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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31,
2006

Commission file number 333-72321



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BGF INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 56-1600845                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

3802 Robert Porcher Way

Greensboro, N.C. 27410

(Address of principal executive offices) (Zip Code)

336-545-0011

(Registrants telephone number, including area code)

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

NONE

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

NONE



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Indicate by check mark if the Registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.     Yes  x     No ̈

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes  x     No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated
Filer ̈Accelerated Filer ̈Non-Accelerated Filer  x

Indicate by check mark
whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

There is no established trading market for the Common Stock of
the registrant. All shares of Common Stock are held by an affiliate of the registrant. As of March 28, 2007, there were 1,000 shares of common stock outstanding.



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BGF INDUSTRIES, INC.

ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS



|           |  |                                                                                                              |  |         
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --------
|           |  |                                                                                                              |  | Page No.
|PART I.    |  |                                                                                                              |  |         
|Item 1.    |  | Business                                                                                                     |  | 2       
|Item 1A.   |  | Risk Factors                                                                                                 |  | 8       
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 15      
|Item 2.    |  | Properties                                                                                                   |  | 15      
|Item 3.    |  | Legal Proceedings                                                                                            |  | 16      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 16      
|           |  |                                                                                                             
|PART II.   |  |                                                                                                              |  |         
|           |  |                                                                                                             
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17      
|Item 6.    |  | Selected Financial Data                                                                                      |  | 17      
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 18      
|Item 7A.   |  | Quantitative and Qualitative Disclosure About Market Risk                                                    |  | 32      
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 32      
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 32      
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 32      
|Item 9B.   |  | Other Information                                                                                            |  | 33      
|           |  |                                                                                                             
|PART III.  |  |                                                                                                              |  |         
|           |  |                                                                                                             
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 34      
|Item 11.   |  | Executive Compensation                                                                                       |  | 35      
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 39      
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 39      
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |  | 40      
|           |  |                                                                                                             
|PART IV.   |  |                                                                                                              |  |         
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 41      
|           | 
|SIGNATURES |  |                                                                                                             



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EXPLANATORY NOTE

BGF Industries, Inc. (BGF) voluntarily files periodic reports with the SEC solely for the purpose of complying with Section 3.20 of the indenture governing its Senior Subordinated Notes. Because there
are fewer than 300 holders of the Senior Subordinated Notes, the Company is no longer required by the federal securities laws to file such reports. Additionally, because it is not required to file such reports, the Company is not an
issuer for purposes of the Sarbanes-Oxley Act of 2002.

FORWARD-LOOKING STATEMENTS

Some of the information in this Annual 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 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 a limited number of suppliers to provide us with materials and services;
| | - |  | --------------------------------------------------------------------------------------------



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



| |  |  | 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 Item 1A. Risk Factors and the other cautionary
statements we make in this Annual 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.



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PART 1



|Item 1. | Business
|------- | --------

General

Our business focuses on the production of value-added specialty woven fabrics, non-woven fabrics and parts made from glass, carbon, aramid and silica fibers. Our products
are a critical component in the production of a variety of electronic, filtration, composite, insulation, protective, construction and commercial products. Our products are used by our customers to strengthen, insulate and enhance the dimensional
stability of hundreds of products they make for their own customers in various markets, including aerospace, transportation, construction, electronics, power generation and oil refining.

In the course of our normal operations, we are engaged in various related party transactions. See Item 13. Certain Relationships and Related Transactions, and Director Independence.

BGF is a Delaware corporation and is an indirect, wholly owned subsidiary of Porcher Industries, S.A. Our headquarters are located at 3802 Robert Porcher Way,
Greensboro, North Carolina, 27410, and our telephone number is (336) 545-0011. Our website address is http://www.bgf.com. Our website also provides a link to reports and other documents that we file or furnish with the Securities and
Exchange Commission.

Limited Number of Domestic Producers. We are one of a limited number of major domestic manufacturers of woven and non-woven
fiber fabrics. Our major competitors in the global glass fabric weaving industry are Hexcel Corporation, Nitto Boseki (Japan) and Taiwan Glass (Taiwan). We and Hexcel Corporation are the primary manufacturers based in the United States. Direct
imports of glass fiber fabrics into the U.S. have been increasing and the relocation of a large segment of the electronics industry to Asia has reduced demand for domestically produced glass fiber fabrics used in printed circuit boards.

Barriers to Entry. There are a limited number of major global suppliers of glass, carbon and aramid yarns to fabric producers such as BGF, and we have
experienced supply shortages from time to time. Accordingly, we believe that it would be difficult for new competitors to ensure a constant and adequate supply of glass and carbon yarns. Additionally, the process of producing high quality glass
fabric and other high performance fabrics requires extensive technological expertise and research and development capability, both of which require substantial know-how and capital compared to many less complex businesses.

Diversified Markets and Uses. The unique characteristics of our fabrics and parts make them critical components in a variety of products manufactured for sale in
the electronics, composites, filtration, commercial, protective, insulation and construction markets. Within each of these markets, our products have a variety of applications, including:



| |  |  | Printed circuit boards
| | - |  | ----------------------



| |  |  | Helicopter blades
| | - |  | -----------------



| |  |  | Telecommunications equipment
| | - |  | ----------------------------



| |  |  | Filtration bags
| | - |  | ---------------



| |  |  | Roofing materials
| | - |  | -----------------



| |  |  | Heat shields
| | - |  | ------------



| |  |  | Wall coverings
| | - |  | --------------



| |  |  | Welding curtains
| | - |  | ----------------



| |  |  | Aircraft laminates
| | - |  | ------------------



| |  |  | Sporting goods
| | - |  | --------------



| |  |  | Automotive insulation
| | - |  | ---------------------

Lack of Product
Substitutes. For many applications of our products, there are currently a limited number of economical product substitutes, if any. For example, substantially all printed circuit boards for high-end electronics applications use glass fiber
fabrics. The unique properties of glass fiber also make it a critical component in high temperature filtration and insulation products. In many composite products, only glass, carbon and aramid fibers can currently meet the requisite
strength-to-weight ratios.



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Glass fiber fabrics offer an excellent combination of properties, from high strength to fire resistance. Wide ranges of
yarn sizes and weave patterns provide broad design potential, enabling customers to choose the best combination of material performance, economics and product flexibility. Carbon fiber fabrics possess many of the same characteristics of glass fiber
fabrics and provide higher strength and lighter weight in the products in which they are incorporated. Aramid fiber fabrics also share many of the same characteristics as glass fiber fabrics and are lighter in weight and provide greater impact
resistance in the products in which they are incorporated.

