##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE
ACT OF 1934



For the quarterly period ended June 30, 2003



Commission File No. 333-72321



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BGF Industries, Inc.

(Exact name of registrant as specified in its charter)



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|Delaware                 |  | 2221                                                     |  | 56-1600845                          
|------------------------ |  | -------------------------------------------------------- |  | ------------------------------------
|(State of incorporation) |  | (Primary Standard Industrial Classification Code Number) |  | (I.R.S. Employer Identification No.)



|3802 Robert Porcher Way, Greensboro, North Carolina  |  | 27410     
|---------------------------------------------------- |  | ----------
|(Address of registrants principal executive office) |  | (Zip Code)



(336) 545-0011

(Registrants telephone number, including area code)



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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 checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes ̈No  x



APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 1,000 shares of common stock, $1.00 par value, as of August 11,
2003.



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##### Table of Contents

BGF INDUSTRIES, INC.

QUARTERLY REPORT FOR THE THREE MONTHS AND SIX MONTHS

ENDED June 30, 2003



TABLE OF CONTENTS



|         |  |                                                                                                                                                    |  | Page No.                                       
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------
|         |  |                                                                                                                                                   
|PART I.  |  | FINANCIAL INFORMATION                                                                                                                              |  |                                                
|         |  |                                                                                                                                                   
|Item 1.  |  | Consolidated Financial Statements                                                                                                                  |  | 3                                              
|         |  |                                                                                                                                                   
|         |  | Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002                                                                  |  | 3                                              
|         |  |                                                                                                                                                   
|         |  | Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and six months ended June 30, 2003 and 2002 (unaudited) |  | 4                                              
|         |  |                                                                                                                                                   
|         |  | Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2003 and 2002 (unaudited)                                 |  | 5                                              
|         |  |                                                                                                                                                   
|         |  | Notes to the Consolidated Financial Statements                                                                                                     |  | 6                                              
|         |  |                                                                                                                                                   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                              |  | 11                                             
|         |  |                                                                                                                                                    | 
|         |  |                                                                                                                                                    |  | Overview                                       
|         |  |                                                                                                                                                    | 
|         |  |                                                                                                                                                    |  | Critical Accounting Policies                   
|         |  |                                                                                                                                                    | 
|         |  |                                                                                                                                                    |  | Environmental Issues                           
|         |  |                                                                                                                                                    | 
|         |  |                                                                                                                                                    |  | Results of Operations                          
|         |  |                                                                                                                                                    | 
|         |  |                                                                                                                                                    |  | Liquidity and Capital Resources                
|         |  |                                                                                                                                                    | 
|         |  |                                                                                                                                                    |  | Recent Accounting Pronouncements               
|         |  |                                                                                                                                                    | 
|         |  |                                                                                                                                                    |  | Disclosure Regarding Forward Looking Statements
|         |  |                                                                                                                                                   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                         |  | 17                                             
|         |  |                                                                                                                                                   
|Item 4.  |  | Controls and Procedures                                                                                                                            |  | 18                                             
|         |  |                                                                                                                                                   
|PART II. |  | OTHER INFORMATION                                                                                                                                  |  |                                                
|         |  |                                                                                                                                                   
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                                                   |  | 19                                             



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. Consolidated Financial Statements



BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

CONSOLIDATED BALANCE SHEETS

(dollars
in thousands)



|                                                                                                           |  | June 30, 2003 |         |   | December 31,2002 |  
|---------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | -
|                                                                                                           |  | (unaudited)   |         |   |                  |  
|ASSETS                                                                                                     |  |               |         |   |                  |  
|Current assets:                                                                                            |  |               |         |   |                  |  
|Cash and cash equivalents                                                                                  |  | $             | 7,275   |   |                  | $
|Trade accounts receivable, less allowance for returns and doubtful accounts of $319 and $316, respectively |  |               | 11,936  |   |                  |  
|Inventories                                                                                                |  |               | 22,033  |   |                  |  
|Other current assets                                                                                       |  |               | 5,052   |   |                  |  
|                                                                                                           |  |               |         |   |                  |  
|Total current assets                                                                                       |  |               | 46,296  |   |                  |  
|Net property, plant and equipment                                                                          |  |               | 45,172  |   |                  |  
|Other noncurrent assets, net                                                                               |  |               | 4,947   |   |                  |  
|                                                                                                           |  |               |         |   |                  |  
|Total assets                                                                                               |  |               | 96,415  |   |                  | $
|                                                                                                           |  |               |         |   |                  |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                             |  |               |         |   |                  |  
|Current liabilities:                                                                                       |  |               |         |   |                  |  
|Accounts payable                                                                                           |  | $             | 4,451   |   |                  | $
|Accrued liabilities                                                                                        |  |               | 11,090  |   |                  |  
|Current portion of capital lease obligation                                                                |  |               | 329     |   |                  |  
|Current portion of long-term debt, net of discount of $0 and $1,217, respectively                          |  |               | 1,200   |   |                  |  
|                                                                                                           |  |               |         |   |                  |  
|Total current liabilities                                                                                  |  |               | 17,070  |   |                  |  
|Capital lease obligation, net of current portion                                                           |  |               | 2,000   |   |                  |  
|Deferred income taxes                                                                                      |  |               | 3,206   |   |                  |  
|Long-term debt, net of discount of $1,102                                                                  |  |               | 102,448 |   |                  |  
|Postretirement benefit and pension obligations                                                             |  |               | 9,405   |   |                  |  
|                                                                                                           |  |               |         |   |                  |  
|Total liabilities                                                                                          |  |               | 134,129 |   |                  |  
|                                                                                                           |  |               |         |   |                  |  
|Commitments and contingencies                                                                              |  |               |         |   |                  |  
|Stockholders equity (deficit):                                                                            |  |               |         |   |                  |  
|Common stock, $1.00 par value. Authorized 3,000 shares; issued and outstanding 1,000 shares                |  |               | 1       |   |                  |  
|Capital in excess of par value                                                                             |  |               | 34,999  |   |                  |  
|Accumulated deficit                                                                                        |  |               | (70,894 | ) |                  |  
|Accumulated other comprehensive loss                                                                       |  |               | (1,476  | ) |                  |  
|Loan to parent                                                                                             |  |               | (344    | ) |                  |  
|                                                                                                           |  |               |         |   |                  |  
|Total stockholders equity (deficit)                                                                       |  |               | (37,714 | ) |                  |  
|                                                                                                           |  |               |         |   |                  |  
|Total liabilities and stockholders equity (deficit)                                                       |  | $             | 96,415  |   |                  | $
|                                                                                                           |  |               |         |   |                  |  



