##### 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, 2004



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,
2004.



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##### Table of Contents

BGF INDUSTRIES, INC.

QUARTERLY REPORT FOR THE THREE MONTHS AND SIX MONTHS

ENDED June 30, 2004



TABLE OF CONTENTS



|         |  |                                                                                                                                                    |  |         
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                                                                    |  | Page No.
|PART I.  |  | FINANCIAL INFORMATION                                                                                                                              |  |         
|         |  |                                                                                                                                                   
|Item 1.  |  | Consolidated Financial Statements                                                                                                                  |  | 3       
|         |  |                                                                                                                                                   
|         |  | Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003                                                                  |  | 3       
|         |  |                                                                                                                                                   
|         |  | Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and six months ended June 30, 2004 and 2003 (unaudited) |  | 4       
|         |  |                                                                                                                                                   
|         |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited)                                                  |  | 5       
|         |  |                                                                                                                                                   
|         |  | Notes to the Consolidated Financial Statements                                                                                                     |  | 6       
|         |  |                                                                                                                                                   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                              |  | 13      
|         |  |                                                                                                                                                   
|         |  | Overview                                                                                                                                           |  | 13      
|         |  |                                                                                                                                                   
|         |  | Critical Accounting Policies                                                                                                                       |  | 14      
|         |  |                                                                                                                                                   
|         |  | Environmental Issues                                                                                                                               |  | 14      
|         |  |                                                                                                                                                   
|         |  | Results of Operations                                                                                                                              |  | 15      
|         |  |                                                                                                                                                   
|         |  | Liquidity and Capital Resources                                                                                                                    |  | 17      
|         |  |                                                                                                                                                   
|         |  | Recent Accounting Pronouncements                                                                                                                   |  | 18      
|         |  |                                                                                                                                                   
|         |  | Disclosure Regarding Forward Looking Statements                                                                                                    |  | 18      
|         |  |                                                                                                                                                   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                         |  | 19      
|         |  |                                                                                                                                                   
|Item 4.  |  | Controls and Procedures                                                                                                                            |  | 19      
|         |  |                                                                                                                                                   
|PART II. |  | OTHER INFORMATION                                                                                                                                  |  |         
|         |  |                                                                                                                                                   
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                                                   |  | 20      



2



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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, 2004 |         |   | December 31,2003 |  
|                                                                                                           |  | (unaudited)   |         |   |                  |  
|ASSETS                                                                                                     |  |               |         |   |                  |   |         |  
|                                                                                                           |  |              
|Current assets:                                                                                            |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                  |  | $             | 1,149   |   |                  | $ | 3,964   |  
|Trade accounts receivable, less allowance for returns and doubtful accounts of $426 and $344, respectively |  |               | 18,366  |   |                  |   | 13,415  |  
|Inventories                                                                                                |  |               | 25,876  |   |                  |   | 22,139  |  
|Other current assets                                                                                       |  |               | 4,327   |   |                  |   | 4,671   |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total current assets                                                                                       |  |               | 49,718  |   |                  |   | 44,189  |  
|Net property, plant and equipment                                                                          |  |               | 41,634  |   |                  |   | 43,863  |  
|Other noncurrent assets, net                                                                               |  |               | 4,055   |   |                  |   | 4,453   |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total assets                                                                                               |  | $             | 95,407  |   |                  | $ | 92,505  |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                      |  |               |         |   |                  |   |         |  
|                                                                                                           |  |              
|Current liabilities:                                                                                       |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                           |  | $             | 5,410   |   |                  | $ | 5,244   |  
|Accrued liabilities                                                                                        |  |               | 14,474  |   |                  |   | 14,004  |  
|Current portion of capital lease obligation                                                                |  |               | 336     |   |                  |   | 330     |  
|Current portion of long-term debt                                                                          |  |               | 1,200   |   |                  |   | 1,200   |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                  |  |               | 21,420  |   |                  |   | 20,778  |  
|Long-term debt, net of discount of $877 and $973, respectively                                             |  |               | 98,419  |   |                  |   | 98,968  |  
|Capital lease obligation, net of current portion                                                           |  |               | 1,667   |   |                  |   | 1,837   |  
|Deferred income taxes                                                                                      |  |               | 3,177   |   |                  |   | 3,177   |  
|Postretirement benefit and pension obligations                                                             |  |               | 5,641   |   |                  |   | 5,287   |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                          |  |               | 130,324 |   |                  |   | 130,047 |  
|                                                                                                           |  |               |         |   |                  |   |         |  
|Commitments and contingencies                                                                              |  |               |         |   |                  |   |         |  
|                                                                                                           |  |              
|Stockholders deficit:                                                                                     |  |               |         |   |                  |   |         |  
|Common stock, $1.00 par value. Authorized 3,000 shares; issued and outstanding 1,000 shares                |  |               | 1       |   |                  |   | 1       |  
|Capital in excess of par value                                                                             |  |               | 34,999  |   |                  |   | 34,999  |  
|Accumulated deficit                                                                                        |  |               | (69,347 | ) |                  |   | (71,628 | )
|Accumulated other comprehensive loss                                                                       |  |               | (570    | ) |                  |   | (570    | )
|Loan to parent                                                                                             |  |               |        |   |                  |   | (344    | )
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total stockholders deficit                                                                                |  |               | (34,917 | ) |                  |   | (37,542 | )
|                                                                                                           |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders deficit                                                                |  | $             | 95,407  |   |                  | $ | 92,505  |  
|                                                                                                           |  |               |         |   |                  |   |         |  