Business Strategy

Our goal is to be the preferred supplier to markets that require a technically complex application of woven and non-woven fabrics and parts made of glass, carbon, aramid, and silica yarns. To achieve this goal, we
pursue the following strategies:

Capitalize on the Continued Growth of the Filtration and Composites Markets.We believe opportunities exist to
increase our sales and market share in both the filtration and composites markets. We intend to leverage our already strong position in the high temperature filtration market by developing new high performance fabrics for environmental applications
in power generation, steel mills and other industries that are subject to strict environmental regulations. In addition, we believe that there may be increased opportunities internationally in this market as lesser-developed countries adopt stricter
environmental regulations. We also believe that we have opportunities to increase our sales in the composites market for applications in the transportation industry. In the composites market, we are pursuing strategic relationships with key
suppliers to the aerospace and automobile industries for the design and manufacture of new products.

Expand our Value-Added Production of Insulation
Products. From our base as a manufacturer of non-woven fiberglass materials, we have introduced a number of value-added products that provide thermal and/or acoustical insulation properties. These products are being utilized in the
automotive exhaust and appliance markets. We plan to continue to expand our capabilities in these processes to provide the required solutions for our customers.

Expand Market Share in the Protective Markets.In 2004, we entered into the production of materials for protection of personnel and vehicles from ballistic threats. This is a natural
outgrowth of our manufacturing expertise with fiber glass and aramid fibers. We have successfully supplied materials that are used to produce rigid armor such as that used to protect military vehicles. We have also begun to supply
materials for personal body armor. Demand has been quite strong due to the needs of the military, but we see this area as an ongoing growth opportunity for homeland security as well.

Focus on Profitable Lightweight Fabrics for the Multi-Layer Printed Circuit Board Market. We seek to supply lightweight, specialty fabrics for the multi-layer
printed circuit board market. Our internal strategy is to produce the highest quality, most technically challenging materials. In addition, we have the capability to supplement our production with material produced at Porcher
Industries Asian affiliate.

Develop New Applications for Fabrics.We plan to continue to leverage the technical expertise and experience of
our research and development and sales and marketing staff to develop new applications for existing fabrics and to develop new fabrics that meet customer requirements for strength, weight, fire resistance and durability. We believe that many
opportunities exist to continue to develop both woven and non-woven fabrics to replace traditional materials in markets which have historically not utilized the fabrics we produce.

Products and Markets

We sell our products primarily in the United States and focus on the following markets:

Commercial. Our glass fiber fabrics are used in commercial applications where fire resistance and dimensional stability are critical. Applications
for these products include ceiling tile and acoustical facing fabrics, window coverings and movie screens. These sales represented 4.3% and 5.8% of our net sales in 2006 and 2005, respectively. Sales of our commercial fabrics were $7.7 million and
$8.8 million in 2006 and 2005, respectively. Sales have decreased in this sector as a result of the displacement of glass fabrics by lower cost substitute materials.

Composites. Our glass, carbon and aramid fiber fabrics are used in various applications, including structural aircraft parts and interiors. Net sales of fabrics for composites were $57.3 million in 2006 and
$50.6 million in 2005. These sales represented



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32.3% and 33.1% of our net sales in 2006 and 2005, respectively. This increase is primarily the result of increased purchases of composite fabrics across the
board by North American customers who produce goods for U.S. based aircraft manufacturers.

Construction. The fire resistant qualities of glass
fiber fabrics make them a critical component of products used in the construction industry. Applications for these products include smoke and fire barrier curtains, roofing reinforcement, rubber mat backing and fabric structures, such as commercial
tents and roofs. Sales of our construction fabrics were $9.6 million and $8.1 million in 2006 and 2005, respectively. These sales represented 5.4% and 5.3% of our net sales in 2006 and 2005, respectively. The increase in sales in this sector is due
primarily to improving general economic conditions and increased demand for construction materials.

Electronics. We produce glass fiber fabrics for
multi-layer and rigid printed circuit boards, coated fabrics and electronic tapes for use in the electronics industry. Buyers of our electronic fabrics are primarily based in North America. Sales of glass fabrics to the electronics industry were
$29.9 million in 2006 and $29.4 million in 2005. These sales represented 16.9% and 19.2% of our net sales in 2006 and 2005, respectively. Sales of these fabrics have been adversely affected by the movement of electronic industry production outside
of North America to lower cost manufacturers in Asia who generally purchase fabrics from Asian suppliers and the consolidation of customers in the United States.

Filtration. We produce fabrics for high temperature dust filtration used by industrial customers to control emissions into the environment. Filter bags produced from our fabrics are sold to utilities, producers of asphalt and carbon
black, cement plants and steel mills. Sales of our filtration fabrics were $35.9 million in 2006 and $29.7 million in 2005. These sales represented 20.3% and 19.4% of our net sales in 2006 and 2005, respectively. This increase is due primarily to a
higher value product mix and a price increase.

Insulation.We produce materials for high-temperature, fire-resistant insulation. Applications for
these products include insulation for joints, pipes, valves, transportation exhaust systems, heat shields and home appliances. Sales of our insulation products were $11.1 million and $11.7 million in 2006 and 2005, respectively. These sales
represented 6.3% and 7.7% of our net sales in 2006 and 2005, respectively. The decline in sales of insulation products is due primarily to the completion of a major automotive program.

Protective.We produce protective fabrics that are used in various ballistics applications such as armored vehicles and personal protective armor. Sales of our
protective fabrics were $25.5 million and $14.4 million in 2006 and 2005, respectively. These sales represented 14.4% and 9.4% of our net sales in 2006 and 2005, respectively. This increase is due primarily to increased purchases by customers who
supply the U.S. military.

Sales and Marketing

We sell
our products through an experienced direct sales force of six field sales representatives, four market managers and one inside sales representative. Our sales representatives have specific customer groups, while the market managers are responsible
for specific product lines. The sales representatives are compensated on a salary and commission basis and the market managers are compensated on a salary and bonus basis. Each sales representative has a technical orientation and the necessary
expertise to sell our full line of products. We maintain an Internet web site, located at http://www.bgf.com, which contains extensive product information, as well as a comprehensive B2B capability for our major customers.

Buyers of fabrics rarely, if ever, enter into purchase commitments. Instead, such buyers generally purchase products on an as-needed basis pursuant to purchase orders.
Although some of our customers from time to time may notify us of forecasted needs for future periods, these forecasts are typically incomplete, do not represent firm commitments and, in managements experience, are generally not indicative of
future trends with respect to our sales.

We have over 400 customers, including many leading companies in their respective industry segments, including
Cytec Engineered Materials, GE Energy (formerly BHA), 3M Company, Composix, Saint Gobain, and W. L. Gore and Associates. We continually seek to strengthen and expand our relationships with our customers. Due to the stringent quality, delivery and
performance standards demanded by many of our customers and the ultimate users of our products in various markets, our customers are increasingly moving toward collaborative arrangements among fabric producers, such as BGF, and their own customers.
We believe that we are well positioned to benefit from this trend because of our strong competitive position within the industry, our investment in technical and manufacturing expertise and our long-term relationships with customers and suppliers.
Our markets remain competitive, however, and this competitiveness is exemplified by continual and rapid



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technological change. To effectively compete, we must process and utilize extensive technological and manufacturing capabilities. We could face further
competition if cost effective alternatives to glass, carbon or aramid fiber fabrics are developed.

One of our customers, Cytec Engineered Materials,
accounted for 13.1% and 12.5% of our net sales in 2006 and 2005, respectively. Our top ten customers in 2006 and 2005 accounted for 51.8% and 45.4% of our net sales, respectively.

Industry Segments

We operate in one business segment that manufactures specialty woven fabrics, non-woven fabrics
and parts made from glass, carbon, aramid and silica fibers for use in a variety of industrial and commercial applications. The nature of the markets, products, production processes and distribution methods are similar for substantially all of our
products.

Research and Development

We maintain a
modern, well-equipped research and development facility, located at our headquarters in Greensboro, North Carolina, that divides its efforts among developing new products and improving current products. The research and development facility is
divided into seven state-of-the-art laboratories focusing on the following strategic areas of product development:



| |  |  | Applications and development;
| | - |  | -----------------------------



| |  |  | Pilot processing;
| | - |  | -----------------



| |  |  | Physical testing;
| | - |  | -----------------



| |  |  | Composites development;
| | - |  | -----------------------



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



| |  |  | Analytical testing; and
| | - |  | -----------------------



| |  |  | Filtration technology.
| | - |  | ----------------------

We have several United
States patents, patent applications and trademarks. While we consider our patents to be valuable assets, we do not believe that our competitive position is dependent on patent protection or that our operations are dependent on any individual patent
or group of related patents. However, in some instances, patents and patent protection may serve as a barrier to entry in some of our product lines, such as commercial and insulation. Our policy is to obtain patents on our new products and enforce
our patent rights.

Raw Materials

The principal
materials we use to manufacture our products are glass, aramid and carbon yarns. Our primary yarn suppliers are AGY Holding Corp. (AGY), Cytec Carbon Fibers, Dupont Company and PPG Industries. Advanced Glassfiber Yarns LLC filed for
protection under Chapter 11 of the US Bankruptcy Code on December 10, 2002. On April 2, 2004, AGY Holding Corp. emerged from bankruptcy. We have not experienced any interruptions in our supply of materials from AGY. As part of AGYs
reorganization, AGYs glass yarn operation at our South Hill lightweight fabrics facility was closed effective September 30, 2004 and our supply agreement with AGY, relating to this facility, was terminated. The closing of this facility
has not affected our raw material supply of glass yarn. Porcher Industries, which owns BGF through NVH, Inc., a US holding company, previously owned a 51% interest in Advanced Glassfiber Yarns LLC. In conjunction with AGYs emergence
from bankruptcy in April 2004, 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, which has been extended through 2009, provides BGF with an economic incentive, but not an obligation, to purchase yarn from AGY. On April 7, 2006, AGY Holding Corp was sold to a private equity investment firm. As a result
Porcher Industries no longer retains an interest in AGY Holding Corp.

We have not historically entered into purchase commitments or obligations for raw
materials or other items used in production. Similar to the manner in which our customers purchase goods from us as discussed above under Sales and Marketing, we purchase raw materials on an as-needed basis pursuant to purchase orders
from a number of different suppliers. These purchase orders do not represent an obligation to purchase any raw materials. In fact, ordinary course orders can be cancelled at any time.



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Employees

As of
December 31, 2006, we employed approximately 864 full time and part time employees, 700 of which are hourly employees and 164 of which are paid on a salary basis. All of our employees are located in the United States. None of our employees are
represented by a labor union.

During the first quarter of 2005, we eliminated nine salary positions at our South Hill multi-layer fabrics facility. This
action was taken as a result of the continuing decline in the domestic electronics market, which has resulted in an indefinite suspension of our plan to expand our multi-layer facility in South Hill. This resulted in approximately $0.4 million of
non-recurring severance costs. All of these costs were paid as of September 30, 2005. We recognized savings of approximately $0.6 million during 2006 as a result of the elimination of the salary positions.

Environmental Matters

The Company is in the final phases of an
Environmental Protection Agency (EPA)-supervised self-implementing remediation program at its Altavista facility. The remediation program has been conducted under EPA rules at 40 C.F.R. §761.61, promulgated under the Toxic
Substances Control Act, that set forth self-implementing cleanup standards for certain contamination by polychlorinated biphenyls, or PCBs. PCBs were discovered at the Altavista facility during a 1998 environmental site assessment, and
the EPA was notified. These PCBs were initially identified in the area of the former location of a heat transfer oil tank that the previous owner of the facility had removed before Porcher Industries acquired the Company in 1988. 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, in groundwater, 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 Town of Altavistas water treatment plant. Interim measures were taken in 1999 and 2000, and have been taken periodically since then, to control PCB
migration and minimize exposure.

In 2003, the Company submitted to the EPA a final Site Characterization Report, or SCR, documenting the
assessment of the property and the sites drainage ditch. In May 2004, the EPA approved the SCR. A draft cleanup plan was submitted to the EPA in September 2004 and a final proposed remediation plan was provided to the EPA for its review in
December 2005. The EPA approved the plan in May 2006.

The remediation plan was generally designed to achieve PCB levels in remaining soils within the area
covered by the plan at or below 25 parts per million (ppm), which is consistent with standards set forth in the EPA rules for low occupancy sites. The remediation plan covered property owned by the Company and off-site areas owned by
third parties, including the portion of the drainage ditch running from the property off-site to the western edge of adjacent railroad tracks. The portion of the drainage ditch east of the railroad tracks was not included within the scope of the
voluntary cleanup. Although this eastern portion of the drainage ditch generally exhibited significantly lower PCB levels than were present in the western portion of the drainage ditch, the exclusion of this area means that soils and/or sediments
with PCBs above 25 ppm will remain in this area even after completion of the plan.