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



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)



|                                                                                 |  | For the Three MonthsEnded June 30, |        |   | For the Six MonthsEnded June 30, |  
|-------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | - | -------------------------------- | -
|                                                                                 |  | 2003                               |        |   | 2002                             |  
|                                                                                 |  | (unaudited)                        |        |   | (unaudited)                      |  
|Net sales                                                                        |  | $                                  | 31,415 |   |                                  | $
|Cost of goods sold                                                               |  |                                    | 26,905 |   |                                  |  
|                                                                                 |  |                                    |        |   |                                  |  
|Gross profit                                                                     |  |                                    | 4,510  |   |                                  |  
|Selling, general and administrative expenses                                     |  |                                    | 2,132  |   |                                  |  
|Asset impairment charges                                                         |  |                                    |       |   |                                  |  
|                                                                                 |  |                                    |        |   |                                  |  
|Operating income (loss)                                                          |  |                                    | 2,378  |   |                                  |  
|Interest expense                                                                 |  |                                    | 3,930  |   |                                  |  
|Other income, net                                                                |  |                                    | (428   | ) |                                  |  
|                                                                                 |  |                                    |        |   |                                  |  
|Loss before income taxes and cumulative effect of change in accounting principle |  |                                    | (1,124 | ) |                                  |  
|Income tax expense                                                               |  |                                    |       |   |                                  |  
|                                                                                 |  |                                    |        |   |                                  |  
|Net loss before cumulative effect of change in accounting principle              |  |                                    | (1,124 | ) |                                  |  
|Cumulative effect of change in accounting principle                              |  |                                    |       |   |                                  |  
|                                                                                 |  |                                    |        |   |                                  |  
|Net loss                                                                         |  |                                    | (1,124 | ) |                                  |  
|Other comprehensive income net of tax:                                           |  |                                    |        |   |                                  |  
|Reclassification to earnings                                                     |  |                                    |       |   |                                  |  
|                                                                                 |  |                                    |        |   |                                  |  
|Change in fair value of cash flow hedge                                          |  |                                    |       |   |                                  |  
|                                                                                 |  |                                    |        |   |                                  |  
|Total comprehensive loss                                                         |  | $                                  | (1,124 | ) |                                  | $
|                                                                                 |  |                                    |        |   |                                  |  



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



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)



|                                                                               |  | For the Six MonthsEnded June 30, |        
|------------------------------------------------------------------------------ |  | -------------------------------- | -------
|                                                                               |  | 2003                             |        
|                                                                               |  | (unaudited)                      |        
|Cash flows from operating activities:                                          |  |                                  |        
|Net loss                                                                       |  | $                                | (2,302 
|Adjustment to reconcile net loss to net cash provided by operating activities: |  |                                  |        
|Depreciation                                                                   |  |                                  | 3,247  
|Cumulative effect of change in accounting principle                            |  |                                  |       
|Asset impairment charges                                                       |  |                                  |       
|Amortization of noncurrent assets                                              |  |                                  | 759    
|Amortization of discount on notes                                              |  |                                  | 100    
|Write off of debt issuance costs                                               |  |                                  | 1,066  
|Deferred income taxes                                                          |  |                                  |       
|Postretirement benefit and pension obligations                                 |  |                                  | 694    
|(Gain) loss on disposal of equipment                                           |  |                                  | (15    
|Gain on extinguishment of Senior Subordinated Notes                            |  |                                  | (422   
|Change in assets and liabilities:                                              |  |                                  |        
|Trade accounts receivable, net                                                 |  |                                  | (1,739 
|Other current assets                                                           |  |                                  | (211   
|Inventories                                                                    |  |                                  | 602    
|Current income tax refundable                                                  |  |                                  | 5,983  
|Other assets                                                                   |  |                                  | (9     
|Accounts payable                                                               |  |                                  | 103    
|Accrued liabilities                                                            |  |                                  | (303   
|                                                                               |  |                                  |        
|Net cash provided by operating activities                                      |  |                                  | 7,553  
|                                                                               |  |                                  |        
|Cash flows from investing activities:                                          |  |                                  |        
|Purchases of property, plant and equipment                                     |  |                                  | (518   
|Proceeds from sale of equipment                                                |  |                                  | 16     
|                                                                               |  |                                  |        
|Net cash used in investing activities                                          |  |                                  | (502   
|                                                                               |  |                                  |        
|Cash flows from financing activities:                                          |  |                                  |        
|Book overdraft                                                                 |  |                                  |       
|Proceeds from revolving credit facility                                        |  |                                  | 10,000 
|Payments on revolving credit facility                                          |  |                                  | (17,573
|Proceeds received from term loan                                               |  |                                  | 6,000  
|Proceeds received on loan receivable from parent                               |  |                                  | 10,624 
|Payments on capital lease obligation                                           |  |                                  | (163   
|Payment on note payable to parent                                              |  |                                  | (5,000 
|Debt issuance costs                                                            |  |                                  | (4,022 
|Purchases of Senior Subordinated Notes                                         |  |                                  | (813   
|                                                                               |  |                                  |        
|Net cash provided by (used in) financing activities                            |  |                                  | (947   
|Net increase (decrease) in cash and cash equivalents                           |  |                                  | 6,104  
|Cash and cash equivalents at beginning of period                               |  |                                  | 1,171  
|                                                                               |  |                                  |        
|Cash and cash equivalent at end of period                                      |  | $                                | 7,275  
|                                                                               |  |                                  |        
|Supplemental disclosures of cash flow information:                             |  |                                  |        
|Cash paid during the period for interest                                       |  | $                                | 5,811  
|                                                                               |  |                                  |        
|Cash paid (received) during the period for income taxes                        |  | $                                | (5,983 
|                                                                               |  |                                  |        
|Supplemental disclosure of non-cash investing and financing activities:        |  |                                  |        
|Property and equipment financed in accounts payable                            |  | $                                | 165    
|                                                                               |  |                                  |        



The accompanying
notes are an integral part of the consolidated financial statements



.



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)



1. Basis of Presentation



The accompanying unaudited interim consolidated financial statements of
BGF Industries, Inc. (the Company) have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly, they do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of items of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the
three and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.



These financial statements should be read in conjunction with the audited consolidated
financial statements of BGF Industries, Inc. as of and for the year ended December 31, 2002 on file with the Securities and Exchange Commission in the 2002 Annual Report on Form 10-K.



The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. Changes in the facts and circumstances could have a significant impact on the resulting financial statements. The critical accounting policies that
affect the Companys more complex judgments and estimates are described in the Companys Annual Report on Form 10-K for the year ended December 31, 2002 and in this Report under Managements Discussion and Analysis of Financial
Condition and Results of OperationsCritical Accounting Policies.



Certain amounts from the prior consolidated financial statements have been reclassified to conform to current presentation.



2. Liquidity and Financial Condition



The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate
the Companys continued existence as a going concern. Industry and economic conditions have had an adverse effect on the Companys operations beginning in 2001. The Company incurred net losses for the year ended December 31, 2002 of
approximately $140,573 and had an $82,719 working capital deficiency and a $46,115 stockholders deficit as of December 31, 2002. The Company incurred net losses of $1,124 and $2,302 for the three and six months ended June 30, 2003 and had a
$37,714 stockholders deficit as of June 30, 2003. The Companys working capital was $29,226 as of June 30, 2003.



On June 6, 2003, the Company entered into a five year financing arrangement with Wells Fargo Foothill, Inc. (WFF). This arrangement (the WFF Loan)
is for a maximum revolver credit line of $40,000 with a letter of credit (L/C) sub-line of $4,000, an inventory sub-line of $15,000 and a term loan sub-line of $6,000 of which the principal is amortized over 60 months. (See Note 7).



During the three months ended June 30, 2003, the Company continued to operate
under its restructured business plan which was implemented during 2002. The Companys South Hill heavyweight fabrics facility has remained closed to reduce excess capacity and the Company has maintained its cost cutting initiatives.



The Companys continued existence is dependent upon several factors including its
ability to continue to generate sufficient operating cash flow to fund its operations and interest payments on its Senior Subordinated Notes and its ability to continue to meet its financial covenants under the WFF loan. While the Companys
performance in the first and second quarters of 2003 has been consistent with its restructured business plan, there can be no assurance that the Company will be able to sustain its current level of operations. The Company continues to evaluate its
current business plan in light of the current market conditions.



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)



2. Liquidity and Financial Condition(Continued)



As discussed further in Note 11, an affiliate and major supplier of the Company, Advanced Glassfiber Yarns LLC (AGY) filed for bankruptcy under Chapter 11 of
the US Bankruptcy Code in December 2002. This could result in the risk that obtaining raw materials from sources other than AGY would be more costly and could be disruptive to the Companys business. There has been no impact on the
Companys operations through second quarter of 2003. The Company has not fully implemented contingency plans to secure alternative supplies of raw materials.



3. Inventories



Inventories consist of the following:



|                 |  | June 30, 2003 |        | December 31, 2002
|---------------- |  | ------------- | ------ | -----------------
|                 |  | (unaudited)   |        |                  
|Supplies         |  | $             | 1,432  |                  
|Raw materials    |  |               | 1,565  |                  
|Stock-in-process |  |               | 3,549  |                  
|Finished goods   |  |               | 15,487 |                  
|                 |  |               |        |                  
|                 |  | $             | 22,033 |                  
|                 |  |               |        |                  



4. Property, Plant and Equipment,
Net



Net property, plant and equipment consists of the following:



|                                    |  | June 30, 2003 |         |   | December 31, 2002 |  
|----------------------------------- |  | ------------- | ------- | - | ----------------- | -
|                                    |  | (unaudited)   |         |   |                   |  
|Land                                |  | $             | 3,155   |   |                   | $
|Buildings                           |  |               | 42,214  |   |                   |  
|Machinery and equipment             |  |               | 81,226  |   |                   |  
|                                    |  |               |         |   |                   |  
|Gross property, plant and equipment |  |               | 126,595 |   |                   |  
|Less: accumulated depreciation      |  |               | (81,423 | ) |                   |  
|                                    |  |               |         |   |                   |  
|Net property, plant and equipment   |  | $             | 45,172  |   |                   | $
|                                    |  |               |         |   |                   |  



5. Other Noncurrent Assets, Net



Other noncurrent assets consist of the following:



|                                        |  | June 30, 2003 |        |   | December 31, 2002 |  
|--------------------------------------- |  | ------------- | ------ | - | ----------------- | -
|                                        |  | (unaudited)   |        |   |                   |  
|Debt issuance costs                     |  | $             | 6,149  |   |                   | $
|Prepaid lease costs                     |  |               | 82     |   |                   |  
|Accumulated amortization                |  |               | (1,616 | ) |                   |  
|                                        |  |               |        |   |                   |  
|                                        |  |               | 4,615  |   |                   |  
|Unrecognized pension prior service cost |  |               | 25     |   |                   |  
|Other noncurrent assets                 |  |               | 307    |   |                   |  
|                                        |  |               |        |   |                   |  
|Total noncurrent assets, net            |  | $             | 4,947  |   |                   | $
|                                        |  |               |        |   |                   |  



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)



5. Other Noncurrent Assets, Net(continued)



Debt issuance costs are amortized over the lives of the respective debt instruments. Prepaid lease costs are amortized over the lease term.



In connection with obtaining new financing in 2003, the Company incurred $1,215 of debt
issuance costs related to a short term financing arrangement with CIT Business Credit (CIT). These costs have been written off in the second quarter 2003 due to the termination of the CIT Facility, as discussed in Note 7. In connection
with efforts to pursue long-term financing, the Company incurred $2,631 and $2,806 of debt issuance costs during the three and six months ended June 30, 2003, respectively. $2,591 of these costs relate to the long-term financing obtained from WFF
and will be amortized over the life of the WFF Loan. $215 of these costs related to long term financing that was not obtained and were written off to interest expense in the three months ended June 30, 2003.



Amortization of debt issuance costs of $177 and $188 for the three months ended June 30, 2003
and 2002, respectively, has been included in interest expense. Amortization of debt issuance costs of $759 and $375 for the six months ended June 30, 2003 and 2002, respectively, has been included in interest expense. In the three months and six
months ended June 30, 2003, BGF wrote off $966 and $1,066 of net debt issuance costs, respectively. These costs have been classified as interest expense in the accompanying financial statements.



The Company adopted the provisions of Statement of Financial Accounting Standard
(SFAS) No. 142 effective January 1, 2002. In accordance with SFAS No. 142, the Company completed its transitional goodwill impairment test in the second quarter of 2002. In performing this test, the Company estimated the fair value of
its business on a discounted cash flow basis. Based on this analysis, the Company determined that recorded goodwill exceeded its implied fair value and an impairment charge was recorded. Accordingly, the Company recorded a noncash charge of $4.7
million, which is recognized as the cumulative effect of a change in accounting principle in the Consolidated Statement of Operations in 2002. There was no income tax benefit recognized for this charge.



6. Accrued Liabilities



Accrued liabilities consist of the following:



|                          |  | June 30, 2003 |        | December 31,2002
|------------------------- |  | ------------- | ------ | ----------------
|                          |  | (unaudited)   |        |                 
|Interest                  |  | $             | 4,670  |                 
|Environmental             |  |               | 2,742  |                 
|Payroll                   |  |               | 333    |                 
|Other employee benefits   |  |               | 654    |                 
|Restructuring             |  |               | 32     |                 
|Medical benefits          |  |               | 650    |                 
|Other                     |  |               | 2,009  |                 
|                          |  |               |        |                 
|Total accrued liabilities |  | $             | 11,090 |                 
|                          |  |               |        |                 



Other employee benefits.In
2002, the Company approved a management bonus of $1,050 payable in 2003 when liquidity permitted. This bonus was paid in the first quarter of 2003.



Restructuring. In August 2002, the Company announced the closure of its South Hill heavyweight fabrics facility, which became effective on October 1, 2002. This
resulted in a reduction of the Companys salary and wage workforce by approximately 10%. Cash payments applied against the restructuring reserve in the six months ended June 30, 2003 were approximately $67.



Environmental. A September 1998 environmental site assessment discovered reportable
quantities of polychlorinated biphenyls (PCBS) in soil at the Altavista plant in and around the former site of a heat transfer oil tank that the previous owner of the facility had removed in 1986, before the Companys 1988
acquisition by the Porcher Group. The Company immediately reported the contamination to United States Environmental Protection Agency (EPA) and the Virginia Department of Environmental Quality (VDEQ).



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##### Table of Contents

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)



6. Accrued Liabilities(continued)



The Company worked with the EPA and VDEQ to establish a sampling protocol. The assessment revealed that the plant was contaminated with PCBs inside in several rooms,
outside in the soil, on the roof, in the sanitary and storm sewers, and in the creeks to which the storm sewers drain. The Company has also been informed that PCBs may have migrated their way into the citys water treatment plant. A Site
Characterization Report (SCR) was submitted to the EPA in April 2001. The EPA responded to that report in May 2002 with a request for additional assessment. The Company responded to the EPAs request in late June 2002 and proposed
actions consistent with the EPAs request. The Company completed the additional assessment in January 2003 and filed a final SCR in the second quarter of 2003. The EPA has not responded to the final SCR. The Companys environmental reserve
reflects the estimated remediation costs for the Altavista plant as obtained from an environmental specialist. However, such remediation costs are subject to approval of a remediation plan by the EPA that has not been obtained at this time. The
Company also has contamination issues at its Cheraw facility. The estimated loss due to this contamination is $354, which is also reflected in the reserve.



The Company believes that these reserves may need to be increased, but the Company is unable to derive a more reliable estimate at this time as actual costs remain
uncertain. The Company does not anticipate significant cash outflows associated with this liability in the next twelve months as the remediation plan has not been submitted to and approved by the EPA. However, there can be no assurance that the
Company will not be required to respond to its environmental issues on a more immediate basis and that such response, if required, will not result in significant cash outlays.



7. Debt



Debt consists of the following:



|                                                                                          |  | June 30, 2003 |         | December 31,2002
|----------------------------------------------------------------------------------------- |  | ------------- | ------- | ----------------
|                                                                                          |  | (unaudited)   |         |                 
|Term loan                                                                                 |  | $             | 6,000   |                 
|Senior Credit Facility:                                                                   |  |               |         |                 
|Revolving Credit Facility                                                                 |  |               |        |                 
|Senior Subordinated Notes, net of unamortized discount of $1,102 and $1,217, respectively |  |               | 97,648  |                 
|Note payable to parent                                                                    |  |               |        |                 
|                                                                                          |  |               |         |                 
|Total debt                                                                                |  | $             | 103,648 |                 
|Current Maturies                                                                          |  |               | 1,200   |                 
|                                                                                          |  |               |         |                 
|Long-term debt                                                                            |  | $             | 102,448 |                 
|                                                                                          |  |               |         |                 



During 2002, the Company had a Senior
Credit Facility with a syndicate of lenders expiring in September 2003. On August 13, 2002, the Company and its senior lenders executed a forbearance agreement with respect to breaches of certain financial covenants under the Senior Credit Facility.
On February 14, 2003, the Company entered into a short-term financing arrangement with CIT Business Credit (the CIT Facility). This provided the Company with the financing to reimburse all senior lenders under the Senior Credit Facility
prior to the expiration of the forbearance agreement discussed above. Also, on February 14, 2003, BGF was able to make the interest payment originally due on January 15, 2003 on the Senior Subordinated Notes within the 30 day grace period. The CIT
Facility was scheduled to expire on June 30, 2003. However, in March 2003, the Company repaid the full amount of its borrowings under the CIT Facility and in April 2003, the Company terminated its arrangement with CIT. The Company paid CIT an early
termination fee of $100 in April 2003.



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BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)



7. Debt(continued)



On June 6, 2003, the Company obtained a five year financing arrangement with Wells Fargo Foothill, Inc.(WFF), formerly Foothill Capital Corporation. The loan
with WFF (WFF Loan) is for a maximum revolver credit line of $40,000 with a letter of credit (L/C) sub-line of $4,000, an inventory sub-line of $15,000 and a term loan sub-line of $6,000 of which the principal is amortized
over 60 months. WFF has a first priority, perfected security interest in the Companys assets. The WFF Loan provides for the following: (1) a borrowing base with advance rates on eligible accounts receivable and eligible finished goods and raw
materials inventory of 85%, 45% and 35%, respectively, with inventory to be capped at the lesser of the eligible inventory calculation, $15,000 or 80% of the net orderly liquidation value; (2) borrowing rates of LIBOR + 3.25% or the Wells Fargo
Prime Rate (RR) + 1.00% for the revolver with a 50 basis points increase if outstanding advances exceed $7,000 and of LIBOR + 3.5% or RR + 1.00% for the term loan with, at all times, a minimum rate of 5% for both facilities; (3) certain financial
covenants including (i) a minimum excess availability at all times, (ii) a minimum EBITDA level in 2003 building to a trailing 12 month calculation in 2004 and (iii) a cap on yearly capital expenditures of $2,000 and; (4) an early termination fee of
5% in year one decreasing by 1% each year thereafter. The WFF Loan proceeds will be used to (1) finance ongoing working capital, capital expenditures, and general corporate needs of the Company and; (2) retire other outstanding debt. The WFF Loan is
guaranteed by the Companys parent, Glass Holdings. As of June 30, 2003, amounts outstanding under the WFF Loan totaled $6,000 consisting only of the term loan as no advances were outstanding under the revolver. The interest rate on the WFF
Loan at June 30, 2003 was 5.25%. Availability under the revolver at June 30, 2003 was $9,735. This availability has been reduced by a reserve to allow for the two annual interest payments on the Senior Subordinated Notes as well as a reserve of $550
for potential environmental liabilities. The reserve for interest payments is increased by $200 a week and is reset to $0 when such payment is made. As of June 30, 2003, the total outstanding reserves amounted to $5,350.



The Senior Subordinated Notes were classified as a current liability as of December 31, 2002
because payment of interest due in 2003 was contingent upon the Companys ability to improve its liquidity in 2003. Due to the long term financing arrangement obtained in June 2003, the Senior Subordinated Notes are classified as a long term
liability as of June 30, 2003. The Senior Subordinated Notes bear interest at a rate of 10.25% which is payable semi-annually in January and July through the maturity date of January 15, 2009. The fair value of the Senior Subordinated Notes as of
June 30, 2003 was approximately $67,644.



On June 20, 2003, the Company
repurchased $1,250 (face amount) of Senior Subordinated Notes for $812 plus accrued interest of $55. This transaction resulted in a gain on extinguishment of $422, which is included as other income on the Consolidated Statements of Operations.



On August 13, 2002, the Company received $5,000 from Glass Holdings under a
loan agreement whereby the loan is payable on demand at anytime after June 30, 2003. Interest on the loan was 3.25% and was payable quarterly in arrears beginning September 2002. In June 2003, the Company repaid the full amount of the loan to Glass
Holdings.



8. Segment Information



The Company operates in one business segment that manufactures specialty woven and non-woven
fabrics for use in a variety of industrial and commercial applications. The Companys principal market is the United States. Net sales information by geographic area is presented below, with sales based on the location of the customer. The
Company does not have any long-lived assets outside the United States.



|              |  | For the Three Months Ended June 30, |        |      |   |        |  | For the Six Months EndedJune 30,
|------------- |  | ----------------------------------- | ------ | ---- | - | ------ |  | --------------------------------
|              |  | 2003                                |        | 2002 |   |        |  |                                 
|              |  | (unaudited)                         |        |      |   |        |  | (unaudited)                     
|United States |  | $                                   | 29,482 |      | $ | 32,683 |  |                                 
|Foreign       |  |                                     | 1,933  |      |   | 1,836  |  |                                 
|              |  |                                     |        |      |   |        |  |                                 
|              |  | $                                   | 31,415 |      | $ | 34,519 |  |                                 
|              |  |                                     |        |      |   |        |  |                                 



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BGF INDUSTRIES, INC.

(a wholly owned subsidiary of Glass Holdings Corp.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands)



9. Commitments and Contingencies



As discussed in Note 6, the Company has environmental exposures associated with two of its manufacturing facilities.



From time to time, the Company is involved in various other legal proceedings and
environmental matters arising in the ordinary course of business. Management believes, however, that the ultimate resolution of such matters will not have a material adverse impact of the Companys financial position or results of operations.



As permitted by Delaware law, the Company has entered into indemnification
agreements pursuant to which the Company indemnifies its directors and officers for certain events or occurrences while the director or officer is, or was, serving at the Companys request, in such capacity. The maximum potential amount of
future payments that the Company could be required to make under these agreements is limited. As a result of its insurance coverage, the Company believes that the estimated fair value of the Companys indemnification agreements with directors
and officers is minimal. No liabilities have been recorded for these agreements as of June 30, 2003.



10. Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standard Board (FASB), issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The primary objective of the
Interpretation is to provide guidance on the identification of entities for which control is achieved through means other than voting rights and how to determine when and where business enterprises should consolidate the variable interest entity.
Management does not believe this Interpretation will have a material impact on the financial position of the Company.



11. Related Party Transactions



An affiliate of the Company, AGY, is also a major supplier and filed for bankruptcy under Chapter 11 of the US Bankruptcy Code in December 2002. This could result in the
risk that obtaining raw materials from sources other than AGY would be more costly and could be disruptive to the Companys business. The Company has not fully implemented contingency plans to secure alternative supplies of raw materials as of
June 30, 2003. The Company purchased approximately $3,500 and $8,200 of raw materials from AGY in the three months and six months ended June 30, 2003, respectively.



During the first quarter of 2003, the Companys parent, Glass Holdings, received a tax refund related to the filing of the 2002
consolidated tax return. In March 2003, $15,619 of this tax refund was remitted to BGF, of which $9,624 was applied to the loan receivable from Glass Holdings. The remaining balance of $5,995 reduced the Companys income tax receivable. An
additional $500 from Glass Holdings was received during the first quarter of 2003 and was also applied against the loan receivable and during the second quarter of 2003 an additional $500 was received from Glass Holdings and applied against the loan
receivable.



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



This Quarterly Report contains forward-looking statements with respect to our operations, industry, financial condition and liquidity. These statements reflect our
assessment of a number of risks and uncertainties. Our actual results could differ materially from the results anticipated in these forward looking statements as a result of certain factors set forth in this Quarterly Report. An additional statement
made pursuant to the Private Securities Litigation Reform Act of 1995 and summarizing certain of the principal risks and uncertainties inherent in our business is included herein under the caption Disclosure Regarding Forward Looking
Statements. You are encouraged to read this statement carefully.



You
should read the following discussion and analysis in conjunction with the accompanying consolidated financial statements and related notes, and with our audited consolidated financial statements and related notes as of and for the year ended
December 31, 2002 set forth in our 2002 Annual Report on Form 10-K.



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Overview



Our business focuses on the production
of value-added specialty woven and non-woven fabrics made from glass, carbon and aramid yarns. Our fabrics are a critical component in the production of a variety of electronic, filtration, composite, insulation, construction and commercial
products. Our glass fiber fabrics are used by our customers in printed circuit boards, that are integral to virtually all advanced electronic products, including computers and cellular telephones. Our fabrics are also used by our customers to
strengthen, insulate and enhance the dimensional stability of hundreds of products that they make for their own customers in various markets, including aerospace, transportation, construction, power generation and oil refining.



Sales of our electronics fabrics remain depressed in 2003 compared to 2002 as a result of the
economic downturn in the electronics industry that began in 2001. Sales of electronics fabrics decreased $3.3 million, or 31.4%, and $6.7 million, or 30.0%, for the three and six months ended June 30, 2003 as compared to June 30, 2002.



Sales of composite fabrics remained relatively flat at $11.3 million for the three months
ended June 30, 2003 as compared to the three months ended June 30, 2002. Sales of composite fabrics increased slightly by $0.5 million, or 2.2%, for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. At this time,
we expect the composite market to remain relatively flat through 2003.



Sales
of our filtration fabrics used by industrial customers to control emissions into the environment increased $0.8 million, or 13.5%, for the three months ended June 30, 2003 as compared to the three months ended June 30, 2002. Sales of filtration
fabrics increased $2.1 million, or 17.1%, for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. This increase is due to an increase in demand for replacement filtration bags.



In 2003, we have continued to operate in our restructured environment. The South Hill
heavyweight fabrics facility is still closed and we have continued our efforts to reduce inventory and maximize our asset utilization. Inventory decreased $0.6 million, or 2.6%, to $22.0 million as of June 30, 2003 as compared to December 31, 2002.
As of June 30, 2003, we reduced our debt by $7.8 million, or 7.0%, to $103.6 million as compared to $111.4 million as of December 31, 2002. On June 20, 2003, we repurchased $1.3 million (face amount) of Senior Subordinated Notes for $0.8 million
plus accrued interest of $0.1 million. This transaction resulted in a gain on extinguishment of $0.4 million.



On June 6, 2003, we obtained a long-term financing arrangement with Wells Fargo Foothill (WFF) formerly Foothill Capital Corporation. The loan with WFF (the WFF loan) is for a maximum revolver
credit line of $40.0 million with an L/C sub-line of $4.0 million, an inventory sub-line of $15.0 million and a term loan sub-line of $6.0 million of which the principal is amortized over 60 months (see Liquidity and Capital Resources).
We currently expect to use borrowings under the WFF Loan to finance our ongoing working capital, capital expenditure and general corporate needs, as well as retire other outstanding debt.



While our performance in the first and second quarters of 2003 has been consistent with our restructured business plan, there can be no
assurance that we will be able to continue to generate sufficient operating cash flow to fund our operations and interest payments on our Senior Subordinated Notes or that we will be able to continue to meet the financial covenants under the WFF
loan.



Critical Accounting Policies



The preparation of
financial statements and accompanying notes in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported. Changes in the facts and circumstances could have a significant
impact on the resulting financial statements. The critical accounting policies that affect our more complex judgments and estimates are described in the Annual Report on Form 10-K for the year ended December 31, 2002.



Significant charges recorded in the second quarter of 2003 include:



Debt Issuance Costs.In connection with the CIT Business Credit agreement (the
CIT Facility) entered into on February 14, 2003, we paid approximately $1.2 million of debt issuance costs. These costs were recorded as an asset and were being amortized to interest expense over the life of the CIT Facility, which was
through June 30, 2003. Upon termination of the CIT Facility in April 2003, the net balance of these debt issuance costs were written off to interest expense. In connection with efforts to pursue long-term financing during 2003, the Company incurred
additional debt issuance costs of $2.8 million. Fees related to the long-term financing obtained from WFF are amortized over the life of the WFF Loan. Fees related to long term financing that was not obtained totaling $0.2 million were written off
to interest expense in the six months ended June 30, 2003.



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Environmental Issues



We are engaged in an
Environmental Protection Agency (the EPA)-supervised Voluntary Remediation Program at our Altavista facility, to address reportable quantities of polychlorinated biphenyls (PCBs) discovered during a 1998 environmental site
assessment at the former site of a heat transfer oil tank that the previous owner of the facility had removed before BGFs 1988 acquisition. A 1998 Phase Two Environmental Site Assessment revealed PCB contamination in several areas inside the
plant and on its roof, in the soil, in the sanitary and storm sewers within the plant, and in the surface waters to which the storm sewers drain. In addition, testing confirmed that measurable quantities of PCBs may have migrated into citys
water treatment plant.



In 2003, we submitted to the EPA a final Site
Characterization Report (SCR), documenting the assessment of the BGF property and the creek draining from the property. The EPA has not yet responded to the SCR.



A 1998 Phase Two Environmental Site Assessment at the Cheraw facility revealed chlorinated solvents and hydrocarbons in soil and
groundwater. The contamination resulted from the previous owners printing operations. Assessment and cleanup are regulated by South Carolinas DHEC, which has notified us that the chlorinated solvent residuals constitute the sole
remediation concern. Recent tests indicate reduced levels of solvent concentrations.



Each of our facilities is in compliance with applicable air quality control requirements. We recently instituted improvements to streamline and reduce costs associated with our air emission tracking and reporting
system. Operations at the Cheraw facility do not require an air permit. The Multilayer Facility recently qualified as a True Minor source, reflecting its low emissions. The Altavista facility qualifies as a Synthetic Minor, with emissions falling
well below Title V permitting requirements.



Each of our facilities is in
compliance with wastewater emission requirements, stormwater requirements, solid waste disposal requirements and with hazardous waste transfer requirements.



As of June 30, 2003, we have recorded a reserve of $2.7 million for environmental exposure, which reflects the estimated remediation costs for the Altavista facility, as
obtained from the environmental consulting firm that has conducted the site assessment and submitted the SCR to EPA. Remediation costs are estimates, subject to EPAs approval of the SCR and of a remediation plan. Estimated remediation costs at
the Cheraw facility are $0.4 million, which also is reflected in the reserve.



We believe that these reserves may need to be increased, but we are unable to derive a more reliable estimate at this time, as actual costs remain uncertain. We do not anticipate significant cash outflows associated with this liability in
the next twelve months, as we must await the EPAs approval of the final SCR before preparing and submitting the remediation plan for agency approval. However, there can be no assurance that we will not be required to respond to our
environmental issues on a more immediate basis and that such response, if required, will not result in significant cash outlays.



Results of Operations



The
following table summarizes our historical results of operations as a percentage of net sales:



|                                                                                 |  | For the Three MonthsEnded June 30, |    |  |       |    |  |  | For the Six Months EndedJune 30, | 
|-------------------------------------------------------------------------------- |  | ---------------------------------- | -- |  | ----- | -- |  |  | -------------------------------- | 
|                                                                                 |  | 2003                               |    |  | 2002  |    |  |  |                                  | 
|                                                                                 |  | (unaudited)                        |    |  |       |    |  |  | (unaudited)                      | 
|Net sales                                                                        |  | 100.0                              | %  |  | 100.0 | %  |  |  |                                  | 
|Cost of goods sold                                                               |  | 85.6                               | %  |  | 106.3 | %  |  |  |                                  | 
|                                                                                 |  |                                    |    |  |       |    |  |  |                                  | 
|Gross profit                                                                     |  | 14.4                               | %  |  | (6.3  | )% |  |  |                                  | 
|Selling, general and administrative expenses                                     |  | 6.8                                | %  |  | 14.9  | %  |  |  |                                  | 
|Asset impairment charges                                                         |  |                                   |    |  | 16.8  | %  |  |  |                                  | 
|                                                                                 |  |                                    |    |  |       |    |  |  |                                  | 
|Operating income (loss)                                                          |  | 7.6                                | %  |  | (38.0 | )% |  |  |                                  | 
|Interest expense                                                                 |  | 12.5                               | %  |  | 9.6   | %  |  |  |                                  | 
|Other (income), net                                                              |  | (1.4                               | )% |  | 0.0   | %  |  |  |                                  | 
|                                                                                 |  |                                    |    |  |       |    |  |  |                                  | 
|Loss before income taxes and cumulative effect of change in accounting principle |  | (3.5                               | )% |  | (47.6 | )% |  |  |                                  | 
|Income tax benefit                                                               |  |                                   |    |  | 31.6  | %  |  |  |                                  | 
|Cumulative effect of change in accounting principle                              |  |                                   |    |  |      |    |  |  |                                  | 
|                                                                                 |  |                                    |    |  |       |    |  |  |                                  | 
|Net loss                                                                         |  | (3.5                               | )% |  | (79.2 | )% |  |  |                                  | 
|                                                                                 |  |                                    |    |  |       |    |  |  |                                  | 



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Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002



Net Sales. Net sales decreased $3.1 million, or 9.0%, to $31.4 million in the three
months ended June 30, 2003 from $34.5 million in the three months ended June 30, 2002. This decrease was primarily due to a decrease in sales of electronics fabrics used in multi-layer and rigid printed circuit boards which decreased $3.3 million,
or 31.4%, a decrease in sales of commercial fabrics used in commercial applications such as ceiling tile, window coverings and acoustical facing fabrics, which decreased $0.3 million or 10.3%, and a decrease in sales of construction products which
decreased $0.4 million, or 28.6%, during the second quarter of 2003 as compared to the second quarter of 2002. These decreases were partially offset by an increase in sales of filtration fabrics of $0.9 million, or 15.0%, over the comparable period
in 2002. The decrease in sales of electronics fabrics was primarily a result of lower demand in the electronics industry that has continued throughout 2002 and 2003. In addition, the decrease in capital spending in the information technology and
telecommunications industries has led fabricators of printed circuit boards to reduce production, thus negatively impacting our sales to these customers. The decrease in sales of commercial and construction products was due to a decrease in demand
for these products due to an overall decrease in spending in the commercial construction industry. The increase in sales of filtration fabrics was due to an increase in demand for replacement filtration bags.



Gross Profit Margins. Gross profit margins increased to 14.4% in the three months
ended June 30, 2003 from (6.3)% in the three months ended June 30, 2002. In June 2002, we incurred charges to cost of goods sold for additional inventory reserves of $4.5 million. In June 2003, we had no comparable charges related to inventory
reserves. In addition during the first six months of 2003, we have had successful cost reductions, lower raw material prices, and a higher capacity utilization allowing for a better absorption of fixed costs.



Selling, General and Administrative Expenses. Selling, general and administrative
expenses decreased $3.0 million to $2.1 million in the three months ended June 30, 2003 from $5.1 million in the three months ended June 30, 2002. This was primarily due to a decrease in legal, professional and consulting fees associated with
restructuring operations of $0.8 million, a decrease in charges for environment reserves of $2.0 million, and a decrease in severance costs of $0.5 million. These decreases were partially offset by an increase in management bonuses.



Asset Impairment Charges.In the three months ended June 30, 2003, we had no asset
impairment charges. During the second quarter of 2002, we recorded a $1.0 million impairment charge on the sale of equipment to an affiliate and a $4.7 million impairment charge on machinery and equipment at our South Hill heavyweight fabric
manufacturing facility.



Operating Income (Loss). As a result of the
aforementioned factors, operating income (loss) increased $15.5 million to $2.4 million, or 7.6% of net sales, in the three months ended June 30, 2003, from $(13.1) million, or (38.0)%, of net sales in the three months ended June 30, 2002.



Interest Expense. Interest expense increased $0.6 million to $3.9
million, or 12.5% of net sales, in the three months ended June 30, 2003 from $3.3 million, or 9.6% of net sales, in the three months ended June 30, 2002, due to an increase in the write off of deferred financing fees charged to interest expense,
partially offset by a decrease in outstanding debt.



Other (income) net.Other income, net, increased $0.4 million to $0.4 million in the three months ended June 30, 2003 from $0.0 million in the three months ended June 30, 2002. This was primarily the result of a gain on extinguishment of debt due to the purchase of
$1.2 million of Senior Subordinated Notes in June, 2003.



Income Tax
Expense. The effective tax rates in the three months ended June 30, 2003 and 2002 were 0.0% and 31.6%, respectively. Due to the fact that we have a full valuation allowance against our deferred tax assets, we did not realize a tax benefit for
the three months ended June 30, 2003.



Net Loss. As a result of the
aforementioned factors, our net loss decreased $26.2 million to a net loss of $1.1 million in the three months ended June 30, 2003, from a net loss of $27.3 million in the three months ended June 30, 2002.



Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002



Net Sales. Net sales decreased $5.8 million, or 8.2%, to $65.1
million in the six months ended June 30, 2003 from $70.9 million in the six months ended June 30, 2002. This decrease was primarily due to a decrease in sales of electronics fabrics used in multi-layer and rigid printed circuit boards of $6.7
million, or 30.0%, a decrease in sales of insulation fabrics used in various composite materials of $0.7 million, or 13.7%, and a decrease in sales of construction products of $0.9 million, or 32.1%, during the first six months of 2003 as compared
to the first six months of 2002. These decreases were partially offset by an increase in sales of filtration fabrics of $2.0 million, or 16.3%, and an increase in sales of composite fabrics of $0.5 million, or 2.2%, over the comparable period in
2002. The decrease in sales of electronics fabrics was primarily a result of lower demands in the electronics industry that has continued throughout 2002 and 2003. In addition, the decrease in capital spending in the information technology and
telecommunications industries has led fabricators of printed circuit boards to reduce production, thus negatively impacting



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our sales to these customers. The decrease in sales of insulation and construction products was due to a decrease in
demand for these products due to an overall decrease in spending in the commercial construction industry. The increase in sales of composite fabrics was primarily the result of a slight increase in market share for composites. The increase in sales
of filtration fabrics was due to an increase in demand for replacement filtration bags.



Gross Profit Margins. Gross profit margins increased to 14.0% in the six months ended June 30, 2003 from (2.3)% in the six months ended June 30, 2002. In June 2002, we incurred charges to costs of goods sold for additional inventory
reserves of $4.5 million. In the six months ended June 2003, we had no comparable charges related to inventory reserves. In addition, during 2003 we have had successful cost reductions, lower raw material prices, and a higher capacity utilization
allowing for a better absorption of fixed costs.



Selling, General and
Administrative Expenses. Selling, general and administrative expenses decreased $2.3 million to $4.2 million in the six months ended June 30, 2003 from $6.5 million in the six months ended June 30, 2002. This was primarily due to a decrease in
legal, professional and consulting fees associated with restructuring operations of $0.6 million, a decrease in charges for environmental reserves of $2.0 million, and a decrease in severance costs of $0.5 million. These decreases were partially
offset by an increase in management bonuses and executive retiree benefits.



Asset Impairment Charges.In the six months ended June 30, 2003, we had no asset impairment charges. During the second quarter of 2002, we recorded a $1.0 million impairment charge on the sale of equipment to an affiliate and a $4.7
million impairment charge on machinery and equipment at our South Hill heavyweight fabric manufacturing facility.



Operating Income (Loss). As a result of the aforementioned factors, operating income (loss) increased $18.8 million to $4.9 million, or 7.5% of net sales, in the
six months ended June 30, 2003, from $(13.9) million, or (19.7)%, of net sales in the six months ended June 30, 2002.



Interest Expense. Interest expense increased $1.0 million to $7.6 million, or 11.7% of net sales, in the six months ended June 30, 2003 from $6.6 million, or 9.4%
of net sales, in the six months ended June 30, 2002, due to an increase in write off of deferred financing fees charged to interest expense, partially offset by a decrease in outstanding debt.



Other (income) net.Other income, net, increased $0.4 million to $0.4 million in the
six months ended June 30, 2003 from $0.0 million in the six months ended June 30, 2002. This was primarily the result of a gain on extinguishment of debt due to the purchase of $1.2 million of bonds in June, 2003.



Income Tax Expense. The effective tax rates in the six months ended June 30, 2003 and
2002 were 0.0% and 45.1%, respectively. Due to the fact that we have a full valuation allowance against our deferred tax assets, we did not realize a tax benefit for the six months ended June 30, 2003.



Cumulative Effect of Change in Accounting Principle. We adopted SFAS No. 142 effective
January 1, 2002 and recorded a noncash charge of $4.7 million for impairment of goodwill in the six months ended June 30, 2002.



Net Loss. As a result of the aforementioned factors, our net loss decreased $32.3 million to a net loss of $2.3 million in the six months ended June 30, 2003, from
a net loss of $34.6 million in the six months ended June 30, 2002.



Liquidity and Capital Resources



Our primary
sources of liquidity are cash flows from operations and borrowings under our financing arrangements. Our future need for liquidity will arise primarily from interest payments on our 101⁄4% Series B Senior Subordinated Notes due 2009, principal
and interest payments on other financing arrangements, and the funding of our capital expenditures and working capital requirements. There are no mandatory payments of principal on our notes scheduled prior to their maturity.



On February 14, 2003, we entered into a financing arrangement with CIT Business Credit (the
CIT Facility). This allowed us to reimburse all senior lenders under the previously existing Senior Credit Facility prior to the expiration of the forbearance agreement executed on August 13, 2002 with the lenders under the Senior Credit
Facility. Also on February 14, 2003, we were able to make the interest payment originally due on January 15, 2003 on the Senior Subordinated Notes within the 30 day grace period. The CIT Facility was scheduled to expire on June 30, 2003. In March
2003, we paid the full amount of our borrowing under the CIT Facility and in April 2003, we terminated our arrangement with CIT. In connection with the termination, we paid an early termination fee to CIT of $0.1 million.



On June 6, 2003, we obtained a five year financing arrangement with Wells Fargo Foothill,
Inc. (WFF). The loan with WFF (the WFF Loan) is for a maximum revolver credit line of $40.0 million with a letter of credit (L/C) sub-line of $4.0 million, an inventory sub-line of $15.0 million and a term loan
sub-line of $6.0 million of which the principal is amortized over 60



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months. WFF has a first priority, perfected security interest in all assets. The WFF Loan provides for the following: (1)
a borrowing base with advance rates on eligible accounts receivable and eligible finished goods and raw materials inventory of 85%, 45% and 35%, respectively, with inventory to be capped at the lesser of the eligible inventory calculation, $15.0
million, or 80% of the net orderly liquidation value; (2) borrowing rates of LIBOR + 3.25% or the Wells Fargo Prime Rate (RR) + 1.00% for the revolver with a 50 basis points increase if outstanding advances exceed $7.0 million and of LIBOR + 3.5% or
RR + 1.00% for the term loan with, at all times, a minimum rate of 5% for both facilities; (3) certain financial covenants including (i) a minimum excess availability at all times, (ii) a minimum monthly EBITDA level in 2003 building to a trailing
12 month calculation in 2004 and (iii) a cap on yearly capital expenditures of $2.0 million and; (4) an early termination fee of 5% in year one decreasing by 1% each year thereafter. We expect to use the WFF proceeds to (1) finance our ongoing
working capital, capital expenditures, and general corporate needs and; (2) retire other outstanding debt. The WFF Loan is guaranteed by our parent, Glass Holdings. Fees incurred in conjunction with entering into the WFF Loan totaled $2.6 million.



Availability under the revolver as of June 30, 2003 and August 4, 2003 was
$9.7 million and $10.7 million, respectively. This availability has been reduced by a reserve to allow for the annual interest payments on the Senior Subordinated Notes as well as a reserve of $0.6 million for potential environmental liabilities.
The reserve for interest payments is increased by $0.2 million per week and is reset to $0 when such payment is made. As of June 30, 2003 and August 4, 2003, the outstanding reserves totaled $5.4 million and $1.2 million, respectively.



The Senior Subordinated Notes were classified as a current liability as of December 31,
2002 due to the fact that payment of interest due in 2003 was contingent upon our ability to improve our liquidity in 2003. Due to the long-term financing arrangement obtained in June 2003, the Senior Subordinated Notes are classified as a long-term
liability as of June 30, 2003. The fair value of the Senior Subordinated Notes as of August 4, 2003 and June 30, 2003 was approximately $69.1 million and $67.6 million, respectively. We are aware that our Senior Subordinated Notes are currently
trading at substantial discounts to their face amount. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we or our affiliates may, from time to time, purchase such securities for cash in
open market purchases, privately negotiated transactions or otherwise. On June 20, 2003, we repurchased $1.3 million (face amount) of Senior Subordinated Notes for $0.8 plus accrued interest of $0.1 million. This transaction resulted in a gain of
$0.4 million which is included in other income.



One of our affiliates,
Advanced Glassfiber Yarns LLC (AGY), is also a major supplier. AGY filed for protection under Chapter 11 of the US Bankruptcy Code on December 10, 2002 and is now operating with Debtor In Possession (DIP) financing. However,
there can be no assurance that AGYs liquidity will remain adequate in the long term, which may negatively impact AGYs ability to operate and to deliver products to us.



During the first quarter of 2003, our parent, Glass Holdings, received a tax refund related to the filing of the 2002 consolidated tax
return. In March 2003, $15.6 million of this tax refund was remitted to us, $9.6 million of which was applied to the loan receivable from Glass Holdings. The remaining balance of $6.0 million reduced our income tax receivable. An additional $0.5
million was received from Glass Holdings in the first quarter of 2003 that was also applied to the loan receivable from Glass Holdings. In the second quarter of 2003, we received an additional $0.5 million from Glass Holdings that was also applied
to the loan receivable.



On August 13, 2002, we received $5.0 million from
Glass Holdings under a loan agreement whereby the loan is payable on demand at anytime after June 30, 2003. Interest on the loan was 3.25% and was payable quarterly in arrears beginning December 2002. In June 2003, the Company repaid the full amount
of the loan to Glass Holdings.



Net Cash Provided by Operating
Activities. Net cash provided by operating activities for the six months ended June 30, 2003 was $7.6 million, compared with $1.8 million in the six months ended June 30, 2002, and was primarily the result of improvements in operating results
due to a lower cost structure from reduced operating capacity during the six months ended June 30, 2003 compared to the same period in 2002 as well as receipt of tax refunds of approximately $6.0 million in 2003, offset by fluctuations in working
capital balances.



Net Cash Used in Investing Activities. Net cash used
in investing activities was $0.5 million for the six months ended June 30, 2003 and was primarily the result of purchases of property, plant and equipment. We currently expect our capital expenditures during 2003 to be approximately $2.0 million.



Net Cash Provided by (Used In)Financing Activities. Net cash used in
financing activities was $1.0 million for the six months ended June 30, 2003 and was primarily the result of proceeds from the CIT Facility of $10.0 million, payments on the Senior Credit Facility and CIT Facility of $17.6 million, receipt of $10.6
million on the loan to our parent, proceeds from the WFF Loan of $6.0 million payment of $5.0 million on loan from parent, and purchases of Senior Subordinated Notes of $0.8 million.



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Recent Accounting Pronouncements



In January
2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The primary objective of the Interpretation is to provide guidance on the identification of entities for
which control is achieved through means other than voting rights and how to determine when and which business enterprise should consolidate the variable interest entity. We do not believe this Interpretation will have a material impact on us.



Disclosure Regarding Forward-Looking Statements



Some of the information in this Quarterly Report may contain forward-looking statements. These statements include, in particular, statements about our plans, strategies and prospects within the meaning of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify forward-looking statements by our use of forward-looking terminology such as may, will, expect, anticipate,
estimate, continue or other similar words. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that our plans,
intentions or expectations will be achieved. Such statements are based on our current plans and expectations and are subject to risks and uncertainties that exist in our operations and our business environment that could render actual outcomes and
results materially different from those predicted. When considering such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any
forward-looking statements:



| |  |  | whether or not our cash flows from operations are sufficient to meet ongoing operations;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the impact of AGYs unpredictable bankruptcy proceeding on the ongoing operations and the resultant risk that obtaining raw materials from sources other than AGY would be more
costly;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our significant level of indebtedness and limitations on our ability to incur additional debt;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | our dependence upon some of our suppliers to provide us with materials and services;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | downturns in the electronics industry and the movement of electronics industry production outside of North America;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of highly competitive markets and recent competition from Asia for heavyweight glass fiber fabrics;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | our concentrated customer base and the competitive nature of our markets;
| | - |  | -------------------------------------------------------------------------



| |  |  | a disruption of production at one of our facilities;
| | - |  | ----------------------------------------------------



| |  |  | an easing of import restrictions and duties with respect to glass fiber fabrics;
| | - |  | --------------------------------------------------------------------------------



| |  |  | whether or not we are able to comply with environmental and safety and health laws and requirements;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | whether or not we are able to address technological advances in the markets we serve;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | changes in economic conditions generally; and
| | - |  | ---------------------------------------------



| |  |  | whether or not we are able to satisfy the covenants and other provisions under our various financing arrangements.
| | - |  | ------------------------------------------------------------------------------------------------------------------



This list of risks and uncertainties, however, is not intended to be exhaustive. You should
also review the other cautionary statements we make in this Quarterly Report and other reports and registration statements we file with the SEC. All forward-looking statements attributable to us or persons acting for us are expressly qualified in
their entirety by our cautionary statements.



We do not have, and expressly
disclaim, any obligation to release publicly any updates or changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



The effects of potential changes in interest rates are discussed below. Our market risk discussion includes forward-looking statements and represents an estimate of possible changes in fair value that
would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially
from those presented. See Managements Discussion and Analysis of Financial Condition and Results of OperationsDisclosure Regarding Forward-Looking Statements.



Our financing arrangements are subject to market risks, including interest rate risk. As of June 30, 2003, we had $6.0 million of variable
rate debt outstanding that was not protected by interest rate hedge contracts. If the weighted average interest rate on this debt is 100 basis points higher or lower during the next twelve months, our interest expense would be increased or decreased
by approximatively $0.1 million. Our financial instruments are not currently subject to commodity price risk. Our risk management strategy is to use derivative financial instruments, such as swaps, to hedge interest rate exposures. However, we
currently do not have any outstanding interest rate hedge contracts. We do not enter into derivatives for trading or speculative purposes.



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Item 4. Controls and Procedures



We maintain
disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosure.



Based on the most recent
evaluation, which was completed within 90 days of the filing of this report, our president and chief financial officer believe that our disclosure controls are effective. There have been no significant changes in our internal controls or in any
other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.



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PART IIOTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits                                                                                                                                                                                                                                                                                                             
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                      
|    |  | 10.1                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                      
|    |  | 31.1                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                      
|    |  | 32.1                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                      
|    |  | 33.1                                                                                                                                                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                                                                                                                      
|    |  | 33.2                                                                                                                                                                                                                                                                                                                 
|    |  | *       Incorporated by reference from the Companys Current Report on Form 8-K dated June 6, 2003                                                                                                                                                                                                                   
|    | 
|(b) |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                                  
|    | 
|    |  | On June 10, 2003, BGF filed a current report on Form 8-K setting forth as an exhibit the Loan and Security Agreementby and among BGF Industries, Inc. as
Borrower, The Lenders that are Signatories Hereto as the Lenders, and WellsFargo Foothill, Inc. as the Arranger and Administrative Agent as of June 6, 2003.



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



BGF INDUSTRIES, INC./s/ Philippe R. DorierPhilippe R. Dorier Chief Financial Officer (Principal Financial and Accounting Officer)




/s/ James R. HendersonJames R. Henderson President




Date: August 11, 2003



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