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



3



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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, |  
|                                             |  | 2004                               |        |   | 2003                             |   |        | 2004 |  | 2003 |       
|                                             |  | (unaudited)                        |        |   | (unaudited)                      |  
|Net sales                                    |  | $                                  | 39,928 |   |                                  | $ | 31,415 |      |  | $    | 78,772 |  | $ | 65,051 |  
|Cost of goods sold                           |  |                                    | 33,551 |   |                                  |   | 26,905 |      |  |      | 65,770 |  |   | 55,965 |  
|                                             |  |                                    |        |   |                                  |   |        |      |  |      |        |  |   |        |  
|Gross profit                                 |  |                                    | 6,377  |   |                                  |   | 4,510  |      |  |      | 13,002 |  |   | 9,086  |  
|Selling, general and administrative expenses |  |                                    | 2,424  |   |                                  |   | 2,132  |      |  |      | 4,954  |  |   | 4,234  |  
|                                             |  |                                    |        |   |                                  |   |        |      |  |      |        |  |   |        |  
|Operating income                             |  |                                    | 3,953  |   |                                  |   | 2,378  |      |  |      | 8,048  |  |   | 4,852  |  
|Interest expense                             |  |                                    | 2,876  |   |                                  |   | 3,930  |      |  |      | 5,756  |  |   | 7,584  |  
|Other (income) expense, net                  |  |                                    | (2     | ) |                                  |   | (428   | )    |  |      | 11     |  |   | (430   | )
|                                             |  |                                    |        |   |                                  |   |        |      |  |      |        |  |   |        |  
|Income (loss) before income taxes            |  |                                    | 1,079  |   |                                  |   | (1,124 | )    |  |      | 2,281  |  |   | (2,302 | )
|Income tax expense                           |  |                                    |       |   |                                  |   |       |      |  |      |       |  |   |       |  
|                                             |  |                                    |        |   |                                  |   |        |      |  |      |        |  |   |        |  
|Net income (loss)                            |  |                                    | 1,079  |   |                                  |   | (1,124 | )    |  |      | 2,281  |  |   | (2,302 | )
|Other comprehensive income net of tax:       |  |                                    |        |   |                                  |   |        |      |  |      |        |  |   |        |  
|Reclassification to earnings                 |  |                                    |       |   |                                  |   |       |      |  |      |       |  |   | 79     |  
|                                             |  |                                    |        |   |                                  |   |        |      |  |      |        |  |   |        |  
|Total comprehensive income (loss)            |  | $                                  | 1,079  |   |                                  | $ | (1,124 | )    |  | $    | 2,281  |  | $ | (2,223 | )
|                                             |  |                                    |        |   |                                  |   |        |      |  |      |        |  |   |        |  



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



4



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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, |       
|                                                                                                  |  | 2004                             |        |   | 2003 |  
|                                                                                                  |  | (unaudited)                      |       
|Cash flows from operating activities:                                                             |  |                                  |        |   |      |   |         |  
|Net income (loss)                                                                                 |  | $                                | 2,281  |   |      | $ | (2,302  | )
|Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                                  |        |   |      |   |         |  
|Depreciation                                                                                      |  |                                  | 2,752  |   |      |   | 3,247   |  
|Amortization of noncurrent assets                                                                 |  |                                  | 431    |   |      |   | 759     |  
|Amortization of discount on notes                                                                 |  |                                  | 96     |   |      |   | 100     |  
|Write off of debt issuance costs                                                                  |  |                                  |       |   |      |   | 1,066   |  
|(Gain) loss on disposal of equipment                                                              |  |                                  | 93     |   |      |   | (15     | )
|Gain on extinguishment of Senior Subordinated Notes                                               |  |                                  |       |   |      |   | (422    | )
|Change in assets and liabilities:                                                                 |  |                                  |        |   |      |   |         |  
|Trade accounts receivable, net                                                                    |  |                                  | (4,951 | ) |      |   | (1,739  | )
|Other current assets                                                                              |  |                                  | (46    | ) |      |   | (211    | )
|Inventories                                                                                       |  |                                  | (3,737 | ) |      |   | 602     |  
|Current income tax refundable                                                                     |  |                                  | 390    |   |      |   | 5,983   |  
|Other assets                                                                                      |  |                                  | (33    | ) |      |   | (9      | )
|Accounts payable                                                                                  |  |                                  | 339    |   |      |   | 103     |  
|Accrued liabilities                                                                               |  |                                  | 470    |   |      |   | (303    | )
|Postretirement benefit and pension obligations                                                    |  |                                  | 354    |   |      |   | 694     |  
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Net cash (used in) provided by operating activities                                               |  |                                  | (1,561 | ) |      |   | 7,553   |  
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Cash flows from investing activities:                                                             |  |                                  |        |   |      |   |         |  
|Purchases of property, plant and equipment                                                        |  |                                  | (834   | ) |      |   | (518    | )
|Proceeds from sale of equipment                                                                   |  |                                  | 44     |   |      |   | 16      |  
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Net cash used in investing activities                                                             |  |                                  | (790   | ) |      |   | (502    | )
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Cash flows from financing activities:                                                             |  |                                  |        |   |      |   |         |  
|Proceeds from revolving credit facility                                                           |  |                                  | 1,500  |   |      |   | 10,000  |  
|Payments on revolving credit facility                                                             |  |                                  | (1,500 | ) |      |   | (17,573 | )
|Proceeds received from term loan                                                                  |  |                                  |       |   |      |   | 6,000   |  
|Payments on term loan                                                                             |  |                                  | (644   | ) |      |   |        |  
|Proceeds received on loan receivable from parent                                                  |  |                                  | 344    |   |      |   | 10,624  |  
|Payments on capital lease obligation                                                              |  |                                  | (164   | ) |      |   | (163    | )
|Payment on note payable to parent                                                                 |  |                                  |       |   |      |   | (5,000  | )
|Debt issuance costs                                                                               |  |                                  |       |   |      |   | (4,022  | )
|Purchases of Senior Subordinated Notes                                                            |  |                                  |       |   |      |   | (813    | )
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Net cash used in financing activities                                                             |  |                                  | (464   | ) |      |   | (947    | )
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                                  | (2,815 | ) |      |   | 6,104   |  
|                                                                                                  |  |                                 
|Cash and cash equivalents at beginning of period                                                  |  |                                  | 3,964  |   |      |   | 1,171   |  
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Cash and cash equivalent at end of period                                                         |  | $                                | 1,149  |   |      | $ | 7,275   |  
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Supplemental disclosures of cash flow information:                                                |  |                                  |        |   |      |   |         |  
|Cash paid during the period for interest                                                          |  | $                                | 5,329  |   |      | $ | 5,811   |  
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Cash received during the period for income tax refunds                                            |  | $                                | 390    |   |      | $ | 5,983   |  
|                                                                                                  |  |                                  |        |   |      |   |         |  
|Supplemental disclosure of non-cash investing and financing activities:                           |  |                                  |        |   |      |   |         |  
|Property and equipment financed in accounts payable                                               |  | $                                | 25     |   |      | $ | 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, such statements include all adjustments (consisting of items of a normal recurring nature) considered necessary for a fair statement of the financial information
included herein in accordance with generally accepted accounting principles in the United States of America. Operating results for the three months and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for
the full year.