The cleanup was divided into a storm water management phase, a soil
remediation phase, and a post-cleanup reconstruction phase. The storm water management phase was completed during the second quarter of 2006. The Company has requested reimbursement from the Town of Altavista for 80% of the costs borne in this
project as the scope of work centers primarily on site utilities. The Town of Altavista has agreed to a total reimbursement of $0.4 million, which is to be paid in equal installments over the next seven years. Payments began in January 2007. A
discounted receivable of $0.3 million has been recorded at December 31, 2006. The soil remediation phase of the cleanup started in November 2006 and was completed in March 2007. The reconstruction phase has begun following completion of the
soil remediation. The Company plans to place deed restrictions on the Altavista property, including restrictions limiting the propertys use consistent with a low occupancy area within the meaning of the EPA rules.

The implementation of the remediation plan has not completely eliminated PCBs from the area subject to the plan; as noted above, the plan is designed to achieve PCB
levels in remaining soils at or below 25 ppm. Further, the remediation plan itself provided for contingencies under which PCBs would remain in place above 25 ppm. While future EPA and/or the Virginia



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Department of Environmental Quality (DEQ) enforcement actions could potentially require further cleanup of the site, the Companys voluntary
remediation program has lessened the likelihood of such enforcement actions.

A reserve of $2.1 million for the environmental issues at the Altavista
facility has been recorded at December 31, 2006 which reflects the accepted bid from the contractor for the soil remediation work of $2.3 million plus estimated additional expenses to be incurred for testing and post-cleanup reconstruction. The
reserve has been reduced by expenses incurred to date. Remediation costs are estimates, subject to the EPAs comments on the remediation plan and to other factors that may arise in the remediation process. Contingencies that may affect the
accuracy of these estimates include:



| |  |  | The portion of the drainage ditch east of the railroad tracks is outside the scope of the self-implemented cleanup. There has been no indication whether the State
or EPA will seek to require the Company to undertake work in this drainage ditch. No cleanup plan or estimate for this work has been developed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The construction estimates are inherently based on assumptions about the total quantity of soil to be removed and disposed, as bids are based on unit costs for
removal, transportation, and disposal. The extensive SCR was used as a basis for estimating quantities of soil to be excavated, transported, and deposited in proper landfills, but verification sampling upon excavation will be necessary and it is
possible that greater quantities of impacted soil than are currently estimated will require removal. Transportation and disposal costs are approximately two-thirds of the estimated cost of the project. Accordingly, a material increase in the
quantity of soil removed in excess of the currently-estimated amounts would correspondingly materially increase the cleanup cost.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Utilities may exist in and around the dig site that could be damaged. While all efforts will be made to avoid damaging utilities, any such damage may cause part or
all work at the plant to be suspended until such utilities can be restored. While not adding greatly to the project cost, the indirect cost of such an interruption through lost revenue could be material.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Completion of the remediation plan has addressed impacted soils at the site but will not preclude possible further action by the EPA under other environmental statutes
and rules or by Virginia. The Company is aware that the DEQ is calculating Total Maximum Daily Loads (TMDLs) for pollutants in water bodies. Samples have been taken for PCBs over large expanses of the Staunton River into which the storm water
discharges. It is not certain whether DEQs sampling may result in additional claims regarding areas downstream of the Companys property including in the portion of the drainage ditch east of the railroad track or in the Staunton River.

In addition, a 1998 Phase Two Environmental Site Assessment at the Cheraw, South Carolina facility revealed reportable levels of 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 Department of Health and Environmental Control (DHEC).
Upon review of the data with DHEC, it was determined that chlorinated solvent residuals constitute the sole remediation concern. With DHEC oversight and approval, the Company is pursuing a Monitored Natural Attenuation strategy, which includes
periodic groundwater monitoring. Work includes semi-annual monitoring and reporting. Recent tests show reduced levels of solvent concentrations. The Company may review the data again with DHEC and recommend reducing the frequency of testing to
annually to reduce costs. No action other than continued monitoring for this facility is anticipated at this time. As of December 31, 2006 and December 31, 2005, the Company had a reserve of $0.1 million for the above-described
environmental issues at the Cheraw facility.

As these environmental cleanups progress, the Company may need to revise the reserves for Altavista and
Cheraw but it is unable to derive a more precise estimate at this time, as actual costs remain uncertain. 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.



7



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|Item 1A. | Risk Factors
|-------- | ------------

Our business operations and financial condition are
subject to various risks. The most significant risks are described below, and you should carefully consider these risks in conjunction with the other information contained in this Annual Report in evaluating us or in deciding whether to trade in our
Senior Subordinated Notes. If any of these risks actually occur, our business, operating results, prospects and financial condition could be harmed.

As a result of our significant debt, we may not be able to meet our obligations or obtain additional financing for capital expenditures or other beneficial activities.

We have substantial outstanding indebtedness. As of December 31, 2006, we had approximately $5.8 million outstanding under our five-year financing agreement with
Wells Fargo Foothill (the WFF Loan), which bears interest at variable rates. The lender under the WFF Loan has a first priority, perfected security interest in our assets.In addition, the original amount of the Senior
Subordinated Notes issued was $100.0 million, of which $83.9 million in face amount before discount remains outstanding as of December 31, 2006. The Senior Subordinated Notes bear an interest rate of 10.25%.

The indenture governing the Senior Subordinated Notes does not prohibit us from incurring substantial additional indebtedness. We can incur additional indebtedness if
our consolidated fixed charge coverage ratio is greater than 2.0 to 1.0. We may also incur up to $5.0 million of capitalized lease obligations and purchase money indebtedness and up to $5.0 million of other indebtedness regardless of our
consolidated fixed charge coverage ratio. If we add new debt to our current debt levels, the related risks that we now face could intensify.

Our
substantial indebtedness creates significant risks, including, but not limited to, the following:



| |  |  | we use a substantial portion of our cash flow from operations to pay principal and interest on our debt, which reduces the funds available for working capital,
capital expenditures, acquisitions, research and development and other general corporate purposes;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our indebtedness may limit our ability to obtain additional financing and to otherwise fund working capital, capital expenditures, acquisitions, research and
development, and other general corporate requirements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our level of indebtedness may make us more vulnerable to economic downturns and may limit our ability to withstand competitive pressures;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our variable-rate debt will result in higher debt service requirements if market interest rates increase; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | our failure to comply with the financial and other covenants applicable to our debt could result in an event of default, which, if not cured or waived, could have a
material adverse effect on us.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may not be able to generate sufficient cash flow to meet our debt obligations, including making
required payments on the Senior Subordinated Notes.

We have $83.9 million principal balance of outstanding Senior Subordinated Notes as of
December 31, 2006. We have reduced the total principal amount of our outstanding debt from $112.6 million at December 31, 2001 to $89.7 million at December 31, 2006. This $22.9 million reduction in outstanding principal debt balances
was funded through $16.2 million in non-recurring tax refunds in 2002 and 2003 and $6.7 million of cash flows from operations throughout the five-year period.

Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive and business
factors, many of which are outside of our control. If we do not generate sufficient cash flow from operations to satisfy our debt obligations, including payments on the Senior Subordinated Notes, we may have to undertake alternative financing plans,
such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold, or, if sold,
of the timing of the sales and the amount of proceeds realized from those sales, or that additional financing could be obtained on acceptable terms, if at all, or would be permitted under the terms of our various debt instruments then in effect. Our
inability to generate sufficient cash flow to



8



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satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial
condition and results of operations, as well as on our ability to satisfy our obligations on the Senior Subordinated Notes.

At maturity on
January 15, 2009, the entire outstanding principal amount of the Senior Subordinated Notes becomes due and payable by us. We have not reserved funds nor do we expect to generate sufficient cash flow from operations to repay the Senior
Subordinated Notes when they mature. We expect that our ability to repay the Senior Subordinated Notes at their scheduled maturity will be dependent in whole or in part on refinancing all or a portion of the Senior Subordinated Notes before they
mature. We cannot assure you that we will be able to arrange for additional financing on favorable terms, if at all, to pay the principal amount at maturity or the repurchase price when due.

Because the WFF Loan is senior to and will mature prior to the Senior Subordinated Notes, we may not have enough assets left to pay the holders of our Senior
Subordinated Notes.

Before paying principal and interest on the Senior Subordinated Notes, we must first make payments on any of our existing and
future senior debt that is in default, including all outstanding amounts under the WFF Loan. All of our real and personal property secures our obligations under the WFF Loan. If we default on any payments required under the WFF Loan, the lender
could declare all amounts outstanding, together with accrued and unpaid interest, immediately due and payable. If we are unable to repay the amounts due, the lender could proceed against the collateral securing the debt. If the lender proceeds
against any of the collateral, we may not have enough assets left to pay the holders of the Senior Subordinated Notes. Moreover, if we become bankrupt or similarly reorganize, we may not be able to use our assets to pay such holders until after we
repay all of our senior debt, including all indebtedness under the WFF Loan. In addition, the WFF Loan may prohibit us from paying amounts due on the Senior Subordinated Notes, or from purchasing, redeeming or otherwise acquiring the Senior
Subordinated Notes, if a default exists under the WFF Loan.

Further, our requirement to repay or refinance the WFF Loan before the maturity date of the
Senior Subordinated Notes will adversely affect our ability to repay, repurchase or refinance the Senior Subordinated Notes on or before their maturity date. The WFF Loan matures on the earlier of February 28, 2010 or the date that is 180 days
prior to the maturity date of the Senior Subordinated Notes. Because the Senior Subordinated Notes are scheduled to mature on January 15, 2009, we expect to be required to refinance the WFF Loan no later than July 18, 2008. We have not
reserved funds nor do we expect to generate sufficient cash flow from operations to repay amounts outstanding under the WFF Loan by July 18, 2008. Even if we are able to refinance the WFF Loan, lenders and other financial institutions may
thereafter be less willing to provide capital to us on favorable terms, if at all, to refinance the Senior Subordinated Notes.

The indenture
governing the Senior Subordinated Notes limits our ability to incur additional debt, transfer or sell assets, and merge or consolidate.

The
indenture governing the Senior Subordinated Notes contains a number of significant covenants that may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our best
interests. These covenants could limit or restrict our ability to:



| |  |  | incur additional debt;
| | - |  | ----------------------



| |  |  | repurchase securities;
| | - |  | ----------------------



| |  |  | make investments;
| | - |  | -----------------



| |  |  | create liens;
| | - |  | -------------



| |  |  | transfer or sell assets;
| | - |  | ------------------------



| |  |  | enter into transactions with affiliates;
| | - |  | ----------------------------------------



| |  |  | issue or sell stock of subsidiaries; or
| | - |  | ---------------------------------------



| |  |  | merge or consolidate.
| | - |  | ---------------------

These limitations and
restrictions may adversely affect our ability to finance our future operations or capital needs or engage in other business activities, which may be in our best interests.



9



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The WFF Loan may prevent us from satisfying our obligations under the Senior Subordinated Notes.

Effective December 1, 2006, the WFF Loan requires us to generate at least $15.0 million of EBITDA during each trailing 12-month period.
Events beyond our control may prevent us from complying with this requirement. If we breach any of the covenants in the WFF Loan, or if we are unable to comply with the minimum EBITDA requirement, we may be in default under the WFF Loan. If we
default under the WFF Loan, the lender can declare all borrowings outstanding, including accrued interest and other fees, due and payable. If we use all of our available cash to repay borrowings under the WFF Loan, we may not be able to make
payments on the Senior Subordinated Notes.

Market downturns could reduce the demand for our products.

We sell our products for use in a wide range of applications in the electronics, composites, filtration, commercial, insulation and construction markets. Any downturn in
these markets, which are susceptible to cyclical and general economic downturns, would reduce demand for our products. A reduction in the overall demand will likely result in increased competition for customers. If we fail to meet satisfactorily the
challenges of increased competition, our business, financial condition and results of operations could be adversely affected.

In addition, since we sell
our products primarily in the United States, economic conditions in the U.S., particularly in sectors such as the automotive, electronics, construction and aviation industries, will significantly affect our revenues for the foreseeable future. In
particular, the growth in military-related production that has occurred in recent years may not be sustained, production may not continue to grow and the increased demand for replacement equipment as a result of the military activities in
Afghanistan and Iraq may not be sustained. The production of military items depends upon U.S. defense budgets and the related demand for defense and related equipment. Defense budgets may decline, and sales of products used in defense and related
equipment may not continue at expected levels.

We compete in highly competitive markets and recent competition from Asia has reduced demand for our
electronic glass fiber fabrics and increased supply, which could result in lower sales.

The markets in which we compete are highly competitive and
some of our competitors may have greater financial and other resources than we do. We cannot assure you that we will be able to continue to compete effectively in the future or that other competitors will not enter the markets in which we compete.

We believe that the principal competitive factors affecting our markets include the:



| |  |  | quality, performance, price and consistency of products;
| | - |  | --------------------------------------------------------



| |  |  | responsiveness to customer requirements; and
| | - |  | --------------------------------------------



| |  |  | ability to maintain customer relationships.
| | - |  | -------------------------------------------

Direct
imports of glass fiber fabrics into the U.S. have been increasing and the relocation of a large segment of the electronics industry to Asia has reduced demand for domestically produced glass fiber fabrics used in printed circuit boards. This
movement of production outside of North America could continue to reduce demand for certain types of our products, particularly electronic fabrics, by our U.S. manufacturing customers. Increased competition from Asian producers, particularly in
heavyweight glass fiber fabrics for the electronics market, has also resulted from:



| |  |  | their increased vertical integration of glass yarn manufacturing and weaving operations;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | greater price competition due to currency fluctuations; and
| | - |  | -----------------------------------------------------------



| |  |  | their increased heavyweight manufacturing capacity.
| | - |  | ---------------------------------------------------

From time to time, our industry also experiences excess manufacturing capacity, which results in excessive supply of our products. During these periods when supply exceeds demand, pricing for our products tends to fall and results in lower
revenues and lower profitability. See Managements Discussion and Analysis of Financial Condition and Results of Operations and BusinessCompetition.



10



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Our operating performance is dependent upon a limited number of customers. A decrease in business from major
customers could reduce cash available to make required payments under the Senior Subordinated Notes.

A decrease in business from, or the loss of,
one or more of our major customers could have a material adverse effect on our business, financial condition and results of operations. Our customers are not contractually required to purchase any of our products and may terminate their relationship
with us at any time.

In addition, our future business, financial condition and results of operations will depend to a significant extent upon the
commercial success of our major customers and their continued willingness to purchase our products. Any significant downturn in the business of our major customers could cause them to reduce or discontinue their purchases from us. This could have a
material adverse effect on our business, financial condition and results of operations. See BusinessSales and Marketing.

If we are
not able to keep up with technological advances in the markets we serve or if our competitors introduce cost-effective alternatives to our products, we could experience declining sales or a loss of customers.

We cannot assure you that we will be able to maintain our current technological position. Rapid technological advances in the markets we serve place rigorous demands on
the weight, quality and consistency of our products. For example, technological changes in the printed circuit board industry are rapid and continuous and require extensive technological and manufacturing capability and expertise. In addition, we
could face increased competition if cost-effective alternatives to glass, carbon or aramid fiber fabrics are developed. If competitors develop and introduce cost-effective alternatives to our products or if we do not anticipate and respond to
technological changes, our business, financial condition and results of operations could suffer a material adverse effect.

Our products may
be viewed as commodities by our customers, which could lead to increased competition from foreign manufacturers.

Some of our products,
particularly electronic fabrics, are viewed as commodities by our customers. These products face increased competition from foreign manufacturers, particularly in Asia, that can manufacture similar products that are competitive with ours at
significantly lower costs. Furthermore, it is becoming increasingly difficult to push prices higher with respect to these products, which reduces our overall revenues and results in lower profitability, particularly as our operating costs continue
to rise. While this commoditization trend is generally limited to our electronic fabrics currently, we expect that some of our other products will be viewed in the future as commodities as Asian manufacturers ramp up production of these other goods,
which will also put further pricing pressure on our overall sales.

In-sourcing of fabric manufacturing by our customers would reduce the demand for
our products.

Some of our existing or former customers have reduced their purchases of our products by satisfying their fabric needs with
in-sourced manufacturing. For example, one significant customer for major appliance applications accounted for approximately 17% of sales of our insulation fabrics in 2004. This customer reduced its purchases by approximately 60% in 2005 after
undertaking to satisfy some of its fabric needs with in-sourced manufacturing, which had the effect of significantly reducing our sales of insulation fabrics in 2005. Similar in-sourcing by other customers would reduce the overall demand for our
products and result in lower net income.

We may experience a decline in the supply of raw materials, which means we could have to pay higher prices
for raw materials or we could be delayed in making our products.

We do not have long-term contracts with most of our suppliers for the delivery of
glass, aramid or carbon yarns and our suppliers can stop selling us glass, aramid and carbon yarns at anytime. As part of the ownership restructuring, Porcher Industries entered into a supply agreement with AGY in which we have an incentive but are
under no obligation to purchase yarn from AGY. However, under this contract, AGY has no obligation to supply us with the requested quantities of raw materials. If our suppliers are unable or unwilling to deliver us glass, aramid or carbon yarns, we
could experience production delays, which could, in turn, cause a material adverse affect in our business, financial condition and results of operations. We cannot assure you that glass, carbon and aramid yarns will continue to be available or that
they will be available at prices that will not have a material adverse effect on our profitability. Additionally, any inability to pass through increases in the cost of yarn to our customers would have a material adverse effect on our business,
financial condition and results of operations.



11



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We will incur substantial costs with respect to our ongoing environmental cleanup projects and monitoring projects
at our Altavista and Cheraw facilities, which will reduce our cash available to make required payments under our Senior Subordinated Notes.

The
Company is in the final phases of an Environmental Protection Agency (EPA)-supervised self-implementing remediation program at its Altavista facility. The remediation program has been conducted under EPA rules at 40 C.F.R. §761.61,
promulgated under the Toxic Substances Control Act, that set forth self-implementing cleanup standards for certain contamination by polychlorinated biphenyls, or PCBs. PCBs were discovered at the Altavista facility during a 1998
environmental site assessment, and the EPA was notified. These PCBs were initially identified in the area of the former location of a heat transfer oil tank that the previous owner of the facility had removed before Porcher Industries acquired the
Company in 1988. 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, in groundwater, 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 Town of Altavistas water treatment plant. Interim measures were taken in 1999 and 2000, and have been taken
periodically since then, to control PCB migration and minimize exposure.

In 2003, the Company submitted to the EPA a final Site Characterization Report,
or SCR, documenting the assessment of the property and the sites drainage ditch. In May 2004, the EPA approved the SCR. A draft cleanup plan was submitted to the EPA in September 2004 and a final proposed remediation plan was
provided to the EPA for its review in December 2005. The EPA approved the plan in May 2006.

The remediation plan was generally designed to achieve PCB
levels in remaining soils within the area covered by the plan at or below 25 parts per million (ppm), which is consistent with standards set forth in the EPA rules for low occupancy sites. The remediation plan covered property owned by
the Company and off-site areas owned by third parties, including the portion of the drainage ditch running from the property off-site to the western edge of adjacent railroad tracks. The portion of the drainage ditch east of the railroad tracks was
not included within the scope of the voluntary cleanup. Although this eastern portion of the drainage ditch generally exhibited significantly lower PCB levels than were present in the western portion of the drainage ditch, the exclusion of this area
means that soils and/or sediments with PCBs above 25 ppm will remain in this area even after completion of the plan.

The cleanup was divided into a storm
water management phase, a soil remediation phase, and a post-cleanup reconstruction phase. The storm water management phase was completed during the second quarter of 2006. The Company has requested reimbursement from the Town of Altavista for 80%
of the costs borne in this project as the scope of work centers primarily on site utilities. The Town of Altavista has agreed to a total reimbursement of $0.4 million, which is to be paid in equal installments over the next seven years. Payments
began in January 2007. A discounted receivable of $0.3 million has been recorded at December 31, 2006. The soil remediation phase of the cleanup started in November 2006 and was completed in March 2007. The reconstruction phase has begun
following completion of the soil remediation. The Company plans to place deed restrictions on the Altavista property, including restrictions limiting the propertys use consistent with a low occupancy area within the meaning of the
EPA rules.

The implementation of the remediation plan has not completely eliminated PCBs from the area subject to the plan; as noted above, the plan is
designed to achieve PCB levels in remaining soils at or below 25 ppm. Further, the remediation plan itself provided for contingencies under which PCBs would remain in place above 25 ppm. While future EPA and/or the Virginia Department of
Environmental Quality (DEQ) enforcement actions could potentially require further cleanup of the site, the Companys voluntary remediation program has lessened the likelihood of such enforcement actions.

A reserve of $2.1 million for the environmental issues at the Altavista facility has been recorded at December 31, 2006 which reflects the accepted bid from the
contractor for the soil remediation work of $2.3 million plus estimated additional expenses to be incurred for testing and post-cleanup reconstruction. The reserve has been reduced by expenses incurred to date. Remediation costs are estimates,
subject to the EPAs comments on the remediation plan and to other factors that may arise in the remediation process. Contingencies that may affect the accuracy of these estimates include:



| |  |  | The portion of the drainage ditch east of the railroad tracks is outside the scope of the self-implemented cleanup. There has been no indication whether the State
or EPA will seek to require the Company to undertake work in this drainage ditch. No cleanup plan or estimate for this work has been developed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



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| |  |  | The construction estimates are inherently based on assumptions about the total quantity of soil to be removed and disposed, as bids are based on unit costs for
removal, transportation, and disposal. The extensive SCR was used as a basis for estimating quantities of soil to be excavated, transported, and deposited in proper landfills, but verification sampling upon excavation will be necessary and it is
possible that greater quantities of impacted soil than are currently estimated will require removal. Transportation and disposal costs are approximately two-thirds of the estimated cost of the project. Accordingly, a material increase in the
quantity of soil removed in excess of the currently-estimated amounts would correspondingly materially increase the cleanup cost.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Utilities may exist in and around the dig site that could be damaged. While all efforts will be made to avoid damaging utilities, any such damage may cause part or
all work at the plant to be suspended until such utilities can be restored. While not adding greatly to the project cost, the indirect cost of such an interruption through lost revenue could be material.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Completion of the remediation plan has addressed impacted soils at the site but will not preclude possible further action by the EPA under other environmental statutes
and rules or by Virginia. The Company is aware that the DEQ is calculating Total Maximum Daily Loads (TMDLs) for pollutants in water bodies. Samples have been taken for PCBs over large expanses of the Staunton River into which the storm water
discharges. It is not certain whether DEQs sampling may result in additional claims regarding areas downstream of the Companys property including in the portion of the drainage ditch east of the railroad track or in the Staunton River.

In addition, a 1998 Phase Two Environmental Site Assessment at the Cheraw, South Carolina facility revealed reportable levels of 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 Department of Health and Environmental Control (DHEC).
Upon review of the data with DHEC, it was determined that chlorinated solvent residuals constitute the sole remediation concern. With DHEC oversight and approval, the Company is pursuing a Monitored Natural Attenuation strategy, which includes
periodic groundwater monitoring. Work includes semi-annual monitoring and reporting. Recent tests show reduced levels of solvent concentrations. The Company may review the data again with DHEC and recommend reducing the frequency of testing to
annually to reduce costs. No action other than continued monitoring for this facility is anticipated at this time. As of December 31, 2006 and December 31, 2005, the Company had a reserve of $0.1 million for the above-described
environmental issues at the Cheraw facility.

As these environmental cleanups progress, the Company may need to revise the reserves for Altavista and
Cheraw but it is unable to derive a more precise estimate at this time, as actual costs remain uncertain. 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.

We may be responsible for safety and health costs that could adversely affect our business, financial condition and results of operations and result in less cash available to make required payments under the Senior Subordinated Notes.

Laws and requirements relating to workplace safety and worker health govern our operations. These laws and requirements establish formaldehyde,
asbestos and noise standards and regulate the use of hazardous chemicals in the workplace. We cannot assure you that future laws and requirements, ordinances or regulations will not give rise to compliance or remediation capital expenditures which
could have a material adverse effect on our business, financial condition and results of operations.

Our operations are subject to various hazards
that may cause personal injury or property damage and increase our operating costs.

Our plant personnel are subject to the hazards associated with
manufacturing, moving and storing large quantities of heavy materials. Operating hazards can cause personal injury or loss of life, damage to or destruction of property, plant and equipment and environmental damage. Although we conduct training
programs designed to reduce the risks of these occurrences, we cannot eliminate these risks. We maintain insurance coverage in amounts and against the risks we believe accord with industry practice, but this insurance may not be adequate to cover
all losses or liabilities we may incur in our operations, and we may not be able to maintain insurance of the types or at levels we deem necessary or adequate or at rates we consider reasonable. A partially or completely uninsured claim, if
successful and of sufficient magnitude, could have a material adverse effect on our financial



13



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condition. Although we maintain insurance policies, those policies are subject to varying levels of deductibles. Losses up to the deductible amounts are
accrued based upon our estimates of the ultimate liability for claims incurred and an estimate of claims incurred but not reported. However, insurance liabilities are difficult to assess and estimate due to unknown factors, including the severity of
an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety program. If we were to experience insurance claims or costs above our estimates, our business
could be materially and adversely affected.

Anticipated increased health care expenses will reduce our future net income.

Based on publicly available data, we currently expect health care costs to increase significantly for the foreseeable future, which will further increase our general and
administrative costs and reduce our net income. Furthermore, because the average age of our employees and other covered persons is generally higher than other companies, we believe that the Company may be potentially exposed to relatively higher
health care costs each year, particularly to the extent we are responsible for covering catastrophic health care costs up to the maximum annual coverage of $0.1 million per covered person. In addition, because we have a relatively small number of
employees and a limited amount of annual net income, the occurrence of even a small amount of such catastrophic costs during any period would have a magnifying adverse impact on our net income during such period. As a result of the foregoing, even
though we have undertaken and will continue to undertake a variety of measures to control increased health care costs, it is likely that our net income will decline in the future due to such expected increased costs unless otherwise offset by
increased revenues or lower costs in other areas.

Anticipated increases in the funding requirements of our pension plan will reduce our future net
income and liquidity.

Substantially all of our eligible employees have also elected to participate in our defined benefit pension plan. Because
pension obligations are ultimately settled in future periods, the determination of our annual pension expense and pension liabilities is subject to estimates and assumptions, such as the discount rate, which are reviewed annually and are based on
current rates and trends. Due to historically low interest rates, we have had to make higher cash contributions to maintain the funded status of this plan. We expect this trend may continue in the future, which we would fund using cash flows from
operations or borrowings under the WFF Loan. We cannot predict whether investment returns will be sufficient to fund all of our future retirement benefits. To the extent our pension plan assets are not sufficient to fund future retirement benefits
for our employees, the average age of which is relatively higher than other companies, we would be required to fund any shortfall using cash generated by our operations. Furthermore, at any time, the federal laws governing pension plans or the
administrative interpretations of those laws may be amended in a manner that could increase our pension plan costs and liabilities.

Ongoing
compliance with increasingly complex regulations governing companies that make voluntary filings with the SEC will likely increase our future selling, general and administrative expenses.

The indenture governing our Senior Subordinated Notes requires us to make filings with the SEC even though we otherwise would not be required to do so. As a result, we
regularly incur many of the same legal, accounting and other related costs incurred by larger public companies to ensure compliance with the rules and regulations of the SEC and other applicable legislation. Because our overall revenues are
relatively lower than such other large companies, such administrative costs tend to have a disproportionate impact on our profit margins. These costs will likely increase in the future, particularly if voluntary filers such as us are required to
evaluate the effectiveness of our internal control over financial reporting and obtain a related report and attestation from our independent auditor.

We may have conflicts of interest with our controlling equity holder that could result in changes in our business that could adversely affect our financial condition and results of operations.

We are a wholly owned subsidiary of Porcher Industries, S.A. through NVH, Inc., a U.S. holding company. We have ongoing financial, managerial and commercial agreements
and arrangements with Porcher Industries, NVH, Inc. and wholly-owned subsidiaries of NVH, Inc., including Glass Holdings LLC, as well as other affiliates of Porcher Industries. The Porcher family, which controls Porcher Industries, has the power to
elect all of our directors and appoint new management. Consequently, the Porcher family has the ability to control our policies and operations. The Porcher family also controls companies in Europe and Asia, which manufacture products competitive to
ours. Further, subject to compliance with applicable provisions of the indenture, we may enter into transactions with Porcher Industries or its affiliates that could conflict with the interests of holders of the Senior Subordinated Notes.



14



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|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|Item 2. | Properties
|------- | ----------

We own and/or lease four manufacturing facilities, a
research and development facility, corporate offices, a distribution center and several warehouses. We believe that these facilities are suitable for manufacturing the products we offer and have capacities appropriate to meet existing production
requirements. The following table sets forth a description of our facilities as of December 31, 2006.



|                              |  |                                                 |  |              |  |                
|----------------------------- |  | ----------------------------------------------- |  | ------------ |  | ---------------
|Facility                      |  | Use                                             |  | Est. Sq. Ft. |  | Leased or Owned
|Greensboro, North Carolina(1) |  | Headquarters; Research and Development facility |  | 36,000       |  | Leased         
|Altavista, Virginia           |  | Weaving glass fiber and aramid fibers           |  | 399,000      |  | Owned          
|South Hill, Virginia(2)       |  | Weaving heavyweight glass fibers                |  | 147,000      |  | Owned          
|South Hill, Virginia(3)       |  | Weaving lightweight glass fibers                |  | 264,000      |  | Owned          
|Cheraw, South Carolina        |  | Weaving carbon fibers                           |  | 76,000       |  | Owned          
|Altavista, Virginia           |  | Warehouse                                       |  | 101,000      |  | Leased         
|Altavista, Virginia(4)        |  | Warehouse and manufacturing non-woven           |  | 251,000      |  | Leased         
|Altavista, Virginia(5)        |  | Warehouse                                       |  | 18,350       |  | Leased         
|Los Angeles, California       |  | Warehouse                                       |  | 20,000       |  | Leased         

---

|(1) | In November 2002, we sold this building and entered into a lease agreement. Under this lease agreement, we have an option to repurchase this facility.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In October 2002, we closed this heavyweight fiber fabrics facility and consolidated operations with our South Hill, Virginia lightweight fiber fabrics facility. In September 2004,
we designated the land and building at this facility as an asset held for sale. These assets have a net book value as of December 31, 2006 and December 31, 2005 of $0.3 million and have been reclassified as other current assets.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | This lightweight fiber fabrics facility includes an unfinished 136,000-square foot building. In the fourth quarter of 2005, we determined that there is no actual useful life of this
building because we are very unlikely to finish and use this building. Further, we do not believe that potential buyers could be found as a result of the location of the building and the fact that it is unfinished. As a result, we have depreciated
this asset to its estimated residual value of $0.4 million. The residual value is based on an appraisal obtained from a third party. The effect of this change in estimate, based on a net book value of $5.3 million prior to the adjustment, was to
increase depreciation expense in the fourth quarter 2005 by $4.9 million and decrease gross profit and operating income in the fourth quarter by $4.9 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In October 2003, we entered into a lease in Altavista, Virginia for additional warehousing space. In 2004, we converted part of this space into a new manufacturing facility in order
to expand capacity for our non-woven fabric products. We have consolidated several of our other leased warehouses into this new warehouse.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | In March 2006, we entered into a lease in Altavista, Virginia for additional warehousing space on a temporary basis to store cloth while new shelving was being installed. The lease
is on a month-to-month basis and we are expected to lease the space until August 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15



---

|Item 3. | Legal Proceedings
|------- | -----------------

We are a party to various legal proceedings
arising in the ordinary course of business. None of these proceedings are expected to have a material adverse effect on our business, financial condition, liquidity or results of operations. See also Item 1. BusinessEnvironmental
Matters.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



16



---

PART II



|Item 5. | Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
|------- | -------------------------------------------------------------------------------------------------------------

There is no established trading market for BGFs common stock. All shares of BGFs issued and outstanding common stock are held by NVH, Inc., which is a wholly
owned subsidiary of Nouveau Verre Holdings, Inc., which is a wholly owned subsidiary of Porcher Industries, S.A.

We did not declare any dividends or make
any distributions on our common stock in 2006. