substantially impacted    by the devaluation or appreciation of the peso relative to the appropriate    currency.

 

*Effect of Inflation    and Foreign Currency Exchange Rate Fluctuations on Total Financing Cost*

 

Our    total financing cost includes (i) net interest expense, (ii) the net effect    of inflation on our monetary assets and liabilities and (iii) the net effect    of changes in nominal foreign currency exchange rates on monetary assets and    liabilities denominated in foreign currencies. Net interest expense is calculated    as the nominal amount of interest expense incurred by us with respect to our    short- and long-term debt and off-balance sheet financings minus the nominal    amount of interest income generated by us with respect to our monetary assets.

 

  Inflation affects our total financing cost. During periods of inflation, the  principal amount of our monetary debt will generally be reduced in real terms  by the rate of inflation. The amount of such reduction will result in a gain  from monetary position. This gain is offset by the reduction in real terms in  the value of the monetary assets we held during such period. Historically, our  monetary liabilities have exceeded our monetary assets and, thus, we have  tended to experience monetary gains during periods of inflation. Declining  levels of inflation since 1999 have resulted in lower monetary gains.

 

Our    total financing cost is also impacted by changes in the nominal value of the    peso relative to the U.S. dollar. Foreign currency exchange gains or losses    included in total financing cost result primarily from the impact of nominal    changes in the U.S. dollar-peso exchange rate on our and our Mexican subsidiaries'    U.S. dollar-denominated monetary liabilities (such as dollar-denominated debt    and accounts payable arising from imports of raw materials and equipment)    and assets (such as dollar-denominated cash and cash equivalents and accounts    receivable from exports). Because our U.S. dollar-denominated liabilities    have historically been significantly in excess of our dollar-denominated monetary    assets, the devaluation or appreciation of the peso resulted in exchange losses    and gains, respectively. Accordingly, in 2002 and 2003, the nominal devaluation    of the peso relative to the U.S. dollar resulted in foreign currency exchange    losses. The nominal appreciation of the peso relative to the U.S. dollar resulted    in a foreign currency exchange gain in 2004, but with the unwind of the currency    exchange swaps in May 2004, we recorded a net exchange loss.

 

**Results of    Operations**

 

  The following table sets forth, for the periods presented, selected items of  our consolidated statement of operations calculated as a percentage of our  consolidated net sales.

 

 

**For the year ended December 31,**

 

**2002**

**2003**

**2004**

Net sales

100.0%

100.0%

100.0%

Cost of goods sold

71.2

72.3

73.6

Gross profit

28.8

27.7

26.4

General, administrative and selling expenses

20.4

20.2

20.4

Operating income

8.4

7.5

6.0

Total financing cost

9.2

8.0

5.4

Net income (loss)

0.6

(1.5)

(0.2)

 

  The following table sets forth, for the periods presented, the consolidated  net sales (before elimination of interdivisional sales and other), export  sales and operating income (before corporate and other eliminations) of each  of our business units, as well as the contribution to our consolidated results  of operations, in percentage terms, of the consolidated net sales (after  elimination of interdivisional sales), export sales and operating income  (after corporate and other eliminations) of each of our business units. The  following table does not include the results of discontinued operations. Peso  amounts set forth in the following table have been restated in millions of  constant pesos as of December 31, 2004.

 

 

**For the year            ended December 31,**

 

**2002**

**2003**

**2004**

**2004**

 

**Amount**

**% of            Total**

**Amount**

**% of            Total**

**Amount**

**% of            Total**

**Amount**

 

**(Ps. millions, except          for percentages)**

**($ millions)(1)**

**Net sales**

** **

** **

** **

** **

** **

** **

** **

Flat Glass

Ps. 13,061

48%

Ps. 13,059

49%

Ps. 12,699

49%

$ 1,139

Glass Containers

11,058

41%

10,451

40%

10,702

41%

960

Glassware

2,878

11%

2,755

11%

2,726

10%

24

Interdivisional sales          and other

(96)

0%

(27)

0%

54

0%

4

Consolidated net          sales

Ps.            26,901

100%

Ps.            26,238

100%

Ps.            26,181

100%

$            2,348

 

 

 

 

 

 

 

 

 

**($          millions, except for percentages)**

 

**Export sales**

** **

** **

** **

** **

** **

** **

 

Flat Glass

$ 272

46%

$ 254

44%

$ 294

46%

Glass Containers

236

40%

248

43%

266

42%

 

Glassware

78

13%

78

13%

78

12%

 

Consolidated exports

$            586

100%

$            579

100%

$            637

100%

 

 

 

 

 

 

 

 

 

 

**(Ps.          millions, except for percentages)**

**($ millions)**(1)

**Operating income          (loss)**

** **

** **

** **

** **

** **

** **

** **

Flat Glass

Ps. 1,013

45%

Ps. 1,101

56%

Ps. 854

54%

$ 77

Glass Containers

1,308

58%

814

42%

794

51%

71

Glassware

287

13%

196

10%

83

5%

7

Corporate and other          eliminations

(336)

(16)%

(151)

(8)%

(161)

(10)%

(14)

Consolidated operating          income

Ps.            2,272

100%

Ps.            1,960

100%

Ps.            1,570

100%

$            141

______________

(1) Peso    amounts have been translated into U.S. dollars, solely for the convenience    of the reader, at the rate of 11.1495 pesos per one U.S. dollar, the Free    Exchange Rate on December 31, 2004.

 

 

***Year Ended    December 31, 2004 Compared to Year Ended December 31, 2003***

 

*Net Sales*

 

Our    consolidated net sales decreased 0.2% to Ps.26,181 million for the year ended    December 31, 2004 from Ps.26,238 million for the year ended December 31,    2003. This decrease was primarily attributable to our divestiture of our 60%    interest in Vitro OCF, which we sold on April 2, 2004, our divestiture of    our 50% interest in Vancan, which we sold on September 27, 2004 and our divestiture    of our 100% interest in ECSA, which we sold on September 10, 2003 (see    "Item 4. Information on the Company-Business-Divestitures"). On a comparable    basis (excluding companies divested in 2003 and 2004) our sales grew 2.6%    to approximately Ps. 25,729 million for the year ended December 31,    2004 from approximately Ps. 25,086 million for the year ended December 31,    2003. This increase was primarily attributable to (i) an increase in    our Glass Containers business unit's sales in our beer, wine, liquor and cosmetics    business lines, (ii) the increase in sales volume of our automotive division,    and (iii) an increase in our Glassware business unit's sales primarily    due to the export sales growth in the commercial segment, as well as higher    sales of candle holders in Mexico. Those increases were offset, in part, by    lower prices in the construction segment of the Flat Glass business unit and    declines in (i) prices in the returnable soft drink business lines' products    of the Glass Containers business unit, and (ii) sales volume in the Glass    Containers business unit's soft drink and pharmaceutical business lines.

 

For    the year ended December 31, 2004, our consolidated export sales were $637    million, an increase of 10% when compared to approximately $579 million for    the same period of 2003, principally due to the increase of exports of our    Flat Glass business unit to the United States. Our export sales represented    approximately 28% of our consolidated net sales for the year ended December    31, 2004. More than 80% of our consolidated net sales for the year ended December    31, 2004 were either denominated in or sensitive to the value of the U.S.    dollar. This is due to the fact that, in addition to exports and foreign subsidiaries'    sales, the prices of a significant portion of our products in Mexico are generally    determined with reference to U.S. dollar-based prices.

 

*Flat Glass    Business Unit*

 

Net    sales of our Flat Glass business unit were approximately Ps. 12,699 million    for the year ended December 31, 2004, a decrease of 2.8% from Ps. 13,059    million for the same period in 2003. On a comparable basis (excluding Vitro OCF) the business unit's net sales grew 1.4% to approximately Ps. 12,498    million for the year ended December 31, 2004 from approximately Ps. 12,326    million for the year ended December 31, 2003. This increase was mainly    due to higher sales in the automotive division, particularly in export sales,    which posted strong sales numbers on increasing OEM volumes and auto glass    replacement export sales volume. Our construction glass division in Mexico experienced a    decline in net sales (despite a larger sales volume) as added competition    from the new Guardian furnace in Queretaro, Mexico and imports from Asia drove    prices of the business unit's products downward.

 

Export    sales of the Flat Glass business unit were approximately $294 million in the    year ended December 31, 2004, an increase of 15.4% when compared to approximately    $254 million for the same period in 2003. This increase was largely due to    an increased sales volume of the business unit's automotive division, especially    as it obtained new OEM contracts. The business unit's automotive division    accounted for 92% of the increase in export sales.

 

*Glass Containers    Business Unit*

 

Net    sales of our Glass Containers business unit increased 2.4% to approximately    Ps. 10,702 million for the year ended December 31, 2004 from approximately    Ps. 10,451 million for the same period in 2003. On a comparable basis    (excluding Vancan) the business unit's net sales grew 3.6% to approximately    Ps. 10,390 million for the year ended December 31, 2004 from approximately    Ps. 10,027 million for the year ended December 31, 2003. This increase    in our business unit's sales primarily due to an increase in sales volume    in the business unit's beer, wine, liquor and cosmetics business lines and    was offset by a decline in sales volume in the business unit's soft drinks    and pharmaceutical business lines and a decline in prices in the returnable    soft drink business lines' products. The decrease in sales volume to the business    unit's soft drink bottler customers was due to the continuous increase in    the market share of alternative forms of packaging in those business lines.

 

  For the year ended December 31, 2004, export sales of the Glass Containers  business unit amounted to approximately $266 million, an increase of 7.2% from  approximately $248 million for the same period in 2003. This was mainly due to  higher sales volume in the business unit's cosmetics and wine and liquor  business lines.

 

*Glassware Business    Unit*

 

Net    sales of our Glassware business unit amounted to approximately Ps. 2,726    million for the year ended December 31, 2004, a decrease of 1.1% from    approximately Ps. 2,755 million for the same period in 2003. The decrease    was primarily due to the divestiture of ECSA on September 10, 2003, which    had net sales of approximately Ps. 147 million in the period beginning    on January 1, 2003 and ending on September 10, 2003. On a comparable    basis, the business unit's sales increased due to higher export sales in the    commercial segment, as well as higher sales of candle holders in Mexico.

 

  Export sales of the Glassware business unit increased 1.0% from approximately  $77.5 million for the year ended December 31, 2003 to approximately  $78.2 million for the same period in 2004.

 

*Operating Income*

 

Our    consolidated operating income decreased 19.9% from approximately Ps. 1,960    million for the year ended December 31, 2003 to approximately Ps. 1,570    million for the same period in 2004. On a comparable basis (excluding companies    divested in 2003 and 2004) our operating income decreased 13.3% to approximately    Ps. 1,491 million for the year ended December 31, 2004 from    approximately Ps. 1,721 million for the year ended December 31,    2003. This decrease was due to an increase in cost of sales from Ps. 18,969    million for the year ended December 31, 2003, to Ps. 19,261 million    for the year ended December 31, 2004, due primarily to (i) an increase    in energy prices, which were partially mitigated through our price-hedging    strategy and the benefits provided by the petroleum coke project in the Monterrey    flat glass and glass container furnaces; (ii) decreased operating margins    in our Flat Glass business unit; (iii) our modifying in 2004 our depreciation    and capitalization policy for molds, consistent with the glass container industry    practices, which reduced their useful life from eight to three years and generated    an additional charge of approximately Ps.65 million; and (iv) an increase    of approximately Ps.41 million in selling, general and administrative expenses    due to higher freight and distribution expenses.

 

*Flat Glass    Business Unit*

 

Operating    income of the Flat Glass business unit amounted to Ps. 854 million for    the year ended December 31, 2004, a decrease of 22.4% from Ps. 1,101    million for the same period in 2003. On a comparable basis (excluding Vitro OCF) the business unit's operating income decreased 12.5% to approximately    Ps. 809 million for the year ended December 31, 2004 from approximately    Ps. 924 million for the year ended December 31, 2003. This decrease    was due mainly to a general decrease in the operating margins of the business    unit as a result of (i) increased cost of sales in all of its business lines    during 2004, due mainly to higher gas and fuel prices and (ii) in the construction    segment of the business unit, also, lower prices in substantially all of the    business line's products. The decrease was partially offset by the business    unit's increased net sales and decreased operating expenses, though it    was not enough to maintain operating margins at the 2003 levels.

 

*Glass Containers    Business Unit*

 

  The operating income of our Glass Containers business unit decreased 2.5% from  approximately Ps. 814 million for the year ended December 31, 2003 to  approximately Ps. 794 million for the same period in 2004. On a comparable  basis (excluding Vancan) the business unit's operating income decreased 0.5%  to approximately Ps. 762 million for the year ended December 31, 2004 from  approximately Ps. 766 million for the year ended December 31, 2003. This  decrease was mainly due to the modification of our depreciation and  capitalization policy for molds in 2004, which was consistent with the glass  container industry practices, reducing their useful life from eight to three  years.

 

*Glassware Business    Unit*

 

For    the year ended December 31, 2004, operating income of our Glassware business    unit was approximately Ps. 83 million, a decrease of 57.7% from approximately    Ps. 196 million for the same period of 2003. On a comparable basis (excluding ECSA) our operating income decreased 55.6% to approximately Ps. 83 million    for the year ended December 31, 2004 from approximately Ps. 186    million for the year ended December 31, 2003. This decrease in the business    unit's operating income resulted primarily from the high energy costs and    an increase in the packaging and transportation costs.

 

*Total Financing    Cost*

 

Our    total financing cost decreased by approximately Ps. 700 million from    approximately Ps. 2,105 million for the year ended December 31, 2003    to approximately Ps. 1,405 million for the same period in 2004. This    decrease in total financing cost was primarily due to (i) a lower exchange    loss of approximately Ps. 78 million in 2004 compared to an approximately    Ps. 822 million exchange loss in 2003 due primarily to the 0.8% revaluation    of the Mexican peso against the U.S. dollar during 2004 compared to the 7.6%    devaluation of the Mexican peso against the U.S. dollar during 2003, which    was partially offset by the loss derived from the unwind of the currency exchange    swaps made in May 2004 and (ii) an increase on gain from monetary position    of approximately Ps. 131 due to the higher inflation during 2004 than    in 2003. The net decrease in our financial costs was partially offset by and    increase of Ps.117 million related to the unwind of interest rate cap at Vitro    on May 2004, and a decrease of Ps.74 million in our interest income.

 

*Taxes and Workers'    Profit Sharing*

 

For    the year ended December 31, 2004, we recorded an expense of Ps. 68    million from income tax, tax on assets and workers' profit sharing, as compared    to an expense of Ps. 94 million for the same period in 2003. The decline    was principally a decrease in deferred income taxes resulting from the    tax rate reduction to 30% in 2005, 29% in 2006 and 28% in 2007 and beyond.

 

*Other expenses,    net*

 

Other    expenses, net, decreased approximately Ps. 15 million from Ps. 156 million    for the year ended December 31, 2003 to Ps. 141 million for the same period    in 2004. During the year 2004, our restructuring charges increased Ps. 145    million to Ps. 243 million from Ps. 98 million in 2003. This increase is the    result of a three-year transformation process at Vitro America designed to    streamline the organization and as a cost reducing measure.  Additionally,    we had an increase in write-off and loss from sale of assets of Ps. 200 million    from Ps. 129 million for the year ended December 31, 2003 to Ps. 329 million    for the same period in 2004. These increases were more than offset by a gain    of Ps. 451 million in gain from sale of subsidiaries and associated companies    from a gain of Ps. 37 million for the year ended December 31, 2003 to a gain    of Ps. 488 million for the same period in 2004, which resulted from the sales    of Vitro OCF and Vancan during 2004.

 

*Net loss*

 

We had    a reduction in net loss of approximately Ps. 351 million from approximately    Ps. 395 million for the year ended December 31, 2003 to approximately    Ps. 44 million for the same period in 2004. This reduction resulted mainly    from the decrease in total financing costs and taxes and worker's profit sharing.

 

***Year Ended    December 31, 2003 Compared to Year Ended December 31, 2002***

 

*Net Sales*

 

Our    consolidated net sales decreased 2.5% to approximately Ps. 26,238 million    for the year ended December 31, 2003 from approximately Ps. 26,901    million for the year ended December 31, 2002. This decrease was primarily    attributable to (i) an approximately 55% decline in our Glass Containers    business unit's sales volume in the beer segment due to reduced purchasing    from the business unit's main customer in that segment in connection with    the expansion of the customer's internal glass bottle production capacity,    (ii) an approximately 8% decline in our Glassware business unit's sales    volume in Mexico, primarily due to lower sales volume in Mexico and competition    from Chinese imports, (iii) lower prices due to pricing pressures in    many of our business units' markets, (iv) a continued slowdown in the    United States non-residential construction market that negatively impacted    Vitro America's net sales, whose business is basically focused on the commercial    segment of the construction market and (v) our divestiture of our 100%    interest in ECSA, which we sold on September 10, 2003 (see "Item 4. Information    on the Company-Business-Divestitures"), and our divestiture of ASA, which    we sold on April 15, 2002 (see "Item 4. Information on the Company-Business-Divestitures").    This decline was partially offset by (i) increased sales volume in our    Flat Glass business unit's Mexican markets, resulting in approximately 10.7%    more tons of flat glass sold to Mexican construction and other non-automobile    customers during 2003 than in 2002, (ii) increased sales volumes by our    Flat Glass business unit to both the Mexican and U.S. automotive replacement    markets-approximately 6% and 18% more units in Mexico and the United States,    respectively, (iii) higher sales in the United States by our Glass Container    business unit due to a shift towards higher-priced products and (iv) an    increase in sales volume in Europe by our Flat Glass business unit due to    the award of significant contracts to our Spanish subsidiary Cristalglass    and the increased market penetration in Portugal.

 

For    the year ended December 31, 2003, our consolidated export sales were $579    million, a decrease of 1.2% when compared to approximately $586 million for    the same period of 2002, principally due to a continued slowdown in the U.S.    non-residential construction market that impacted our Flat Glass business    unit's sales in the United States. Our export sales represented approximately    26% of our consolidated net sales for the year ended December 31, 2003. More    than 80% of our consolidated net sales for the year ended December 31, 2003    were either denominated in or sensitive to the value of the U.S. dollar. This    is due to the fact that, in addition to exports and foreign subsidiaries'    sales, the prices of a significant portion of our products in Mexico are generally    determined with reference to U.S. dollar-based prices.

 

*Flat Glass    Business Unit*

 

Net    sales of our Flat Glass business unit were approximately Ps. 13,059 million    for the year ended December 31, 2003, almost flat from Ps. 13,061    million for the same period in 2002. Sales of auto glass for the OEM's decreased    as low automobile demand in both the domestic and export markets remained    weak. With respect to the construction market, the Flat Glass business unit    experienced higher sales volume in Mexico due to the higher demand by certain    of its major distributors and the commencement of operations of Vitro AFG,    our joint venture with AFG Industries. During 2003, Cristalglass, our Spanish    subsidiary, increased its market penetration in Portugal, and showed a growth    in net sales of 14% when compared to the year ended December 31, 2002. During    2003, Cristalglass was also awarded significant supply contracts which provided    access to new markets, such as contracts to supply architectonic glass to    the Spanish monumental construction market. Sluggish demand in the United    States' non-residential construction market was largely responsible for the    decline in the net sales of Vitro America.  

 

  Export sales of the Flat Glass business unit were approximately $254 million  in the year ended December 31, 2003, a decrease of 6.6% when compared to  approximately $272 million for the same period in 2002, principally due to  lower sales to the automotive markets, particularly by Vitro Flex, which sells  almost exclusively to Ford Motor Co. in the United States.

 

*Glass Containers    Business Unit*

 

Net    sales of our Glass Containers business unit decreased 5.5% to approximately    Ps. 10,451 million for the year ended December 31, 2003 from approximately    Ps. 11,058 million for the same period in 2002. The decrease was principally    attributable to a decrease in the sales volume of, and a shift in product    mix in, the beverages segment in Mexico, mainly in the beer segment. Sales    volume in that segment fell 55% in 2003 when compared to the sales volume    in 2002, primarily due to the increase of the glass container production capacity    of Grupo Modelo S.A. de C.V., a Mexican brewer, which also produces some of    its own bottles. In addition, the business unit's product mix in the beer    segment shifted towards less-expensive products. The decrease in net sales    was partially offset by a 22.6% increase in sales volume of the non-returnable    beverages segment and increased sales volume to value-added markets. Although    prices remained stable in 2003 relative to 2002, except in the beer business    segment, the product mix generally shifted slightly towards higher-priced    goods. The divestiture of ASA during 2002, which had net sales of approximately    Ps. 93 million in the period beginning on January 1, 2002 and ending    on April 15, 2002, also contributed to the decrease in the business unit's    net sales.

 

For    the year ended December 31, 2003, export sales of the Glass Containers business    unit amounted to approximately $248 million, an increase of 5.1% from    approximately $236 million for the same period in 2002. This was mainly the    result of the business unit's higher sales volume, mainly in the beverages    segments, and its focus on value-added niche products.

 

*Glassware Business    Unit*

 

  Consolidated net sales of our Glassware business unit amounted to  approximately Ps. 2,755 million for the year ended December 31, 2003, a  decrease of 4.3% from approximately Ps. 2,878 million for the same period in  2002. 

 

The    decrease was primarily due to (i) lower sales volume in Mexico due to    lower than expected demand in certain segments and increased competition from    Chinese imports and (ii) the divestiture of ECSA on September 10, 2003,    which had net sales of approximately Ps. 193 million for the year    ended December 31, 2002 and approximately Ps. 147 million in the    period beginning on January 1, 2003 and ending on September 10,    2003. Higher sales volume to Latin America and Europe partially offset the    decline in the business unit's consolidated net sales.

 

  Export sales of the Glassware business unit decreased 1.0% from approximately  $79 million for the year ended December 31, 2002 to approximately $78 million  for the same period in 2003.

 

*Operating Income*

 

  Our consolidated operating income decreased 13.7% from approximately Ps. 2,272  million for the year ended December 31, 2002 to approximately Ps. 1,960  million for the same period in 2003. The decrease was mainly due to the  decrease in our consolidated net sales. This decrease in our consolidated  operating income was partially offset by a 3.2% decrease in our general,  administrative and selling expenses from approximately Ps. 5,479 million for  the year ended December 31, 2002 to approximately Ps. 5,309 million for the  same period in 2003 as a result of our efforts to reduce expenses and our  divestitures.

 

*Flat Glass    Business Unit*

 

  Operating income of the Flat Glass business unit amounted to Ps. 1,101 million  for the year ended December 31, 2003, an increase of 8.7% from Ps. 1,013  million for the same period in 2002, primarily due to a reduction in cost of  sales and operating expenses, than in net sales in 2003. During 2003, as a  result of our commitment to reduce costs and realign our product mix, the Flat  Glass business unit focused on increasing efficiencies at its facilities by  automating certain processes and by reducing expenses especially within the  sales and distribution departments. Variable costs in the Flat Glass business  unit were lower in 2003 than 2002, as it had a scheduled cold repair in 2003  which shut down one of its furnaces for three months. These effects were  partially offset by higher fuel and energy prices, and by the need for higher  purchases from third parties to fulfill its clients orders while one of its  furnaces was shut down for such scheduled cold repair. As a percentage of  sales, its costs did not vary significantly from the period ended December 31,  2002 compared to the same period in 2003.

 

*Glass Containers    Business Unit*

 

The    operating income of our Glass Containers business unit decreased 37.8% from    approximately Ps. 1,308 million for the year ended December 31,    2002 to approximately Ps. 814 million for the same period in 2003. This    decrease in operating income for the year was mainly due to the decrease in    its net sales and the failure of its cost of sales and general, administrative    and selling expenses to decline proportionately to its net sales. Also, the    divestiture of ASA, which contributed approximately Ps. 11 million    of operating income for the period beginning on January 1, 2002 and ending    on April 15, 2002, contributed to the decline.

 

*Glassware Business    Unit*

 

For    the year ended December 31, 2003, operating income of our Glassware business    unit was approximately Ps. 196 million, a decrease of 31.7% from approximately    Ps. 287 million for the same period of 2002. The decrease in the business    unit's operating income resulted primarily from the decrease in its net sales    and increased energy costs due to the increase in the price of natural gas.

 

*Total Financing    Cost*

 

  Our total financing cost decreased by approximately Ps. 378 million from  approximately Ps. 2,483 million for the year ended December 31, 2002 to  approximately Ps. 2,105 million for the same period of 2003. This decrease in  total financing cost was primarily due to a lower exchange loss of  approximately Ps. 822 million in 2003 compared to an approximately Ps. 1,687  million exchange loss for 2002. The lower exchange loss was due primarily to  the 7.6% devaluation of the Mexican peso against the U.S. dollar during 2003  compared to the 13.8% devaluation of the Mexican peso against the U.S. dollar  during 2002. The exchange loss, which is a non-cash item, was partially offset  by a lower gain from monetary position of approximately Ps. 252 million due  the lower inflation during 2003 and an increase of Ps. 96 million in our  interest income when compared to the year 2002. The net decrease in financing  cost was also partially offset by the increase of Ps. 207 million in our  interest expense resulting from an increase in our total debt and a change in  our Indebtedness mix that saw an increase in our peso denominated debt.

 

*Taxes and Workers'    Profit Sharing*

 

For    the year ended December 31, 2003, we recorded an expense of Ps. 94    million from income tax, tax on assets and workers' profit sharing, as compared    to a net benefit of Ps. 452 million for the same period in 2002 due principally    to an increase in deferred income taxes. The recording during 2002 of the    gradual decrease in income tax rates from 35% in 2002 to 32% in 2005 and the    effect of a higher devaluation of the Mexican peso during 2002, when compared    to 2003, resulted in higher taxes in 2003.

 

*Other expenses,    net*

 

Other    expenses, net, decreased approximately Ps. 298 million from Ps. 454 million    for the year ended December 31, 2002 to Ps. 156 million for the same period    in 2003. The decrease was due mainly to a decrease of Ps. 318 million in write-off    and loss from sale of assets to Ps. 129 million for the period in 2003, from    Ps. 447 million for the year ended December 31, 2002 which resulted    from the write-off made in 2002 of equipment and machinery at the Mexicali    plant that was contributed to Vitro AFG, our joint venture with AFG Industries.    

 

*Net Income    (loss)*

 

  Our net income decreased approximately Ps. 560 million from approximately  Ps. 165 million for the year ended December 31, 2002 to a loss of  approximately Ps. 395 million for the same period in 2003. This decrease  resulted from the aforementioned reasons and because our results of operations  for the year ended December 31, 2002 included an approximately Ps. 506 million  gain from the sale of our 51% interest in Vitromatic to Whirlpool, which was  partially offset by a net loss by Vitromatic of approximately Ps. 128 million  for the six months ended June 30, 2002.

 

 

**LIQUIDITY AND    CAPITAL RESOURCES**

 

As of    May 31, 2005, we had cash and cash equivalents totalling approximately Ps.    1,938 million ($178 million). Our policy is to invest available cash in short-term    instruments issued by Mexican and international banks and securities issued    by the governments of Mexico and the United States.

 

Under    Mexican GAAP, our consolidated statement of changes in financial position    identifies the generation and application of resources representing differences    between beginning and ending financial statement balances in constant pesos.    Thus, the changes shown in the statements of changes in financial position    included in our consolidated financial statements do not necessarily represent    cash flow activities. Accordingly, the discussion of cash flows presented    in the following paragraph and under "-Changes in Working Capital" are based    on the reconciliation to U.S. GAAP included in note 22 to our audited consolidated    financial statements. The U.S. GAAP figures presented in Note 22 to our consolidated    financial statements have been restated as discussed further in Note 22 to    our consolidated financial statements.

 

  Net cash generated from operations for the year ended December 31, 2004 was  approximately Ps. 1,442 million ($129 million), an decrease of 9% from  approximately Ps. 1,324 million of net cash generated from operations for the  year ended December 31, 2003.

 

***Changes in    Working Capital***

 

  Our working capital increased Ps. 509 million during 2004. This increase  was principally due to an increase in our trade receivables, inventories and  payments to funding the pension plan of the Company.

 

The    accounts receivable increase during 2004 due to the advance payment of approximately    Ps.100 million of several of our clients of our Glass Container business    unit at the end of the year 2003, which was extinguished during 2004 and for    the increase in our sales of our beer, wine, liquor and cosmetics business    lines during 2004.

 

Our    inventories increased Ps. 310 million due to (i) the build-up of finished    inventory in our Glass Container business in anticipation of sales expectations    for the first quarter of 2005, (ii) to give better and quicker service to    our most important clients in our wine, food, cosmetics and beverages business    line, and (iii) the build-up of finished inventory of flat glass and glassware    in anticipation of the refurbishment of these furnaces during 2005.

 

***Capital Expenditures***

 

  We operate in capital-intensive industries and require ongoing investments to  update our assets and technology. Over the past years, funds for those  investments and for working capital needs, joint venture transactions,  acquisitions and dividends have been provided by a combination of cash  generated from operations, short- and long-term debt and, to a lesser extent,  divestitures.

 

  Our capital expenditures program is focused on new investments in,  technological upgrades to and maintenance of, our manufacturing facilities, as  well as expansion of our production capacity. Our capital expenditures program  also contemplates the purchase and maintenance of environmental protection  equipment required to meet applicable environmental laws and regulations, as  such may be in effect from time to time.

 

  During 2005, we expect to make capital expenditures in the range of $100  million as follows:
-    purchase of molds and racks required for introduction of new automotive glass  products and for glass containers. We estimate capital expenditures of  approximately $19 million; 
-    refurbish and provide needed maintenance to certain of our furnaces, including  one of our float glass furnaces and one of our glassware furnaces, both  located in Monterrey, Mexico. We estimate capital expenditures of  approximately $14 million; and 
-  the remaining    capital expenditures in 2005 will be applied to (i) mainly maintaining or    improving efficiencies on the installed technology of several of our other    facilities, and (ii) minor investments in purchasing equipment and making    other expenditures relating to obtaining Industria Limpia ("Clean Industry")    certificates for each of our Mexican facilities and purchasing and maintaining    environmental protection equipment required to continue to meet applicable    environmental laws and regulations. 

  We expect to finance the capital expenditures discussed above with cash flow  generated by our operations.

 

For    the year ended December 31, 2004, our capital expenditures totalled approximately    Ps. 1,453 million ($130 million), a decrease of 22% compared with the capital    expenditures for the same period in 2003. Capital expenditures during 2004    were made primarily in our Flat Glass and Glass Containers business units.    Our Flat Glass business unit accounted for 39% of our total capital expenditures,    which expenditures were mainly used in the refurbishment of one of our furnaces    in Monterrey, Mexico and to build the double glazing facilities in Spain.    Approximately 46% of our capital expenditures for the year ended December    31, 2004 were made by our Glass Containers business unit, mainly for maintenance    in both its Mexican and Central American facilities. Approximately 9% and    6% of our capital expenditures were made by our Glassware business unit and    our corporate offices, respectively, mainly for maintenance purposes.

 

For    the year ended December 31, 2003, our capital expenditures totalled approximately    Ps. 1,871 million ($168 million). Capital expenditures during 2003 were made    primarily in our Flat Glass and Glass Containers business units. Our Flat    Glass business unit expenditures were mainly used in connection with Vitro    AFG, our joint venture with AFG Industries, as well as the refurbishment of    one of our furnaces in Monterrey. Our Glass Containers business unit expenditures    were mainly for the refurbishment of its furnace in Queretaro, Mexico and    maintenance in both its Mexican and Central American facilities. The remaining    amount was mostly used for maintenance programs.

 

For    the year ended December 31, 2002, our capital expenditures amounted to approximately    Ps. 1,136 million ($102 million). The largest investment project was in our    Glass Containers and Glassware business units for the expansion of one of    our glass containers furnaces in Guadalajara, Mexico and a glassware furnace    in Monterrey, Mexico. The remaining amount was mostly used for maintenance    programs.