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, 2003 on file with the Securities and Exchange Commission in the Companys 2003 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, 2003 and in this Report under
Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies.



2. Liquidity and Financial Condition



During the three months and six months ended June 30, 2004, 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. Industry and economic conditions had an adverse effect on the Companys operations
beginning in 2001. The Company incurred net losses of approximately $3,036 for the year ended December 31, 2003 and had a $37,542 stockholders deficit as of December 31, 2003. In the three months and six months ended June 30, 2004, the Company
generated net income of $1,079 and $2,281, respectively and had a $34,917 stockholders deficit as of June 30, 2004.



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 and make required payments under the Wells Fargo Foothill (WFF) loan (See Note 7). While the Companys
performance to date in 2004 has been consistent with, or better than, the level of performance anticipated in 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 monitor 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)



3. Inventories



Inventories consist of the following:



|                 |  |               |        |                   |   |       
|---------------- |  | ------------- | ------ | ----------------- | - | ------
|                 |  | June 30, 2004 |        | December 31, 2003
|                 |  | (unaudited)   |        |                  
|Supplies         |  | $             | 1,504  |                   | $ | 1,502 
|Raw materials    |  |               | 2,403  |                   |   | 1,546 
|Stock-in-process |  |               | 4,052  |                   |   | 3,561 
|Finished goods   |  |               | 17,917 |                   |   | 15,530
|                 |  |               |        |                   |   |       
|                 |  | $             | 25,876 |                   | $ | 22,139
|                 |  |               |        |                   |   |       



4. Property, Plant and Equipment,
Net



Net property, plant and equipment consists of the following:



|                                    |  |               |         |   |                   |   |         |  
|----------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                    |  | June 30, 2004 |         |   | December 31, 2003 |  
|                                    |  | (unaudited)   |         |   |                   |  
|Land                                |  | $             | 3,155   |   |                   | $ | 3,155   |  
|Buildings                           |  |               | 42,648  |   |                   |   | 42,239  |  
|Machinery and equipment             |  |               | 82,361  |   |                   |   | 82,314  |  
|                                    |  |               |         |   |                   |   |         |  
|Gross property, plant and equipment |  |               | 128,164 |   |                   |   | 127,708 |  
|Less: accumulated depreciation      |  |               | (86,530 | ) |                   |   | (83,845 | )
|                                    |  |               |         |   |                   |   |         |  
|Net property, plant and equipment   |  | $             | 41,634  |   |                   | $ | 43,863  |  
|                                    |  |               |         |   |                   |   |         |  



5. Other Noncurrent Assets, net



Other noncurrent assets, net consist of the following:



|                                        |  |               |        |   |                   |   |        |  
|--------------------------------------- |  | ------------- | ------ | - | ----------------- | - | ------ | -
|                                        |  | June 30, 2004 |        |   | December 31, 2003 |  
|                                        |  | (unaudited)   |        |   |                   |  
|Debt issuance costs                     |  | $             | 6,014  |   |                   | $ | 6,014  |  
|Prepaid lease costs                     |  |               | 82     |   |                   |   | 82     |  
|Accumulated amortization                |  |               | (2,430 | ) |                   |   | (1,999 | )
|                                        |  |               |        |   |                   |   |        |  
|                                        |  |               | 3,666  |   |                   |   | 4,097  |  
|Unrecognized pension prior service cost |  |               | 19     |   |                   |   | 19     |  
|Other noncurrent assets                 |  |               | 370    |   |                   |   | 337    |  
|                                        |  |               |        |   |                   |   |        |  
|Total other noncurrent assets, net      |  | $             | 4,055  |   |                   | $ | 4,453  |  
|                                        |  |               |        |   |                   |   |        |  



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



Amortization of deferred financing charges of $215 and $177 for the three months ended June
30, 2004 and 2003, respectively, has been included in interest expense. Amortization of deferred financing charges of $431 and $759 for the six months ended June 30, 2004 and 2003, respectively, has been included in interest expense. In the three
and six months ended June 30, 2003, the Company 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.



6. Accrued Liabilities



Accrued liabilities consist of the following:



|                                        |  |              |        |                  |   |       
|--------------------------------------- |  | ------------ | ------ | ---------------- | - | ------
|                                        |  | June 30,2004 |        | December31, 2003
|                                        |  | (unaudited)  |        |                 
|Interest                                |  | $            | 4,494  |                  | $ | 4,497 
|Current contribution to retirement plan |  |              | 3,284  |                  |   | 3,304 
|Environmental                           |  |              | 2,728  |                  |   | 2,736 
|Payroll                                 |  |              | 664    |                  |   | 275   
|Other employee benefits                 |  |              | 717    |                  |   | 971   
|Restructuring                           |  |              | 7      |                  |   | 16    
|Medical benefits                        |  |              | 667    |                  |   | 667   
|Other                                   |  |              | 1,913  |                  |   | 1,538 
|                                        |  |              |        |                  |   |       
|Total accrued liabilities               |  | $            | 14,474 |                  | $ | 14,004
|                                        |  |              |        |                  |   |       



Current contribution to retirement
plan. Employer contributions payable to the retirement plan represents the contribution payable for 2003 which is to be paid in 2004. (See Note 9)



Environmental. The Company is engaged in an Environmental Protection Agency (EPA)-supervised Voluntary Remediation Program at its 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 the citys water treatment plant.



In 2003, the Company submitted to the EPA a final Site Characterization Report (SCR) documenting the assessment of the BGF property and the creek draining
from the property. In May 2004, the EPA approved the SCR and described acceptable steps for a phased clean-up of the site. The Company is in the process of drafting a clean-up plan consistent with the EPAs directions and expects to submit the
plan later in 2004. At this time, the Company is unable to determine if there will be a financial effect in addition to the already established reserves.



A 1998 Phase Two Environmental Site Assessment at the Companys Cheraw, South Carolina 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.



As of June 30, 2004 and December 31, 2003, the Company had a reserve of $2,728 and $2,736, respectively, for environmental exposure, which reflects the estimated remediation costs for the Altavista facility, as obtained from the
environmental consulting firm that conducted the site assessment and submitted the SCR to the EPA. Remediation costs are estimates, subject to the EPAs approval of a remediation plan. Estimated remediation costs at the Cheraw facility are
$400, which also is reflected in the reserve.



8



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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 believes that these reserves may need to be increased, but 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 it must await the EPAs approval of the final remediation plan. 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 that would have a material adverse effect on the Companys financial condition.



Other employee benefits.In 2003, the Company approved a management
bonus of $920 to be paid in 2004. This bonus was paid in the first quarter of 2004.



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, 2004 and 2003 were approximately $9 and $67, respectively.



7. Debt



Debt consists of the following:



|                                                                                      |  |               |        |                  |   |        
|------------------------------------------------------------------------------------- |  | ------------- | ------ | ---------------- | - | -------
|                                                                                      |  | June 30, 2004 |        | December 31,2003
|Term loan                                                                             |  | $             | 4,746  |                  | $ | 5,391  
|Senior Subordinated Notes, net of unamortized discount of $877 and $973, respectively |  |               | 94,873 |                  |   | 94,777 
|                                                                                      |  |               |        |                  |   |        
|Total debt                                                                            |  | $             | 99,619 |                  | $ | 100,168
|Current Maturities                                                                    |  |               | 1,200  |                  |   | 1,200  
|                                                                                      |  |               |        |                  |   |        
|Long-term debt                                                                        |  | $             | 98,419 |                  | $ | 98,968 
|                                                                                      |  |               |        |                  |   |        



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 was amended effective July 2004,
amending the cap on yearly capital expenditures to be set at the lesser of (a) $5,000 or (b) the last twelve months cumulative EBITDA less $16,000 times 50% plus $2,000.



The WFF Loan proceeds are used to finance ongoing working capital, capital expenditures, and general corporate needs of the Company and
retire other outstanding debt. The WFF Loan is guaranteed by the Companys parent, Glass Holdings. As of June 30, 2004 and December 31, 2003, amounts outstanding under the WFF Loan totaled $4,746 and $5,391, respectively, and consisted only of
the term loan as no advances were outstanding under the revolver. The interest rate on amounts outstanding under the term loan portion of the WFF Loan at June 30, 2004 and December 31, 2003 was 5.25% and 5.0%, respectively.



9



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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)



7. Debt  (Continued)



Availability under the revolver at June 30, 2004 and December 31, 2003 was $15,723 and $9,837, 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 $550 for potential environmental liabilities. The reserve for interest payments is increased by $200 a week in 2003 and $189 a week in 2004, and is reset to $0
when such payment is made. As of June 30, 2004 and December 31, 2003, the total outstanding reserves amounted to $4,892 and $5,350, respectively.



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
original amount of the Senior Subordinated Notes issued was $100,000, of which approximately $95,750 in face amount remain outstanding, as a result of repurchases made by the Company in the second and third quarters of 2003.



The fair value of the Senior Subordinated Notes as of June 30, 2004 and December 31, 2003 was
approximately $83,302 and $71,812, respectively.



8. Income Taxes



The effective tax rate for the three and six months ended June 30, 2004
and June 30, 2003 was 0.0%. The Company incurred no tax provision in these periods due to the fact that the Company has a full valuation allowance recorded against its net deferred tax assets which include net operating loss carryforwards.



9. Employee Benefits



BGF has a defined benefit pension plan covering substantially all of its employees.
Participating employees are required to contribute to the pension plan.



The
Company also has a postretirement benefit plan that covers substantially all of its employees. Upon the completion of the attainment of age fifty-five and ten years of continuous service, an employee may elect to retire. Employees eligible to retire
receive postretirement health benefits, including medical and dental coverage.



Net periodic costs for pension benefits and other postretirement benefits for the three and six months ended June 30, 2004 and June 30, 2003 were comprised of:



|                                        |  |                                    |      |                                  |                        |   |                  |      |  |                        |    |      |   |    |      |   |      |      |  |      |      |   |  |   |     |  |   |    
|--------------------------------------- |  | ---------------------------------- | ---- | -------------------------------- | ---------------------- | - | ---------------- | ---- |  | ---------------------- | -- | ---- | - | -- | ---- | - | ---- | ---- |  | ---- | ---- | - |  | - | --- |  | - | ---
|                                        |  | For the Three Months Ended June 30 |      | For the Six Months Ended June 30
|                                        |  | Pension Benefits                   |      |                                  | PostretirementBenefits |   | Pension Benefits |      |  | PostretirementBenefits
|                                        |  | 2004                               |      |                                  | 2003                   |   |                  | 2004 |  | 2003                   |    | 2004 |   |    | 2003 |   |      | 2004 |  | 2003
|Net periodic pension cost:              |  |                                    |      |                                  |                        |   |                  |      |  |                        |    |      |   |    |      |   |      |      |  |      |      |   |  |   |     |  |   |    
|Service cost                            |  | $                                  | 247  |                                  |                        | $ | 198              |      |  | $                      | 22 |      | $ | 21 |      | $ | 490  |      |  | $    | 363  |   |  | $ | 46  |  | $ | 42 
|Interest cost                           |  |                                    | 300  |                                  |                        |   | 258              |      |  |                        | 34 |      |   | 35 |      |   | 596  |      |  |      | 474  |   |  |   | 71  |  |   | 70 
|(Expected return on plan assets)        |  |                                    | (249 | )                                |                        |   | (161             | )    |  |                        |   |      |   |   |      |   | (463 | )    |  |      | (322 | ) |  |   |    |  |   |   
|Amortization of prior service cost      |  |                                    | 2    |                                  |                        |   | 2                |      |  |                        |   |      |   |   |      |   | 3    |      |  |      | 3    |   |  |   |    |  |   |   
|Recognized net actuarial (gain) or loss |  |                                    | 25   |                                  |                        |   | 36               |      |  |                        | 4  |      |   | 7  |      |   | 50   |      |  |      | 64   |   |  |   | 8   |  |   | 14 
|                                        |  |                                    |      |                                  |                        |   |                  |      |  |                        |    |      |   |    |      |   |      |      |  |      |      |   |  |   |     |  |   |    
|Total net periodic pension cost         |  | $                                  | 325  |                                  |                        | $ | 333              |      |  | $                      | 60 |      | $ | 63 |      | $ | 676  |      |  | $    | 582  |   |  | $ | 125 |  | $ | 126
|                                        |  |                                    |      |                                  |                        |   |                  |      |  |                        |    |      |   |    |      |   |      |      |  |      |      |   |  |   |     |  |   |    



10



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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)



9. Employee Benefits  (Continued)



In order to continue to provide all distribution options allowed by the defined benefit pension plan, the Company accelerated its 2003 contributions and paid $3,284 into
the defined benefit plan on July 14, 2004. On April 15, 2004, the Company paid $399 into the defined benefit plan, attributable to the 2004 plan year. Expected contributions (previously disclosed and revised), based on the current pension funding
requirements, for the year ended December 31, 2004, attributable to the 2004 plan year are as follows:



|         |  |                            |     |                |   |  
|-------- |  | -------------------------- | --- | -------------- | - | -
|         |  | Previously DisclosedAmount |     | Revised Amount
|7/15/04  |  | $                          | 399 |                | $ | 
|10/15/04 |  | $                          | 399 |                | $ | 
|         |  |                            |     |                |   |  
|         |  | $                          | 798 |                | $ | 
|         |  |                            |     |                |   |  



The revised amount reflects the
provisions of the Pension Funding Equity Act of 2004, enacted on April 10, 2004, which provides interest rate relief and reduces the amount of the required quarterly contributions for the years 2004 and 2005, as well as the accelerated 2003
contributions.



Expected net employee contributions for the postretirement
benefit plan for the year ended December 31, 2004 is $98.



10. 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 MonthsEnded June 30, |        | For the Six Months Ended June 30,
|              |  | 2004                               |        | 2003                              |   | 2004   |  | 2003
|              |  | (unaudited)                        |        | (unaudited)                      
|United States |  | $                                  | 37,252 |                                   | $ | 29,482 |  | $    | 73,905 |  | $ | 61,290
|Foreign       |  |                                    | 2,676  |                                   |   | 1,933  |  |      | 4,867  |  |   | 3,761 
|              |  |                                    |        |                                   |   |        |  |      |        |  |   |       
|              |  | $                                  | 39,928 |                                   | $ | 31,415 |  | $    | 78,772 |  | $ | 65,051
|              |  |                                    |        |                                   |   |        |  |      |        |  |   |       



11. 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 whereby it 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, 2004.



12. Recent Accounting Pronouncements



There are no new accounting pronouncements that could have an impact on the Companys consolidated financial statements.



11



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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)



13. Related Party Transactions



On December 10, 2002, Advanced Glassfiber Yarns, LLC (AGY), a major supplier and affiliate of BGF, filed for protection under Chapter 11 of the U. S.
bankruptcy code. On April 2, 2004, AGY emerged from bankruptcy. The Company has not experienced any interruptions in its supply of materials from AGY. As part of AGYs reorganization, the glass yarn operation at the South Hill facility is
expected to be closed effective September 2004 and the supply agreement, relating to this facility, with BGF will be terminated. Porcher Industries, which owns BGF through a US holding company, previously owned a 51% interest in AGY. In conjunction
with AGYs emergence, Porcher Industries indirectly received a 15% interest in the newly emerged AGY entity, AGY Holding Corp., in exchange for entering into a supply agreement with AGY Holding Corp. through December 31, 2006. The supply
agreement provides BGF with an economic incentive, but not an obligation, to purchase yarn from AGY.



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 in January 2003 and another $500 in
June 2003. These amounts were applied against the loan receivable. During the second quarter of 2004, Glass Holdings paid an additional $344 to BGF. This amount was also applied against the loan receivable. Subsequent to receipt of this payment, the
unpaid principal balance on the loan receivable totaled $97,711. In July 2004, the note receivable was canceled. Because the Company previously fully reserved the unpaid principal balance of the note in 2002, there was no financial statement impact
as a result of the cancellation.



In July 2004, the Companys parent,
Glass Holdings, converted to a limited liability company, Glass Holdings LLC, and subsequently distributed its stock in BGF to NVH Inc., a 100% owned subsidiary of Nouveau Verre Holdings, Inc., which is a 100% owned subsidiary of Porcher Industries,
S.A.



12



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##### Table of Contents

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, 2003 set forth in our 2003 Annual Report on Form 10-K.



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.



In 2004, we have continued to operate in our restructured environment that resulted from a
significant deterioration of our business in 2002. The South Hill heavyweight fabrics facility is still closed and we have continued our efforts to maintain a level of inventory that is consistent with our sales level and maximize our asset
utilization. Overall sales increased $8.5 million and $13.7 million, or 27.1% and 21.1%, respectively in the three months and six ended June 30, 2004 compared to the three months and six months ended June 30, 2003. The increase in sales is mainly
the result of increased sales of new products for the automotive and ballistics industries. In addition, our profitability improved with gross margins increasing from 14.4% to 16.0% in the three months ended June 30, 2004 compared to the three
months ended June 30, 2003. Profitability improved with gross margins increasing from 14.0% to 16.5% in the six months ended June 30, 2004 compared to the six months ended June 30, 2003. These factors directly impacted our net income, resulting in
an increase in net income of $2.2 million to a net income of $1.1 million in the three months ended June 30, 2004, from a net loss of $1.1 million in the three months ended June 30, 2003 and an increase in net income of $4.6 million to a net income
of $2.3 million in the six months ended June 30, 2004 from a net loss of $2.3 million in the six months ended June 30, 2004.



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. On April 2, 2004, AGY emerged from bankruptcy. To date, we have not experienced any interruptions in our supply of materials from AGY. As part of AGYs reorganization, the glass yarn operation at the South Hill facility is
expected to be closed effective September 2004 and our supply agreement, relating to this facility, will be terminated at that time. We do not expect the closing of this facility to have a material impact on our raw material supply. Porcher
Industries, which owns BGF through Glass Holdings Corp., a US holding company, previously owned a 51% interest in AGY. In conjunction with AGYs emergence, Porcher Industries indirectly received a 15% interest in the newly emerged AGY entity,
AGY Holding Corp., in exchange for entering into a supply agreement with AGY Holding Corp. through December 31, 2006. The supply agreement provides BGF with an economic incentive, but not an obligation, to purchase yarn from AGY.



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 BGF, of which $9.6 million 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 from Glass Holdings was received in January 2003 and another $0.5 million in June 2003. These amounts were applied against the loan receivable. During the second quarter of 2004, Glass Holdings paid
us an additional $0.3 million. This amount also applied against the loan receivable. Subsequent to receipt of this payment, the unpaid principal balance on the loan receivable totaled $97.7 million. In July 2004, the note receivable was cancelled.
Because we had previously fully reserved the unpaid principal balance of the note in 2002, there was no financial statement impact as a result of the cancellation.



In July 2004, our parent, Glass Holdings Corp., converted to a limited liability company, Glass Holdings LLC, and subsequently distributed
its stock in BGF to NVH, Inc., a 100% owned subsidiary of Nouveau Verre Holdings, Inc., which is a 100% owned subsidiary of Porcher Industries. This transaction will have not affect on our operations.



While our performance in 2004 has been consistent with, or better than, the level of
performance anticipated in 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 and make required loan payments under the WFF loan.



13



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##### Table of Contents

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, 2003.



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 the
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. In May 2004, the EPA approved the SCR and described acceptable steps for a phased clean-up of the site. We are in
the process of drafting a clean-up plan consistent with the EPAs directions and expect to submit the plan later in 2004. At this time, the Company is unable to determine if there will be a financial effect in addition to the already
established reserves.



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, storm water requirements, solid waste disposal requirements and with hazardous waste
transfer requirements.



As of June 30, 2004, 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 conducted the site assessment and submitted the SCR to EPA. Remediation costs are
estimates, subject to the EPAs approval 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 these liabilities in the next twelve months, as we must await the EPAs approval of the final remediation plan. 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 that would have a material adverse effect on our financial condition.



14



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##### Table of Contents

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 MonthsEnded June 30, |   
|                                             |  | 2004                               |   |  | 2003                             |    |  | 2004  |   |  | 2003  |   
|Net sales                                    |  | 100.0                              | % |  | 100.0                            | %  |  | 100.0 | % |  | 100.0 | % 
|Cost of goods sold                           |  | 84.0                               | % |  | 85.6                             | %  |  | 83.5  | % |  | 86.0  | % 
|                                             |  |                                    |   |  |                                  |    |  |       |   |  |       |   
|Gross profit                                 |  | 16.0                               | % |  | 14.4                             | %  |  | 16.5  | % |  | 14.0  | % 
|Selling, general and administrative expenses |  | 6.1                                | % |  | 6.8                              | %  |  | 6.3   | % |  | 6.5   | % 
|                                             |  |                                    |   |  |                                  |    |  |       |   |  |       |   
|Operating income                             |  | 9.9                                | % |  | 7.6                              | %  |  | 10.2  | % |  | 7.5   | % 
|Interest expense                             |  | 7.2                                | % |  | 12.5                             | %  |  | 7.3   | % |  | 11.7  | % 
|Other (income), net                          |  |                                   |   |  | (1.4                             | )% |  |      |   |  | (0.7  | )%
|                                             |  |                                    |   |  |                                  |    |  |       |   |  |       |   
|Income (loss) before income taxes            |  | 2.7                                | % |  | (3.5                             | )% |  | 2.9   | % |  | (3.5  | )%
|Income tax benefit                           |  |                                   |   |  |                                 |    |  |      |   |  |      |   
|                                             |  |                                    |   |  |                                  |    |  |       |   |  |       |   
|Net income (loss)                            |  | 2.7                                | % |  | (3.5                             | )% |  | 2.9   | % |  | (3.5  | )%
|                                             |  |                                    |   |  |                                  |    |  |       |   |  |       |   



Three Months Ended June 30, 2004
Compared to Three Months Ended June 30, 2003



Net Sales. Net
sales increased $8.5 million, or 27.1%, to $39.9 million in the three months ended June 30, 2004 from $31.4 million in the three months ended June 30, 2003.



Sales of our insulation fabrics, used for high temperature products, increased $1.7 million, or 75.5%, for the three months ended June 30, 2004 as compared to the three
months ended June 30, 2003 due primarily to new products for the automotive and appliance markets.



Sales of our electronics fabrics used in multi-layer and rigid printed circuit boards, coated fabrics and specialty electronic tapes increased $2.2 million, or 30.1%, for the three months ended June 30, 2004 as
compared to the three months ended June 30, 2003 due to a general worldwide improvement in demand for electronic products made with printed circuit boards.



Sales of our construction fabrics increased $1.2 million, or 118.4%, for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003 due to a
new product introduction, which brings improved performance to the customer product line.



Sales of protective fabrics, which are used in various ballistics applications, increased $3.6 million to $3.6 million from $0.0 million for the three months ended June 30, 2004 as compared to the three months ended
June 30, 2003 due to the development and sale of new products.



Sales of our
filtration fabrics used by industrial customers to control emissions into the environment decreased $0.7 million, or 10.8%, for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. This decrease is due to fewer
large volume replacement contracts.



Gross Profit Margins. Gross
profit margins increased to 16.0% in the three months ended June 30, 2004 from 14.4% in the three months ended June 30, 2003 due primarily to successful cost reductions and a higher capacity utilization allowing for better absorption of fixed costs.



Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.3 million to $2.4 million in the three months ended June 30, 2004 from $2.1 million in the three months ended June 30, 2003. This was primarily due to an increase in employee benefit expense and sales
commissions.



Operating Income. As a result of the aforementioned
factors, operating income increased $1.6 million to $4.0 million, or 9.9% of net sales, in the three months ended June 30, 2004, from $2.4 million, or 7.6% of net sales in the three months ended June 30, 2003.



Interest Expense. Interest expense decreased $1.0 million to $2.9 million, or 7.2% of
net sales, in the three months ended June 30, 2004 from $3.9 million, or 12.5% of net sales, in the three months ended June 30, 2003, due to lower borrowings.



Other income net.Other income, net, decreased $0.4 million to $0.0 million in the three months ended June 30, 2004 from $0.4 million in the three months ended
June 30, 2003. 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.



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Income Tax Expense. The effective tax rates in the three months ended June 30, 2004 and 2003 were 0.0%. Due to the
fact that we have a full valuation allowance against our deferred tax assets, we did not realize a tax provision for the three months ended June 30, 2004 and June 30, 2003.



Net Income (Loss). As a result of the aforementioned factors, our net income (loss) increased $2.2 million to a net income of $1.1
million in the three months ended June 30, 2004, from a net income (loss) of $(1.1) million in the three months ended June 30, 2003.



Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003



Net Sales. Net sales increased $13.7 million, or 21.1%, to $78.8 million in the six months ended June 30, 2004 from $65.1 million in
the six months ended June 30, 2003.



Sales of our insulation fabrics, used for
high temperature products, increased $3.6 million, or 85.6%, for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 due primarily to new products for the automotive and appliance markets.



Sales of our electronics fabrics used in multi-layer and rigid printed circuit boards, coated
fabrics and specialty electronic tapes increased $3.4 million, or 21.8%, for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 due to a general worldwide improvement in demand for electronic products made with
printed circuit boards.



Sales of composite fabrics, which are used in various
applications including structural aircraft parts and interiors, increased $1.6 million or 7.1%, for the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 due to market share gains.



Sales of our construction fabrics increased $2.1 million, or 109.7%, for the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003 due to a new product introduction, which brings improved performance to the customer product line.



Sales of protective fabrics, which are used in various ballistics applications, increased $5.2 million to $5.2 million from $0.0 million for
the six months ended June 30, 2004 as compared to the six months ended June 30, 2003 due to the development and sale of new products.



Sales of our filtration fabrics used by industrial customers to control emissions into the environment decreased $1.8 million, or 12.5%, for the six months ended June 30,
2004 as compared to the six months ended June 30, 2003. This decrease is due to fewer large volume replacement contracts.



Gross Profit Margins. Gross profit margins increased to 16.5% in the six months ended June 30, 2004 from 14.0% in the six months ended June 30, 200 due to
successful cost reductions and higher capacity utilization allowing for better absorption of fixed costs.



Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.7 million to $4.9 million in the six months ended June 30, 2004 from $4.2 million in the six months ended
June 30, 2003. This was primarily due to an increase in employee benefit expense and sales commissions.



Operating Income. As a result of the aforementioned factors, operating income increased $3.1 million to $8.0 million, or 10.2% of net sales, in the six months ended June 30, 2004, from $4.9 million, or 7.5% of
net sales in the six months ended June 30, 2003.



Interest Expense.
Interest expense decreased $1.8 million to $5.8 million, or 7.3% of net sales, in the six months ended June 30, 2004 from $7.6 million, or 11.7% of net sales, in the six months ended June 30, 2003, due to lower interest rates on outstanding senior
debt combined with lower borrowings.



Other income net.Other income,
net, decreased $0.4 million to $0.0 million in the six months ended June 30, 2004 from $0.4 million in the six months ended June 30, 2003. 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.



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Income Tax Expense. The effective tax rates in the six months ended June 30, 2004 and 2003 were 0.0%. 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, 2004 and June 30, 2003.



Net Income (Loss). As a result of the aforementioned factors, our net income increased $4.6 million to a net income of $2.3 million
in the six months ended June 30, 2004, from a net loss of $2.3 million in the six months ended June 30, 2003.



Balance Sheets



Accounts
Receivable. Accounts receivable increased $4.9 million, or 36.8%, from December 31, 2003 to June 30, 2004. This increase was a result of increased sales. Sales in the six months ended June 30, 2004 were 31.3% greater than sales in the six months
ended December 31, 2003.



Inventory. Inventory increased $3.7 million,
or 16.9%, from December 31, 2003 to June 30, 2004. This was mainly due to an increase in production as a result of increased sales.



Accounts Payable and Accrued Liabilities. Accounts payable and accrued liabilities increased $0.7 million, or 3.6%, from December 31, 2003 to June 30, 2004. This
increase was primarily the result of an increase in accrued employee benefits and property taxes.



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 $95.8 million Senior Subordinated Notes ($94.9 million net of
unamortized discount of $0.9 million), principal and interest payments on the WFF Loan, and the funding of capital expenditures and working capital requirements. There are no mandatory payments of principal on the Senior Subordinated Notes scheduled
prior to their maturity in January 2009. Based upon our current and anticipated levels of operations, we believe, but cannot guarantee, that our cash flows from operations, combined with availability under the WFF financing arrangement, will be
adequate to meet our liquidity needs for the next twelve months. However, this forward-looking statement is subject to risks and uncertainties. See Disclosure Regarding Forward-Looking Statements included below.



On June 6, 2003, we entered into a five-year financing agreement with Wells Fargo Foothill
(WFF) that 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 months. The WFF Loan proceeds are used to finance ongoing working capital, capital expenditures, and general corporate needs and to retire other outstanding debt. The WFF Loan is guaranteed by our parent, Glass Holdings. As of June
30, 2004 and December 31, 2003, amounts outstanding under the WFF Loan totaled $4.7 million and $5.4 million, respectively, consisting only of the term loan. No advances were outstanding under the revolver. The interest rate on the WFF Loan at June
30, 2004 and December 31, 2003 was 5.25% and 5.0%, respectively.



Availability
under the revolver as of June 30, 2004 and August 4, 2004 was $15.7 million and $13.8 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, 2004 and August 4, 2004, the outstanding reserves
totaled $4.9 million and $1.1 million, respectively.



The WFF loan was amended
effective July 2004 and amended the $2.0 million cap on yearly capital expenditures to be set at the lesser of (a) $5.0 million or (b) the last twelve months cumulative EBITDA less $16.0 million times 50% plus $2.0 million.



The fair value of the Senior Subordinated Notes as of June 30, 2004 and December 31, 2003 was
approximately $83.3 million and $71.8 million, respectively.



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. However, our financing agreement with WFF limits our ability to purchase such securities if the securities are trading at greater than 80% of their face value.



Net Cash Provided by (Used In) Operating Activities. Net cash provided by (used in) operating activities for the six months ended
June 30, 2004 was $(1.5) million, compared with $7.6 million in the six months ended June 30, 2003, and was primarily the result of improvements in profitability in 2004 compared to the same period in 2003, an increase in accounts receivables and
inventories as well as receipt of tax refunds of approximately $6.0 million in 2003, offset by other fluctuations in working capital balances.



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Net Cash Used in Investing Activities. Net cash used in investing activities was $0.8 million for the six months
ended June 30, 2004 and was primarily the result of purchases of property, plant and equipment.



Net Cash Used In Financing Activities. Net cash used in financing activities was $0.5 million for the six months ended June 30, 2004, compared with net cash used in financing activities of $0.9 million for the
six months ended June 30, 2003 and was primarily the result of a reduction in the overall indebtedness of the Company.



Outlook for the Remainder of 2004



The following section contains forward-looking statements about our plans, strategies and prospects during the remainder of 2004. 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 important factors that could cause our actual results to differ materially from those contained in any forward-looking statements set forth under, Disclosure Regarding Forward-Looking Statements.



Looking ahead for 2004:



| |  | Sales trends during July and August 2004 increased from the average monthly sales for the same period of 2003. Although no assurances can be given, we believe this continued trend
could be maintained contingent upon the recovery of the electronics markets and our continued efforts to develop and sell products in new markets.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We plan to continue our efforts to maintain a level of inventory during 2004 that is consistent with our level of sales. This could result in increased capacity utilization
resulting in improved gross margins compared to 2003, contingent upon the continued improvement of the electronics market and the sustainability of our sale of new products for the automotive and ballistics industry.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On July 14, 2004, we made our semi-annual interest payment on the Senior Subordinated Notes of $5.0 million and the $3.3 million contribution to our retirement plan. These payments
were made using cash reserves accumulated plus a borrowing of $4.0 million on the WFF revolving credit line.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recent Accounting Pronouncements



There are no
new recent accounting pronouncements that could have an impact on our consolidated financial statements.



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 liquidity needs;
| | - | ---------------------------------------------------------------------------------------------



| |  | 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;
| | - | ------------------------------------------------------------------------------------



| |  | continued movement of electronics industry production outside of North America;
| | - | -------------------------------------------------------------------------------



| |  | general downturns in our markets;
| | - | ---------------------------------



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



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



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



| |  | an easing of 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 financial instruments.
| | - | -----------------------------------------------------------------------------------------------------------------



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 in other reports and registration statements we file with the Securities and Exchange Commission. 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. Our financial instruments are not currently subject to
commodity price risk. We are exposed to market risk related to changes in interest rates on borrowings under our credit facilities. The credit facilities bear interest based on LIBOR or prime. When deemed appropriate, our risk management strategy is
to use derivative financial instruments, such as swaps, to hedge interest rate exposures. We do not enter into derivatives for trading or speculative purposes.



The fair value of the Senior Subordinated Notes as of June 30, 2004 and August 2, 2004 was approximately $83.3 million and $86.2 million, respectively.



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 as of the end of the period covered by 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            |  |                                                                                       
|    |  |                    
|    |  | 10.25               |  | Second Amendment to the Loan and Security Agreement, dated July 30, 2004.             
|    |  |                    
|    |  | 31.1                |  | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|    |  |                    
|    |  | 31.2                |  | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|    | 
|(b) |  | Reports on Form 8-K
|    | 
|    |  | None               





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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. DorierChief Financial Officer(Principal Financial and Accounting Officer)/s/ James R. HendersonJames R. HendersonPresident




Date: August 11, 2004



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