 

The    capital expenditures described above do not include amounts that we have spent    in connection with acquisition of companies, which amounted to approximately    Ps. 519 million ($47 million) and Ps. 13 million ($1 million) in 2001 and    2002, respectively. In 2003 and 2004, we did not acquire any companies.

 

***Financing Transactions***

 

During    the year ended December 31, 2004 and the five months ended May 31, 2005, we    refinanced a significant portion of our consolidated indebtedness. The indebtedness    we incurred generally bore interest at a higher rate than the indebtedness    it refinanced, which was, however, consistent with our strategy of extending    the average life of our debt, giving us flexibility to concentrate on improving    profitability of our operations. Since we incurred the indebtedness in the    second half of 2004 and the first quarter of 2005, our consolidated statement    of operations does not fully reflect the increase in our cost of capital.

 

For    a description of our most recent financing transactions, see "-Indebtedness  and factoring programs-Long-Term Debt-Glass Containers Business Unit-Vena's  10.75% Senior Secured Guaranteed Notes due 2011," "-Indebtedness and factoring    programs-Long-Term Debt-Glass Containers Business Unit-Vena's Senior Secured    Term Loan" and "-Indebtedness and factoring programs-Long-Term Debt-Glass  Containers Business Unit-Vena's Receivables Securitization."

 

Certain    of our and our subsidiaries' indentures and credit facilities restrict our    ability to incur additional debt, other than debt which refinances existing    debt, if we or our subsidiaries fail to comply with certain financial ratios.    As of December 31, 2004 and March 31, 2005, we did not meet certain of those    financial ratios.At no time has the Company failed to make required capital    or interest payments. The failure to meet certain of the covenants related    to financial ratios discussed above as of December 31, 2004 and March 31,    2005 did not allow the lender to accelerate the maturity of the debt under    the indentures and credit facilities discussed above.

 

At the    time of the original filing, we expected not to meet a more restrictive financial    ratio as of June 30, 2005. Such non-compliance, although subject to waiver,    would allow the lender to accelerate the maturity of one of our credit facilities. As we met the current covenant requirements related to this ratio as of December    31, 2004, the outstanding debt is classified as noncurrent.

 

***Indebtedness    and Factoring Programs***

 

We are    highly leveraged and a significant portion of our debt is short term. See    "Item 3. Key Information-Risk Factors-We may be unable to repay our debt,    access credit or pursue business opportunities because of our leverage and    debt service requirements" and "Item 3. Key Information-Risk Factors-A significant    portion of our indebtedness is short-term debt." Our management and board    of directors are currently undertaking a broad-based strategic review of our    businesses and operations in order to determine the most efficient combination    of asset sales and cost and expense reductions to implement in order to reduce    our debt.

 

***Short-Term    Debt.***Our short-term debt consists primarily of unsecured and secured borrowing    arrangements with Mexican and foreign banks and commercial paper programs    denominated in both U.S. dollars and Mexican pesos. We engage, from time to    time, in the ordinary course of business, in a number and variety of short-term    loan arrangements with a number of Mexican and foreign banks. Such loans generally    have a maturity ranging from 30 to 180 days and have interest rates ranging    from 1.5% to 3.0% above LIBOR, for the U.S. dollar-denominated loans, and    floating market rates, for the peso-denominated loans. As of December 31,    2004 and May 31, 2005, we had approximately Ps. 2,172 million ($195 million)    and Ps. 2,819 million ($258 million), respectively, of short-term debt, excluding    the current portion of long-term debt.

 

The    following table sets forth the aggregate amounts of our outstanding short-    and long-term debt as of May 31, 2005.

 

 

**As of May 31, 2005**

 

**(Ps. millions)**

**($            millions)**(1)

Short‐term debt(2)(3)

Ps.4,080

$ 374

Long‐term debt(4)(5)

12,303

1,127

  ___________

(1) Peso    amounts have been translated into U.S. dollars, solely for the convenience    of the reader, at a rate of 10.9160 pesos per one U.S. dollar, the Free Exchange    Rate on May 31, 2005.

 

(2) Includes    the current portion of our long-term debt. If the current portion of our long-term    debt were excluded, the aggregate amount of our outstanding short-term debt    as of May 31, 2005 was Ps. 2,819 million ($258 million).

 

(3) Approximately    81% and 4% of the aggregate amount of our short-term debt as of May 31, 2005    was denominated in U.S. dollars and Euros, respectively. If the current portion    of our long-term debt were excluded from our outstanding short-term debt,    approximately 82% and 5% of the aggregate amount of our short-term debt as    of May 31, 2005 was denominated in U.S. dollars and Euros, respectively.

 

(4) Excludes    the current portion of our long-term debt. If the current portion of our long-term    debt were included, the aggregate amount of outstanding long-term debt as    of May 31, 2005 was Ps. 13,564 million ($1,243 million).

 

(5) Approximately    83% and 1% of the aggregate amount of our long-term debt as of May 31, 2005    was denominated in U.S. dollars and Euros, respectively. If the current portion    of our long-term debt were included within our outstanding long-term debt,    approximately 83% and 1% of the aggregate amount of our long-term debt as    of May 31, 2005 was denominated in U.S. dollars and Euros, respectively.

 

***Long-Term    Debt.***As of December 31, 2004 and May 31, 2005, we had approximately Ps.    14,626 million ($1,312 million) and Ps. 13,564 million ($1,243 million), respectively,    of long-term debt, including the current portion of long-term debt.

 

The    following description of certain of the agreements and instruments governing    our indebtedness is limited to those agreements pursuant to which more than    $20 million (or its equivalent in pesos) of long-term debt was outstanding    (or could be incurred) as of May 31, 2005 and certain other long-term debt.

 

Facility

Outstanding                  Principal                  Amount as of                  May 31, 2004

Interest Rate                  and Payment Dates

Final Amortization/                  Maturity

**Vitro (Holding Company)**

** **

** **

** **

 

 

 

 

1999-1 UDI-Denominated  *Certificados Bursatiles*

*Issuer:*Vitro

UDI              157 million

(Ps. 562              million or $51 million)

*Interest Rate*:              9.0% per annum.

*Interest              Payment Dates*: Quarterly beginning on September 7, 1999.

June 7,              2006

 

 

 

 

1999-2 UDI- Denominated  *Certificados Bursatiles*

*Issuer*:              Vitro

UDI              129 million

(Ps. 463              million or $42 million)

*Interest Rate*:              9.9% per annum.

*Interest              Payment Dates*: Quarterly beginning on January 12, 2000.

October 12,              2006

 

 

 

 

Inbursa-Vitro Credit              Agreement

*Borrower*:              Vitro and Vitolsa

$23              million

*Interest Rate*:              LIBOR plus 4%.

*Amortization*:              Annually beginning on December 31, 2004.

*Interest              Payment Dates*: Monthly beginning on March 30, 2004.

December 31,              2006

 

 

 

 

11 3/8% Vicap Notes

*Issuer*:              SOFIVSA

*Guarantor*:              Vitro

$162              million

*Interest Rate*:              11 3/8% per annum.

*Interest              Rate Payment Dates*: Semi-annually on May 15 and November 15              of each year.

May 15,              2007

 

 

 

 

2002 Peso-Denominated  *Certificados Bursatiles*

*Issuer*:              Vitro

Ps. 360              million

($33              million)

*Interest Rate*:              CETES 182d plus 3.25% per annum.

*Interest              Rate Payment Dates*: Interest is paid every 28 days beginning              on October 10, 2002.

October 2,              2008

 

 

 

 

2002 Peso-Denominated  *Certificados Bursatiles*

*Issuer*:              Vitro

Ps. 206              million

($19              million)

*Interest Rate*:              CETES 182d plus 3.25% per annum.

*Interest              Rate Payment Dates*: Interest is paid every 28 days beginning              on December 30, 2002.

December 22,              2008

 

 

 

 

2002 Peso-Denominated  *Certificados Bursatiles*

*Issuer*:              Vitro

Ps. 150              million

($14              million)

*Interest Rate*:              CETES 182d plus 3.25% per annum.

*Interest              Rate Payment Dates*: Interest is paid every 28 days beginning              on February 13, 2003.

February 5,              2009

 

 

 

 

11 1/2% 2009 Notes

*Issuer*:              Vitro

$22              million

*Interest Rate*:              11 1/2% per annum.

*Interest              Payment Dates*: Semi-annually on April 30 and October 30 of each              year.

April 30,              2009

 

 

 

 

11 3/4% 2013 Notes

*Issuer*:              Vitro

$225              million

*Interest Rate*:              11 3/4% per annum.

*Interest              Rate Payment Dates*: Semi-annually on May 1 and November 1 of              each year.

*Interest              Rate Step Up*: 1% per annum, until completion of the offer to              exchange for SEC registered notes.

November 1,              2013

 

 

 

 

**Flat              Glass Business Unit**

 

 

 

 

 

 

 

Flat Glass Credit Facility

*Borrowers*:              Vitro Plan, VVP Holding Corp., VVP Syndication Inc.

*Guarantors*:              Each of Vitro Plan's material wholly owned subsidiaries

Tranche              A:

$40              million

*Interest Rate Tranche              A:*

*Year 1:*              LIBOR plus 1.875%

*Year 2:*              LIBOR plus 2.000%

*Year 3:*              LIBOR plus 2.125%

*Amortization              and Interest Payment Dates:* Semi-annually beginning on September              27, 2003.

Tranche              A: March 27, 2006

 

Tranche              B:

$58              million

*Interest Rate Tranche              B:*

*Year 1:*              LIBOR plus 2.250%

*Year 2:*              LIBOR plus 2.375%

*Year 3:*              LIBOR plus 2.500%

*Year 4:*              LIBOR plus 2.625%

*Year 5:*              LIBOR plus 2.750%

*Amortization              and Interest Payment Dates:* Semi-annually beginning on September              27, 2004.

Tranche              B: March 27, 2008

 

Tranche              C:

Ps. 439              million ($40 million)

*Rate Tranche C:*

*Year 1:*              TIIE 28d plus 2.000%

*Year 2:*              TIIE 28d plus 2.125%

*Year 3:*              TIIE 28d plus 2.250%

*Year 4:*              TIIE 28d plus 2.375%

*Amortization              and Interest Payment Dates:* Semi-annually beginning on September              27, 2003.

Tranche              C: March 27, 2007

 

 

* *

 

 **Glass              Containers Business Unit**

 

 

 

 

Senior Secured Guaranteed              Notes

*Borrower*:              Vitro Envases Norteamerica

*Guarantor:*Certain Subsidiaries of Vitro Envases Norteamerica

$250              million

*Interest Rate*:              10.75% per annum

*Interest              Payment Dates*: Semi-annually beginning on January 23, 2005.

July 29,              2011

Secured Term Loan

*Borrower:*Vitro Envases Norteamerica*Guarantors:*Certain Subsidiaries              of Vitro Envases Norteamerica

$150              million

*Interest Rate.*LIBOR              plus 6.25%

*Interest              Payment Dates:*Quarterly beginning on May 24, 2005.

February 24,              2010

 

 

 

 

**Glassware              Business Unit**

 

 

 

 

 

 

 

Glassware Credit Facility

*Borrower*:              Vitrocrisa Comercial

*Tranche              A Guarantors*: Vitro and Vitrocrisa

*Tranche              B Guarantors*: Libbey, Libbey Glass and Vitrocrisa

Tranche              A Term Loan:

$35              million

*Interest Rate Tranche              A Term Loan:*

*Year 1:*LIBOR plus 2.750%

*Year 2:*LIBOR plus 2.875%

*Year 3:*LIBOR plus 3.000%

*Year 4:*LIBOR plus 3.125%

*Year 5:*LIBOR plus 3.250%

Decreasing upon meeting              certain debt ratios

*Amortization              Dates:*Quarterly beginning on July 6, 2004.

*Interest              Payment Dates:* 1, 2, 3 or 6 months at the choosing of the Borrower.

Tranche              A Term Loan: April 2, 2009

 

 

 

 

 

Tranche              A

Revolving              Loan:

$10              million

*Interest Rate Tranche              A Revolving Loan:*

*Year 1:*LIBOR plus 2.750%

*Year 2:*LIBOR plus 2.875%

*Year 3:*LIBOR plus 3.000%

Tranche              A Revolving Loan Commitment terminates on April 2, 2007

 

Tranche              B:

$23              million

*Interest Rate Tranche              B:*

*Year 1:*LIBOR plus 2.000%

*Year 2:*LIBOR plus 2.125%

*Year 3:*LIBOR plus 2.250%

*Amortization:*Quarterly beginning on October 2, 2006. *Interest Payment              Dates:*1, 2, 3 or 6 months at the choosing of the Borrower.

Tranche              B: April 2, 2007

 

Below    is a summary of the terms of the foregoing facilities or securities.

 

***Holding Company***

 

*1999-1 UDI-Denominated Certificados Bursatiles.*On June 7, 1999, we issued Certificados    Bursatiles or medium-term notes with an aggregate principal amount of UDI    200 million. The Certificados Bursatiles were issued under a single financing    program, which was approved by the Comision Nacional Bancaria y de Valores,  which we refer to as the "CNBV."As of May 31, 2005, we had repurchased UDI    43 million of the outstanding Certificados Bursatiles. The Certificados Bursatiles    bear an annual fixed interest rate of 9.0% and mature on June 7, 2006, at    which point the entire aggregate principal amount will become due. The Certificados    Bursatiles are senior unsecured obligations of Vitro and do not impose any    restrictive covenants on us. In January 2001, we entered into a swap agreement    which had the effect of converting (i) our payment obligations in UDIs under    the Certificados Bursatiles into payment obligations in dollars and (ii) the    Certificados Bursatiles' 9.0% fixed interest rate calculated over UDI's into    a 8.58% fixed interest rate calculated over U.S. dollars. In May 2002, we    entered into a swap agreement which had the effect of converting our payment    obligations in dollars under the foregoing swap agreement into payment obligations    in pesos. In May 2004, we terminated the swap agreements we entered into in    January 2001 and May 2002.

 

*1999-2 UDI-Denominated Certificados Bursatiles.*On October 12, 1999, we issued Certificados    Bursatiles or medium-term notes with an aggregate principal amount of UDI    155 million. The Certificados Bursatiles were issued under a single financing    program, which was approved by the CNBV. As of May 31, 2005, we had repurchased    UDI 26 million of the outstanding Certificados Bursatiles. The Certificados    Bursatiles bear an annual 9.9% fixed interest rate and mature on October 12,    2006, at which point the entire aggregate principal amount will become due.    The Certificados Bursatiles are senior unsecured obligations of Vitro and    do not impose any restrictive covenants on us. In January 2001, we entered    into a swap agreement which had the effect of converting (i) our payment obligations    in UDIs under the Certificados Bursatiles into payment obligations in dollars    and (ii) the Certificados Bursatiles' 9.9% fixed interest rate calculated    over UDIs into a 9.48% fixed interest rate calculated over U.S. dollars. In    May 2002, we entered into a swap agreement which had the effect of converting    our payment obligations in dollars under the foregoing swap agreement into    payment obligations in pesos. In May 2004, we terminated the swap agreements    we entered into in January 2001 and May 2002.

 

*Inbursa-Vitro    Credit Agreement.*On December 31, 2003, Vitro, S.A. de C.V. and Vidriera Toluca,    S.A. de C.V., which we refer to as "Vitolsa," entered into a credit agreement    with Banco Inbursa which provides for aggregate loans of up to $30 million.    As of May 31, 2005, the outstanding aggregate principal amount of the loans    made under the credit agreements was approximately $23.4 million. The loans    made under the credit agreement bear an annual floating interest rate of LIBOR    plus 4.00%. The final amortization on the loans made under the credit agreement    will become due on December 31, 2006. The loans made under the credit agreement    are secured by mortgages on certain real property of certain of our subsidiaries.    The credit agreement contain customary restrictive covenants including restrictions    on the ability of Vitro, S.A. de C.V. to (i) grant certain liens on its assets    and (ii) make certain investments. In addition, the credit agreement requires    that Vitro, S.A. de C.V. maintain compliance with certain financial ratio    covenants. Vitro's ability to pay dividends is unrestricted by the credit    agreement. The proceeds from the loans made under the credit agreement were    used to refinance certain of our indebtedness.

 

*Vicap    Notes.*On May 13, 1997, Vicap, S.A. de C. V., which we refer to as "Vicap,"    Vitro's wholly owned subsidiary and financing vehicle in Mexico, completed    an offering under Rule 144A of the Securities Act of 1933, as amended, which    we refer to as the "Securities Act" in the international capital markets of    $250 million aggregate principal amount of its 11?% Guaranteed Notes due 2007,    unconditionally guaranteed by Vitro, which we refer to as the "Old Vicap  Notes."

 

On November    18, 1998, in accordance with the terms of a registration rights agreement    entered into at the time of the Old Vicap Notes, Vicap and Vitro consummated    their offer to exchange the Old Vicap Notes for notes of Vicap with an aggregate    principal amount of $250 million that were registered under the Securities    Act, which we refer to as the "New Vicap Notes". The aggregate principal amount    of Old Vicap Notes that were exchanged in the exchange offer for New Vicap    Notes was $232 million. Pursuant to the undertaking by the Vicap and Vitro    in the registration statement filed in connection with the Exchange Offer,    Vicap and Vitro removed from registration all the New Vicap Notes that remained unexchanged as of November 18, 1998. Accordingly, as of November 18, 1998    there were outstanding approximately $232 million and $18 million, respectively,    of New Vicap Notes and Old Vicap Notes, which we refer to the Old Vicap Notes    and the New Vicap Notes collectively as the "Vicap Notes".

 

The    terms of the New Vicap Notes are identical in all material respects to the    terms of the Old Vicap Notes except that the New Vicap Notes have been registered    under the Securities Act and are issued free of any transfer restrictions.    As a consequence, the Old Vicap Notes bear legends restricting their transfer    and, in general, may not be offered or sold, unless registered under the Securities    Act, except pursuant to an exemption from, or in a transaction not subject    to, the Securities Act and applicable state securities laws.

 

The    Vicap Notes are debt securities issued under an Indenture dated as of May    1, 1997, which we refer to as the "Indenture" among Vicap, as issuer, Vitro,    as guarantor, and The Chase Manhattan Bank, as trustee. The Vicap Notes and    the guarantee by Vitro are general, senior unsecured obligations, respectively,    of Vicap and Vitro and rank pari passu with senior unsecured obligations,    respectively of Vicap and Vitro (other than obligations given preference by    statute). However, obligations of Vitro to its creditors, including holders    of the Vicap Notes, are effectively subordinated in right of payment to all    direct liabilities of its subsidiaries. The Vicap Notes are redeemable at    the option of Vicap after May 15, 2002, at defined redemption prices plus    accrued interest on the redemption date. The Indenture contains covenants    limiting, among other things, the ability of Vitro and/or its Restricted Subsidiaries    (as defined therein) to incur additional indebtedness, pay dividends or make    certain investments, engage in transactions with affiliates, engage in mergers    and consolidations and create or permit liens.

 

On January    31, 2001, Servicios y Operaciones Financieras Vitro, S.A. de C.V., a wholly  owned subsidiary of Vitro which we refer to as "SOFIVSA," entered into a merger    agreement with Vicap and upon consummation of the merger contemplated therein, SOFIVSA became the surviving entity. On the same date, SOFIVSA, as issuer,    Vitro, as guarantor, and The Chase Manhattan Bank, as trustee, entered into    a supplemental indenture pursuant to which SOFIVSA expressly assumed all of    the obligations of Vicap under the notes and the Indenture. As of the filing    of this annual report, we had purchased Vicap Notes with an aggregate principal    amount of $88.0 million, which were canceled.

 

*2002-2003    Peso-Denominated Certificados Bursatiles.*On October 10, 2002, we established    a Certificados Bursatiles or medium-term notes program under which we can    issue up to an aggregate principal amount of Ps. 2.5 billion. Our program    was approved by the CNBV. Each Certificado Bursatil issued under the program    must be denominated in pesos and have a maturity in excess of one year. The    program will expire on October 10, 2006.

 

On October    10, 2002, we issued Certificados Bursatiles with an aggregate principal amount    of Ps. 360 million. The Certificados Bursatiles were issued under the program    referenced above. The Certificados Bursatiles bear an annual floating interest    rate of 3.25% over the 182-day CETES and mature on October 2, 2008, at which    point the entire aggregate principal amount will become due. The Certificados    Bursatiles are senior unsecured obligations of Vitro and do not impose restrictive    covenants on us.

 

On December    30, 2002, we issued Certificados Bursatiles with an aggregate principal amount    of Ps. 1 billion. The Certificados Bursatiles were issued under the program    referenced above. The Certificados Bursatiles bear an annual floating interest    rate of 3.25% over the 182-day CETES and mature on December 22, 2008, at which    point the entire aggregate principal amount will become due. The Certificados    Bursatiles are senior unsecured obligations of Vitro and do not impose restrictive    covenants on us. As of the filing of this annual report, we had purchased    Certificados Bursatiles from this issuance for approximately Ps. 794 million    ($73 million).

 

On February    13, 2003, we issued Certificados Bursatiles with an aggregate principal amount    of Ps. 1.14 billion. The Certificados Bursatiles were issued under the program    referenced above. The Certificados Bursatiles bear an annual floating interest    rate of 3.25% over the 182-day CETES and mature on February 5, 2009, at which    point the entire aggregate principal amount will become due. The Certificados    Bursatiles are senior unsecured obligations of Vitro and do not impose restrictive    covenants on us. As of the filing of this annual report, we had purchased    Certificados Bursatiles from this issuance for approximately Ps. 990 million    ($91 million), approximately Ps. 807 million ($74 million) of which were cancelled.

 

*111/2%    Senior Notes due 2009.*On April 30, 2002, we sold $88.35 million aggregate    principal amount of 11 1/2% Senior Notes due 2009, which we refer to as the "2009    Senior Notes," to CSFBI, an affiliate of Credit Suisse First Boston Corporation,    for net proceeds of $77.9 million. The notes bear a fixed annual interest    rate of 11.50%. The 2009 Senior Notes are senior, unsecured debt securities    governed by an indenture dated as of April 30, 2002 between Vitro, as issuer,    and JPMorgan Chase Bank, as trustee. The indenture contains customary covenants.

 

A portion    of the net proceeds of the sale of the 2009 Senior Notes, in the amount of    $38.8 million, was used to pay a portion of the principal and accrued interest    of the $175 million aggregate principal amount 10 1/4% Guaranteed Notes due in    2002 issued by our wholly owned subsidiary SOFIVSA, and guaranteed by us,    which matured on May 15, 2002. The remaining proceeds, in the amount of $39.1    million, were used to purchase 13.889% Credit Linked Notes issued by Credit    Suisse First Boston Corporation, acting through its Nassau branch, which we    refer to as the "CLN Issuer," with an aggregate principal amount of $40 million.    Under the terms of the 13.889% Credit Linked Notes, upon the occurrence of    a Credit Event, which includes our bankruptcy or insolvency, noncompliance    with the terms of our indebtedness which would permit the acceleration thereof,    a default with respect to our indebtedness, a restructuring of our indebtedness    or a repudiation of or moratorium with respect to payments of our indebtedness,    whether by us or a governmental entity, the principal amount of the 13.889%    Credit Linked Notes will be reduced pursuant to a formula based on the then    current market price of the Vicap Notes. As a result, if a Credit Event occurs    and we are not able to cure such Credit Event within the applicable period,    we may lose the entire amount that we invested in the 13.889% Credit Linked    Notes. As long as a Credit Event has not occurred, the CLN Issuer is generally    required to redeem (i) the 13.889% Credit Linked Notes in four annual installments,    beginning on May 7, 2003 and (ii) a pro rata portion of the 13.889% Credit    Linked Notes at the time any portion of the 2009 Senior Notes is sold by CSFBI.

 

Concurrently    with the issuance of the 2009 Senior Notes and the purchase of the 13.889%    Credit Linked Notes, we entered into a swap agreement with CSFBI pursuant    to which we agreed to make certain payments on April 30 of each year,    beginning on April 30, 2003 and ending on April 30, 2006, to CSFBI calculated    with respect to an original notional amount of $80 million if a proportional    part of the 2009 Senior Notes have not been sold by CSFBI at that time and    the market price of the Vicap Notes has declined from an initial benchmark    price which is based on the price paid by CSFBI for the 2009 Senior Notes.

 

In accordance    with the swap transaction, we have already paid to CSFBI a notional amount    of approximately $44 million of the $88.35 million aggregate principal amount    of the 2009 Senior Notes. As of May 31, 2005, the outstanding aggregate principal    amount of the 13.889% Credit Linked Notes is approximately $9 million and    the outstanding aggregate principal amount of the 2009 Senior Notes is approximately    $22 million.

 

*113/4%    Senior Notes due 2013.*On October 22, 2003, Vitro completed an offering of    $225 million aggregate principal amount of Original 2013 Notes. The Original    2013 Notes are general unsecured obligations of Vitro. The indenture governing    the Original 2013 Notes contains certain customary restrictive covenants including    restrictions on the ability of Vitro to (i) incur additional indebtedness,    (ii) grant certain liens on its assets, (iii) make certain investments and    (iv) pay dividends. The proceeds from the issuance of the Original 2013 Notes    were used to repay certain of our indebtedness.

 

Pursuant    to a registration rights agreement Vitro, S.A. de C.V. entered into in connection    with the issuance of the Original 2013 Notes, Vitro agreed to file a registration    statement with the SEC relating to an offer to exchange the Original 2013    Notes for New 2013 Notes. Upon registration, the New 2013 Notes will be free    of the transfer restrictions that apply to the Original 2013 Notes, but will    otherwise have substantially the same terms of the outstanding Original 2013    Notes. Pursuant to the terms of the registration rights agreement, if the    SEC does not declare the registration statement effective within 210 days    of the date of the issuance of the Original 2013 Notes or if Vitro fails to    complete the offer to exchange within 240 days of the date of the issuance    of the Original Notes, Vitro will be required to pay additional interest at    a rate of 0.50% per annum until the first anniversary of the issuance of the    Original 2013 Notes and 1.00% per annum thereafter, until it completes the    offer to exchange. As of the date of this report, Vitro has not completed    the exchange offer.

 

***Flat Glass Business Unit***

 

*Flat    Glass Credit Facility.*On February 26, 2003, Vitro Plan entered into two    credit agreements with Comerica Bank, Citibank and certain other lenders pursuant    to which it borrowed an aggregate amount of $201 million. The credit agreements    include (i) an approximately $80 million term loan with an annual floating    interest rate equal to LIBOR plus a spread ranging between 1.875% and 2.125%    and a final amortization on March 27, 2006, (ii) an approximately $64 million    term loan with an annual floating interest rate equal to LIBOR plus a spread    ranging between 2.25% and 2.75% and a final amortization on March 27, 2008    and (iii) an approximately Ps. 628 million term loan with an annual floating    interest rate equal to the 28 day TIIE plus a spread ranging between 2.000%    and 2.375% and a final amortization on March 27, 2007. The loans made    under the credit agreements are secured by cash collateral and are guaranteed    by each of Vitro Plan's material wholly owned subsidiaries. The credit agreements    contain customary restrictive covenants including restrictions on the ability    of Vitro Plan to (i) incur additional indebtedness, (ii) grant certain    liens on its assets and (iii) make certain investments. In addition,    the credit agreements require that Vitro Plan maintain compliance with certain    financial ratio covenants. On September 29, 2003, Vitro Plan sought and    obtained a waiver of and an amendment to certain of these financial ratio    covenants due to its non compliance with them. Provided it meets certain conditions,    Vitro Plan's ability to pay dividends is unrestricted by the credit agreements.    During the year ended December 31, 2004, Vitro Plan met such conditions.    However, the agreements include a restrictive financial ratio that would allow    the lender to accelerate the maturity of the debt if violated. Although this    financial ratio was subject to waiver, at the time of the original filing    we expected not to meet this ratio as of June 30, 2005. As we met the current    covenant requirements as of December 31, 2004, the outstanding debt is classified    as noncurrent.

 

***Glass Container    Business Unit***

 

*Vena's    10.75% Senior Secured Guaranteed Notes due 2011.*On July 23, 2004, Vena completed    an offering of $170 million aggregate principal amount of Senior Secured Guaranteed    Notes due 2011. The Notes are senior obligations secured on a first priority    basis by liens on some of our Mexican subsidiaries' real property and all    of their inventory, machinery and equipment in Mexico, a small portion of    our accounts receivable in Mexico and all of our U.S. subsidiary inventory    and accounts receivable. The indenture governing the Notes contain certain    customary restrictive covenants including restriction on the ability of Vena    to (i) incur additional indebtedness, (ii) pay dividends and make other restricted    payments, (iii) grant certain liens on assets and (iv) be part of certain    merger, consolidation and asset sale activities. The proceeds from the issuance    of the Notes were used to repay certain of Vena's debt.

 

On January    31, 2005, Vena reopened the 10.75% Senior Secured Guaranteed Notes due 2011    for an additional aggregate principal amount of $80 million. These Notes constitute    a further issuance of, and form a single series and will be fully fungible    with, the 10.75% Senior Secured Guaranteed Notes due 2011 that we issued in    July 2004 in an aggregate principal amount of $170 million.

 

Vena's    Senior Secured Term Loan. On February 24, 2005, Vena entered into a $150 million    Senior Secured Term Loan with Credit Suisse First Boston. The facility is    secured, on a pari passu basis with the existing Senior Secured Guaranteed    Notes due 2011. As of May 31, 2005, the outstanding aggregate principal amount    of the loan made under the credit agreement was approximately $150 million.    The loan made under the credit agreement bears an annual interest rate of    LIBOR plus 625 basis points. The final amortization of the loan will become    due on February 24, 2010. The agreement governing the Senior Secured Term    Loan contains certain customary restrictive covenants including restriction    on the ability of Vena to (i) incur additional indebtedness, (ii) pay dividends    and make other restricted payments, (iii) grant certain liens on assets and    (iv) be part of certain merger, consolidation and asset sale activities. The    proceeds from the issuance of the Term Loan were used to repay an existing    bridge loan with Credit Suisse First Boston and certain other lenders.

 

***Glassware Business    Unit***

 

*Glassware    Credit Facility.*On April 2, 2004, Vitrocrisa Comercial entered into a credit    agreement with Bank of Montreal, Citibank and certain other lenders pursuant    to which it borrowed an aggregate amount of $65 million and established a    committed revolving credit line of up to $10 million. As of May 31, 2005,    the outstanding aggregate principal amount of the loans made under the credit    agreement was approximately $68 million. The credit agreement contemplates    (i) a $42 million term loan with an annual floating interest rate equal to    LIBOR plus a spread ranging between 2.75% and 3.25% and a final amortization    on April 2, 2009, which we refer to as the "Tranche A Term Loan," (ii) a $10    million committed revolving credit line with an annual floating interest rate    equal to LIBOR plus a spread ranging between 2.75% and 3.00% and a commitment    termination date of April 2, 2007, which we refer to as the "Tranche A Revolving    Loan," and (iii) a $23 million term loan with an annual floating interest    rate equal to the LIBOR plus a spread ranging between 2.00% and 2.25% and    a final amortization on April 2, 2007, which we refer to as the "Tranche B    Loan." The Tranche A Term Loan and the Tranche A Revolving Loan are secured    by the accounts receivable of Vitrocrisa Comercial and are guaranteed by Vitro,    S.A. de C.V. and Vitrocrisa. The Tranche B Term Loan is guaranteed by Vitrocrisa,    Libbey and Libbey Glass. The credit agreement contains customary restrictive    covenants including restrictions on the ability of Vitrocrisa Comercial to    (i) incur additional indebtedness, (ii) grant certain liens on its assets    and (iii) make certain investments. The credit agreement also contains a provision    that requires that any cash generated by Vitrocrisa Comercial that is not    used in its operations be used to repay the loans made under the credit agreement.    In addition, the credit agreement requires that Vitrocrisa Comercial maintain    compliance with certain financial ratios. Provided it meets certain conditions    (including maintaining a certain leverage ratio), Vitrocrisa Comercial's ability    to pay dividends is unrestricted by the credit agreement. However, the proceeds    from the loans made under the credit agreement were used to repay short-term    debt of Vitrocrisa Comercial.

 

***Sales of receivables***

 

The Company    has entered into several factoring agreements to sell trade accounts receivable.    In accordance with the terms of some of these agreements, the Company has    the obligation to pay uncollected receivables, in the case of non-compliance    of clients. The outstanding balance of receivables sold, which are deducted    from the trade receivables balance, at December 31, 2003 and 2004 amounted    to approximately $ 70 and $ 74 million, respectively, as follows: 
-  *Covisa Agreement.*In August 2000, the Company entered into a factoring agreement with Transamerica    Commercial Finance Corporation and its affiliates (collectively, "TCFC")    covering the sale of its accounts receivable related to its Glass Containers    business in Mexico. Pursuant to the terms of this arrangement, the Company    agreed to sell and TCFC agreed to purchase, on a non-recourse basis but subject    to a garantia de cobro ("collection guarantee") certain eligible    accounts receivable. As of December 31, 2003 and 2004, the Company had sold    approximately $50 million and $53 million, respectively, of receivables under    this agreement, which are excluded from the accompanying balance sheets. At    any given time, the maximum capacity available under this agreement was $75    million. In connection with the sale of the accounts receivable to TCFC, the    Company assigned all of its title and interest in such accounts receivable    along with all of its interest in the goods represented by such accounts receivable    to TCFC. 
-  *Vitro Cristalglass*,    the Company's subsidiary in Spain, has fourteen agreements whereby designated    accounts receivable are sold with recourse at a discount to financial institutions.    It is Vitro's policy to endorse all documents sold to the banks, such that    the banks as the bearer of the endorsed documents have been transferred legal    title of such receivables. The banks have the legal right to transfer such    receivables at their discretion as Vitro has transferred their control upon    endorsement. At any given time, the maximum capacity available under these    agreements is $21 million. At December 31, 2003 and 2004, the Company had    sold approximately $20 million and $21 million, respectively, of receivables    under these agreements, which are excluded from the accompanying balance sheets. The recourse obligation was not material to the Company's consolidated financial    statements. 

***Securitization    of trade receivables***

 

*Vitro America, Inc. ("VVP") Agreement.*In 2003, VVP entered into an agreement to    sell of its accounts receivable, on a revolving basis, to VVP Funding, a wholly-owned    subsidiary of VVP. VVP Funding is a special-purpose entity that was formed    prior to the execution of this agreement for the sole purposes of buying and    selling accounts receivable and is designed to be bankruptcy remote. During    June 2003, VVP and VVP Funding entered an agreement with an unrelated major    financial institution whereby VVP Funding sells, on a revolving basis and    subject to the maintenance of certain financial and receivables-based ratios,    an undivided percentage ownership in all eligible accounts receivable, as    defined, for consideration composed of cash, up to a maximum account of $40    million, and retained undivided interests in securitized receivables. The    agreement expired on June 30, 2004. The transfer of undivided ownership interests    from VVP Funding to the unrelated major financial institution for cash consideration    is accounted for as a sale of receivables. During 2004, VVP and VVP Funding    entered into an agreement with another unrelated financial institution substantially    similar to the agreement above. VVP and VVP Funding may sell, on a revolving    basis and subject to the maintenance of certain financial and receivables-based    ratios, an undivided percentage ownership in all eligible accounts receivable,    as defined, for consideration composed of cash, up to a maximum amount of    $40 million, and retain undivided interests in securitized receivables. The    agreement expires in May 2007 but is subject to annual renewal approval by    the financial institution. Similar to the previous securitization agreement,    the transfer of undivided ownership interests from VVP Funding to the unrelated    major financial institution for cash consideration is accounted for as a sale    of receivables. The gross receivables sold, totaling approximately $57 million    and approximately $63 million at December 31, 2003 and 2004, respectively,    are reflected as a reduction of trade receivables. Estimated fair value of    the retained undivided interests in securitized receivables at December 31,    2004 totaled approximately $29 million.

 

*Vena's    Receivables Securitization.*On March 31, 2005 Compania Vidriera, S.A. de C.V.    ("Covisa"), Industria del Alcali, S.A. de C.V. ("Alcali") and Comercializadora  Alcali, S. de R.L. de C.V. ("Comercializadora"), all subsidiaries of Vena,    closed a five year non-recourse revolving account receivables facility, through    which such companies obtained approximately Ps. 550 million and $19 million.    Such amounts were obtained from the issuance through a trust that was specifically    setup for this transaction, of Ps. 550 million in "Certificados Bursatiles    Preferentes" that trade on the Mexican Stock Exchange and $19 million in Subordinated    Notes. The Subordinated Notes were guaranteed by us. Interest and principal    on the "Certificados Bursatiles Preferentes" and the Subordinated Notes are    payable from the collection of the receivables originated by the three Vena    subsidiaries and sold to the trust.

 

***Covenant    Compliance.***As a result of the deterioration in our results of operations,    it has been difficult for us to maintain compliance with certain financial    and other restrictive covenants contained in our debt instruments. During    2002 and 2003, we and our subsidiaries have been required to seek amendments    and waivers with respect to some of our financial ratios and other covenants    contained in our debt instruments and in one of our accounts receivable factoring    programs. In each case, we and our subsidiaries have obtained the necessary    amendments and waivers.

 

Our    ability to comply with our financial covenants in the future depends upon    several variables, including our operating results, the level of our indebtedness    and changes in currency and interest rates. The occurrence of one or more    of the following events, among others, in the future will likely require us    to seek further amendments and waivers of our financial covenants-a lack of    improvement in our operating results, our failure or inability to reduce our    level of indebtedness, a devaluation of the peso relative to the U.S. dollar    or an increase in interest rates applicable to our indebtedness. Thus, we    may be required to obtain amendments and waivers in order to comply with our    financial covenants. However, there can be no assurance that we will be able    to obtain such future amendments or waivers or be successful in taking other    actions to avoid potential defaults under such covenants.

 

Under    certain of our subsidiaries' credit agreements, if such subsidiary does not    meet certain financial ratios and other conditions, its ability to pay dividends    is restricted. During 2001, 2002, 2003 and 2004, certain of our subsidiaries    were restricted from paying dividends by their credit agreements. For more    information, see "-Long-Term Debt."

 

Certain    of our and our subsidiaries' indentures and credit facilities restrict our    ability to incur additional debt, other than debt which refinances existing    debt, if we or our subsidiaries fail to comply with certain financial ratios.    As of December 31, 2004 and March 31, 2005, we did not meet certain of those    financial ratios. At no time has the Company failed to make required capital    or interest payments. The failure to meet certain of the covenants related    to financial ratios discussed above as of December 31, 2004 and March 31,    2005 did not allow the lender to accelerate the maturity of the debt under    the indentures and credit facilities discussed above.

 

At the    time of the original filing, we expected not to meet a more restrictive financial    ratio as of June 30, 2005. Such non-compliance, although subject to waiver,    would allow the lender to accelerate the maturity of one of our credit facilities. As we met the current covenant requirements related to this ratio as of December    31, 2004, the outstanding debt is classified as noncurrent.

 

***Other Restrictions    on Dividend Payments***

 

Pursuant    to article 20 of the Mexican Ley General de Sociedades Mercantiles, which    we refer to as the "Mexican General Law of Corporations," 5% of the annual    net income of Mexican corporations must be set aside to create or increase    a mandatory legal reserve until such reserve amounts to not less than 20%    of such corporation's outstanding equity capital. Thereafter, a majority of    our Shares present at such annual general ordinary shareholders' meeting may    allocate all or a portion of the remainder of our net income to a reserve    fund for the purchase of our Shares or other reserve funds.

 

Certain    of the instruments governing our indebtedness, under certain circumstances,    restrict our ability to pay dividends. See "-Indebtedness and factoring  programs."

 

In addition    to the foregoing restriction, the majority of our joint venture agreements    require the consent of our joint venture partners for certain significant    operating and management decisions, including the payment of dividends. For    example, in our joint venture with Libbey, whether dividends will be paid    and the amount of dividends to be paid are decisions determined by the vote    of the majority of the shareholders represented in the Board of Directors,    and such majority consists of at least one director appointed by us and one    director appointed by Libbey. In our joint venture with Visteon, whether dividends    will be paid and the amount of dividends to be paid are decisions determined    by the vote of the majority of shares of common stock of Vitro Flex present    at an ordinary shareholders' meeting, provided, however, that if less than    80% of earnings are to be distributed as dividends, then the approval by at    least 65% of Vitro Flex's outstanding shares is required. In the case of Vitro    Plan, our joint venture with Pilkington, whether dividends will be paid and    the amount of dividends to be paid are decisions determined by a vote of the    majority of the shareholders. In our joint ventures with Solutia and AFG Industries    approval by a majority of the shareholders is required in order to distribute    dividends.

 

***Divestitures***

 

Since    2000, we received aggregate net proceeds of approximately $314 million from    divestitures and asset sales. Please refer to "Item 4. Information on the    Company-Business-Divestitures" for a description of these transactions. These    transactions provided a non recurring source of cash that were used primarily    for debt reduction.

 

***Share Repurchases    and Sales***

 

During    2004, we did not repurchase or sell our Shares.

 

As of    December 31, 2004 approximately 28.3 million of our Shares remained held as    treasury stock.

 

***PBGC Matter***

 

As part    of the disposal of Anchor Glass Container Corp., which we refer to as  "Anchor," in a transaction approved by the U.S. Bankruptcy Court, we entered  into a term sheet which contemplated an agreement pursuant to which we would  provide to the Pension Benefit Guaranty Corporation, which we refer to as the  "PBGC,"    a United States governmental agency that guarantees pensions, a limited guaranty    of Anchor's unfunded pension liability. No payments would be made under such    a guaranty unless the PBGC terminated any of the covered pension plans, and    the guaranty would be payable only to the extent the PBGC could not otherwise    recover the unfunded liabilities from the entity that purchased Anchor's assets,    which we refer to as "New Anchor." The amount of the guaranty was originally    limited to $70 million. Under the guaranty, payments would not begin until    August 1, 2002, and would then generally be payable in equal semi-annual installments    over the following 10 years. Payments would not bear interest. The amount    and the term of the guaranty would be proportionately reduced if the pension    plans were terminated after January 31, 2002. Beginning February 2002, the    guaranty would be reduced by $7 million semi-annually until August 1, 2006,    when the guaranty would expire if the plans did not terminate.

 

On April 15,    2002, New Anchor filed a pre-negotiated plan of reorganization under Chapter    11 of the U.S. Bankruptcy Code. On August 8, 2002, an amended plan of    reorganization was confirmed, pursuant to which the plan resulting from the    merger of the covered pension plans was terminated and the obligations thereunder    were assumed by the PBGC in exchange for cash, securities and a commitment    of reorganized New Anchor to make certain future payments.

 

On June 20,    2003, the PBGC wrote us, asserting that the plan had been terminated effective    as of July 31, 2002, with an estimated unfunded liability of $219 million.    The PBGC stated that the value of the recovery from New Anchor and reorganized    New Anchor amounts to no more than $122.25 million; it alleged that the recovery    that it secured in the bankruptcy was insufficient and that an underfunding    in excess of our limited guaranty had occurred. Accordingly, in such letter,    the PBGC demanded payments pursuant to the term sheet of $7 million on or    before August 1, 2003 and of $3.5 million semi-annually through August 1,    2011. We intend to contest this liability. There are various issues concerning    such demand and certain defenses that may be asserted by us. Management is    currently evaluating these issues and defenses. At this point, it is not possible    to reasonably estimate the amounts that will ultimately be payable in response    to such demand. When management is able to reasonably estimate those amounts,    we will establish an appropriate accounting reserve. As of this date, we have    not established any reserves in connection with such liability.

 

***Energy***

 

Beginning    in April 2003, certain of our subsidiaries agreed to purchase, in the aggregate,    approximately 110 megawatts of electrical power and approximately 1.3 million    tons of steam per year pursuant to a 15 year "take-or-pay" power purchase    agreement with Tractebel Energia. Whirlpool and Vitro OCF, together, were    required to purchase approximately 10 megawatts of electrical power. Thus,    after their divestiture, we are currently obliged to purchase approximately    100 megawatts of electrical power. The price at which we are required to purchase    electrical power and steam is based on variables, such as inflation, the peso/U.S.    dollar exchange rate and the price of natural gas, whose future value is uncertain.

 

***Put on Shares    of Cristalglass***

 

A group    of individual investors owns a 40% interest in Cristalglass. We have the option    of purchasing the 40% of the shares from the minority interest, which can    be exercised beginning on May 1, 2005 for fair value as calculated by independent    appraisers and cannot be less than 4,800 million Spanish pesetas (approximately    $39 million as of December 31, 2004). Additionally, the minority interest    has a put option pursuant to which they may require us to purchase all or    part of their 40% interest in Cristalglass, which can be exercised beginning    on May 1, 2003 for 4,000 million Spanish pesetas (approximately $32.5 million    as of December 31, 2004) at the value of the Spanish peseta at the date of    sale. However, the terms of certain of our indentures and credit facilities    currently restrict our ability to purchase shares in Cristalglass or any of    our other subsidiaries.

 

 

**OFF-BALANCE    SHEET ARRANGEMENTS**

 

***Sales of receivables***

 

The Company    has entered into several factoring agreements to sell trade accounts receivable.    In accordance with the terms of some of these agreements, the Company has    the obligation to pay uncollected receivables, in the case of non-compliance    of clients. The outstanding balance of receivables sold, which are deducted    from the trade receivables balance, at December 31, 2003 and 2004 amounted    to approximately $ 70 and $ 74 million, respectively, as follows:
-  *Covisa Agreement.*In August 2000, the Company entered into a factoring agreement with Transamerica    Commercial Finance Corporation and its affiliates (collectively, "TCFC")    covering the sale of its accounts receivable related to its Glass Containers    business in Mexico. Pursuant to the terms of this arrangement, the Company    agreed to sell and TCFC agreed to purchase, on a non-recourse basis but subject    to a garantia de cobro ("collection guarantee") certain eligible    accounts receivable. As of December 31, 2003 and 2004, the Company had sold    approximately $50 million and $53 million, respectively, of receivables under    this agreement, which are excluded from the accompanying balance sheets. At    any given time, the maximum capacity available under this agreement was $75    million. In connection with the sale of the accounts receivable to TCFC, the    Company assigned all of its title and interest in such accounts receivable    along with all of its interest in the goods represented by such accounts receivable    to TCFC. 
-  *Vitro Cristalglass*,    the Company's subsidiary in Spain, has fourteen agreements whereby designated    accounts receivable are sold with recourse at a discount to financial institutions.    It is Vitro's policy to endorse all documents sold to the banks, such that    the banks as the bearer of the endorsed documents have been transferred legal    title of such receivables. The banks have the legal right to transfer such    receivables at their discretion as Vitro has transferred their control upon    endorsement. At any given time, the maximum capacity available under these    agreements is $21 million. At December 31, 2003 and 2004, the Company had    sold approximately $20 million and $21 million, respectively, of receivables    under these agreements, which are excluded from the accompanying balance sheets. The recourse obligation was not material to the Company's consolidated financial    statements. 

***Securitization    of trade receivables***

 

*Vitro America, Inc. ("VVP") Agreement.*In 2003, VVP entered into an agreement to    sell of its accounts receivable, on a revolving basis, to VVP Funding, a wholly-owned    subsidiary of VVP. VVP Funding is a special-purpose entity that was formed    prior to the execution of this agreement for the sole purposes of buying and    selling accounts receivable and is designed to be bankruptcy remote. During    June 2003, VVP and VVP Funding entered an agreement with an unrelated major    financial institution whereby VVP Funding sells, on a revolving basis and    subject to the maintenance of certain financial and receivables-based ratios,    an undivided percentage ownership in all eligible accounts receivable, as    defined, for consideration composed of cash, up to a maximum account of $40    million, and retained undivided interests in securitized receivables. The    agreement expired on June 30, 2004. The transfer of undivided ownership interests    from VVP Funding to the unrelated major financial institution for cash consideration    is accounted for as a sale of receivables. During 2004, VVP and VVP Funding    entered into an agreement with another unrelated financial institution substantially    similar to the agreement above. VVP and VVP Funding may sell, on a revolving    basis and subject to the maintenance of certain financial and receivables-based    ratios, an undivided percentage ownership in all eligible accounts receivable,    as defined, for consideration composed of cash, up to a maximum amount of    $40 million, and retain undivided interests in securitized receivables. The    agreement expires in May 2007 but is subject to annual renewal approval by    the financial institution. Similar to the previous securitization agreement,    the transfer of undivided ownership interests from VVP Funding to the unrelated    major financial institution for cash consideration is accounted for as a sale    of receivables. The gross receivables sold, totaling approximately $57 million    and approximately $63 million at December 31, 2003 and 2004, respectively,    are reflected as a reduction of trade receivables. Estimated fair value of    the retained undivided interests in securitized receivables at December 31,    2004 totaled approximately $29 million.

 

*Vena's    Receivables Securitization.*On March 31, 2005 Compania Vidriera, S.A. de C.V.    ("Covisa"), Industria del Alcali, S.A. de C.V. ("Alcali") and Comercializadora  Alcali, S. de R.L. de C.V. ("Comercializadora"), all subsidiaries of Vena,    closed a five year non-recourse revolving account receivables facility, through    which such companies obtained approximately Ps. 550 million and $19 million.    Such amounts were obtained from the issuance through a trust that was specifically    set up for this transaction, of Ps. 550 million in "Certificados Bursatiles    Preferentes" that trade on the Mexican Stock Exchange and $19 million    in Subordinated Notes. The Subordinated Notes were guaranteed by us. Interest    and principal on the "Certificados Bursatiles Preferentes" and the Subordinated    Notes are payable from the collection of the receivables originated by the    three Vena subsidiaries and sold to the trust.

 

Through    these programs, in 2004 we sold approximately 34% of our consolidated accounts    receivable and we therefore consider these factoring programs significant    to our financial condition. As of December 31, 2002, 2003 and 2004 respectively,    we had an aggregate of $99 million, $99 million and $105 million in off-balance-sheet    financing related to these accounts receivable factoring programs.

 

 

**TABULAR DISCLOSURE    OF CONTRACTUAL OBLIGATIONS**

 

The    following table sets forth a summary of our contractual obligations and commercial    commitments, as of December 31, 2004, in millions of constant pesos as of    December 31, 2004.

 

**Contractual Obligations**

**Total**

**Less than 1 year**

**1-3 years**

**3-5 years**

**More than 5 years**

 

 

 

**(Ps. millions)**

 

 

** **

 

 

 

 

 

Short- and long-term debt(4)(5)

Ps. 23,760

Ps. 4,795

Ps. 9,357

Ps. 2,773

Ps. 5,834

Capital lease obligations

0

0

0

0

0

Operating leases(1)

1,705

417

626

398

264

Unconditional purchase obligations(2)

0

0

0

0

0

Other long-term obligations(3)

2,295

228

462

457

1,148

Total contractual obligations

Ps. 26,760

Ps. 5,440

Ps. 10,445

Ps. 3,928

Ps. 7,246

  __________________

(1) The amounts    set forth above under "Operating leases" include payments that will be made    under leases relating to three airplanes, warehouses, forklifts and computer    equipment.

 

(2) Beginning    in April 2003, certain of our subsidiaries agreed to purchase, in the aggregate,    approximately 110 megawatts of electrical power and approximately 1.3 million    tons of steam per year pursuant to a 15 year "take-or-pay" power purchase    agreement with Tractebel Energia. Whirlpool and Vitro OCF, together, were    required to purchase approximately 10 megawatts of electrical power. Thus,    after their divestiture, we are currently obliged to purchase approximately    100 megawatts of electrical power. The price at which we are required to purchase    electrical power and steam is based on variables, such as inflation, the peso/U.S.    dollar exchange rate and the price of natural gas, whose future value is uncertain.

 

(3) Expected    benefits payment regarding the company pension and seniority pension plan.

 

(4) For a    description of our most recent financing transactions, see "-Indebtedness  and factoring programs-Long-Term Debt-Glass Containers Business Unit-Vena's  10.75% Senior Secured Guaranteed Notes due 2011," "-Indebtedness and factoring    programs-Long-Term Debt-Glass Containers Business Unit-Vena's Senior Secured    Term Loan" and "-Indebtedness and factoring programs-Long-Term Debt-Glass  Containers Business Unit-Vena's Receivables Securitization."

 

(5) Includes    scheduled interest payments with fixed and variable rates. For our variable    interest rate debt, we utilized the rates in effect as of December 31, 2004,    as disclosed in Note 9 of our consolidated financial statements when estimating    the scheduled interest payments.

 

 

**ACCOUNTING    CONSIDERATIONS**

**Critical Accounting    Estimates**

 

We prepare    our consolidated financial statements in conformity with Mexican GAAP. As    such, we are required to make certain estimates, judgments and assumptions    that we believe are reasonable based on the available information. These estimates    and assumptions affect the reported amounts of assets and liabilities at the    date of the financial statements, the reported amounts of revenues and expenses    during the periods presented and the related disclosures. The significant    accounting policies that we believe are the most sensitive to such estimates    and relevant to aid you in fully understanding and evaluating our reported    financial statements are the following:

 

***Trade Receivables***

 

We perform    ongoing credit evaluations of our customers and adjust credit limits based    upon payment history and the customer's current creditworthiness, as determined    by our review of their current credit information. We continually monitor    collections and payments from customers and maintain an allowance for doubtful    accounts based upon our historical experience and any specific customer collection    issues that we have identified. While such credit losses have historically    been within our expectations and the provisions established, we cannot guarantee    that we will continue to experience the same credit loss rates that we have    in the past. A significant change in our experience of credit losses could    have a material adverse impact on our consolidated results of operations and    financial position.

 

***Contingencies***

 

Contingencies,    by their nature, relate to uncertainties that require management to exercise    judgment both in assessing the likelihood that a liability has been incurred    as well as in estimating the amount of potential loss. We believe the amounts    recorded or disclosed in our financial statements are based on the best estimates    and judgments of management. However, actual outcomes could differ from our    estimates. See "-Liquidity and Capital Resources-Guarantee of Anchor Glass  pension fund liability."

 

***Financial Instruments***

 

Assets    and liabilities resulting from financial instruments, except for such instruments    held to maturity, are recorded on our balance sheet at fair value. The financial    instruments held to maturity are valued at their acquisition cost. The effects    of changes in the valuation of the financial instruments not held to maturity,    including their cost and yield, are recorded in the corresponding year in    our consolidated statement of operations.

 

Financial    instruments for hedging purposes are valued using the same criteria of valuation    of the underlying assets or liabilities hedged, and the effect of such valuation    is recognized in net income, net of costs, expenses or income from the assets    or liabilities whose risks are being hedged.

 

For    U.S. GAAP purposes, fair values of financial instruments are estimated using    available market information or other appropriate valuation methodologies    that require considerable judgment in interpreting and developing estimates.    The use of different market assumptions and/or estimation methodologies may    have a material adverse effect on the estimated fair value amounts. See  "Item 11. Quantitative and Qualitative Disclosures About Market Risk."

 

***Seniority Premiums    and Pension Plans***

 

Seniority    premiums and pension plans for all personnel are considered as costs in the    periods in which the related services are rendered. Periodic costs are calculated    in accordance with Bulletin D-3 "Labor Obligations" issued by the Instituto    Mexicano de Contadores Publicos, which we refer to as the "IMCP," and the    actuarial computations are made by an independent actuary, based on estimates    of future compensation increases, inflation, investment returns, mortality,    turnover and expected discount rates well into the future. While we have made    such estimates based on published tables and current market conditions, significant    variance in actual experience compared to our estimates could have a material    adverse effect on our consolidated results of operations and financial condition.

 

The    table below presents the impact of a one-percentage-point increase and a one-percentage-point    decrease in the assumed discount rate and expected rate of return on plan    assets on the net periodic pension cost and on the net pension liability:

 

 

**Year Ended**

**December 31, 2004**

**(In millions of constant pesos)**

**One-percentage-point          increase in assumed discount rate**

+ Effect on total          net periodic cost

+ Effect on net pension          liability

 

(2)

(116)

**One-percentage-point          decrease in assumed discount rate**

+ Effect on total          net periodic cost

+ Effect on net pension          liability

 

5

133

**One-percentage-point          increase in expected rate of return on plan assets**

+ Effect on total          net periodic cost

+ Effect on net pension          liability

 

(4)

(4)

**One-percentage-point          decrease in expected rate of return on plan assets**

+ Effect on total          net periodic cost

+ Effect on net pension          liability

 

7

4

 

***Environmental    Obligations***

 

Our    operations are subject to the environmental laws and regulations of the jurisdictions    in which we conduct our operations. Our environmental department monitors    the status of all significant environmental matters and compliance with regulations    through various means, one being an environmental auditing program. An environmental    reserve is recorded to cover the costs of expected environmental obligations    when we become aware that an expenditure will be required. We estimate the    cost for the environmental obligations based on historical experience, results    of monitoring and the known extent of exposure. We believe we are in substantial    compliance with Mexican and foreign environmental laws applicable to our operations.    We do not believe that continued compliance with these environmental laws    will have a material adverse effect on our financial condition or results    of operations. However, a significant change in laws, the discovery of previously    unknown contamination and other factors beyond our control could result in    expenditures that are materially greater than currently estimated.

 

***Impairment    of Long-Lived Assets***

 

Long-lived    assets, which include property, goodwill, intangible assets and certain other    assets comprise a significant portion of our total assets. We make judgments    and estimate the carrying value of these assets, including amounts to be capitalized,    depreciation and amortization methods and useful lives. Additionally, the    carrying values of these assets are periodically reviewed for impairment or    whenever events or circumstances indicate that the carrying amounts may not    be recoverable. An impairment loss is recorded in the period in which it is    determined that the carrying amount is not recoverable. This requires us to    make long-term forecasts of our future revenues and costs relating to the    assets under review. These forecasts require assumptions about demand for    our products, future market conditions and technological developments. Significant    and unanticipated changes to these assumptions could result in a determination    that the value of these long-lived assets has been impaired in a future period.

 

Certain    material events or circumstances may indicate that carrying amounts of our    long-lived assets may not be recoverable. Our policy is to review the carrying    amounts of long-lived assets in use when an impairment indicator suggests    that such amounts might not be recoverable. The impairment indicators considered    for these purposes are, among others, as follows: operating losses or negative    cash flows in the period if they are combined with a projection of losses,    reduction in the demand for the products manufactured, competition, capacity    utilization reduction, obsolescence or technological changes, decrease of    market value of assets and other legal and economic factors.

 

***Deferred Taxes***

 

In assessing    the realizability of deferred tax assets, management considers whether it    is highly probable that some portion or all of the deferred tax assets will    not be realized. The ultimate realization of deferred tax assets is dependent    upon the generation of future taxable income during the periods in which those    temporary differences become deductible. Management considers the scheduled    reversal of deferred tax liabilities, projected future taxable income, and    tax planning strategies in making this assessment. In order to fully realize    the deferred tax assets recorded as of the most recent balance sheet presented,    the Company will need to generate future taxable income of approximately Ps.    9,153 million prior to the expiration of the net operating loss carryforwards    in 2014. Taxable income for the year ended December 31, 2004 was Ps. 574 million.    

 

We believe we will generate sufficient taxable income in future years that    will allow us to utilize our tax loss carryforwards. Our operating plans    and future projections support this position. Despite a cumulative loss    for the three-year period ended December 31, 2004, we estimate that we will    be able to generate taxable income in the future based on reasonable economic    assumptions, such as the significant reduction in the devaluation of the Mexican    peso against the U.S. dollar, in recent years. The Mexican peso devaluation    has continued to decrease significantly over the previous three year period,    which supports our position that our ability to generate future profits will    not be adversely impacted by this economic effect to the same extent as in    previous years. However, although the exchange rate has been stable in recent    years, there is still a risk of devaluation in Mexico.

 

 A significant percentage    of the Company's taxable temporary differences expire in fiscal years 2007    and 2008. The amount of the shortfall from the reversal of taxable temporary    differences in 2007 and 2008 that could lead to the expiration of tax loss    carryforwards and asset tax carryforwards or the write-off of deferred tax    assets, absent future taxable income and the implementation of certain tax-planning    strategies, is Ps. 225 million and Ps. 1,205 million, respectively. Our asset    tax carryforwards may only be utilized after we have fully utilized our tax    loss carryforwards and generated sufficient taxable income. A significant    portion of our asset tax carryforwards expire in 2008. We plan to recover    such asset tax carryforwards in 2008 after utilizing our tax loss carryforwards,    by generating taxable income based on our tax-planning strategies. The potential    impact to the financial statements if our tax planning strategies do not result    in the full utilization of our tax loss carryforwards is that Ps. 193 million    of asset tax would expire in 2008 unutilized. The amount of headroom    that the Company estimates to realize the asset tax carryforwards in 2008    is approximately Ps. 91 million.

 

The    Company has tax-planning strategies which management believes are prudent    and feasible, and, if required, would be implemented to prevent the tax loss    carryforwards and asset tax credit carryforwards from expiring unused. Such    tax planning strategies allow us to generate taxable income in the future    in order to utilize our tax loss carryforwards and asset tax credit carryforwards.    The nature of these tax-planning strategies includes: gain on sale of assets    (corporate office building and the surrounding undeveloped land), gain on    sale of subsidiaries and contributions to our non-deductible pension account,    among others.

 

Based    upon the level of historical taxable income, projections for future taxable    income over the periods in which the deferred tax assets are deductible and    the implementation of tax-planning strategies, if necessary, management believes    it is highly probable that the Company will realize the benefits of these    deductible differences, net of the existing valuation allowance at December    31, 2004. The amount of the deferred tax asset considered realizable, however,    could be reduced in the near term if significant changes to the Mexican Tax    Laws are enacted, which might limit our ability to implement our tax planning    strategies.

 

**New Accounting    Pronouncements**

 

***Mexican GAAP***

 

*Retirement,    Severance and Other Similar Obligations.*In December 2003, the IMCP modified    Bulletin D-3, which sets forth the accounting treatment of retirement and    other similar benefits, to require the application of such bulletin to obligations    that become payable upon termination of employment. Bulletin D-3 applies to    all financial statements prepared under Mexican GAAP relating to periods beginning    on or after January 1, 2005.

 

*Derivative    Financial Instruments and Hedging Transactions; Modifications to Bulletin    C-2.*In April 2004, the IMCP issued Bulletin C-10 which applies to all financial    statement relating to periods beginning after January 1, 2005. Bulletin C-10    establishes additional accounting guidelines for the valuation, presentation    and disclosure of derivative financial instruments and hedging transactions.    Bulletin C-10 establishes that fair value hedging and the gain or loss resulting    from valuing them at fair value must be recognized during the period in which    they are incurred. Bulletin C-10 also modifies Bulletin C-2 to establish    that gains or losses attributable to changes in the fair value of financial    instruments classified as available for sale and their monetary effect must    be recognized as an item in net income.

 

*Business    Acquisitions.*In May 2004, the IMCP issued Bulletin B-7 which apply to all    financial statement relating to periods beginning after January 1, 2005. Early    application of the provisions of this Statement is encouraged. This Statement    establishes a) the purchase method as the only acceptable method to account    for businesses acquisitions and investment in affiliated companies b) goodwill    is no longer subject to amortization and instead is subject to an impairment    test, in accordance with Bulletin C-15, c) specific standards for the acquisition    of minority interest and asset transfers or share exchanges between companies    under common control and c) supplemental guidance for the accounting for intangible    assets recognized in a business acquisition in accordance with Bulletin C-8.

 

***U.S. GAAP***

 

*Share-Based Payments.*In December 2004, the Financial Accounting  Standards Board ("FASB")    issued SFAS No. 123(R). This Statement eliminates the option to apply the    intrinsic value measurement provisions of Accounting Principles Board ("APB")    Opinion No. 25, Accounting for Stock Issued to Employees, and establishes    standards for the accounting for transactions in which an entity exchanges    its equity instruments for goods or services. This Statement requires public    companies to measure the cost of employee services received in exchange for    an award of equity instruments based on the grant-date fair value of the award.    That cost will be recognized over the period during which an employee is required    to provide service in exchange for the award, which is the requisite service    period (usually the vesting period). SFAS No. 123(R) applies to all awards    granted after the required effective date and to awards modified, repurchased,    or cancelled after that date. SFAS No. 123(R) will be effective for our fiscal    year ending December 31, 2006. The Company currently applies the provisions    of SFAS No. 123, Accounting for Stock-Based Compensation, and recognizes the    cost of employee services received in exchange for an award of equity instruments    based on the grant-date fair value of the award.

 

*Inventory    Costs.*In November 2004, the FASB issued SFAS No. 151. This Statement amends    the guidance in Accounting Research Bulletin, or ARB, No. 43. This Statement    clarifies the accounting for abnormal amounts of idle facility expense, freight,    handling costs, and wasted material and requires that those items be recognized    as current-period charges regardless of whether they meet the criterion of    "so abnormal." In addition, this Statement requires that allocation    of fixed production overheads to the costs of conversion be based on the normal    capacity of the production facilities. This guidance is effective for inventory    costs incurred during the fiscal years beginning after June 15, 2005, with    earlier application allowed for inventory costs incurred during fiscal years    beginning after November 23, 2004.

 

*Exchanges    of Nonmonetary Assets.*In December 2004, the FASB issued SFAS No. 153, which    amends APB Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate    the exception for nonmonetary exchanges of similar productive assets and replaces    it with a general exception for exchanges of nonmonetary assets that do not    have commercial substance, considering that a nonmonetary exchange has commercial    substance if the future cash flows of the entity are expected to change significantly    as a result of the exchange. SFAS No. 153 is effective for nonmonetary assets    exchanges occurring in fiscal periods beginning after June 15, 2005.

 

 

**RESEARCH AND    DEVELOPMENT**

 

Our    research and development efforts are generally decentralized with each operating    business unit making its own decisions as to research and development expenditures    and areas of emphasis. In 1999, we formed a technology committee which coordinates    research and development projects that have the potential to create synergies    or that could be implemented in more than one of our business units. In addition,    in 2001 we migrated several of our Mexican subsidiaries that own certain of    our intellectual property relating to our Flat Glass and Glass Containers    business units to Switzerland. These Swiss subsidiaries will perform research    and development activities, license the technology to our Mexican operating    subsidiaries and undertake development efforts jointly with the Mexican subsidiaries    and, eventually, third parties. Also, through technology licensing arrangements,    we benefit significantly from research and development conducted by certain    of our joint venture partners. Of particular significance to us is the technology    license arrangement with Pilkington, which provides us with state of the art    float glass technology. This technology license agreement has been recently    extended until December 31, 2005. Even though we do not expect having difficulties    in subscribing another extension or a new agreement, we cannot assure that    the agreement will be extended, or a new agreement will be subscribed, before    the expiration of the current agreement or that the agreement will be extended,    or a new agreement subscribed, substantially in the same terms and conditions    as the current agreement. The Glass Containers business unit uses its own    technology, some of which has been patented, and technology provided by Owens-Illinois    pursuant to a series of technical assistance agreements that began in 1964    and expired in September 1999. We currently have the right to use the technology    provided to us by Owens-Illinois under those technical assistance agreements.    However, we do not currently have an agreement that provides us with the technology    developed by Owens-Illinois after September 1999. We own a number of trademarks    and patents, which, in the aggregate, are important to the conduct of our    business, none of which individually, however, is material to our business    as a whole. No material amount of money was spent on research activities during    2002, 2003 or 2004.

 

A number    of our subsidiaries conduct all or a portion of their businesses through joint    ventures or technology alliances with non-Mexican partners and we expect to    enter into other similar arrangements in the future. Certain of these partners    also license technology and trade names to our subsidiaries for use in the    manufacture of various products, including flat glass, glassware and glass    containers. We believe that these joint ventures, alliances and license arrangements    provide us with important competitive advantages. We cannot be certain that    in the future, some of these partners will not prefer to conduct business    directly in Mexico and terminate their relationships with us in view of the    easing of the limitations on foreign investments, the reduction of import    duties and tariffs that has occurred under NAFTA or for other reasons. In    addition, there can be no assurance that we will be successful in renewing    any joint venture, technical assistance, license or other agreements or arrangements    upon their expiration, in renewing these agreements on terms as favorable    as the present ones, in forming similar alliances with other partners or in    developing equivalent technologies independently. Please see  "Business-Operating Business Units."

 

 

**Item 13.  Defaults, Dividend Arrearages and Delinquencies**

 

**Covenant Compliance**

 

Certain    of our and our subsidiaries' indentures and credit facilities restrict our    ability to incur additional debt, other than debt which refinances existing    debt, if we or our subsidiaries fail to comply with certain financial ratios.    As of December 31, 2004 and March 31, 2005, we did not meet certain of    those financial ratios. At no time has the Company failed to make required    capital or interest payments. The failure to meet certain of the covenants    related to financial ratios discussed above as of December 31, 2004 and March    31, 2005 did not allow the lender to accelerate the maturity of the credit    facilities discussed above.

 

At the    time of the original filing, we expected not to meet a more restrictive financial    ratios as of June 30, 2005. Such non-compliance, although subject to waiver,    would allow the lender to accelerate the maturity of one of our credit facility. As we met the current covenant requirements at December 31, 2004, the outstanding    debt must be classified as noncurrent.

 

We are    currently not in (i) default in the payment of principal, interest or sinking    or purchase fund installments or (ii) any other material default, in each    case, under the instruments governing our indebtedness or our off-balance    sheet arrangements. However, we are currently seeking amendments or waiver    of covenants continued in certain of our credit facilities. See "Item 3. Key    Information-Risk Factors-We may not comply with covenants in the debt instruments    governing a substantial portion of our indebtedness" and "Item 5. Operating  and Financial Review and Prospects-Liquidity and Capital  Resources-Indebtedness and factoring programs-Covenant Compliance."

 

Within    2002 and 2003, we breached certain of our covenants relating to the maintenance    of financial ratios and other matters contained in certain of our credit agreements    and in one of our accounts receivable factoring programs. In each case, either    (i) such breach was waived by the lender, (ii) we repaid in full the outstanding    indebtedness under such credit agreements or (iii) we purchased the accounts    receivable from the lender. At no time did we fail to make required principal    or interest payments.

 

 

**Item 15.  Controls    and Procedures**

 

Our    Chief Executive Officer (CEO), Chief Administrative Officer (CAO), and Chief    Financial Officer (CFO) regularly review disclosure controls and procedures    and make changes as they deem necessary to allow them to conclude that these    controls and procedures are effective. Our disclosure controls and procedures    are designed to provide reasonable assurance that the controls and procedures    will meet their objectives. Our CEO, CAO and CFO previously concluded that    our disclosure controls were effective to provide reasonable assurance that    information required to be disclosed by us in reports we file under the Exchange    Act is recorded, processed, summarized and reported within the time periods    specified in the rules and forms of the Securities and Exchange Comission    ("SEC"). As a result of evaluating the cause of the restatement items discussed    below, we identified deficiencies in our internal control over financial reporting,    specifically within our U.S. GAAP reporting and disclosure controls. As a    result of the U.S. GAAP-related control deficiencies identified, our CEO,    CAO and CFO have concluded that our disclosure controls were not effective    as of December 31, 2004.

 

The    restatement of our 2004 Form 20-F relates to technical accounting items solely    within our U.S. GAAP consolidated financial statements, as follows:

 

 
          • The application of the equity method of accounting for Empresas          Comegua S.A. in          accordance with EITF 96-16, "Investor's Accounting for an Investee          When the Investor Has a Majority of the Voting Interest but the Minority          Shareholder or Shareholders Have Certain Approval or Veto Rights."

 

• The recognition    of an obligation for severance indemnities and the related costs in accordance    with SFAS No. 112, "Employers' Accounting for Postemployment Benefits, an    amendment of FASB Statements No. 5 and 43".

 

• The presentation    of Vitro OCF, S.A. de C.V., Envases Cuautitlan, S.A. de C.V., Ampolletas,    S.A., Vitro America Inc.'s ("Vitro America") distribution and production facilities    in the Northwestern United States and the disposal of our Productos de Valor    Agregado ("PVA") facilities as discontinued operations in accordance with SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets".

 

• The reclassification    of the gain/loss on sale of assets not considered to be components of a business    into Operating Income in accordance with SFAS No. 144.

 

• The reversal    of an impairment charge, given that the asset was determined to be recoverable    based on an undiscounted cash flow analysis performed by the Company, as required    by SFAS No. 144.

 

• The recognition    of a valuation allowance related to a recoverable asset tax, as under U.S. GAAP contingent tax assets resulting from legal settlements generally cannot  be recognized until cash or other forms of payment are received.

 

We    previously concluded that the accounting for the issues and transactions addressed    above was appropriate under U.S. GAAP. Our conclusions were based on the research    and analysis performed by our management. We had obtained an unqualified audit    opinion from our independent auditors regarding our consolidated financial    statements included in our first amendment to our 2004 Form 20-F. Upon further    analysis of the technical accounting guidance discussed previously, we have    subsequently concluded that a restatement is necessary to properly reflect    our U.S. GAAP consolidated financial statements included within this second    amendment to our 2004 Form 20-F. Our independent auditors have reissued their    audit opinion and included an explanatory paragraph addressing the restatement    of our consolidated financial statements, specifically Note 22. 

 

The    Company plans to perform system and process evaluation and testing (and any    necessary remediation) of its internal controls on an ongoing basis. In addition,    the Company is in the process of fully documenting, testing and assessing    the effectiveness of its internal controls to comply with the Sarbanes-Oxley    section 404 internal control attestation requirements for the year ended December    31, 2006. 

 

The    Company is focused on maintaining effective internal control and strongly    prioritizes accuracy of financial reporting. In order to properly address    and rectify the internal control deficiencies identified as well as to prevent    future misstatements, the Company's management is implementing a remediation    plan, which includes the following modifications to its internal controls:    (a) Periodic review of U.S. GAAP information; (b) Reinforcement of personnel    knowledge base of U.S. GAAP through mandatory training; (c) Hiring additional    technical accounting personnel with U.S. GAAP experience; (d) Involvement    of specialists as needed when concluding with respect to technical accounting    matters and obtaining written documentation to support such conclusions; and    (e) Sarbanes-Oxley 404 compliance as discussed above. As a result of the current    initiatives set forth above as well as ongoing monitoring, and as needed,    remediation, the Company's management intends to continue to focus on maintaining    effective internal control over financial reporting.

 

 

**Item 18.  Financial    Statements**

 

The    consolidated financial statements of Vitro, S.A. de C.V. and its subsidiaries    for the years ended December 31, 2002, 2003 and 2004, attached to this annual    report have been audited by Galaz, Yamazaki, Ruiz Urquiza, S.C., independent    registered public accountants, member of Deloitte Touche Tohmatsu, as stated    in their report with respect to our audited consolidated financial statements.    

 

The    financial statements of Vitro Flex, S.A. de C.V. and the consolidated financial    statements of Empresas Comegua, S.A. de C.V. and its subsidiaries for the    years ended December 31, 2002 and 2003, attached to this annual report have    been audited by PricewaterhouseCoopers, independent registered public accountants,    as stated in their reports. 

 

 

**Item 19.   Exhibits **

 

 

 

**SIGNATURES**

 

Vitro, S.A. de C.V. hereby certifies that it meets all of the requirements for filing    on Form 20-F and that it has duly caused and authorized each of the undersigned    to sign this second amendment to the annual report on Form 20-F on its behalf.

 

Date:    April 24, 2006

 

 

 
VITRO, S.A. DE C.V.
 
  by

  /s/ Federico Sada Gonzalez 

Name: Federico    Sada Gonzalez 

Title: President    and Chief Executive Officer

 
  by

  /s/ Claudio Del Valle Cabello

Name: Claudio    Del Valle Cabello 

Title: Chief    Administrative Officer 

 
  by

  /s/ Alvaro Rodriguez Arregui 

  Name: Alvaro Rodriguez Arregui

  Title: Chief Financial Officer

 

 

 

[DELOITTE. LETTERHEAD]
Galaz, Yamazaki,

Ruiz Urquiza,    S.C.

Lazaro Cardenas    2321 Poniente, PB

Residencial    San Agustin

66260 Garza    Garcia, N.L.

Mexico

 

**REPORT OF INDEPENDENT    REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board    of Directors and Stockholders of

Vitro, S.A.    de C.V.

Garza Garcia,    N. L.

 

We have audited    the accompanying consolidated balance sheets of Vitro, S.A. de C.V. and Subsidiaries    (the "Company") as of December 31, 2003 and 2004, and the related consolidated    statements of operations, stockholders' equity and changes in financial position    for each of the three years in the period ended December 31, 2004 (all expressed    in millions of constant Mexican pesos as of December 31, 2004). These financial    statements are the responsibility of the Company's management. Our responsibility    is to express an opinion on these financial statements based on our audits.    We did not audit the financial statements of the Company's consolidated subsidiaries    mentioned in Note 2 b) for the years ended December 31, 2002 and 2003, which    statements reflect total assets constituting 10% of consolidated total    assets as of December 31, 2003, and total net sales constituting 9% and 8%    of consolidated net sales for the years ended December 31, 2002 and 2003,    respectively. Those statements were audited by other auditors whose reports    have been furnished to us, and our opinion, insofar as it relates to the amounts    included for such subsidiaries for the years ended December 31, 2002 and 2003,    is based solely on the reports of such other auditors, except as noted below.

 

We conducted    our audits in accordance with auditing standards generally accepted in Mexico    and with the standards of the Public Company Accounting Oversight Board (United    States). Those standards require that we plan and perform the audit to obtain    reasonable assurance about whether the financial statements are free of material    misstatement. The Company is not required to have, nor were we engaged to    perform, an audit of its internal control over financial reporting. Our audits    included consideration of internal control over financial reporting as a basis    for designing audit procedures that are appropriate in the circumstances,    but not for the purpose of expressing an opinion on the effectiveness of the    Company's internal control over financial reporting. Accordingly, we express    no such opinion. An audit also includes examining, on a test basis, evidence    supporting the amounts and disclosures in the financial statements, assessing    the accounting principles used and significant estimates made by management,    as well as evaluating the overall financial statement presentation. We believe    that our audits and the reports of other auditors provide a reasonable basis    for our opinion.

 

In our opinion,    based on our audits and the reports of the other auditors, such consolidated    financial statements present fairly, in all material respects, the financial    position of the Company as of December 31, 2003 and 2004, and the results    of their operations, changes in their stockholders' equity and changes in    their financial position for each of the three years in the period ended December    31, 2004 in conformity with accounting principles generally accepted in Mexico.

 

The consolidated    financial statements of Empresas Comegua, S.A. and its Subsidiaries have been    prepared in accordance with accounting principles generally accepted in Guatemala.    We have assumed responsibility for auditing the conversion of the amounts    in such financial statements into Mexican pesos and accounting principles    generally accepted in Mexico.

 

Accounting    principles generally accepted in Mexico vary in certain significant respects    from accounting principles generally accepted in the United States of America.    Information relating to the nature and effect of such differences is presented    in Note 22 to the consolidated financial statements. Our audits were conducted    for the purpose of forming an opinion on the consolidated financial statements    taken as a whole. The information in Note 22 is the responsibility of the    Company's management. We have assumed responsibility for auditing the conversion    of the amounts in such financial statements to accounting principles generally    accepted in the United States of America.

 

As discussed    in Note 22 to the accompanying consolidated financial statements, the reconciliation    to U.S. GAAP as of December 31, 2003 and 2004 and for each of the three years    in the period ended December 31, 2004 has been restated for the effects of    various items.

 

Our audits    also comprehended the translation of Mexican peso amounts into U.S. dollar    amounts and, in our opinion, such translation has been made in conformity    with the basis stated in Note 2 a). The translation of the financial statement    amounts into United States dollars and the translation of the financial statements    into English have been made solely for the convenience of readers in the United    States of America.

 

 

Galaz, Yamazaki,    Ruiz Urquiza, S.C.

Member of Deloitte    Touche Tohmatsu

 

 

  /s/

C.P.C. Ernesto    Cruz Velazquez de Leon

February 25,    2005,

June 29, 2005,    as to Notes 21 and 22,

and April 24,    2006 as to the effects of the restatement discussed in Note 22

 

 

[PRICEWATERHOUSECOOPERS,    S.C. LETTERHEAD]
PricewaterhouseCoopers,    S.C.

Condominio    Losoles D-21

Av. Lazaro    Cardenas Poniente 2400

66270 Garza    Garcia, N.L.

 

**REPORT OF INDEPENDENT    REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Stockholders    of 

Empresas Comegua,    S.A. 

Monterrey,    N.L., February 2, 2004 

 

We have audited    the accompanying consolidated balance sheets of Empresas Comegua, S.A. and    its Subsidiaries, as of December 31, 2002 and 2003, and the related consolidated    statements of income, changes in stockholders' equity and of cash flows for    the years ended December 31, 2002 and 2003. These consolidated financial statements    have been prepared in accordance with generally accepted accounting principles    in Guatemala and are the responsibility of the Company's management. Our responsibility    is to express an opinion on these financial statements based on our audits.    

 

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

 

In our opinion,    the consolidated financial statements referred to above, present fairly, in    all material respects, the financial position of Empresas Comegua, S.A. and    Subsidiaries as of December 31, 2003 and 2002, and their results of operations    and cash flows for each of the two years in the period ended December 31,    2003, in conformity with accounting principles generally accepted in Guatemala.    

 

 

  /s/

  C.P. Jose de Jesus Mariscal Chavez 

Partner 

Assurance and    Business Advisory Services

 

 

 

 

[PRICEWATERHOUSECOOPERS,    S.C. LETTERHEAD]
PricewaterhouseCoopers,    S.C.

Condominio    Losoles D-21

Av. Lazaro    Cardenas Poniente 2400

66270 Garza    Garcia, N.L.

 

**REPORT OF INDEPENDENT    REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Stockholders    of 

Vitro Flex,    S.A. de C.V.: 

Monterrey,    N.L., February 13, 2004 

 

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

 

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

 

In our opinion,    the aforementioned financial statements present fairly, in all material respects,    the financial position of Vitro Flex. S.A. de C.V. at December 31, 2003 and    2002, and the results of its operations, the changes in its stockholders'    equity and the changes in its financial position for each of the two years    in the period ended December 31, 2003, in conformity with accounting principles    generally accepted in Mexico. 

 

 

/s/

C.P. Jose de Jesus Mariscal Chavez 

Partner 

Assurance and    Business Advisory Services

 

 

 

**Vitro, S.A.    de C.V. and Subsidiaries**

**Consolidated    Balance Sheets**

(Millions of    constant Mexican pesos as of December 31, 2004)

 

 

**December 31,**

**Millions of   US dollars (Convenience Translation) December 31,**

 

**2003**

**2004**

**2004**

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

Ps. 1,474

Ps. 2,828

 $ 254

Trade receivables, net  

2,325

2,259

202

Other receivables

1,390

1,289

116

Inventories

4,110

4,141

371

 

 

 

 

Current assets

9,299

10,517

943

 

 

 

 

Land and buildings  

9,467

9,071

813

Machinery and equipment  

9,792

8,403

754

Construction in progress

1,038

1,008

90

Goodwill, net of accumulated amortization of Ps.263 and  Ps.370

877

734

66

Intangible pension asset

541

442

40

Other assets

1,398

1,056

95

Long-term assets

23,113

20,714

1,858

 

 

 

 

 

 

 

 

Total assets

Ps. 32,412

Ps. 31,231

 $ 2,801

 

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

 

 

**Vitro, S.A.    de C.V. and Subsidiaries**

**Consolidated    Balance Sheets**

(Millions of    constant Mexican pesos as of December 31, 2004)

 

 

**December 31,**

**Millions of   US dollars (Convenience Translation) December 31,**

 

**2003**

**2004**

**2004**

LIABILITIES

 

 

 

 

 

 

 

Short-term borrowings  

Ps. 2,374

Ps. 2,172

 $ 195

Current maturities of long-term debt

2,357

1,097

98

Trade payables

2,301

2,144

192

Accrued expenses

774

860

77

Other current liabilities

1,596

1,500

135

Current liabilities

9,402

7,773

697

 

 

 

 

Long-term debt  

11,918

13,529

1,214

Seniority premiums, pensions and other long-term liabilities

1,587

1,692

151

Deferred tax liabilities

459

84

8

Long-term liabilities

13,964

15,305

1,373

Total liabilities

23,366

23,078

2,070

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Capital stock: no par value, 324,000,000 shares issued

324

324

29

Restatement of capital stock

6,460

6,460

579

Capital stock restated

6,784

6,784

608

Treasury stock (52,946,110 shares in 2003 and 51,044,097 in 2004)

(608)

(594)

(53)

Paid-in capital

1,017

1,017

91

Shortfall in restatement of capital

(18,158)

(18,416)

(1,652)

Cumulative initial effect of deferred taxes

(1,624)

(1,624)

(145)

Minimum pension liability adjustment

(348)

(419)

(37)

Retained earnings reserved for reacquisition of shares of  Vitro 

2,514

2,000

179

Retained earnings

16,446

16,601

1,489

Total majority interest

6,023

5,349

480

Minority interest in consolidated subsidiaries

3,023

2,804

251

Total stockholders' equity  

9,046

8,153

731

Total liabilities and stockholders' equity

Ps. 32,412

Ps. 31,231

 $ 2,801

 

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

 

 

**Vitro, S.A.    de C.V. and Subsidiaries**

**Consolidated    Statements of Operations**

(Millions of    constant Mexican pesos as of December 31, 2004, except per share amounts which    are in pesos)

 

 

**Year ended December 31,**

**Millions of   US dollars except per share amounts (Convenience Translation) Year Ended**

**December 31,**

 

**2002**

**2003**

**2004**

**2004**

Net              sales

Ps. 26,901

Ps. 26,238

Ps. 26,181

 $ 2,348

Cost              of sales

19,150

18,969

19,261

1,728

Gross profit

7,751

7,269

6,920

620

Selling,              general and administrative expenses

5,479

5,309

5,350

479

Operating income

2,272

1,960

1,570

141

Total              financing cost 

2,483

2,105

1,405

126

Operating income (loss) after financing cost

(211)

(145)

165

15

Other              expenses, net 

454

156

141

13

Income (loss) before income tax and workers' profit  sharing

(665)

(301)

24

2

Income              and asset tax

(504)

54

(52)

(5)

Workers'              profit sharing

52

40

120

11

Net loss from continuing operations  

(213)

(395)

(44)

(4)

Net loss from discontinued operations  

(128)

 

 

 

Gain              on disposal of discontinued operations 

506

 

 

 

Net income (loss) for the year

Ps. 165

Ps. (395)

Ps. (44)

Ps. (4)

Net              income of minority interest

170

201

223

20

Net              loss of majority interest

(5)

(596)

(267)

(24)

 

Ps. 165

Ps. (395)

Ps. (44)

 

 

 

 

 

 

Earnings              per common share (based on weighted average shares outstanding of              275,437,527 for 2002, 275,152,973 for 2003 and 271,840,010 for 2004):

 

 

 

 

Net loss from continuing operations

Ps. (0.77)

Ps. (1.44)

Ps. (0.16)

Ps. (0.02)

Net loss from discontinued operations

(0.47)

 

 

 

Gain              on disposal of discontinued operations

1.84

 

 

 

Net              income of minority interest

(0.61)

(0.73)

(0.82)

(0.07)

Net              loss of majority interest

Ps. (0.01)

Ps. (2.17)

Ps. (0.98)

$ (0.09)

 

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

 

 

**Vitro, S.A.    de C.V. and Subsidiaries**

**Consolidated    Statements of Changes in Financial Position**

(Millions of    constant Mexican pesos as of December 31, 2004)

 

 

**Year ended   December 31,**

**Millions of    US dollars (Convenience Translation)**

**Year ended,   December 31,**

 

**2002**

**2003**

**2004**

**2004**

OPERATING          ACTIVITIES:

 

 

 

 

Net          loss from continuing operations

Ps. (213)

Ps. (395)

Ps. (44)

 $ (4)

Add          (deduct) non cash items:

 

 

 

 

Depreciation and amortization

2,122

2,062

2,247

202

Provision for seniority premiums and pensions  

205

264

272

24

Amortization of debt issue costs

55

67

123

11

Gain from sale of subsidiaries and associated companies

(72)

(37)

(488)

(44)

Write-off and loss from sale of assets

447

129

329

30

Deferred income tax and workers' profit sharing

(925)

(138)

(155)

(14)

 

1,619

1,952

2,284

205

 

 

 

 

 

Increase          in trade receivables

(320)

(121)

(125)

(11)

Decrease          (increase) in inventories

(560)

68

(271)

(24)

Increase          (decrease) in trade payables

(274)

(176)

4

0

Change          in other current assets and liabilities, net

323

(610)

159

14

Pension          funding payments

(183)

(169)

(187)

(17)

 

 

 

 

 

Resources          generated from continuing operations

605

1,493

1,864

167

Net          loss from discontinued operations

(128)

 

 

 

Proceeds          from disposal of discontinued operations

1,551

 

 

 

Operating          assets and liabilities from discontinued operations

182

 

 

 

 

 

 

 

 

Resources generated from operations

2,210

1,493

1,864

167

 

 

 

 

 

FINANCING          ACTIVITIES:

 

 

 

 

Short-term          bank loans

6,021

2,741

3,466

311

Long-term          bank loans

4,257

6,291

6,063

544

Capital          stock contributed by minority interest

8

 

 

 

Monetary          effect on liabilities with financing cost

(858)

(647)

(827)

(74)

Payment          of short-term loans

(6,775)

(5,440)

(4,478)

(402)

Payment          of long-term loans

(2,031)

(3,061)

(3,852)

(346)

Acquisition          of treasury stock

 

(64)

 

 

Sale          of treasury stock 

26

16

14

1

Dividends          paid to stockholders of Vitro, S.A. de C.V.

(85)

(117)

(92)

(8)

Dividends          paid to minority interest

(300)

(134)

(150)

(13)

Effect          from discontinued operations

(46)

 

 

 

Resources          generated from(used in) financing activities

217

(415)

144

13

 

 

 

 

 

INVESTING          ACTIVITIES:

 

 

 

 

Investment          in land and buildings and machinery and equipment

(1,136)

(1,871)

(1,453)

(130)

Sale          of land and buildings and machinery and equipment

153

46

20

2

Investment          in subsidiaries and associated companies

(13)

 

 

 

Sale          of subsidiaries and associated companies

126

201

889

80

Long-term          investments

(54)

(238)

186

16

Effect          from discontinued operations

(6)

 

 

 

Other

(220)

(226)

(296)

(26)

 

 

 

 

 

Resources used in investing activities

(1,150)

(2,088)

(654)

(58)

Net increase(decrease) in cash and cash equivalents

1,277

(1,010)

1,354

122

Balance          at beginning of year

1,207

2,484

1,474

132

Balance at end of year

Ps. 2,484

Ps. 1,474

Ps. 2,828

$ 254

 

 

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

 

 

**Vitro, S.A.    de C.V. and Subsidiaries**

**Consolidated    Statements of Stockholders' Equity**

(Millions of    constant Mexican pesos as of December 31, 2004, except per share amounts)

 

 

**Capital            stock restated**

**Treasury            stock and paid-in capital**

**Shortfall            in restatement of capital**

**Cumulative            initial effect of deferred taxes**

**Minimum            pension liability adjustment**

**Retained            earnings**

**Minority            interest**

**Stockholders'            equity**

**Balance          at January 1, 2002**

Ps. 6,784

Ps. 431

Ps. (18,265)

Ps. (1,624)

Ps. (210)

Ps. 19,763

Ps. 4,171

Ps. 11,050

Dividends          (Ps.0.27 per share)

 

 

 

 

 

(85)

 

(85)

Decrease          in minority interest

 

 

 

 

 

 

(1,489)

(1,489)

Paid-in          capital

 

8

 

 

 

 

 

8

Comprehensive          income

 

 

18

 

(116)

(5)

374

271

**Balance          at**

**December          31, 2002**

6,784

439

(18,247)

(1,624)

(326)

19,673

3,056

9,755

Dividends          (Ps.0.39 per share)

 

 

 

 

 

(117)

 

(117)

Decrease          in minority interest

 

 

 

 

 

 

(136)

(136)

Paid-in          capital

 

18

 

 

 

 

 

18

Acquisition          of treasury stock

 

(64)

 

 

 

 

 

(64)

Sale          of treasury stock

 

16

 

 

 

 

 

16

Comprehensive          loss

 

 

89

 

(22)

(596)

103

(426)

**Balance          at**

**December          31, 2003**

6,784

409

(18,158)

(1,624)

(348)

18,960

3,023

9,046

Dividends          (Ps.0.31 per share)

 

 

 

 

 

(92)

 

(92)

Decrease          in minority interest

 

 

 

 

 

 

(322)

(322)

Sale          of treasury stock

 

14

 

 

 

 

 

14

Comprehensive          loss

 

 

(258)

 

(71)

(267)

103

(493)

**Balance          at**

**December          31, 2004**

Ps.            6,784

Ps.            423

Ps.            (18,416)

Ps.            (1,624)

Ps.            (419)

Ps.            18,601

Ps.            2,804

Ps.            8,153

 

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

 

 

**Vitro, S.A.    de C.V. and Subsidiaries**

**Notes to Consolidated    Financial Statements**

(Millions of    constant Mexican pesos as of December 31, 2004, except per share amounts)

 

**1. Activities    of the company**

 

Vitro, S.A.    de C.V. ("Vitro") is a holding company, whose subsidiaries manufacture and    market glass, flat glass for construction and automotive uses, glassware for    table and kitchen use, thermoformed articles, chemical products and minerals,    and capital goods.

 

**2. Basis    of presentation and principles of consolidation**

 

*a) Basis    of presentation*

 

The consolidated    financial statements of Vitro and its subsidiaries (the "Company") are prepared    in accordance with accounting principles generally accepted in Mexico ("Mexican GAAP"), as further described in note 3.

 

The consolidated    financial statements presented herein are expressed in millions of constant    Mexican pesos as of December 31, 2004, except per share amounts. However,    solely for the convenience of users, the consolidated financial statements    as of and for the year ended December 31, 2004 have been translated into United    States ("US") dollars at the rate of Ps.11.1495 per one dollar, the rate of    exchange determined by Banco de Mexico (Mexico's Central Bank) on December    31, 2004. Such arithmetical translation should not be construed as a representation    that the peso amounts shown could be converted into US dollars at such rate    or at any rate.

 

All references    to dollars, in the financial statements and these notes, correspond to dollars    of the United States of America. 

 

*b) Consolidated    subsidiaries*

 

Those companies    in which Vitro holds, directly or indirectly, more than 50% of the capital    stock, or which Vitro controls, are included in the consolidated financial    statements. For those companies in which Vitro has joint control, the proportionate    consolidation method is used. This method consists of consolidating on a proportionate    basis the assets, liabilities, stockholders' equity and revenues and expenses.    All significant intercompany balances and transactions have been eliminated    in consolidation. The main subsidiaries the Company consolidates are:

 

FLAT GLASS

Vitro Plan, S.A. de C.V.

(65%)

GLASS CONTAINERS

Vitro Envases Norteamerica,  S.A. de C.V.

(100%)

GLASSWARE

 

 

Vitro              Vidrio y Cristal, S.A. de C.V

  Compania              Vidriera, S.A. de C.V.

Vitrocrisa Holding, S. de R.L. de C.V. (51%)

Distribuidora de Vidrio de Mexico, S.A. de C.V.

Vidriera Monterrey, S.A. de C.V.

-Vitrocrisa, S. de R.L. de C.V.

Vitro              Automotriz, S.A. de C.V

Vidriera Guadalajara, S.A. de C.V.

-Vitrocrisa Comercial, S. de  R.L. de C.V.

Distribuidora Nacional de Vidrio, S.A. de C.V.

Vidriera              Los Reyes, S.A. de C.V.

Plasticos Bosco, S.A. de C.V.

Vidrio Plano de Mexico, S.A. de C.V.

Vidriera              Mexico, S.A. de C.V.

Fabricacion              de Cubiertos, S.A. de C.V.

Vitro Flex, S.A. de C.V. (62%)

 

Vitro AFG, S.A. (50%)

Vidriera              Queretaro, S.A. de C.V.

 

Vidriera              Toluca, S.A. de C.V.

CORPORATE

Cristales Automotrices, S.A. de C.V. (51%)

Vitro Packaging, Inc.

Vitro Corporativo, S.A. de C.V.

Vitro America, Inc.

Empresas Comegua S.A. (49.7%)

Servicios              y Operaciones Financieras Vitro, S.A. de C.V.

Vitro Colombia, S.A.

Vidrio Lux, S.A.

Fomento              Inmobiliario y de la Construccion, S.A. de C.V.

Quimica M, S.A. de C.V. (51%)

Industria del  Alcali, S.A. de C.V.

Aerovitro, S.A. de C.V.

Vitro Cristalglass, S.L. (60%)

Fabricacion              de Maquinas, S.A. de C.V.

 

Vitro              Chaves Industria de Vidro, S.A. (60%)

 

 

 

Until December    31, 2003, Vitro's subsidiaries Vitromatic, S.A. de C.V. and subsidiaries (see    note 18 b); Empresas Comegua, S.A. and subsidiaries ("Comegua"); and Vitro    Flex, S.A. de C.V.; were audited by public accounting firms other than the    Company's principal auditor. Vitromatic S.A. de C.V. and subsidiaries were    audited by auditors other than the Company's principal auditor through December    31, 2001.

 

In order to    consolidate the financial statements of foreign subsidiaries, the effects    of inflation were taken into consideration in accordance with Bulletin B-10    "Recognition of the Effects of Inflation in Financial Information", as amended.    Such companies' financial statements are translated into Mexican pesos under    the current rate method. The assets, liabilities, stockholders' equity (except    capital stock) and the statement of operations accounts are translated into    Mexican pesos using the exchange rate as of the date of the most recent balance    sheet presented. The cumulative translation adjustment is included as a component    of stockholders' equity.

 

*c) Investment    in associated companies*

 

Associated    companies are those companies in which Vitro holds, as a permanent investment,    less than 50% of the capital stock and maintains significant influence. Such    investments are accounted for by the equity method.

 

**3. Principal    accounting policies**

 

*a) Accounting    method for the treatment of the effects of inflation*

 

The  consolidated financial statements of the Company have been prepared in  accordance with Bulletin B-10, as amended, issued by the Mexican Institute of  Public Accountants ("IMCP"), which relates to the recognition of the effects of inflation. The    Third Amendment to Bulletin B-10 (the "Third Amendment") has been adopted    in preparing such consolidated financial statements. The Third Amendment requires    the restatement of all comparative financial statements to constant pesos    as of the date of the most recent balance sheet presented. For that purpose,    Vitro's Mexican subsidiaries use the "Indice Nacional de Precios al Consumidor"  (Mexican National Consumer Price Index: "INPC"), published by Banco de Mexico.    For Vitro's foreign subsidiaries the Consumer Price Index - All Urban Consumers    - All Items, Unadjusted ("CPI") published by the US Labor Department is  used, and the financial statements are translated using the US dollar exchange  rate at the end of the last period presented, except in the case of the  subsidiaries located in Spain for which it applies the Index of Prices of  Consumption ("IPC"),    published by the National Institute of Statistics of Spain and are translated    using the exchange rate of the Euro.

 

Bulletin B-12    "Statements of Changes in Financial Position" establishes presentation requirements    related to the statement of changes in financial position. This statement    presents the sources and uses of funds during the period measured as the differences,    in constant pesos, between the beginning and ending balances of balance sheet    items adjusted by the excess (shortfall) in restatement of capital. As required    by Bulletin B-12, the monetary effect and the effect of changes in exchange    rates are not considered non-cash items in the determination of resources    generated from operations due to the fact they affect the purchasing power    of the entity.

 

*b) Cash    and cash equivalents*

 

Highly liquid    short-term investments with original maturity of ninety days or less, consisting    primarily of Mexican Government Treasury Bonds through money market instruments,    are classified as cash equivalents. They are valued at the lower of acquisition    cost plus accrued yields or estimated net realizable value. 

 

*c) Financial    instruments*

 

Assets and    liabilities resulting from any financial instrument, except for such instruments    held to maturity, are recorded in the balance sheet at fair value. The financial    instruments held to maturity are valued at their acquisition cost. The effects    of valuation of the financial instruments, including their cost and yield    are recorded in the corresponding year in the statement of operations.

 

Financial instruments    for hedging purposes, are valued using the same criteria of valuation of the    assets or liabilities hedged, and the effect of such valuation is recognized    in net income, net of costs, expenses, or income from the assets or liabilities    whose risks are being hedged.

 

*d) Inventories    and cost of sales*

 

Inventories    are valued at the price of the last purchase made during the year or at the    latest production cost without exceeding net realizable value. Cost of sales    is determined by using the price of the last purchase prior to the date of    consumption or the latest production cost at the time of sale.

 

*e) Land,    buildings, machinery and equipment*

 

Expenditures    for land, buildings, machinery and equipment, including renewals and improvements    that extend useful lives, are capitalized and restated based on the method    of consumer price index adjustment, using the INPC. The initial balance to    apply the INPC was the net replacement value as of December 31, 1996. For    machinery and equipment purchased in a foreign country, the restatement is    based on a general consumer price index from the country of origin and the    exchange rate at the end of each period. 

 

Maintenance    and repair expenses are recorded as costs and expenses in the period incurred.

 

Depreciation    is calculated using the straight-line method, taking into consideration the    estimated useful life of the asset, in order to depreciate the original cost    and the revaluation. The depreciation begins in the month in which the asset    is placed in service. The estimated useful lives of the assets are as follows:

 

Years

Buildings

20 to 50

Machinery and equipment

5 to 30

 

In December    2004, the Company modified its depreciation and capitalization policy for    molds, changing the useful life from 8 to 3 years. This generated an additional    depreciation charge of approximately Ps.119. The change also produced additional    capitalization of approximately Ps.54, representing a credit to the results    of the Company. This modification is consistent with industry practices.

 

*f) Impairment    of long-lived assets in use*

 

The Company    reviews the carrying amounts of long-lived assets in use when a potential    impairment indicator suggests that such amounts might not be recoverable,    considering the greater of the present value of discounted future net cash    flows or the net selling price upon disposal. Impairment is recorded when    the carrying amounts exceed the greater of the amounts mentioned above. 

 

*g) Goodwill*

 

Goodwill is    amortized on a straight-line basis over a period of 20 years. Amortization    expense for the years ended December 31, 2002, 2003 and 2004 was Ps.58, Ps.60    and Ps.49, respectively. Additionally as of December 31, 2003 and 2004 an    additional cost in operations of Ps.26 and Ps.70, respectively corresponding    to the impairment of goodwill was recorded.

 

*h) Seniority    premiums, retirement plans and severance payments*

 

Cost associated    with seniority premiums and pension plans for all personnel are recorded in    the periods in which services are rendered. Periodic costs are calculated    in accordance with Bulletin D-3 "Labor Obligations" issued by the IMCP, and    the actuarial computations were made by an independent actuary, using estimates    of the salaries that will be in effect at the time of payment. The past service    cost is amortized over the average period required for workers to reach their retirement age. The method used is the projected unit credit. The Company    funds a trust in order to cover the payment of such liabilities.

 

Severance payments    are expensed in the period in which such payments are made.

 

*i) Shortfall    in restatement of capital*

 

This item,    which is an element of stockholders' equity, reflects the accumulated effect    of holding non-monetary assets and the effect of the initial monetary position    gain or loss. The cumulative effect of holding non-monetary assets represents    the difference between the specific values of non-monetary assets in excess    of or below the increase attributable to general inflation.

 

*j) Restatement    of capital stock and retained earnings*

 

Capital stock    and retained earnings, for Mexican subsidiaries, are restated using the INPC    from the respective dates such capital was contributed or net income generated    to the date of the most recent balance sheet presented. Retained earnings    for foreign subsidiaries are restated using the CPI, except in the case of    the subsidiaries located in Spain for which the Company applies the IPC.

 

*k) Employee    stock option plan*

 

An employee    stock option plan (see note 13 b) was adopted in 1998. The Company is accounting    for stock-based compensation using a fair value based method. Compensation    cost is measured at the grant date based on the fair value of the stock option    award and is recognized over the vesting period.

 

*l) Transactions    in foreign currency for Mexican subsidiaries*

 

All transactions    in foreign currency are translated at the exchange rate as of the date of    such transactions. Monetary assets and liabilities denominated in foreign    currency are translated into Mexican pesos at the exchange rate at the date    of the financial statements. Exchange fluctuations are recorded in the statements    of operations as part of the total financing cost.

 

*m) Revenue    recognition*

 

Revenues and    related costs are recognized in the period in which risks and benefits are    transferred to purchasers, which generally coincides with the shipment of    products to customers in satisfaction of orders.

 

*n) Gain    (loss) from monetary position*

 

The gain (loss)    from monetary position reflects the result of holding monetary assets and    liabilities during periods of inflation. Values stated in current monetary    units decrease in purchasing power over time. This means that losses are incurred    by holding monetary assets over time, whereas gains are realized by maintaining    monetary liabilities. The net effect is presented in the statements of operations    as part of the total financing cost. For foreign subsidiaries the result from    monetary position is calculated using the CPI, except in the case of the subsidiaries    located in Spain for which it applies the IPC.

 

*o) Income    tax, tax on assets and profit sharing to workers*

 

The Company    applies the provisions of the Bulletin D-4 "Accounting Treatment of Income    Tax, Tax on Assets and Workers' Profit Sharing", issued by the IMCP. As required    by this bulletin, deferred income taxes are provided for differences between    the book and tax value of assets and liabilities and deferred workers' profit    sharing for temporary differences between the financial and adjusted tax income,    that are expected to reverse in the future. Additionally, tax on assets paid    in excess of income tax payable is recognized as an asset to the extent it    is recoverable. 

 

*p) Earnings    per share*

 

Earnings per    share are computed by dividing income by the weighted average number of shares    outstanding during each period. Diluted earnings per share is not presented    for periods in which all common stock equivalents are anti-dilutive or periods    in which the Company records a net loss from continuing operations.

 

*q) Use of    estimates*

 

The preparation    of financial statements in conformity with generally accepted accounting principles,    requires management to make estimates and assumptions that affect the reported    amounts in these consolidated financial statements and in the related disclosures.    Actual results could differ from those estimates.

 

*r) Foreign    Subsidiaries as Economic Hedges*

 

In March 2004,    management designated some of its foreign subsidiaries as economic hedges,    whose accounting treatment is as follows:

 

The results    from exchange rate fluctuation and from monetary position are presented in    shortfall in restatement of capital within stockholders' equity, to the extent    the net investment in the foreign subsidiary covers the debt. The results    from monetary position are measured using inflation factors from the designated    subsidiary's country of origin. The effect related to this change on the results    of operations for the year 2004 was a benefit of Ps.2.

 

**4. Discontinued    operations**

 

On July 3,    2002, Vitro sold its 51% interest in Vitromatic, S.A. de C.V ("Vitromatic")    the holding company of the subsidiaries that comprised the segment Acros -    Whirlpool. Vitro sold its ownership in Vitromatic to Whirlpool Corporation,    who owned the related remaining 49% interest, for $ 148.3 million. Such sale    resulted in a gain of Ps.506 which is presented in the consolidated statement    of operations in the line item "Income on disposal of discontinued  operations."

 

The statement    of operations for 2002 has been restated to present the results of Vitromatic    as a discontinued operation. The condensed statement of operations of Vitromatic    is comprised as follows:

 

 

**Period from              January 1,              to June 30, 2002              (unaudited)**

Net              sales

Ps. 3,623

Cost              of sales

 3,032

Gross              profit

 591

Selling,              general and administrative expenses

 334

Operating              income

 257

Financing              cost and other

 486

Income              tax

 (101)

Net              loss

Ps. (128)

 

**5. Trade    receivables**

 

a) Trade    receivables are recorded net of allowance for doubtful accounts of Ps.77 and    Ps.89 at December 31, 2003 and 2004, respectively.

 

b) Sales    of receivables. - The Company has entered into several factoring agreements    to sell trade accounts receivable. In accordance with the terms of some of    these agreements, the Company has the obligation to pay uncollected receivables,    in the case of non-compliance of clients. The outstanding balance of receivables    sold, which are deducted from the trade receivables balance, at December 31,    2003 and 2004 amounted to approximately $ 70 and $ 74 million, respectively,    as follows: 

 

  • Covisa Agreement.    In August 2000, the Company entered into a factoring agreement with Transamerica    Commercial Finance Corporation and its affiliates (collectively, "TCFC")    covering the sale of its accounts receivable related to its Glass Containers    business in Mexico. Pursuant to the terms of this arrangement, the Company    agreed to sell and TCFC agreed to purchase, on a non-recourse basis but subject    to a garantia de cobro ("collection guarantee") certain eligible    accounts receivable. As of December 31, 2003 and 2004, the Company had sold    approximately $50 million and $53 million, respectively, of receivables under    this agreement, which are excluded from the accompanying balance sheets. At    any given time, the maximum capacity available under this agreement was $75    million. In connection with the sale of the accounts receivable to TCFC, the    Company assigned all of its title and interest in such accounts receivable    along with all of its interest in the goods represented by such accounts receivable    to TCFC.

 

The Company    retained collection and administrative responsibilities for the accounts receivable    sold to TCFC. However, the servicing obligations of the Company and its affiliates    to TCFC were performed by TDFM, an affiliate of TCFC, under a servicing agreement    to render exclusive accounts receivable management services. The liability    to service the receivables sold was not material to the Company's consolidated    financial statements.

The Company's    recourse liability was limited to (i) a garantia de cobro ("collection    guarantee"), that is with respect to any accounts receivable sold to    guarantee that such receivable was validly assigned and that the obligation    of the customer underlying such receivable represented a valid and enforceable    claim of payment (ii) a first loss risk pool in the amount of $5 million for    any losses that TCFC could incur with respect to the receivables purchased. The recourse obligation recorded by the Company was approximately $ 0.1 million    as of December 31, 2003 and 2004.

 

• Vitro Cristalglass, S.L. ("Vitro Cristalglass"), the Company's subsidiary in Spain, has fourteen    agreements whereby designated accounts receivable are sold with recourse at    a discount to financial institutions. It is Vitro's policy to endorse all    documents sold to the banks, such that the banks as the bearers of the endorsed    documents have been transferred legal title of such receivables. The banks    have the legal right to transfer such receivables at their discretion as Vitro    Cristalglass has transferred their control upon endorsement. At any given    time, the maximum capacity available under these agreements is $21 million.    At December 31, 2003 and 2004, the Company had sold approximately $20 million    and $21 million, respectively, of receivables under these agreements, which    are excluded from the accompanying balance sheets. The recourse obligation    was not material to the Company's consolidated financial statements.

 

c) Securitization of trade receivables - Vitro America, Inc. ("VVP") Agreement. In 2003, VVP    entered into an agreement to sell of its accounts receivable, on a revolving    basis, to VVP Funding, a wholly-owned subsidiary of VVP. VVP Funding is a    special-purpose entity that was formed prior to the execution of this agreement    for the sole purpose of buying and selling accounts receivable and is designed    to be bankruptcy remote. During June 2003, VVP and VVP Funding entered an    agreement with an unrelated major financial institution whereby VVP Funding    sells, on a revolving basis and subject to the maintenance of certain financial    and receivables-based ratios, an undivided percentage ownership in all eligible    accounts receivable, as defined therein, for consideration composed of cash,    up to a maximum account of $40 million, and retained undivided interests in    securitized receivables. The agreement expired on June 30, 2004. The transfer    of undivided ownership interests from VVP Funding to the unrelated major financial    institution for cash consideration is accounted for as a sale of receivables.

 

During 2004,    VVP and VVP Funding entered into an agreement with another unrelated financial    institution substantially similar to the agreement above. VVP and VVP Funding    may sell, on a revolving basis and subject to the maintenance of certain financial    and receivables-based ratios, an undivided percentage ownership in all eligible    accounts receivable, as defined therein, for consideration composed of cash,    up to a maximum amount of $40 million, and retain undivided interests in securitized    receivables. The agreement expires in May 2007 buy is subject to annual renewal    approval by the financial institution. Similar to the previous securitization    agreement, the transfer of undivided ownership interests from VVP Funding    to the unrelated major financial institution for cash consideration is accounted    for as a sale of receivables.

 

The gross receivables    sold, totaling approximately $57 million and approximately $63 million at    December 31, 2003 and 2004, respectively, are reflected as a reduction of    trade receivables. Estimated fair value of the retained undivided interests    in securitized receivables at December 31, 2004 totaled approximately $29    million and was determined based on expected credit losses and allowances    of 3%, expected average receivable collection time of 52 days, and expected    short-term commercial paper rates of 2.3% per annum. The Company has completed    a sensitivity analysis on the estimated fair value of the retained undivided    interests with the objective of measuring the change in value associated with    changes in individual key variables. A ten percent increase in expected credit    losses and allowances, to 3.3%, would decrease the year-end valuation by approximately    $269 thousand, and twenty percent increase in expected credit losses and allowances,    to 3.6%, would decrease the year-end valuation by approximately $539 thousand.    Similar ten or twenty percent adverse fluctuations in either average receivable    collection time or expected short-term commercial papers rates would not significantly    affect the recorded fair value of the retained undivided interests. This sensitivity    analysis is hypothetical and should be used with caution. Changes in fair    value based on a ten or twenty percent variation should not be extrapolated    because the relationship of the change in assumption to the change in fair    value may not always be linear. 

 

Proceeds received    by VVP from the revolving securitizations aggregated to approximately $291    million and $448 million for the years ended December 31, 2003 and 2004, respectively,    and are included in operating activities. Losses on the sales of accounts    receivable totaled approximately $500 thousand and $1 million for the years    ended December 31, 2003 and 2004, respectively, and are included in selling,    general and administrative expenses. Delinquencies on securitized receivables,    representing amounts over 60 days past due, totaled approximately $9 million    at December 31, 2004, with credit losses totaling approximately $3 million    for the year then ended. VVP continues to service the securitized receivables,    receiving compensation that is approximately equal to its cost of such servicing;    accordingly, no servicing assets or liabilities are recorded. For the years    ended December 31, 2003 and 2004, the Company received servicing feed totaling    approximately $ 0.6 million and $ 0.5 million, respectively.

 

**6. Inventories**

 

Inventories    are summarized as follows:

 

 

December 31,

 

2003

2004

Semi-finished              and finished products

Ps.              2,794

Ps.              2,893

Raw              materials

673

595

Packaging                materials

86

100

 

3,553

3,588

Spare              parts

310

259

Refractory

27

35

Merchandise              in transit

196

247

Other

24

12

 

Ps.                4,110

Ps.                4,141

 

**7. Land    and buildings and machinery and equipment**

 

Land and buildings    and machinery and equipment are summarized as follows:

 

 

**December 31,**

 

**2003**

**2004**

Land

Ps. 3,748

Ps. 3,635

Buildings

11,186

10,843

Accumulated depreciation

5,467

5,407

 

Ps. 9,467

Ps. 9,071

Machinery and equipment

Ps. 28,682

Ps. 26,935

Accumulated depreciation

18,890

18,532

 

Ps. 9,792

Ps. 8,403

 

**8. Short-term    borrowings**

 

At December    31, 2003 and 2004, short-term borrowings denominated in Mexican pesos totaled    Ps.178 and Ps.600, respectively, and short-term borrowings denominated in    foreign currency totaled Ps.2,196 and Ps.1,572, respectively. During 2004,    the Company's weighted average rate for short-term borrowings in Mexican pesos    was 10.09% and for short-term borrowings denominated in dollars was 4.93%.    

 

**9. Long-term    debt**

 

a) Long-term    debt consists of the following:

 

 

 

**December 31,**

 

 

**2003**

**2004**

*I.*

*Foreign Subsidiaries (payable in US Dollars)*:

 

 

 

  Secured debt, floating interest rate based on LIBOR plus a spread between  1.25% and 3.00%, principal payable in several installments through 2009.

Ps. 190

Ps.              135

 

  Unsecured debt, floating interest rate based on LIBOR plus a spread of 2.50%,  principal payable in several installments through 2009.

 

61

*II*.

*Foreign Subsidiaries (payable in Euros):*

 

 

 

Secured debt, floating interest rate based on EURIBOR plus  a spread of 1.25%, principal payable in several installments through 2008.

34

15

 

Unsecured debt, floating interest rate based on EURIBOR  plus a spread between 0.75% to 2.5%, principal payable in several  installments through 2009.

 117

 114

*III.*

*Vitro and Mexican Subsidiaries (payable in US Dollars):*

3,713

2,430

 

Secured debt, floating interest rate based on LIBOR plus a  spread between 2.0% and 4.0%, principal payable in several installments through  2009.

 

 

 

Unsecured debt, floating interest rate based on LIBOR plus  a spread between 0.25% and 2.95%, principalpayable in several installments  through 2008.

805

194

 

10.75% Senior secured guaranteed notes due in 2011.

 

1,813

 

Senior secured term loan, floating interest rate based on  LIBOR plus a spread between 10.25% and 13.75%, principal payable in 2006.

 

2,564

 

Unsecured debt, fixed interest rate of 11.50%, principal  payable in several installments through 2009.

732

475

 

11.375% Guaranteed senior unsecured notes due in 2007.

 2,065

 1,806

 

11.75% Guaranteed senior unsecured notes due in 2013.

2,634

2,487

*IV.*

*Vitro              and Mexican Subsidiaries (payable in Mexican Pesos):*

 

 

 

Unsecured medium term notes, floating interest rate based  on 182 day treasury bonds (CETES) plus a spread between 2.4% and 3.25%,  principal payable in 2004, 2008 and 2009.

1,915

716

 

Secured debt, floating interest rate based on 28 day  interbank interest rate (TIIE) plus a spread of 2.0%, principal payable in  several installments through 2007.

626

502

*V.*

*Vitro and Mexican Subsidiaries denominated in  investment units (UDI's) payable in Mexican Pesos:*

 

 

 

Unsecured debt, interest rate of UDI's plus 8.75% and 9.0%,  principal payable in several installments through 2006.

129

70

 

Unsecured medium term notes, fixed interest rate between  9.0% and 9.9%, principal payable in 2006.

1,152

1,244

 

Unsecured medium term notes, floating rate based on UDI's  plus 1.75%, principal payable in 2004.

 163

 

 

 

14,275

14,626

 

Less current maturities

2,357

1,097

 

 

Ps. 11,918

Ps. 13,529

 

As of December    31, 2004, the interest rates of EURIBOR, CETES, TIIE and LIBOR were 2.30%,    8.51%, 8.93% and 2.49%, respectively.

 

The schedule    of contractual principal payments of long-term debt as of December 31, 2004    is as follows:

 

**Year ending December 31,**

 

 

 

2006

Ps. 5,049

2007

2,595

2008

864

2009

721

2010 and thereafter

4,300

 

Ps. 13,529

 

b) Certain    of the Company's long-term debt agreements contain restrictions and covenants    that require the maintenance of various financial ratios. At no time has the    Company failed to make required capital or interest payments. The failure    to meet certain of the covenants related to financial ratios as of December    31, 2004 did not allow the lender to accelerate the maturity of these debt    agreements.

 

In addition,    under certain of our subsidiaries' credit agreements; if the subsidiary does    not meet certain financial ratios or other conditions, its ability to pay    dividends is restricted. During 2003 and 2004, certain subsidiaries were restricted    from paying dividends by the credit agreements.

 

Additionally,    in some of the Company's credit facilities, if it does not meet certain financial    ratios at a consolidated level, its ability to incur additional debt is restricted.    As of December 31, 2004, the Company is restricted to a maximum of $ 100 million    of additional debt for working capital needs, capital expenditures and interest    payments and an additional $ 25 million for any other purpose. The capacity    of refinancing debt by the Company is not limited.

 

c) Debt    of the Company totaling Ps.4,961 is collateralized by fixed assets, inventory,    machinery, equipment, trade receivables and a first priority lien on its 49.7%    equity interest in Comegua, with a book value of Ps.11,216 as of December    31, 2004.

 

Additionally,    Ps.2,498 of debt is collateralized with by cash of Ps.282, which is presented    in long-term other assets in the balance sheet.

 

d) The 11.375%    Guaranteed senior unsecured notes due in 2007 were issued by Servicios y Operaciones    Financieras Vitro, S.A. de C.V. ("SOFIVSA"), which is a 100% owned finance    subsidiary of the Company. The Company has fully and unconditionally guaranteed    the senior unsecured notes and there are no restrictions on the ability of    the Company to obtain funds from SOFIVSA by dividend or loan.

 

e) The Company    uses derivative financial instruments as forward contracts, foreign currency    swaps ("currency swaps"), currency options and interest rate swaps    to manage its exposure to fluctuations in foreign currency exchange rates    and interest rates. The Company formally documents all relationships between    hedging instruments and hedged items, as well as its risk management objectives    and strategies for undertaking various derivative transactions. It is the    Company's policy not to enter into derivative financial instruments for speculative    purposes.

 

The following    table summarizes the derivative financial instruments in place as of December    31, 2004.

 

**Type of  transaction**

**Commencement  date**

**Termination  date**

**Notional  amount**

**Contract  currency**

**Foreign  exchange rate**

Foreign Currency  Options

June 02, 2004

February 15, 2005

$3.7 million

Peso

Ps.12.50

Foreign Currency  Options

June 02, 2004

March 15, 2005

$14.6 million

Peso

Ps.12.50

Foreign Currency  Options

June 18, 2004

May 13, 2005

$14.0 million

Peso

Ps.12.50

 

During 2004,    the Company cancelled some of its derivative transactions, including interest    rate swaps, forward contracts and currency swaps. The effects in the statements    of operations of the above mentioned transactions with derivative financial    instruments were:

 

 

**Income (expense)   Year ended December 31,**

 

**2003**

**2004**

 

 

 

Interest rate swaps

Ps. (173)

Ps. (268)

Forward contracts

18

(116)

Currency swaps

(11)

(25)

Premiums on foreign currency options

 

(11)

Net

Ps. (166)

Ps. (420)

 

**10. Pension    plans and seniority premiums**

 

The disclosures    relating to the Company's pension plans and seniority premiums required by    Bulletin D-3, issued by IMCP, calculated as described in note 3 h), together    with certain actuarial assumptions utilized, are presented below as of December    31, 2003 and 2004:

 

 

**December 31,**

 

**2003**

**2004**

Accumulated benefit obligation

Ps. 1,849

Ps. 2,009

 

 

 

Projected benefit obligation

Ps. 2,379

Ps. 2,623

Plan assets at fair value

(582)

(554)

Unrecognized net loss

(214)

(174)

Unrecognized transition obligation

(380)

(268)

Changes in assumptions and adjustments from experience

(856)

(1,239)

Projected net liability

Ps. 347

Ps. 388

Additional minimum liability

Ps.1,093

Ps. 1,122

Net periodic cost (Ps. 234 for 2002)

312

322

 

At December 31,    2004, the plan assets presented above, include 39.2 million shares of    Vitro.

 

**Assumptions**

**December 31,**

 

**2003**

**2004**

Discount rate

5.75%

5.75%

Expected rate of return on plan assets

7.0%

7.0%

Rate of compensation increase

0.0%

0.0%

 

**11. Commitments    and contingencies**

 

a) Several    subsidiaries of Vitro, which have facilities throughout Monterrey, Mexico    and Mexico City area, entered into a 15 year energy purchase agreement for    approximately 100 Megawatts of electricity and 1.3 million tons of steam per    year, with Tractebel Energia de Monterrey, S. de R.L. de C.V. ("Tractebel").    Tractebel started operations in April 2003.

 

b) The Company    uses different derivative instruments to manage its exposure to the volatility    of gas natural prices. The portfolio is dynamically managed, in accordance    with the guidelines and policies set by management.

 

The Company's  natural gas consumption during 2004 was approximately 24,732,000 million  British Thermal Units ("MMBTUS"). During 2004, the company hedged for approximately    57% of its consumption of natural gas at an average price of $ 5.03 dollar    per MMBTUS.

 

The market    average price per MMBTUS during 2004 was $ 6.14.

 

The percentage    of consumption hedged can vary from 10% to 100% of the estimated consumption.    The percentage of consumption hedged and the hedged prices, change constantly    according to market conditions based on the Company's needs and to the use    of alternative fuels within its production processes. As of December 31, 2004,    the Company had hedges equivalent to 55% of estimated natural gas consumption    for 2005.

 

As of February    25, 2005, the Company had hedges equivalent to approximately 20% - 30% of    the annual consumption at an average of $ 6.89 dollars by MMBTUS.

 

As of February    25, 2005, the market price for MMBTUS was $ 6.72 dollars.

 

c) The Company    has several non-cancellable operating lease agreements for the rent of warehouses    and equipment. Rental expense for the years 2002, 2003 and 2004 was Ps.628,    Ps.663 and Ps.608, respectively.

 

Future minimum    lease payments under these agreements are as follows:

 

2005

Ps. 417

2006

348

2007

278

2008

220

2009

178

2010 and thereafter

264

 

d) The Company    is not a party to, and none of its assets are subject to, any pending legal    proceedings, nor is the Company subject to any contingent liabilities, other    than as described in note 11 e) and legal proceedings and contingent liabilities    arising in the ordinary course of business and against which the Company is    adequately insured or indemnified or which the Company believes are not material    in the aggregate.

 

e) As part    of the Company's disposal of Anchor Glass Containers Corporation ("Anchor")    in 1996, in a transaction approved by the U.S. Bankruptcy Court, Vitro provided    to the Pension Benefit Guaranty Corporation ("PBGC"), a US government    agency that guarantees pensions, a limited guarantee of Anchor's under funded    pension liability. No payments would be made under the guarantee unless the    PBGC terminated any of Anchor's pension plans, and the guarantee would be    payable only to the extent the PBGC could not otherwise recover the under    funded liabilities from the entity that purchased Anchor's assets.

 

The amount    of the guarantee was originally limited to $ 70 million. The payments would    not begin until August 1, 2002 and would be payable in equal semi-annual installments    over the following 10 years. Payments would not bear interest. The amount    and the term of the guarantee would be proportionately reduced if the pension    plans were terminated after January 31, 2002.

 

Beginning February    2002, the guarantee would be reduced by $ 7 million semi-annually until August    1, 2006, when the guarantee would expire if the plans did not terminate.

 

On April 15,    2002, Anchor filed a pre-negotiated plan of reorganization under Chapter 11    of the U.S. Bankruptcy Code. On August 8, 2002, an amended plan of reorganization    was confirmed, pursuant to which the plan of Anchor was terminated and the    obligations thereunder were assumed by PBGC in exchange for cash, securities    and the commitment of carrying out certain future payments. The actual date    of termination is not known. On June 20, 2003, PBGC asked for payment from    Vitro under the limited guarantee stating that the Plan had terminated on    July 31, 2002 and demanded payment of $ 7 million on August 1, 2003 and $    3.5 million semi-annually through August 1, 2011. As of today the Company    has not made any payment. There are various issues concerning such demand,    and certain defenses may be asserted by the Company. At this point it is not    possible to reasonably estimate the amounts that might ultimately be paid.

 

f) The Company    is in the process of litigation with the Mexican Tax Authorities (Secretaria    de Hacienda y Credito Publico), in relation to Asset Tax (Impuesto al Activo)    that the Company considers was unnecessarily paid between 1994 and 1998. If    the Company obtains a favorable result, in addition to the amount of the restated    tax paid, there is a possibility of recovering interest from the date of the    payment to the date of its recovery. No asset has been recorded for this contingent    interest income as of December 31, 2004.

 

**12. Foreign    currency operations**

 

a) At December    31, 2004, the assets and liabilities denominated in foreign currency of the    Company's Mexican subsidiaries consist of the following:

 

 

**Millions of  US dollars**

**Millions of  Mexican pesos**

Monetary assets

 $ 222

 Ps. 2,478

Inventories

28

315

Fixed assets

313

3,493

Monetary liabilities

1,232

13,734

 

b) Foreign    currency operations of the Company's Mexican subsidiaries during 2004 consisted    of the following:

 

 

**Millions of  US dollars**

**Millions of  Mexican pesos**

Exports

 $ 637

 Ps. 7,323

Imports

301

3,484

Interest expense, net

122

1,414

 

c) The condensed    financial information of the principal foreign subsidiaries of the Company    at December 31, 2004 consisted of the following:

 

 

**United States    of America**

**Central and   South America**

**Europe**

Net sales

 Ps. 8,570

 Ps. 1,459

 Ps. 1,463

Operating income

176

100

55

Total assets

2,900

2,870

1,723

Total liabilities

1,264

819

825

Capital expenditures

30

141

143

 

d) The exchange    rates of the Mexican peso against the US dollar and the Euro, used for purposes    of the Company's consolidated financial statements at the following dates    were:

 

 

**US dollar**

**Euro**

December 31, 2001

 Ps. 9.1695

 Ps. 8.0810

December 31, 2002

10.4393

10.9476

December 31, 2003

11.2372

14.1925

December 31, 2004

11.1495

15.0941

 

On February 25,    2005, the exchange rate was Ps. 11.1086 per one US dollar and Ps. 14.6577    per one Euro.

 

**13. Stockholders'    equity**

 

a) At December    31, 2003 and 2004, the capital stock of the Company consisted of 324,000,000    ordinary, nominative, fully paid common shares, without par value.

 

b) The Company    maintains an Employee Stock Option Plan established in March 1998 (the "Plan").    The Plan specifies the amount of shares, time and initial exercise price,    which is equal to the average closing price on the Mexican Stock Exchange    of the common shares on the 20 days prior to the grant date, except for options    issued during 2000, 2001 and 2002, which were Ps.11.00, Ps.8.27 and Ps.7.53,    respectively. The vesting period of the options is 5 years and the life of    such options is 10 years.

 

The following    table summarizes the activity relating to the Plan:

 

 

1998

1999

2000

2001

1998*

2002

Total              outstanding

Options  granted during the year

2,813,300

2,893,000

4,851,900

3,204,800

940,950

3,941,950

 

Options  canceled or exercised at December 31, 2004

2,350,000

928,000

2,904,525

2,211,525

109,250

2,059,475

 

Options  outstanding at December 31, 2004

463,300

1,965,000

1,947,375

993,275

831,700

1,882,475

8,083,125

Initial  exercise price

 Ps. 31.31

 Ps. 14.88

 Ps. 11.00

 Ps. 8.27

 Ps. 13.00

 Ps. 7.53

 

Exercise  price at December 31, 2004

49.94

25.46

11.00

8.27

13.00

7.53

 

 

*During 2001    the Company modified the exercise price of 940,950 options granted in 1998    to Ps.13.00.

 

The closing    price of the Company's shares on the Mexican Stock Exchange on December 31,    2004 was Ps.11.62.

 

The exercise    price of the options granted in 1998 and 1999 will be determined at the time    such options are exercised by indexing the initial price using an indexing    factor based on the cumulative performance of the Company's common shares    relative to the cumulative performance of the Indice de Precios y Cotizaciones    of the Mexican Stock Exchange; such indexing factor is subject to certain    ceilings and floors. There is no indexing factor for the options granted in    2000, 2001 and 2002.

 

The estimated    fair value of the options was made on the Grant Date using the Black-Scholes    option-pricing model with the following assumptions:

 

 

1999-2001

2002

Risk-free interest rate

15%

3%

Expected life in years

5

8

Price volatility

44%

45%

Dividend Yield

0

0

 

Compensation    cost charged against income for the Plan was Ps.62, Ps.30 and Ps.12, for 2002,    2003 and 2004, respectively. 

 

c) Retained    earnings includes the statutory legal reserve. Mexican General Corporate Law    requires that at least 5% of net income of the year be transferred to the    legal reserve until the reserve equals 20% of capital stock at par value (historical    pesos). The legal reserve may be capitalized but may not be distributed unless    the entity is dissolved. The legal reserve must be replenished if it is reduced    for any reason. At December 31, 2003 and 2004, the legal reserve, in historical    pesos, was Ps.72.

 

d) As of    December 31, 2003 and 2004 the treasury shares held by the Company were 52,946,110    and 51,044,097, respectively, which included the shares held by the Stock    Option Trust (see note 13 b) which were 24,674,020 and 22,772,007 as of December    31, 2003 and 2004, respectively.

 

e) Stockholders'    equity, except restated paid-in capital and tax retained earnings, will be    subject to income tax at the rate in effect when a dividend is distributed.    In 2004, the income tax rate was 33%; it will decrease to 30% in 2005, 29%    in 2006 and 28% in 2007 and thereafter.

 

As of December    31, 2003 and 2004 the majority interest stockholders' equity tax account,    corresponding to the contributed capital account and the net consolidated    tax income account was Ps.1,520 and Ps.1,083, respectively.

 

f) Dividends    declared and paid:

 

 

**Dividend amount**

 

**Stockholders'   meeting date**

**Nominal**

**Constant**

**Payment date**

April 5, 2001

 Ps. 149

 Ps. 177

May, 2001

April 5, 2001

149

 

(1)

March 14, 2002

75

85

June, 2003

March 27, 2003

108

117

April, 2003

March 25, 2004

89

92

April, 2004

 

(1) This dividend    will be paid on a date to be determined by the Board of Directors.

 

g) Minority    interest in consolidated subsidiaries consists of the following:

 

 

**December 31,**

 

**2003**

**2004**

Capital stock

 Ps. 2,289

 Ps. 2,232

Shortfall in restatement of  capital

(3,074)

(3,150)

Retained earnings

3,607

3,499

Net income for the year

201

223

 

 Ps. 3,023

 Ps. 2,804

 

h) Majority    interest stockholders' equity consists of the following:

 

 

**December 31, 2004**

 

**Nominal   value**

**Restatement**

**Restated   value**

Capital stock

 Ps. 324

 Ps. 6,460

 Ps. 6,784

Treasury stock

(336)

(258)

(594)

Paid-in capital

(104)

1,121

1,017

Shortfall in restatement of capital

 

(18,416)

(18,416)

Cumulative effect of deferred taxes

(1,259)

(365)

(1,624)

Minimum pension liability adjustment

(419)

 

(419)

Retained earnings

(3,408)

22,009

18,601

 

 Ps. (5,202)

 Ps. 10,551

 Ps. 5,349

 

i) At December    31, 2004, stockholders equity includes Ps.2,899 of retained earnings and other    undistributed capital items of subsidiaries.

 

j) Comprehensive    income (loss) that is reflected in the accompanying statements of stockholders'    equity, represents the net result of the Company's performance each financial    year, and consists of net income of each year plus other items of comprehensive    income of the same period, which in accordance with Mexican GAAP are reflected    directly in stockholders' equity, without affecting the statement of operations.    The other items of comprehensive income consist of the result of holding non-monetary    assets and the minimum pension liability adjustment.

 

**14. Total    financing cost**

 

  Following is a disclosure of the most important items that are included in  total financing cost:

 

 

**Year ended December 31,**

 

**2002**

**2003**

**2004**

  Interest expense on debt denominated in dollars

 Ps. 1,331

 Ps. 1,241

 Ps. 1,262

  Interest expense on debt denominated in pesos

76

379

258

  Interest expense on debt denominated in UDI's

36

30

108

  Restatement of UDI's

10

4

10

  Interest income

(64)

(160)

(86)

  Exchange loss

1,687

822

78

Gain  from monetary position

(851)

(599)

(730)

Other  financial expenses, net

258

388

505

Total  financing cost

 Ps. 2,483

 Ps. 2,105

 Ps. 1,405

 

**15. Other    expense, net**

 

  Following is the analysis of other expense, net: 

 

 

**Year ended December 31**

 

**2002**

**2003**

**2004**

Restructuring          charges

Ps 103

Ps. 98

Ps. 243

Write-off          and loss from sale of assets

447

129

329

(Gain) from sale of subsidiaries and associated companies

(72)

(37)

(488)

Other

(24)

(34)

57

 

Ps. 454

Ps. 156

Ps. 141

 

During 2002,    2003 and 2004 the Company downsized its corporate services at its headquarters    and certain business units, which resulted in charges of Ps.103, Ps.98 and    Ps.120, respectively. 

 

**16. Tax loss carryforwards**

 

  At December 31, 2004, the tax loss carryforwards, the asset tax to be  recovered and the capital losses that can be amortized against capital gains  consist of the following: 

 

 

**Tax   loss carryforwards**

**Asset   tax**

 

Expiration   Year

**Majority**

**interest**

**Minority**

**interest**

**Majority**

**Interest**

**Minority**

**interest**

**Capital   losses**

2007

Ps. 1,607
   
Ps. 552

2008

5,028

13

193

 

1,233

2009

22

5

5

 

145

2010

383

28

4

 

203

2011

224

28

4

 

 

2012

1,323

158

8

 

 

2013

164

185

10

2

 

2014

178

267

-

4

 

 

Ps. 8,929

Ps. 684

Ps. 224

Ps. 6

Ps. 2,133

 

**17. Income    tax, asset tax and workers' profit sharing**

 

a) The Company    is subject to income tax and asset tax for consolidation purposes in proportion    to the number of the subsidiary's voting shares that Vitro owns. As of January    1, 2002, the ratio has been calculated based on the daily average equity percentage    that the Company owns of its subsidiaries during the year. The taxable income    of the subsidiaries is consolidated at 60% of the ratio mentioned above. The    monthly tax advances to the Secretaria de Hacienda y Credito Publico by Vitro    as well as its subsidiaries, are made as if they have not elected tax consolidation.

 

On December    1, 2004, certain amendments to the income tax and assets tax laws were published    and are effective as of 2005, the most significant changes were: a) the income    tax rate was reduced to 30% in 2005, 29% in 2006 and 28% as of 2007 and forward;    (b) for income tax purposes, cost of sales will be deducted instead of inventory    purchases; c) the consolidation of tax results will be at 100% of the proportion    owned. 

 

b) The income    tax and workers' profit sharing included in the Company's results are:

 

 

**Year  ended December 31,**

 

**2002**

**2003**

**2004**

Income tax:

 

 

 

Current

Ps. 454

Ps. 214

Ps. 130

Deferred  

(893)

(133)

(51)

    Adjustment of rates

(34)

(27)

(149)

 

(473)

54

(70)

Asset tax

(31)

 

18

 

Ps. (504)

Ps. 54

Ps. (52)

 

 

 

 

Workers' profit sharing:

 

 

 

Current

Ps. 50

Ps. 18

75

Deferred

2

22

45

 

Ps. 52

Ps. 40

Ps. 120

 

Deferred tax    liabilities presented in the balance sheets consist of the following: 

 

 

**December 31,**

 

**2003**

**2004**

Assets:

 

 

Accounts receivable allowance

Ps. 265

Ps. 221

Tax          benefit from the future deduction of inventories held on December 31,          1986

108

4

Reserve          for seniority premiums and pensions

480

475

Tax          loss carryforwards, net of valuation allowance of Ps. 103 in 2003 and          Ps. 53 in 2004

3,067

2,675

Exchange          fluctuations

15

(33)

Asset          tax credit carryforwards

418

431

 

4,353

3,773

Liabilities:

 

 

Inventories

856

872

Fixed assets

3,612

2,776

Other

344

209

 

4,812

3,857

Net liabilities

Ps. 459

Ps. 84

 

  c) To determine deferred income tax at December 31, 2004, the Company applied  the different tax rates that will be in effect beginning in 2005 to temporary  differences according to their estimated dates of reversal. 

 

  Following is a reconciliation between the Company's effective income tax rate  and the statutory rate:

 

 

**Year ended December 31,**

 

**2002**

**2003**

**2004**

Effective          income tax rate

75.8%

(17.9)%

(216.6)%

Asset          tax included as income tax

(1.2)

2.6

(76.3)

(Loss)          gain on sale of subsidiaries

1.0

(4.2)

455.2

Difference          between tax and accounting basis for monetary gain

(8.9)

2.7

(63.0)

Foreign          companies

(14.0)

14.7

22.7

Effect          of change in the income tax rate

(5.1)

(9.0)

632.7

Tax          loss carryforwards reserved

 

36.9

(547.5)

Nondeductible          expenses

 

 

(49.9)

Other

(12.6)

8.2

(124.3)

Statutory            income tax rate

35.0%

34.0%

33.0%

 

d) Changes    in stockholders' equity in shortfall in restatement of capital and the minimum    pension liability adjustment are presented net of the deferred tax effect    as follows:

 

 

**Year ended December 31,**

 

**2002**

**2003**

**2004**

Income          tax effect of:

 

 

 

 

 

 

 

Shortfall          in restatement of capital

Ps. (46)

Ps. 56

Ps. (52)

Minimum          pension liability adjustment

63

10

37

 

Ps. 17

Ps. (46)

Ps. (15)

 

**18. Business    dispositions**

 

a) Sale    of Ampolletas, S.A. - On April 15, 2002 the Company sold to Gerresheimer Glas    AG, its 51% interest in Ampolletas, S.A. for consideration that includes cash,    the assumption of debt and the assignment of certain receivables, that    altogether amount to approximately $ 21 million.

 

b) Sale    of Vitromatic - On July 3, 2002, Vitro sold its interest in Vitromatic (see    note 4).

 

c) Sale    of Envases Cuautitlan, S.A de C.V. - On September 10, 2003 the Company sold    Envases Cuautitlan, S.A de C.V. (ECSA), to Phoenix Capital Ltd. for an approximate    amount of $ 18 million. ECSA was dedicated to the manufacture and sale of    plastic containers.

 

d) Sale    of Vitro Fibras, S.A. - On April 2, 2004 the Company sold its 60% interest    in Vitro OCF, S.A. de C.V. the holding Company of Vitro Fibras, S.A, to Owens    Corning for approximately $ 71.5 million.

 

e) Sale    of Vitro American National Can, S.A. de C.V. (Vancan). - On September 27,    2004 the Company sold its 50% interest in Vancan, to Rexam for approximately    $ 26.5 million.

 

**19. Business    segment data**

 

The accounting    policies of the segments are the same as those described in notes 2 and 3.    The Company evaluates the performance of its segments on the basis of operating    income. Intersegment sales and transfers are accounted for as if the sales    and transfers were to third parties, that is, at current market prices. 

 

Vitro's reportable    segments are strategic business units that offer different products. The segments    are managed separately; each requires different manufacturing operations,    technology and marketing strategies; and each segment primarily serves a different    customer base.

 

The Company    has three reportable segments: Glass Containers, Flat Glass and Glassware.    On July 3, 2002, Vitro sold its interest in the segment Acros-Whirlpool (see    note 4). The principal products of each of the segments are summarized below: 

 

**Segment**

** **

**Principal  products**

 

 

 

Glass Containers

 

Glass containers, sodium carbonate and bicarbonate, capital  goods, precision components and molds for glass industry.

 

 

 

Flat Glass

 

Flat glass for the construction and automotive          industries.

 

 

 

Glassware

 

Glassware for table and kitchen use, and plastic          disposable thermo fold ware.

 

The segment    data presented below does not include discontinued operations for any of the    periods presented.

 

 

**Glass**

**Containers**

**Flat Glass**

**Glassware**

**Corporate**

**and other**

**Consolidated**

**December 31, 2002:**

 

 

 

 

 

Net sales

Ps. 11,058

Ps. 13,061

Ps. 2,878

Ps. 130

Ps. 27,127

Interdivisional sales

76

 

32

 

226

Consolidated net sales

10,982

12,943

2,846

130

26,901

Operating income (loss)

1,308

1,013

287

(336)

2,272

Total assets

14,264

13,055

3,510

2,601

33,430

Capital expenditures

647

330

137

22

1,136

Depreciation and amortization

980

750

289

103

2,122

Goodwill

 

984

 

 

984

 

 

 

 

 

 

**December 31, 2003:**

 

 

 

 

 

Net sales

Ps. 10,451

Ps. 13,059

Ps. 2,755

Ps. 258

Ps. 26,523

Interdivisional sales

109

156

20

 

285

Consolidated net sales

10,342

12,903

2,735

258

26,238

Operating income (loss)

814

1,101

196

(151)

1,960

Total assets

13,529

13,919

3,062

1,902

32,412

Capital expenditures

809

910

116

36

1,871

Depreciation and amortization

1,003

710

271

78

2,062

Goodwill

 

877

 

 

877

 

 

 

 

 

 

**December 31, 2004:**

 

 

 

 

 

Net sales

Ps. 10,702

Ps. 12,699

Ps. 2,726

Ps. 306

Ps. 26,433

Interdivisional sales

158

63

31

 

252

Consolidated net sales

10,544

12,636

2,695

306

26,181

Operating income (loss)

794

854

83

(161)

1,570

Total assets

12,722

12,173

2,922

3,414

31,231

Capital expenditures

672

560

132

89

1,453

Depreciation and amortization

1,252

713

218

64

2,247

Goodwill

 

734

 

 

734

 

Export sales    from Mexico, substantially all of which are denominated in US dollars, are    mainly to the United States and Canada and were as follows (in million of    US dollars): 

 

**Year ended December 31,**

**2002**

**2003**

**2004**

$586

$579

$637

 

Certain geographic    information about the Company's operations is summarized as follows:

 

** **

**Year ended December 31,**

** **

**2002**

**2003**

**2004**

Net          sales(1)to          customers in:

 

 

 

Mexico

Ps. 12,401

Ps. 11,845

Ps. 11,483

All foreign counries, mainly the United States and Canada

14,500

14,393

14,698

Consolidated

Ps. 26,901

Ps. 26,238

Ps. 26,181

 

(1) Net sales    are attributed to countries based on location of customer.

 

Sales of the    Company's principal products made to third parties are summarized as follows:

 

 

**Year ended December 31,**

 

**2002**

**2003**

**2004**

Construction Glass

Ps. 8,947

Ps. 9,061

Ps. 8,975

Automotive Glass

3,411

3,258

3,521

Glass Containers

9,408

8,637

8,909

Glassware

2,258

2,208

2,261

Other  (1)

2,877

3,073

2,514

 

Ps. 26,901

Ps. 26,238

Ps. 26,181

 

(1) Other is    mainly comprised of sales of raw materials, machinery and molds, metal flatware,    aluminum cans, fiber glass and plastic containers. None of these products    represented more than 5% of sales to third parties.

 

  Consolidated net sales to any single external customer did not equal 10% or  more of Vitro's total consolidated net sales. 

 

  Land and buildings, machinery and equipment geographical information is  summarized as follows: 

 

** **

**December 31,**

** **

**2002**

**2003**

**2004**

Land          and buildings, machinery and equipment, and construction in progress:

 

 

 

Mexico

Ps. 18,020

Ps. 17,775

Ps. 15,963

All foreign          countries, mainly          United States, Europe, Central and South America

2,368

2,522

2,519

Consolidated

Ps. 20,388

Ps. 20,297

Ps. 18,482

 

**20. New accounting    principles**

 

During 2004 the IMCP  issued the following bulletins, whose application is mandatory for periods  beginning after January 1, 2005:

 

Bulletin B-7,    "Business Acquisitions" ("B-7"). B-7 provides updated rules for the accounting    treatment of business acquisitions and investments in associated entities.    Management believes that the principal effect of adopting this new accounting    principle as of January 1, 2005 will be to suspend the amortization of goodwill,    which at December 31, 2004 has a balance of Ps.734, whose effect on the results    of operations for the year 2004 was Ps.48, although the goodwill is now subject    to the impairment rules.

 

Bulletin C-10,    "Derivative Instruments and Hedging Activities" ("C-10"). In general, C-10    establishes that for fair value hedges, any variances in the fair value, both    of the derivative and the underlying, must be reflected in current earnings    when such variances occur; for cash flow hedges, the effective portion of    fair value variances must be recognized in other comprehensive income in stockholders'    equity, while the ineffective portion must affect current earnings.

 

With respect    to derivative financial instruments, C-10 establishes the conditions that    must be met for an instrument to be considered as such, and revises and adds    certain definitions. It also includes rules regarding the elements involved    in hedging activities, including the formal documentation at the inception    of each hedge and measurement of its effectiveness during its term, among    others; C-10 classifies hedges into three categories: a) fair value hedges,    b) cash flow hedges and c) foreign currency hedges, and provides specific    rules by type of hedge, for their valuation, recognition, presentation and    disclosure. The administration of the Company is in the process of quantifying    the effects that the adoption of this Bulletin will have on the financial    position and results of operations.

 

Bulletin D-3,    "Labor Obligations" ("D-3"), which replaces the concept of unforeseen severance    payments that are recognized in earnings of the period in which the payment    decision is made, with that of "Severance payments at the end of the work    relationship", defined as payments granted to employees when they conclude    their labor relationship before reaching retirement age, for which the valuation    and disclosure rules applicable to pension and seniority premium payments    must be followed. The Company's management believes that the application of    this Bulletin will affect the result of operations for 2005 with an additional    charge by Ps.8 and increase assets and liabilities by Ps.141 and Ps.149, respectively. 

 

**21. Subsequent    events**

 

On February    7, 2005 Vitro Envases Norteamerica, S.A. de C.V., completed the issuance of    $ 80 million aggregate principal amount of senior secured notes due in 2011    with at an interest rate of 10.75%.  

 

On February    24, 2005, Vitro Envases Norteamerica, S.A. de C.V. obtained a senior secured    term loan of $150 million with a 5 year maturity and an interest rate of Libor    plus 6.25%.

 

On April 1,    2005, the Company completed the sale of its 100% interest in Plasticos Bosco,    S.A. de C.V. ("Plasticos Bosco"). This practically completes the divestiture    of all non-glass related businesses. Plasticos Bosco, located south of Mexico    City, was acquired by Vitro in 1981 and engaged in the manufacture and commercialization    of disposable tableware. 

 

**22. Differences    between accounting principles in Mexico and in the United States of America**

 

The Company's    consolidated financial statements are prepared in accordance with Mexican GAAP, which differ in certain significant respects from accounting principles    generally accepted in the United States of America ("U.S. GAAP"). The Mexican GAAP consolidated financial statements include the effects of inflation as    provided for under Bulletin B-10, as amended (see note 3), whereas financial    statements prepared under U.S. GAAP are presented on a historical basis. However,    the following reconciliation to U.S. GAAP does not include the reversal of    the adjustments required under Bulletin B-10, as amended, as permitted by    the rules and regulations of the Securities and Exchange Commission (the "SEC").    The application of Bulletin B-10, as amended, represents a comprehensive measure    of the effects of price level changes in the inflationary Mexican economy    and, as such, is considered a more meaningful presentation than historical    cost-based financial reporting for both Mexican and U.S. accounting purposes. 

 

 We have    restated our U.S. GAAP consolidated financial statements, for the following:

 

 
          • The application of the equity method of accounting for Empresas          Comegua S.A. in          accordance with EITF 96-16, "Investor's Accounting for an Investee          When the Investor Has a Majority of the Voting Interest but the Minority          Shareholder or Shareholders Have Certain Approval or Veto Rights."

 

• The recognition    of an obligation for severance indemnities and the related costs in accordance    with SFAS No. 112, "Employers' Accounting for Postemployment Benefits, an    amendment of FASB Statements No. 5 and 43".

 

• The presentation    of Vitro OCF, S.A. de C.V., Envases Cuautitlan, S.A. de C.V., Ampolletas,    S.A., Vitro America Inc.'s ("Vitro America") distribution and production facilities    in the Northwestern United States and the disposal of our Productos de Valor    Agregado ("PVA") facilities as discontinued operations in accordance with SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets".

 

• The reclassification    of the gain/loss on sale of assets not considered to be components of a business    into Operating Income in accordance with SFAS No. 144.

 

• The reversal    of an impairment charge, given that the asset was determined to be recoverable    based on an undiscounted cash flow analysis performed by the Company, as required    by SFAS No. 144.

 

• The recognition    of a valuation allowance related to a recoverable asset tax, as under U.S. GAAP contingent tax assets resulting from legal settlements generally cannot  be recognized until cash or other forms of payment are received.

 

The other principal    differences between Mexican GAAP and U.S. GAAP and the effect on consolidated    net loss and consolidated stockholders' equity are presented below: 

 

 

**Year          ended December 31,**

**Reconciliation          of Net Loss:**

**As          Presented**

**As          Restated**

**2004**

 

**2002**

**2003**

**2004**

**2002**

**2003**

**2004**

**($          millions)**

 

**(Ps.          millions)**

**(Ps.          millions)**

**(Convenience          Translation)**

Net loss of majority          interest as reported under Mexican GAAP

Ps. (5)

Ps. (596)

Ps. (267)

Ps. (5)

Ps. (596)

Ps. (267)

$ (24)

Deferred income tax

(173)

(78)

41 

(176)

(81)

38 

3 

Reduction          of amortization expense related to negative goodwill

33 

26 

23 

33 

26 

23 

2 

Depreciation of the          effect of applying the Fifth Amendment

(221)

(197)

(187)

(213)

(189)

(187)

(17)

Workers' profit sharing

35 

41 

47 

38 

47 

47 

4 

Capitalized interest

 

 

52 

 

 

52 

5 

Additional depreciation          of capitalized interest

(7)

(8)

(8)

(7)

(8)

(8)

(1)

Goodwill amortization          and impairment, net

45 

17 

49 

45 

17 

49 

4 

Fair value of derivative          financial instruments

(192)

24 

9 

(192)

24 

9 

1 

Monetary Gain

48 

30 

36 

48 

30 

36 

3 

Termination benefits

 

 

 

9

8

9

1

Effect of applying          Bulletin B-15

(44)

(4)

 

(44)

(4)

 

 

Impairment

 

 

 

 

 

11 

1 

Discontinued operations

(275)

 

 

(287)

(12)

23 

2 

Effect of the above          adjustments on net income of minority interest

180 

(6)

(51)

178 

(10)

(51)

(5)

Total U.S. GAAP adjustments

(571)

(155)

11 

(573)

(156)

46 

4 

Net loss under U.S.          GAAP

Ps. (576)

Ps. (751)

Ps. (256)

Ps. (578)

Ps. (752)

Ps. (221)

$ (20)

 

 

**Reconciliation          of Stockholders' Equity:**

**Year          ended December 31,**

** **

**As          Presented**

**As          Restated**

**2004**

 

**2002**

**2003**

**2004**

**2002**

**2003**

**2004**

**($          millions)**

 

**(Ps.          millions)**

**(Ps.          millions)**

**(Convenience          Translation)**

Total stockholders'          equity reported under Mexican GAAP

Ps.          9,755

Ps.          9,046

Ps.          8,153

Ps.          9,755 

Ps.          9,046 

Ps.          8,153 

$          731 

Less minority interest          included as stockholders' equity under Mexican GAAP

(3,056)

(3,023)

(2,804)

(3,056)

(3,023)

(2,804)

(251)

Majority stockholders'          equity under Mexican GAAP

6,699 

6,023 

5,349 

6,699 

6,023 

5,349 

480 

U.S. GAAP adjustments:

 

 

 

 

 

 

 

Deferred income taxes:

 

 

 

 

 

 

 

Effect on retained          earnings

(56)

(106)

(30)

(256)

(306)

(233)

(21)

Effect on excess          (shortfall) in restatement of capital

(681)

(604)

(575)

(681)

(604)

(575)

(52)

Reversal of negative          goodwill

(4,913)

(4,913)

(4,913)

(4,913)

(4,913)

(4,913)

(441)

Reversal of the accumulated          amortization related to negative goodwill

4,737 

4,763 

4,786 

4,737 

4,763 

4,786 

429 

Workers' profit sharing

(63)

(20)

28 

(63)

(20)

28 

3 

Capitalized interest

90 

82 

126 

90 

82 

126 

11 

Goodwill amortization          and impairment

45 

62 

111 

45 

62 

111 

10 

Effect of applying          the Fifth Amendment

1,252 

822 

540 

1,252 

822 

540 

48 

Effect of applying          Bulletin B-15

(205)

54 

 

(205)

54 

 

0 

Fair value of derivative          financial instruments

(194)

(170)

(161)

(194)

(170)

(161)

(14)

Termination benefits

 

 

 

(112)

(109)

(105)

(9)

Impairment

 

 

 

 

 

11 

1 

Discontinued operations

(275)

 

 

(281)

(10)

13 

1 

Effect of the above          adjustments on minority interest

(71)

(173)

(204)

(23)

(126)

(159)

(14)

Total U.S. GAAP adjustments

(334)

(203)

(292)

(604)

(475)

(531)

(48)

Total stockholders'          equity under U.S. GAAP

Ps.          6,365

Ps.          5,820

Ps.          5,057

Ps.          6,095 

Ps.          5,548

Ps.          4,818 

$          438 

 

a) Minority    interest

 

Under Mexican    GAAP, minority interest in consolidated subsidiaries is presented as a separate    component within stockholders' equity section in the consolidated balance    sheet. For U.S. GAAP purposes, minority interest is not included in stockholders'    equity and is presented below total liabilities and above the stockholder'    equity section in the consolidated balance sheet. 

 

b) Deferred    income taxes

 

The Company    applies the provisions of Bulletin D-4, "Accounting for Income Tax, Tax on    Assets and Workers' Profit Sharing", issued by the IMCP (see notes 3 o and    17). As required by this Bulletin, deferred income taxes are provided for    differences between the book and tax value of assets and liabilities and deferred    workers' profit sharing for temporary differences between the financial and    adjusted tax income that are expected to reverse in the future. Additionally,    the tax on assets paid is recognized as an asset to the extent it is determine    to be recoverable. For U.S. GAAP purposes, the Company has applied SFAS No.    109, "Accounting for Income Taxes", for all periods presented.

 

Under SFAS    No. 109, deferred tax assets and liabilities are recognized for future tax    consequences of all temporary differences between the financial statement    carrying amounts of assets and liabilities and their tax bases. Deferred tax    assets are also recognized for the estimated future effects of tax loss carryforwards.    A valuation allowance is recognized to reduce a deferred tax asset if, based    on the weight of available evidence, it is more likely than not that some    portion or all of the deferred tax asset will not be realized.

 

For U.S. GAAP    purposes the Company recognizes deferred taxes each period for the changes    in the taxable portions of its distributable stockholder's equity. The Company's    policy is to compare the deferred tax balance that would be required if all    of the stockholders' equity were distributed. This amount is compared to the    total deferred tax balance recorded prior to any adjustment. The difference    between the amount recorded and the amount calculated from the stockholders'    equity taxable accounts is recorded as an adjustment to deferred taxes as    of the balance sheet date

 

The significant    components of deferred tax assets and liabilities, which differ for U.S. GAAP    from deferred tax assets and liabilities calculated under Mexican GAAP, are    presented as follows: 

 

 

**As Presented**

**As Restated**

** **

**December 31,**

**December 31,**

**Deferred Tax Assets and  Liabilities:**

**2003**

**2004**

**2003**

**2004**

**Noncurrent:**

 

 

 

 

Assets:

 

 

 

 

Reversal  of negative goodwill

Ps. 48

Ps. 36

Ps. 48

Ps. 36

Tax  loss carryforwards

103

53(1)

103

53(1)

Asset  tax credit carryforwards

0

0

(200)(2)

(200) (2)

Termination  benefits

 

 

44

42

Capital  losses

1,382

608(1)

1,382

608(1)

Fair  value of derivative financial instruments

56

48

56

48

 

 

 

 

 

Liabilities:

 

 

 

 

Buildings,  machinery and equipment

(227)

(120)

(227)

(120)

Stockholders'  equity

(561)

(533)

(561)

(533)

Other

(26)

(36)

(26)

(36)

Net  deferred tax assets

775

56

619

(102)

 

 

 

 

 

Valuation  allowance

(1,485)

(661)(1)

(1,485)

(661)(1)

 

 

 

 

 

Net deferred tax liability

Ps. (710)

Ps. (605)

Ps. (866)

Ps. (763)

 

(1) The valuation    allowance at December 31, 2003 and 2004 of Ps.1,485 and Ps.661, respectively,    includes Ps.1,382 and Ps.608, respectively, related to capital losses and    Ps.103 and Ps.53, respectively, related to tax loss and tax on asset carryforwards.

 

(2) Under U.S.    GAAP contingent tax assets resulting from legal settlements generally cannot    be recognized until cash or other forms of payment are received. Further disclosure    is provided in section l) of this footnote.

 

c) Negative    goodwill and reduction in depreciation expense

 

Under Mexican    GAAP, the Company records as a component of the consolidated statements of    operations the amortization of the excess of book value over cost of certain    acquisitions (negative goodwill). The period of amortization for negative    goodwill is 18 months. Under U.S. GAAP, such excess is recorded as a reduction    of fixed assets, and depreciation expense is reduced accordingly over the    estimated useful life of the related assets. 

 

d) Workers'    profit sharing

 

In accordance    with Mexican GAAP the Company determines the provision of workers' profit    sharing by applying the partial accrual method (Bulletin D-4). For U.S. GAAP    purposes the Company accrues for workers' profit sharing based on a liability    approach similar to accounting for income taxes under SFAS No. 109. If the    methodology of SFAS No. 109 had been used for the year ended December 31,    2004, the cumulative effect in the results of the Company would have been    an expense of Ps.23 and a debit to excess (shortfall) in restatement of capital    of Ps.514. From these amounts the effect in the results for the years 2002,    2003 and 2004 would have been an (decrease) increase of Ps.(182), Ps.72 and    Ps.63, respectively.  

 

e) Capitalized    interest

 

Prior to 1999,    the Company had not capitalized interest under Mexican GAAP, since such capitalization    is optional under Mexican GAAP. Beginning in 1999, interest on certain additions    to buildings, machinery and equipment began to be capitalized for Mexican    GAAP purposes as is required under U.S. GAAP. Consequently, the related differences    in depreciation on such amounts included in buildings, machinery and equipment    are presented in the reconciliation of net income for the years ended December    31, 2002, 2003 and 2004. 

 

f) Goodwill    and other intangible assets

 

Under Mexican    GAAP, goodwill is amortized over a straight-line basis over 20 years. Effective    January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other  Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets    with indefinite lives no longer be amortized, but instead tested for impairment    at least annually and written-down with a charge to operations when the carrying    amount exceeds the estimated fair value. The cost of intangible assets with    determinable useful lives continues to be amortized over the useful lives    of the assets. In connection with the transition provisions for adopting this    standard, the Company performed a transitional impairment test and found no    impairment. The Company also reviewed the classification of its intangible    assets and determined there were no other intangible assets with indefinite    lives requiring reclassification. 

 

The Company    tests goodwill for impairment at least annually, or more frequently if events    or changes in circumstances indicate that the asset might be impaired at the    reporting unit level as required by SFAS No. 142. We perform the impairment    test according to the following two-step process: The first step of the goodwill    impairment test we use to identify potential impairment compares the fair    value of our reporting units with their carrying amount, including goodwill.    If the fair value of the reporting unit exceeds its carrying amount, goodwill    of the reporting unit is considered not impaired, thus the second step of    the impairment test is unnecessary. If the carrying amount of the reporting    unit exceeds its fair value, the second step of the goodwill impairment test    is performed to measure the amount of impairment loss, if any. The second    step of the goodwill impairment test we use to measure the amount of impairment    loss compares the implied fair value of reporting unit goodwill with the carrying    amount for such goodwill. If the carrying amount of reporting unit's goodwill    exceeds the implied fair value of such goodwill, an impairment loss is recognized    in an amount equal to that excess. After goodwill impairment loss is recognized,    the adjusted carrying amount of goodwill becomes its new accounting basis.    For the years ended December 31, 2003 and 2004 the Company recorded an impairment    of Ps.62 and Ps.70, respectively.

 

The changes    in the carrying amount of goodwill for the years ended December 31, 2003 and    2004 are as follows: 

 

Balance as of January 1, 2003

Ps. 861

Impairment

(62)

Changes for effects of inflation

121

Balance as of December 31, 2003

920

Impairment

(70)

Changes for effects of inflation

(6)

Balance as of December 31, 2004

Ps. 844

 

g) Effect of    applying the Fifth Amendment to Bulletin B-10.

 

As discussed    in note 3 e), under Mexican GAAP the Fifth Amendment to Bulletin B-10 allows    the restatement of machinery and equipment purchased in a foreign country    using the consumer price index of the country of origin and the period-end    exchange rate. For U.S. GAAP purposes, such restatement is based on the INPC.

 

h) Effect of    applying Bulletin B-15.

 

In 1997, the    IMCP issued Bulletin B-15, which specifies procedures to be applied in the    consolidation of foreign subsidiaries by Mexican companies for (i) current    year amounts and (ii) prior year amounts, presented for comparative purposes.    Vitro's accounting policies for the consolidation of its foreign subsidiaries    are described in notes 2 b) and 3 a). Such policies conform to the requirements    of Bulletin B-15.

 

The staff of    the SEC has agreed that the methodology of Bulletin B-15 to translate the    current year amounts for foreign operations does not result in a difference    between Mexican GAAP and U.S. GAAP that must be reconciled in order to comply    with the rules and regulations of the SEC.

 

However, there    are two methods allowed under Bulletin B-15 to restate prior year amounts    for foreign subsidiaries. Vitro uses the method that reconsolidates prior    year balances by restating foreign subsidiaries using the current inflation    rate in the foreign country and translating into pesos using the year-end    exchange rate. The staff of the SEC has stated that the methodologies of Bulletin    B-15 used to restate prior years balances for comparative purposes do not    conform to the requirements of SEC Rule 3-20e of Regulation S-X, which requires    all amounts in financial statements to be presented in the same reporting    currency. Accordingly, in filings with the SEC, the staff requires an adjustment    for the difference in methodologies of restating prior year balances. These    amounts (Ps.(44) and Ps.(4) in 2002 and 2003, respectively, in the reconciliation    of net income, and Ps.(175) and Ps.54 in 2002 and 2003, respectively, in the    reconciliation of stockholders' equity) represent the differences between    (i) the balance if all amounts were adjusted by applying the INCP, and (ii)    the balance used in the primary financial statements to comply with Bulletin    B-15. 

 

i) Fair value    of derivative financial instruments

 

Under Mexican    GAAP, derivative instruments that are considered as a hedge from an accounting    perspective are valued using the same criteria of valuation of the assets    or liabilities hedged and the effect of such valuation is recognized in the    results of operations. Under U.S. GAAP, the Company's derivative instruments    are accounted for as defined by SFAS No. 133, "Accounting for Derivative Instruments    and Hedging Activities" and consequently the Company reflects all    derivatives on the balance sheet at fair value, regardless of the purpose    or intent for holding them. The accounting for changes in fair value of the    derivatives varies, depending if the derivative is considered to be a hedge    for accounting purposes, and whether that hedged instrument is a fair value,    or a cash flow hedge.

 

The Company    primarily uses interest rate swaps, currency swaps, foreign currency    forward purchase contracts and natural gas contracts to manage its exposure    to fluctuations in interest, foreign currency exchange rates and changes    in the price of natural gas. It is the Company's policy to not enter into    derivative financial instruments for speculative purposes.

 

Certain derivative    financial instruments, although considered to be an effective hedge from an    economic perspective, have not been designated as a hedge for accounting purposes.    Such contracts are recognized in the balance sheet at fair value with changes    in the fair value recognized in earnings concurrently with the change in fair    value of the underlying assets and liabilities.

 

Derivatives    that are considered to be hedges from an accounting perspective are recognized    in the balance sheet at fair value with changes in fair value either: (1)    offset by changes in fair value of the hedged assets, liabilities or firm    commitments through earnings as a component of the corresponding asset or    liability if the derivative is designated as a fair value hedge, or (2) recognized    in other comprehensive income until the hedged item is recognized in earnings    if the derivative is designated as a cash flow hedge. The ineffective portion    of the change in fair value for a hedged derivative is immediately recognized    in earnings, regardless of whether the hedged derivative is designated as    a cash flow or fair value hedge. 

 

SFAS No. 133    provides specific criteria necessary for a derivative to qualify for hedge    accounting and requires the discontinuance, on a prospective basis, of the    accounting of the effective portion recorded in other comprehensive income    for an existing hedge if the designation of the cash flow hedge is removed.    Derivatives entered into by the Company in 2002, 2003 and 2004 do not qualify    for hedge accounting as defined by SFAS No. 133.

 

Natural gas    risk management - The Company uses natural gas hedge contracts to reduce its    cash flow volatility associated with price changes in natural gas. Change    in the fair value of the Company's natural gas contracts not indentified as    cash flow hedges resulted in a charge of Ps. 162 recorded in the results of    operations for the year ended December 31, 2004. 

 

j) Discontinued    operations

 

U.S. GAAP as    defined by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived    Assets", requires that an entity report as discontinued operations those components    of its business that have been classified as held for sale. A component of    an entity is defined as comprising operations and cash flows that can be clearly    distinguished, operationally and for financial reporting purposes, from the    rest of the business. Individually insignificant disposals of a component    of an entity should be aggregated for purposes of assessing materiality for    all periods presented. Therefore, individually insignificant dispositions    should be aggregated and reported as discontinued operations under SFAS No.144    beginning in the period the impact of the dispositions is material to the    financial statements of any period presented. This evaluation should also    include the effect of the gain or loss on sale of the component. 

 

Mexican GAAP    as defined by Bulletin C-15, "Impairment of Long-lived Assets and their Disposal",    requires the asset group being disposed of to be presented as a discontinued    operation only if its operations are individually significant to the consolidated    operations. Bulletin C-15 defines the discontinuance of an operation as the    process of final interruption of a significant business activity of an entity    and establishes that the discontinuation of an operation implies the final    interruption of a significant activity of the entity that leads to the sale,    abandonment, exchange or return to stockholders of long-lived assets originally    intended for use, in addition to other assets and liabilities related to the    operation. Therefore, the analysis of the significance of the disposed business    is performed without considering the eventual gain or loss on sale or aggregating    each businees being disposed with other businesses sold, and instead considers    only the significance of the business activity of the relevant business being    sold.

 

As a result    of the differences identified above between U.S. and Mexican GAAP, the following    components of the Company's business that were classified as held for sale    during 2004, 2003 and 2002, are presented as discontinued operations in our    U.S. GAAP consolidated financial statements:

 

• On April    2, 2004, we sold our 60% interest in Vitro OCF, S.A. de C.V., which we refer    to as "Vitro OCF," our joint venture with Owens Corning engaged in the manufacturing    and distribution of fiberglass and fiberglass products, to Owens Corning for    $71.5 million in cash (approximately Ps. 797 million). The gain on sale of    this component was approximately Ps. 407. This business was previously included    in our Flat Glass reportable segment.

 

• In March    2004, the Board of Directors of Vitro America, authorized management to close    all of its distribution and production facilities and discontinue operations    in the Northwestern United States. The closing plan included operation of    the facilities through June 30, 2004. As of December 31, 2004, all operations    in these facilities have ceased. Vitro America conducts a substantial majority    of our flat glass operations in the United States and is a subsidiary of Vitro    Plan, the holding company of our Flat Glass business unit, which is included    in our Flat Glass reportable segment.

 

• During 2004,    the Company's management decided to close two small facilities (the PVA facilities)    in Mexico dedicated to the manufacture of architectural value added products.    These disposal activities were initiated and finalized during 2004 and as    a result no liability has been accrued for as of December 31, 2004. The amount    incurred in these disposal activities were Ps. 19. The PVA facilities were    managed by Vitro Flotado Cubiertas, a subsidiary of Vitro Plan, the holding    company of our Flat Glass business unit. This business was previously included    in our Flat Glass reportable segment.

 

• On September    10, 2003, we sold 100% of the outstanding shares of Envases Cuautitlan, S.A.  de C.V., which we refer to as "ECSA," one of our subsidiaries engaged in the    manufacturing and distribution of plastic products, to a subsidiary of Phoenix    Capital Limited for approximately $18 million (approximately Ps. 200 million).    The gain on sale of this component was approximately Ps. 37. This business    was previously included in our Glass Containers reportable segment.

 

• On April    15, 2002, we sold our 51% interest in Ampolletas, S.A., which we refer to as  "ASA," to Gerresheimer Glass AG for $13.4 million in cash (approximately    Ps. 149 million). ASA is engaged in the manufacturing of borosilicate glass    products for laboratory and pharmaceutical use, such as ampoules, vials and    syringes. The gain on sale of this component was approximately Ps. 72. This    business was previously included in our Flat Glass reportable segment.

 

The following    table discloses the condensed balance sheets and condensed income statements    of the entities that were disposed for all periods presented:

 

 

**For          the year ended December 31, 2004**

 

**Vitro          OCF**

**VVP          NW**

**PVA**

**ECSA**

**ASA**

**Total**

**Condensed Income          Statement:**

 
   
 

 

Sales

140

49

149

-

-

339

Cost of sales

76

52

134

-

-

262

General, administrative          and selling expenses

24

43

14

-

-

80

Operating income

40

(45)

1

-

-

(3)

Total financing cost

(3)

-

-

-

-

(3)

Income (loss) before          income tax

43

(45)

1

-

-

(0)

Income taxes

14

(20)

-

-

-

(5)

Net income (loss)

29

(25)

1

-

-

5

 

 

**As          of and for the year ended December 31, 2003**

 

**Vitro          OCF**

**VVP          NW**

**PVA**

**ECSA**

**ASA**

**Total**

**Condensed Balance          Sheet:**

 

 

 

 

 

 

Current assets

195

36

7

-

-

238

Fixed assets, net

657

9

22

-

-

689

Other long-term assets

5

-

-

-

-

5

Total assets

857

45

30

-

-

931

 

-

-

-

-

 

 

Short-term liabilities

277

12

59

-

-

348

Long-term liabilities

-

-

-

-

-

-

 

 

 

 

 

 

 

**Condensed Income          Statement:**

-

-

-

-

 

 

Sales

555

188

170

137

-

1,049

Cost of sales

322

164

129

121

-

737

General, administrative          and selling expenses

66

45

15

8

-

134

Operating income

167

(22)

26

7

-

179

Total financing cost

21

-

-

9

-

30

Income (loss) before          income tax

146

(22)

26

(2)

-

149

Income taxes

48

(8)

-

1

-

40

Net income (loss)

98

(13)

26

(3)

-

108

 

 

**For          the year ended December 31, 2002**

 

**Vitro          OCF**

**VVP          NW**

**PVA**

**ECSA**

**ASA**

**Total**

**Condensed Income          Statement:**

 

 

 

 

 

 

Sales

535

211

131

175

85

1,136

Cost of sales

352

172

114

151

71

860

General, administrative          and selling expenses

55

39

3

11

7

116

Operating income

127

-

14

13

6

160

Total financing cost

38

-

-

16

5

58

Income (loss) before          income tax

89

-

14

(3)

2

102

Income taxes

17

-

-

(3)

(1)

13

Net income (loss)

72

-

14

0

3

88

 

Basis difference    between U.S. GAAP and Mexican GAAP.- The basis of the assets and liabilities    under U.S. GAAP of Vitromatic, and the entities mentioned above at the time    of their sale was different from the basis of such assets and liabilities    under Mexican GAAP; accordingly, the gain recorded on disposal of such entities    under U.S. GAAP differs from that under Mexican GAAP.

 

k) Deconsolidation    of Comegua

 

For Mexican    GAAP purposes, based on: (a) the Company's control over the CEO whose function    is to govern the operating decisions and financial policies of Comegua; (b)    the Company's sole right to propose the CEO for designation by the Board of    Directors of Comegua; and (c) the Company's sole right to remove the CEO,    the Company concludes that it controls Comegua as defined by Bulletin B-8    "Consolidated and Combined Financial Statements and Valuation of Permanent    Investments in Shares" and therefore, Comegua should be consolidated in accordance    with Mexican GAAP.

 

For U.S. GAAP    purposes, the Company has determined that the control it retains over the    management of the operating and financial policies of Comegua is not sufficient    to meet all of the technical requirements for consolidation. The Company's    position is based on the guidance provided by EITF 96-16, "Investor's Accounting    for an Investee When the Investor Has a Majority of the Voting Interest but    the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights".    Under EITF 96-16, such approval and veto rights held by the minority shareholders    of Comegua, including the approval of operating plans, qualify as substantive    participating rights and therefore do not allow the Company to consolidate    Comegua in its financial statements for U.S. GAAP purposes. Therefore, the    Company's investment in Comegua is recorded by applying the equity method    in the Company's U.S. GAAP consolidated financial statements.

 

l) Recovery    of Asset Tax Carryforwards

 

In 1994 the    Company paid an asset tax of Ps. 200 and as a result recorded a recoverable    tax asset under both Mexican and U.S. GAAP. The Company is seeking to recover    this asset tax by means of a settlement with the Mexican Tax Authorities.

 

Prior to November    1999, the Company was not allowed to deduct liabilities owed to financial    institutions (i.e. bank loans) for asset tax calculation purposes. In November    1999, the Mexican Supreme Court ruled that the restriction and inability to    deduct such financial liabilities was unconstitutional (the "November    1999 Ruling"). On March 13, 2002, the Mexican Tax Authorities confirmed    that the Company was allowed to deduct the liabilities held with the financial    system for asset tax calculation purposes. Based on this resolution, the recovery    of the asset tax paid in prior years by the Company was considered to be highly    probable. The court ruling and related confirmation remained effective as    of December 31, 2004, and based on the previous history of recovering asset    tax paid in fiscal years 1999, 2000 and 2001 and the fact that no settlements    regarding this issue had been denied, the Company considers that the recorded    Ps. 200 million of tax on asset carryforward is accurate.

 

As of December    31, 2004 the Company, based on discussion with its internal legal counsel,    previous court rulings and related inquiries with the relevant authorities,    considered that the recovery of this asset tax carryforward from the Mexican    Tax Authorities was highly probable. Furthermore, the Company obtained a legal    opinion from its independent legal counsel supporting its position that the    recovery of this asset tax was highly probable as of December 31, 2004. Mexican    GAAP allows the recognition of this type of asset based on a threshold of    highly probable, which the Company believed it met at the balance sheet date.

 

In February    2005, the Mexican Supreme Court ruled that the recovery of asset tax carryforwards    only applies to asset tax paid after an inquiry regarding this issue is made    with the Mexican Tax Authorities (the "February 2005 Ruling"). However,    at that time legal counsel advised the Company that there was still a high    probability of recovery of asset tax paid, because the February 2005 ruling    was not dispositive of the issue and they did not believe that the ruling    was applicable to the Company's fact pattern because the Company filed the    inquiry to the Mexican Tax Authorities before the November 1999 Ruling. 

 

In June and    July of 2005, a definitive Supreme Court ruling was issued, and some judges    took the position that the February 2005 Ruling also applied to inquiries    made before the November 1999 Ruling. Based on these rulings in June and July    of 2005, the Company considered that the tax authorities may challenge the    tax refund, and accordingly recorded a reserve, based on management's best    estimates, over the Ps. 200 million, since (i) the possibility of applying    that amount against taxes to be paid in the future expired in 2004, and (ii)    the high probability of prevailing in court had been reduced. 

 

As a result    of the rulings that occurred in June and July of 2005, which resulted in the    Company reevaluating the probability of recovery of this asset, the Company    had already issued its local Mexican GAAP financial statements. As of the    time the Company prepared its 2004 financial statements under Mexican GAAP,    the Company and outside legal counsel concluded that there was still a high    probability of recovery of the asset tax paid on the basis of all available    information at such time and that the accounting treatment for this item was    consistent with this conclusion. The Company complied with EITF D-86, "Issuance    of Financial Statements," regarding the official issuance date of financial    statements and did not modify its previously issued Mexican GAAP financial    statements. 

 

This recoverable    tax is not an asset under U.S. GAAP, as the threshold is higher than what    is considered by Mexican GAAP when analyzing the realizability of an asset    related to a positive legal ruling. In accordance with U.S. GAAP, contingent    tax assets resulting from legal settlements generally cannot be recognized    until cash or other forms of payment are received, such that realization is    assured beyond a reasonable doubt. As this particular asset tax should not    be recorded for U.S. GAAP purposes, the Company wrote-off the amount of Ps.    200 million, debiting the balance of beginning retained earnings as of January    1, 2002 due to the restatement discussed previously.

 

m) Other differences    and supplemental U.S. GAAP disclosures

 

*1. Pension    disclosures.-*The Company maintains defined benefit pension plans for all    of its subsidiaries and provides for seniority premiums and severance payments    at the end of the work relationship (severance indemnities) for all of its    Mexican subsidiaries. For its Mexican GAAP consolidated financial statements,    the Company applies Bulletin D-3 issued by the IMCP. The accounting treatment    for pensions set forth in this Bulletin is substantially the same as those    set forth in SFAS No. 87, "Employers' Accounting for Pensions". The Company    records the pension cost determined by actuarial computations, as described    in notes 3 h) and 10. Significant assumptions (weighted-average rates) used    in determining net periodic pension cost and the Company's related pension    obligations for 2003 and 2004 are also described in note 10.

 

Severance indemnities.- Under Mexican GAAP, as described in Note 20, effective 2005 revised Bulletin    D-3 requires the recognition of a severance indemnity liability calculated    based on actuarial computations. The same recognition criteria under U.S.    GAAP are established in SFAS No. 112, "Employers' Accounting for Postemployment    Benefits", which requires that a liability for certain termination benefits    provided under an ongoing benefit arrangement such as these statutorily mandated    severance indemnities, be recognized when the likelihood of future settlement    is probable. The tables above reflect the differing requirements under U.S. GAAP, which applies the SFAS No. 112 standard for 2004, 2003 and 2002. 

 

For purposes    of determining the cost of our pension plans, seniority premiums and severance    indemnities under U.S. GAAP, the Company applies SFAS Nos. 87 and 112. The    Company uses a December 31 measurement date for its pension plans, seniority    premiums and severance indemnities. The additional pension disclosures required    by SFAS No. 132(R), "Employers' Disclosures about Pensions and Other Postretirement    Benefits", which are applicable to the Company, are presented below:

 

 

**As          Presented**

**As          Restated**

 

**2003**

**2004**

**2003**

**2004**

Change in benefit          obligation:

 

 

 

 

Benefit obligation          at beginning of year

Ps.          1,924

Ps.          2,379

2,087

2,541

Service          cost

55 

51 

74 

69 

Interest          cost

132 

146 

141 

155 

Actuarial          losses

477 

275 

500 

291 

Benefits          paid

(209)

(228)

(260)

(271)

Benefit          obligation at end of year

2,379 

2,623 

2,541 

2,785 

Changes in plan assets:

 

 

 

 

Fair          value of plan assets at beginning of year

465 

521 

465 

521 

Contribution          of cash and securities

250 

180 

250 

180 

Return          on plan assets

29 

39 

29 

39 

Benefits          paid

(162)

(186)

(162)

(186)

Fair          value of plan assets at end of year(1)

582 

554 

582 

554 

Funded status:

1,797 

2,069 

1,635 

1,907 

Unrecognized          actuarial loss

(856)

(1,139)

(856)

(1,139)

Unrecognized          transition obligation

(381)

(293)

(381)

(293)

Unrecognized          prior service costs

(213)

(249)

(213)

(249)

Net          amount recognized

Ps. 347

Ps. 388

185 

226 

Amounts recognized          in the consolidated balance sheet consists of:

Ps.          1,396

Ps.          1,500

1,558 

1,662 

Accrued          benefit liability

(498)

(437)

(660)

(599)

Intangible          asset

(551)

(675)

(551)

(675)

Accumulated          other comprehensive income

Ps. 347

Ps. 388

347 

388 

 

(1) Includes    approximately Ps.455 and as of December 31, 2003 and 2004 of Vitro common    shares (39,150,000 shares at market value).

 

Net periodic    pension, seniority premiums and severance indemnity costs for 2002, 2003 and    2004 are summarized below: 

 

 

**Year ended December 31,**

** **

**As Presented**

**As Restated**

** **

**2002**

**2003**

**2004**

**2002**

**2003**

**2004**

Service          costs

Ps. 55

Ps. 55

Ps. 51

74 

74 

69 

Interest          cost

84 

132 

146 

93 

141 

155 

Return          on plan assets

(29)

(29)

(39)

(29)

(29)

(39)

Net          amortization and deferral

124            

154            

164            

124            

154            

164            

Net          periodic cost

Ps.            234

Ps.            312

Ps.            322

262            

339            

349            

 

The trust assets    consist of fixed income and variable funds, valued at market. As of December    31, 2003 and 2004, the pension plan assets are invested in the following financial    instruments:

 

 

**As Presented**

 

**2003**

**2004**

Fixed Rate:

 

 

Federal          Government instruments

22%

20%

Variable Rate:

 

 

Equity          securities traded on the Mexican Stock Exchange

78%

80%

 

100%

100%

 

We develop    our expected long-term rate of return assumption based on the historical experience    of our portfolio and the review of projected returns by asset class on broad,    publicly traded equity and fixed-income indices. The Company has a policy    of maintaining at most 30% of the plan assets in Federal Government instruments. Objective portfolio guidelines have been established for the remaining 70%,    and investment decisions are being made to comply with those guidelines to    the extent that market conditions and available funds allow. The composition    of the objective portfolio is consistent with the share composition of the    portfolios of the five best-known international companies located in Mexico    that manage long-term funds.

 

Contributions    to the pension plans amounted to Ps. 165 and Ps. 180 as of December 31, 2003    and 2004, respectively. The Company estimates that the contributions to the    pension plan funds during 2005 will be approximately Ps. 176.

 

Expected benefit    payments for our pension plans, seniority premium and severance indemnities    are as follows:

 

** **

**As Presented**

**As Restated**

**Year            ended December 31,**

**Pension**

**Seniority Premium**

**Severance Indemnities**

2005

 Ps.          217

 Ps.          11

 Ps.          38

2006

216

11

34

2007

224

11

30

2008

216

11

27

2009

218

12

24

2010          - 2014

1,095

53

88

 

Expected benefit    payments are based on the same assumptions used to measure the benefit obligations. 

 

*2. Exit or    disposal activities.-*The disclosures required by SFAS No. 146 "Accounting    for Costs Associated with Exit or Disposal Activities" related to the Company's    exit or disposal activities are as follows:

 

(a) Vitro America    Restructuring - In 2004, Vitro America implemented a three-year operational    restructuring designed to streamline the organization and instill a more customer    and results oriented culture in its workforce. Teams of internal and external    consultants and vendors are evaluating and re-organizing the Vitro America's    installation, manufacturing and corporate processes. These teams have identified    and initiated a number of projects with a view to position Vitro America as    the leader among the distributors, manufacturers and installers of flat glass    in the United States. The Company incurred expenses during 2004 of approximately    Ps. 33, which are recorded as "Other Expenses" under Mexican GAAP    and within selling, general and administrative expenses for U.S. GAAP purposes.    These expenses related to professional and consulting fees that were expensed    as incurred. Additionally, the Company incurred approximately Ps. 18, which    for both Mexican and U.S. GAAP purposes was recorded in selling, general and    administrative expenses for severance costs related to one-time termination    benefits given to former officers and members of management. The Company    does not expect to incur additional severance or termination costs in future    years related to this restructuring and has estimated that approximately Ps.    15 to Ps 30 of additional professional and consulting fees will be incurred    in future years. As such as of December 31, 2004 no liability has been recorded    as the professional and consulting fees will continue to be expensed as such    services are provided. Vitro America conducts a substantial majority of our    flat glass operations in the United States and is a subsidiary of Vitro Plan,    the holding company of our Flat Glass business unit.

 

(b) Tin Oxide    Project - During 2004, the Company's management decided to stop the manufacture    of mirrors with tin oxide. This exit activity was initiated and finalized    during 2004 and as a result no liability has been accrued for as of December    31, 2004. This decision led to the sale of certain fixed assets and inventory    on hand. These sales were recorded as other expenses under Mexican GAAP and    within operating income under U.S. GAAP. The costs incurred as a result of    this exit activity were Ps. 26. Our terminated Tin Oxide Project had been    conducted by Vitro Flotado Cubiertas, a subsidiary of Vitro Plan, the holding    company of our Flat Glass business unit.

 

*3. Impairment    of Long Lived Assets.-*For U.S. GAAP purposes, in accordance with SFAS No.    144, long-lived assets are reviewed for impairment whenever events or changes    in circumstances indicate that the carrying amount of an asset may not be    recoverable. The carrying amount of an asset is not recoverable when the    estimated future undiscounted cash flows expected to result from the use of    the asset are less than the carrying value of the asset. Impairment is recorded    when the carrying amount of the asset exceeds its fair value. Impairment charges    and asset write-downs are presented in selling, general and administrative    expenses in operating income in our U.S. GAAP consolidated financial statements.

 

For Mexican    GAAP purposes, in accordance with Bulletin C-15, the Company reviews the carrying    amounts of long-lived assets in use when an impairment indicator suggests    that such amounts might not be recoverable, considering the greater of the    present value of future net cash flows or the net sales price upon disposal.    Impairment is recorded when the carrying amount of the asset exceeds the greater    of the amounts mentioned above.For Mexican GAAP purposes, we recorded an impairment    charge of Ps. 11 as the carrying amount of the long-lived asset exceeded the    present value of future net cash flows. For U.S. GAAP purposes no impairment    charge was recorded as the asset was considered to be recoverable given that    the estimated undiscounted cash flows expected to result from the use of the    asset were greater than the carrying value of the asset. Impairment charges    and asset write-downs are presented in other expenses in our Mexican GAAP    consolidated financial statements.

 

*4. Gain or    loss on sale of assets.-*The gain or loss on sale of assets that do not meet    the definition of a component of a business as described in SFAS No. 144 are    included in operating income in our U.S. GAAP consolidated financial statements.    Gains or losses on sales of assets not presented as discontinued operations    under Mexican GAAP are included in other expenses in our consolidated Mexican    GAAP financial statements.

 

*5. Equity method    investments.-* The Company's subsidiaries Vitro American National Can, S.A.    de C.V. ("Vancan") (sold in 2004 as described in note 18e) and Vitro AFG,    S.A. de C.V. ("AFG"), which are part of the Flat Glass and Glass Containers    segments, respectively, are joint ventures in which the Company has a 50%    interest and shares joint control of each subsidiary with its partners, Rexam    and AFG Industries, Inc., respectively. Under Mexican GAAP, the subsidiaries    are consolidated using the proportionate consolidation method. Under U.S.    GAAP, the Company's investment in and its interest in the net income of Vancan    and AFG would be recorded based on the equity method. In addition, as  mentioned in Note 22 k) we account for Comegua under the equity method for  U.S. GAAP purposes. 

 

Summary information of the Company's  equity method investments is as follows:

 

 

**As Presented**

**As Restated**

 

**As of the year ended December 31,**

**As of the year ended December 31,**

 

**2003**

**2004**

**2003**

**2004**

**2003**

**2004**

 

**Vancan**

**AFG**

**Comegua**

Current assets

Ps. 179

Ps.

Ps. 55

Ps. 66

Ps. 599

Ps. 661

Total assets

414

 

522

508

2,183

2,215

Current liabilities

113

 

289

280

338

347

Total liabilities

160

 

312

298

790

703

Stockholders' equity

254

 

210

210

1,394

1,512

Net sales

424

312

26

217

1,075

1,129

Net income

22

14

(23)

7

56

47

Cash flow information-net  cash provided by:

 

 

 

 

 

 

Operating  activities

110

(4)

50

75

122

208

Financing  activities

(53)

(53)

262

(67)

(66)

(2)

Investing  activities

(7)

15

(306)

(13)

(199)

(146)

 

Under U.S.    GAAP, as of December 31, 2003 and 2004 the Company's investment in Vancan    and AFG was Ps.254 and Ps.0, and Ps.210 and Ps.210, respectively. 

 

*6. Weighted-average    interest rates.-*The weighted-average interest rates on short-term borrowings    outstanding as of December 31, 2002, 2003 and 2004 were approximately 4.3%,    4.3% and 5.37%, respectively.

 

*7. Fair value    of financial instruments.-*SFAS No. 107, "Disclosures about Fair Value of    Financial Instruments", requires disclosure of the estimated fair values of    certain financial instruments. The carrying amounts and estimated fair values    of the Company's significant financial instruments were as follows:

 

 

**December 31, 2003**

**December 31, 2004**

 

**Carrying Amount (Mexican GAAP)**

**Fair Value**

**Carrying Amount (Mexican GAAP)**

**Fair Value**

Liabilities:

 

 

 

 

Short-term borrowings

2,374

2,374

2,172

2,172

Long-term debt(1)

14,275

14,157

14,626

14,644

Derivative instruments:

 

 

 

 

Interest rate swaps

0

281

0

0

Foreign currency          forward contracts

0

(112)

0

0

Natural gas contracts

0

0

0

162

__________

(1) Includes    current portion of long-term debt.

 

The fair value    of short-term borrowings approximate their carrying value due to their short    maturities. The fair value of the U.S. (dollar denominated) publicly traded    long-term debt was Ps.4,689 and Ps.6,228 as of December 31, 2003 and 2004,    respectively, and its related book value was Ps.4,808 and Ps.6,210, respectively.    The fair value of the remaining long-term debt closely approximates its book    value of Ps.9,478 and Ps.8,416 as of December 31, 2003 and 2004, respectively. The fair value of long-term investments and long-term debt was determined    using available quoted market prices or other appropriate valuation methodologies    that require considerable judgment in interpreting market data and developing    estimates. Accordingly, the estimates presented above on long-term financial    instruments are not necessarily indicative of the amounts that the Company    could realize in a current market exchange. The use of different market assumptions    and/or estimation methodologies may have a material effect on the estimated    fair value amounts.

 

The fair value    information presented herein is based on information available to management    as of December 31, 2003 and 2004. Although management is not aware of any    factors that would significantly affect the estimated fair value amounts,    such amounts have not been comprehensively revalued for purposes of these    financial statements since that date and, therefore, the current estimates    of fair value may differ significantly from the amounts presented herein. 

 

*8. Classification    of workers' profit sharing. -*In a U.S. GAAP statement of operations, workers'    profit sharing expense would be classified as an operating expense.

 

*9. Earnings    per common share in accordance with U.S. GAAP.-*Earnings per share in accordance    with U.S. GAAP are based on the provisions of SFAS No. 128, "Earnings Per    Share", and are calculated using the weighted-average number of common shares    outstanding during each period. The stock options granted under the Company's    Plan (see note 13 b) were not dilutive during 2002, 2003 and 2004, as the    average market price per share of the Company's common stock during the period    was less than the exercise price per share of the options and due to the net    losses recorded in 2003 and 2004. The Company has no other potentially dilutive    securities. Basic earnings per share are based upon, 275,437,527, 275,152,973    and 271,840,010 weighted-average shares outstanding for 2002, 2003 and 2004,    respectively. 

 

Loss per common    share computed in accordance with U.S. GAAP is presented below:

 

 

**As Presented**

**As Restated**

** **

**Year ended December 31,**

**Year ended December 31,**

** **

**2002**

**2003**

**2004**

**2002**

**2003**

**2004**

Loss per share - Basic and diluted earnings          (loss) before discontinued operations

Ps. (2.46)

Ps. (2.73)

Ps. (0.94)

Ps. (3.05)

Ps. (3.24)

Ps. (2.47)

Discontinued operations

0.37

 

 

0.94

0.52

1.66

Loss per common share

Ps.            (2.09)

Ps.            (2.73)

Ps.            (0.94)

Ps.            (2.10)

Ps.            (2.73)

Ps.            (0.81)

 

*10. Comprehensive    income. -*Under U.S. GAAP, SFAS No. 130, "Reporting Comprehensive Income",    establishes standards for reporting and display of comprehensive income and    its components. Vitro's items of other comprehensive income are loss from    holding nonmonetary assets, unrealized gain (loss) on long-term investments,    currency translation and the minimum pension liability adjustment.

 

See note 22n),    for consolidated financial statements presented on a U.S. GAAP basis, which    reflect the provisions of SFAS No. 130. There were no reclassification    adjustments for any of the periods presented. 

 

*11. Employee    stock option plan. -*The Plan (see note 13 b) was adopted in 1998. The Company    applies SFAS No. 123 in accounting for its Plan under both Mexican GAAP and    U.S. GAAP. The disclosures required under U.S. GAAP are included in note 13    b).

 

*12. Restrictions    that limit the payment of dividends by the registrant. -* The Company derives    substantially all of its operating income from advances, fees, interest and    dividends paid to the Company by its subsidiaries. Accordingly, in paying    the principal of, premium, if any, interest on, and additional amounts, if    any, with respect to the Company's indebtedness, the Company relies on income    from advances, fees, interest and dividends from its' subsidiaries, as well    as income from the disposition of one or more of its subsidiaries, interests    therein or assets thereof. Therefore, the Company's subsidiaries' ability    to pay such dividends or make such distributions are subject to (i) such subsidiaries    having net income and the requisite amount of paid-in capital under Mexican    law, (ii) such subsidiaries' shareholders (including the Company's joint venture    partners) having approved the payment of such dividends at the annual general    ordinary shareholders' meeting and (iii) applicable laws and, in certain circumstances,    restrictions contained in joint venture and debt agreements. At December 31,    2003 and 2004, the amount of restricted retained earnings of the Company's    consolidated subsidiaries amounted to Ps.3,587 and Ps.2,607 respectively.

 

*13. Concentration    of credit risk. -*The Company sells products to customers primarily in Mexico,    the U.S. and Europe, although no single customer accounted for more than 10%    of consolidated net sales in 2004 and 2003, the Company's has customers that    are significant to its business units and to its consolidated financial statements    taken as a whole. The Company's three largest customers accounted for approximately    10% of its consolidated net sales in 2004 and 2003. The Company conducts periodic    evaluations of its customers' financial condition and generally does not require    collateral. The Company does not believe that significant risk of loss from    a concentration of credit risk exists given the large number of customers    that comprise its customer base and their geographical dispersion. The Company    also believes that its potential credit risk is adequately covered by the    allowance for doubtful accounts.

 

*14. New  accounting pronouncements. -*In December 2004 the Financial Accounting  Standards Board ("FASB") issued SFAS No. 123(R). This Statement eliminates the option to apply    the intrinsic value measurement provisions of Accounting Principles Board    ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and establishes    standards for the accounting for transactions in which an entity exchanges    its equity instruments for goods or services. This Statement requires public    companies to measure the cost of employee services received in exchange for    an award of equity instruments based on the grant-date fair value of the award.    That cost will be recognized over the period during which an employee is required    to provide service in exchange for the award, which is the requisite service    period (usually the vesting period). SFAS No. 123(R) applies to all awards    granted after the required effective date and to awards modified, repurchased,    or cancelled after that date. SFAS No. 123(R) will be effective for our fiscal    year ending December 31, 2006. The Company currently applies the provisions    of SFAS No. 123, "Accounting for Stock-Based Compensation", and recognizes    the cost of employee services received in exchange for an award of equity    instruments based on the grant-date fair value of the award. As the requirements    of SFAS No. 123 as applied by the Company are similar to those of SFAS No.  123(R), the Company's management does not anticipate that the adoption of this  Statement will have a significant effect on its consolidated financial  position or results of operations. 

 

In November    2004, the FASB issued SFAS No. 151. This Statement amends the guidance in    Accounting Research Bulletin, or ARB, No. 43. This Statement clarifies the    accounting for abnormal amounts of idle facility expense, freight, handling    costs, and wasted material and requires that those items be recognized as    current-period charges regardless of whether they meet the criterion of "so    abnormal." In addition, this Statement requires that allocation of fixed    production overheads to the costs of conversion be based on the normal capacity    of the production facilities. This guidance is effective for inventory costs    incurred during the fiscal years beginning after June 15, 2005, with earlier    application allowed for inventory costs incurred during fiscal years beginning    after November 23, 2004. The Company's management does not anticipate that    the adoption of this Statement will have a material effect on its consolidated    financial position or results of operations.

 

In December    2004, the FASB issued SFAS No. 153, which amends APB Opinion No. 29, "Accounting    for Nonmonetary Transactions", to eliminate the exception for nonmonetary    exchanges of similar productive assets and replaces it with a general exception    for exchanges of nonmonetary assets that do not have commercial substance,    considering that a nonmonetary exchange has commercial substance if the future    cash flows of the entity are expected to change significantly as a result    of the exchange. SFAS No. 153 is effective for nonmonetary assets exchanges    occurring in fiscal periods beginning after June 15, 2005 The Company's management    does not anticipate that the adoption of this Statement will have a material    effect on its consolidated financial position or results of operations. 

 

*15. Reclassifications.    -*Certain amounts in the consolidated financial statements as of and for the    years ended December 31,  2002 and 2003 have been reclassified in    order to conform to the presentation of the consolidated financial statements    as of and for the year ended December 31, 2004.

 

n) Comparative    consolidated financial statements - U.S. GAAP

 

**CONSOLIDATED    BALANCE SHEETS**

**U.S. GAAP BASIS**

(Millions of    constant Mexican pesos as of December 31, 2004)

 

 

**As          Presented**

**As          Restated**

 

**December          31,**

**December          31,**

 

**2003**

**2004**

**2003**

**2004**

**Assets**

 

 

 

 

** **

 

 

 

 

Cash and cash equivalents

Ps.          1,422

Ps.          2,825

 1,303 

 2,667 

Trade receivables,          net of allowance for doubtful accounts

2,223

2,207

 1,952 

 2,013 

Other receivables

1,454

1,418

 1,300 

 1,322 

Inventories

4,094

4,132

 3,758 

 3,919 

Current assets from          discontinued operations

 

 

 250 

 - 

Current          assets

9,193

10,582

 8,563 

 9,921 

Long-term investments

832

396

 809 

 372 

Investment in associated          companies

465

210

 1,194 

 961 

Land and buildings

9,323

9,023

 8,512 

 8,434 

Machinery and equipment

10,034

8,561

 8,625 

 7,665 

Construction in progress

1,039

998

 863 

 946 

Goodwill

920

844

 920 

 844 

Intangible pension          asset

542

442

 539 

 442 

Other assets

562

659

 550 

 659 

Other assets from          discontinued operations

 

 

 730 

 - 

Total          assets

Ps. 32,910

Ps. 31,715

 31,305 

 30,244 

 

 

 

 

 

**Liabilities**

 

 

 

 

 

 

 

 

 

Short-term borrowings

Ps.          2,242

Ps.          2,172

 2,059 

 2,111 

Current portion of          long-term debt

2,346

1,097

 2,281 

 1,072 

Trade payables

2,202

2,132

 1,997 

 2,040 

Accrued expenses

776

855

 651 

735 

Deferred taxes

653

642

 653 

 642 

Current liabilities          from discontinued operations

 

 

 366 

 - 

Other current liabilities

1,514

1,529

 1,370 

 1,480 

Current          liabilities

9,733

8,427

 9,377 

 8,080 

Long-term debt

11,888

13,529

 11,717 

 13,356 

Seniority premiums,          pensions and other long-term liabilities

1,774

1,664

 1,476 

 1,609 

Long-term liabilities          from discontinued operations

 

 

 141 

 - 

Deferred taxes

498

28

 639 

 169 

Long-term          liabilities

14,160

15,221

 13,973 

 15,134 

Total          liabilities

23,893

23,648

 23,350          

 23,214 

Minority interest          in consolidated subsidiaries

3,197

3,010

 2,407 

 2,213 

 

 

 

 

 

**Stockholders'          Equity**

 

 

 

 

 

 

 

 

 

Majority interest:

 

 

 

 

Capital stock: no          par value 324,000,000 shares issued

Ps.          324

Ps.          324

 324 

 324 

Restatement of capital          stock

6,460

6,460

 6,460 

 6,460 

Capital          stock restated

6,784

6,784

 6,784 

 6,784 

Treasury stock (52,946,110          in 2003 and 51,044,097 in 2004)

(608)

(594)

 (608)

 (594)

Paid-in capital

1,017

1,017

 1,017 

 1,017 

Shortfall in restatement          of capital

(17,783)

(18,450)

 (17,805)

 (18,476)

Minimum pension liability          adjustment

(347)

(419)

 (347)

 (419)

Retained earnings          reserved for reacquisition of shares of Vitro

2,514

2,000

 2,514 

 2,000 

Retained earnings

14,994

14,975

 14,745 

 14,727 

Net (loss) for the          year

(751)

(256)

 (752)

 (221)

Total          stockholders' equity

5,820

5,057

 5,548 

 4,818 

Total          liabilities, minority interest in consolidated subsidiaries and stockholders'          equity

Ps. 32,910

Ps. 31,715

 31,305 

 30,245 

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**U.S. GAAP BASIS**

(Millions of    constant Mexican pesos as of December 31, 2004)

 

 

**As          Presented**

**As          Restated**

** **

**Year          ended December 31,**

**Year          ended December 31,**

** **

**2002**

**2003**

**2004**

**2002**

**2003**

**2004**

** **

 

 

 

 

 

 

Net          sales

Ps.          25,798

Ps.          25,812

Ps          .25,752

23,398

23,577

24,285

Cost          of sales

18,478

18,801

19,022

16,809

17,288

17,965

 

 

 

 

 

 

 

Gross          profit

7,320

7,011

6,730

6,589

6,289

6,320

Selling, general, administrative          expenses

5,889

5,498

5,914

5,455

5,083

5,559

 

 

 

 

 

 

 

Operating          income

1,431

1,513

816

1,134

1,206

761

 

 

 

 

 

 

 

Interest          expense

1,971

2,054

2,161

1,945

2,035

2,145

Interest          income

147

198

128

155

207

121

Exchange          loss, net

1,676

802

78

1,623

777

78

Gain          from monetary position

847

593

719

824

586

715

Total          financing cost

2,653

2,065

1,392

2,589

2,019

1,387

 

 

 

 

 

 

 

Loss          after financing cost

(1,222)

(552)

(576)

(1,455)

(813)

(626)

Other          income (loss), net

96

69

438

16

30

31

 

 

 

 

 

 

 

Loss          before income taxes, minority interest and share in earnings

(1,126)

(483)

(138)

(1,439)

(783)

(595)

Income tax expense

402

(64)

134

492

42

146

Minority interest

34

(204)

(273)

67

(181)

(267)

Share in earnings          of unconsolidated associated companies

11

 

21

42

29

45

 

 

 

 

 

 

 

Loss          from continuing operations

(679)

(751)

(256)

(838)

(893)

(671)

Discontinued operations

103

 

 

260

141

450

Net          loss

Ps. (576)

Ps. (751)

Ps. (256)

(578)

(752)

(221)

 

**CONSOLIDATED    STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**

**U.S. GAAP BASIS**

(Millions of    constant Mexican pesos as of December 31, 2004)

 

 

**As Presented**

**As Restated**

 

**Capital Stock**

**Treasury Stock**

**Paid-In Capital**

**Shortfall in Restatement of  Capital**

**Other**

**Retained Earnings**

**Comprehensive Loss**

**Stock-  holders' Equity**

**Stock-  holders' Equity**

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2002

Ps. 6,784

Ps. (597)

Ps. 1,028

Ps. (18,831)

Ps. (105)

Ps. 18,827

 

Ps. 7,106

6,841 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(576)

Ps. (576)

(576)

(578)

Bulletin B-15 adjustments

 

 

 

248

 

(503)

 

(255)

(258)

Other comprehensive income  (loss):

 

 

 

 

 

 

 

 

0 

Minimum pension liability  adjustment

 

 

 

 

(182)

 

(182)

(182)

(182)

Gain from holding  nonmonetary assets

 

 

 

(62)

 

 

(62)

(62)

(62)

Cumulative Translation  Adjustment

 

 

 

96

 

 

96

96

96 

Deferred income taxes

 

 

 

673

119

 

792

792

792 

Effect of applying the Fifth  Amendment

 

 

 

(309)

 

 

(309)

(309)

(309)

Deferred workers' profit  sharing

 

 

 

(9)

 

 

(9)

(9)

(9)

Fair value of financial  instruments

 

 

 

 

(158)

 

(158)

(158)

(158)

Other comprehensive income

 

 

 

 

 

 

168

 

0 

Comprehensive loss

 

 

 

 

 

 

Ps. (408)

 

0 

Dividends (Ps. 0.27 pesos  per share)

 

 

 

 

 

(85)

 

(85)

(85)

Additional paid-in capital

 

 

(28)

 

 

 

 

(28)

(28)

Acquisition of treasury  stock

 

35

 

 

 

 

 

35

35 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2002

Ps. 6,784

Ps. (562)

Ps. 1,000

Ps. (18,194)

Ps. (326)

Ps. 17,663

 

Ps. 6,365

6,095 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(751)

Ps. (751)

(751)

(752)

Bulletin B-15 adjustments

 

 

 

(137)

 

(38)

 

(175)

(176)

Other comprehensive income  (loss):

 

 

 

 

 

 

 

 

0 

Minimum pension liability  adjustment

 

 

 

 

(32)

 

(32)

(32)

(32)

Gain from holding  nonmonetary assets

 

 

 

(19)

 

 

(19)

(19)

(19)

Cumulative Translation  Adjustment

 

 

 

139

 

 

139

139

139 

Deferred income taxes

 

 

 

600

11

 

611

611

611 

Effect of applying the Fifth  Amendment

 

 

 

(173)

 

 

(173)

(173)

(173)

Deferred workers' profit sharing

 

 

 

1

 

 

1

1

1 

Other comprehensive income

 

 

 

 

 

 

527

 

0 

Comprehensive loss

 

 

 

 

 

 

Ps. (224)

 

0 

Dividends (Ps.0.39 pesos per  share)

 

 

 

 

 

(117)

 

(117)

(117)

Additional paid-in capital

 

 

17

 

 

 

 

17

17 

Acquisition of treasury  stock

 

(46)

 

 

 

 

 

(46)

(46)

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

Ps. 6,784

Ps. (608)

Ps. 1,017

Ps. (17,783)

Ps. (347)

Ps. 16,757

 

Ps. 5,820

5,548 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

(256)

Ps. (256)

(256)

(221)

Bulletin B-15 adjustments

 

 

 

(256)

 

310

 

54

52 

Other comprehensive income  (loss):

 

 

 

 

 

 

 

 

Minimum pension liability  adjustment

 

 

 

 

(108)

 

(108)

(108)

(108)

Gain from holding  nonmonetary assets

 

 

 

(398)

 

 

(398)

(398)

(398)

Cumulative Translation  Adjustment

 

 

 

88

 

 

88

88

88 

Deferred income taxes

 

 

 

(30)

36

 

6

6

6 

Effect of applying the Fifth  Amendment

 

 

 

(72)

 

 

(72)

(72)

(72)

Deferred workers profit  sharing

 

 

 

1

 

 

1

1

1 

Other comprehensive income

 

 

 

 

 

 

(483)

 

0 

Comprehensive loss

 

 

 

 

 

 

(739)

 

0 

Dividends (Ps.0.31 pesos per  share)

 

 

 

 

 

(92)

 

(92)

(92)

Additional paid-in capital

 

14

 

 

 

 

 

14

14 

Acquisition of treasury  stock

 

 

 

 

 

 

 

0

0 

 

 

 

 

 

 

 

 

 

 

 

 

Ps. 6,784

Ps. (594)

Ps. 1,017

Ps. (18,450)

Ps. (419)

Ps. 16,719

 

Ps. 5,057

4,818 

 

**CONSOLIDATED    STATEMENTS OF CASH FLOWS**

**U.S. GAAP BASIS***

(Millions of    nominal pesos)

 

 

**As          Presented**

**As          Restated**

 

**Year          ended December 31,**

**Year          ended December 31,**

 

**2002**

**2003**

**2004**

**2002**

**2003**

**2004**

**Operating Activities:**

 

 

 

 

 

 

Loss from continuing          operations in constant pesos

Ps.          (679)

Ps.          (751)

Ps.          (256)

(838)

(893)

(671)

Effect of constant          pesos

16 

28 

18 

61 

36 

(3)

Loss from continuing          operations in nominal pesos

(663)

(723)

(238)

(777)

(857)

(674)

Add (deduct) non          cash items:

 

 

 

 

 

 

Minority interest

(31)

194 

273 

(67)

181 

267 

Depreciation          and amortization

1,965 

2,036 

2,255 

1,801 

1,886 

2,154 

Provision          for seniority premiums, pension and other long-term liabilities

182 

246 

265 

207 

286 

298 

Amortization          of debt issue cost

50 

63 

121 

50 

62 

121 

Share          in net income of unconsolidated associated companies

(10)

 

(21)

(33)

(25)

(45)

Fair          value of derivative financial instruments

176 

(23)

(9)

176 

(23)

(9)

Gain          from sale of subsidiaries and associated companies

(64)

(36)

(475)

0 

0 

(82)

Write-off          and loss from sale of fixed assets

395 

115 

327 

395 

120 

316 

Deferred          income tax and workers' profit sharing

(761)

(148)

(280)

(768)

(187)

(262)

Gain          from monetary position

(757)

(554)

(731)

(741)

(548)

(727)

Exchange          loss 

1,495 

743 

68 

1,448 

721 

69 

Increase (decrease)          in trade payables

(131)

(189)

127 

(36)

(216)

80 

Increase in trade          receivables

(322)

(79)

(224)

(356)

(121)

(185)

(Increase) decrease          in inventories

(503)

20 

(275)

(510)

83 

(310)

Change in other current          assets and liabilities, net

335 

(246)

68 

460 

(149)

131 

Pension funding payments

(167)

(157)

(182)

(197)

(202)

(225)

Net loss from discontinued          operations

(116)

 

 

(33)

106 

2 

Proceeds from disposal          of discontinued operations

1,390 

 

 

1,501 

188 

553 

Operating assets          and liabilities from discontinued operations

164 

 

 

6 

19 

(30)

Cash          provided by operating activities

2,627 

1,262 

1,069 

2,526 

1,324 

1,442 

 

 

 

 

 

 

 

**Investing Activities:**

 

 

 

 

 

 

Sales          of land and buildings and machinery and equipment

138 

43 

18 

138 

42 

18 

Investment          in land and buildings and machinery and equipment

(985)

(1,442)

(1,434)

(862)

(1,221)

(1,317)

Investment          in subsidiaries and associated companies

(9)

 

 

(9)

0 

0 

Sale          of subsidiaries and associated companies

111 

188 

904 

(0)

(0)

351 

Restricted          cash on long-term loans

(49)

(232)

181 

(49)

(232)

181 

Effect          from discontinued operations

(6)

 

 

(51)

(23)

(8)

Other

(204)

(175)

(291)

(139)

(172)

(253)

Cash          used in investing activities

(1,004)

(1,618)

(622)

(972)

(1,606)

(1,028)

 

 

 

 

 

 

 

**Financing Activities:**

 

 

 

 

 

 

Short-term          borrowings

4,640 

2,175 

3,328 

4,260 

1,970 

3,127 

Issuance          of long-term debt

2,793 

5,318 

5,891 

2,759 

5,240 

5,831 

Capital          stock contributed by minority interest

7 

 

 

7 

0 

0 

Payment          of short-term borrowings

(5,801)

(4,994)

(4,188)

(5,564)

(4,565)

(4,061)

Payment          of long-term debt

(1,779)

(2,859)

(3,728)

(1,750)

(2,853)

(3,709)

Acquisition          of treasury stock

 

(61)

 

 

(61)

0 

Sale          of treasury stock

24 

17 

14 

24 

17 

14 

Dividends          paid to stockholders of Vitro

(75)

(108)

(89)

(75)

(108)

(89)

Dividends          paid to minority interests

(257)

(123)

(148)

(196)

(107)

(124)

Effect          from discontinued operations

(42)

 

 

67 

(113)

73 

Cash          (used) provided in financing activities

(490)

(635)

1,080 

(467)

(579)

1,062 

Net          increase (decrease) in cash and cash equivalents

1,133 

(991)

1,527 

1,086 

(861)

1,476 

Monetary and exchange          rate effect on cash and cash equivalents

118 

119 

(54)

122 

120 

(49)

Balance at beginning          of year

973 

2,224 

1,352 

773 

1,981 

1,240 

Balance at end of          year

Ps. 2,224

Ps. 1,352

Ps. 2,825

1,981 

1,240 

2,667 

 

 

 

 

 

 

 

Net          cash provided by operating activities reflects net cash payments of          interest and income taxes as follows:

 

 

 

 

 

 

Interest

Ps.          1,536

Ps.          1,847

Ps.          1,896

Ps.          1,514

Ps.          1,810

Ps.          1,874

Income taxes

148 

61 

112 

124

17

101

 

 

 

*This consolidated    statement of cash flows on the basis of nominal pesos is presented to fulfill    disclosure requirements of the International Practices Task Force of the American    Institute of Certified Public Accountants.

 

 

**Schedule I    - Condensed Financial Information of Registrant**

 

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

**Balance Sheets**

**(Millions of constant Mexican pesos as of December 31, 2004)**

 

** **

**December 31,**

**Assets**

**2003**

**2004**

Cash          and cash equivalents

Ps. 770

Ps. 1,662

Receivables from services to subsidiaries

98

84

Due from subsidiaries

1,029

2,843

Other receivables

36

47

Current assets

1,933

4,636

Investments in subsidiaries and associated companies

12,610

8,807

Land and buildings

366

361

Other          assets

278

217

Other accounts receivable from subsidiaries

856

219

Deferred          taxes

192

77

Long-term assets

14,302

9,681

Total assets

Ps. 16,235

Ps. 14,317

 

 

 

**Liabilities**

 

 

Short-term          borrowings 

Ps. 320

Ps. 1,096

Current maturities of long-term debt

521

29

Due to subsidiaries

258

34

Income tax payable

2,334

2,240

Other current liabilities

330

272

Current liabilities

3,763

3,671

Long-term debt  

6,196

5,154

Due to subsidiaries long-term

253

143

Long-term liabilities

6,449

5,297

Total liabilities

10,212

8,968

 

 

 

**Stockholders'          equity**

 

 

Capital          stock

324

324

Restatement          of capital stock

6,460

6,460

Total restated capital stock 

6,784

6,784

Treasury stock  

(608)

(594)

Additional paid-in capital

1,017

1,017

Shortfall in restatement of capital

(18,158)

(18,416)

Cumulative initial effect of deferred taxes

(1,624)

(1,624)

Minimum pension liability adjustment

(348)

(419)

Retained earnings reserve for reacquisition of Vitro  shares 

2,514

2,000

Retained earnings

16,446

16,601

Total stockholders' equity 

6,023

5,349

Total liabilities and  stockholders' equity

Ps. 16,235

Ps. 14,317

 

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

**Statements of Operations**

**(Millions of    constant Mexican pesos as of December 31, 2004, except per share amounts which    are in pesos)**

 

 

**Year          ended December 31,**

 

**2002**

**2003**

**2004**

Equity in earnings (loss) of subsidiaries and associated  companies

Ps. (219)

Ps. (311)

Ps. 466

Other income

 

 

85

Administrative expenses

53

95

74

Operating (loss) income

(272)

(406)

477

Total financing cost:

 

 

 

Interest expense

(535)

(958)

(1,124)

Interest income

45

104

167

Exchange (loss) gain, net

(253)

181

(204)

Gain from monetary position

351

283

372

 

392

390

789

Loss after financing cost

(664)

(796)

(312)

Other income, net

49

37

5

Loss before income tax and asset tax

(615)

(759)

(307)

Income tax and asset tax

(232)

(163)

(40)

Loss from continuing operations

(383)

(596)

(267)

Loss from discontinued operations

(128)

 

 

Gain on disposal of discontinued operations

506

 

 

Net loss  

Ps. (5)

Ps. (596)

Ps. (267)

Earnings per common share (based on weighted average  shares outstanding of 275,437,527 for 2002, 275,152,973 for 2003 and  271,840,010 for 2004):

 

 

 

Loss from continuing operations

Ps. (1.38)

Ps. (2.17)

Ps. (0.98)

Loss from discontinued operations

(0.47)

 

 

Gain on disposal of discontinued operations

1.84

 

 

Net loss  

Ps. (0.01)

Ps. (2.17)

Ps. (0.98)

 

 

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

**Statements of Changes in Financial Position**

**(Millions of    constant Mexican pesos as of December 31, 2004)**

 

 

**Year          ended December 31,**

 

**2002**

**2003**

**2004**

Operating activities:

 

 

 

Loss from continuing operations

Ps. (383)

Ps. (596)

Ps. (267)

Add (deduct) non-cash items:

 

 

 

Depreciation and amortization

26

24

20

Amortization of debt issue  costs

36

40

47

Equity in earnings (loss) of  subsidiaries and 

 

 

 

associated companies (net of  dividends received)(1)

406

(148)

147

Deferred income tax

(177)

(164)

115

Gain from sale of subsidiaries  and associated companies

(72)

(37)

(488)

 

(164)

(881)

(426)

Other current assets and liabilities, net

(761)

41

(44)

Resources generated by (used in) continuing operations

(925)

(840)

(470)

Loss from discontinued  operations

(128)

 

 

Gain on disposal of  discontinued operations

1,550

 

 

Resources generated by (used in) operating activities

497

(840)

(470)

Financing activities:

 

 

 

Proceeds received from  short-term bank loans

2,284

1,335

2,313

Proceeds received from  long-term bank loans

2,545

4,562

(216)

Notes payable to subsidiaries

(1,957)

160

(1,605)

Monetary effect on liabilities  with financing cost

(69)

(268)

(321)

Payment of short-term loans

(1,783)

(2,659)

(2,162)

Payment of long-term loans

(418)

(1,515)

(372)

Acquisition of common stock

 

(64)

 

Issuance of common stock

26

16

14

Dividends paid

(85)

(117)

(92)

Resources generated by (used in) financing activities

543

1,450

(2,441)

Investing activities:

 

 

 

Investment in land and  buildings, and machinery and equipment

 

18

 

Investment in subsidiaries and  associated companies

68

(971)

3,803

Other investing activities

(140)

 

 

Resources generated by (used in) investing activities

(72)

(953)

3,803

Cash and cash equivalents

 

 

 

Net increase (decrease)

968

(343)

892

Balance at beginning of year

145

1,113

770

Balance at end of year

Ps. 1,113

Ps. 770

Ps. 1,662

 

(1) The following    table sets forth for the periods presented the amount of dividends received    by the Company:

 

 

**Year ended  December 31,**

 

**2002**

**2003**

**2004**

Dividends Received  

598

458

435

 

  NOTE: The detailed footnote disclosure which would normally be included with  complete financial statements have been omitted since such information has  been separately disclosed in the Company's consolidated financial statements. 

 

 

**Schedule II    -Valuation and Qualifying Accounts**

 

**Schedule of  Valuation and Qualifying Accounts**
**For the years Ended  December 31, 2004, 2003 and 2002**

**Millions of constant  Mexican pesos as of December 31, 2004**

 

 

**Balance at beginning  of year**

**Additions**

**Deductions**

**Changes for effects  of inflation**

**Balance at the end  of the year**

**Year ended December 31, 2004**

Allowance for doubtful accounts

77

30

13

(5)

89

Deferred tax valuation allowance

103

53

98

(5)

53

 

180

83

111

(10)

142

 

 

 

 

 

 

**Year ended December 31, 2003**

Allowance for doubtful accounts

68

16

5

(2)

77

Deferred tax valuation allowance

85

20

-

(2)

103

 

153

36

5

(4)

180

 

 

 

 

 

 

**Year ended December 31, 2002**

Allowance for doubtful accounts

45

27

2

(2)

68

Deferred tax valuation allowance

449

-

310

(54)

85

493

27

312

(56)

152 |
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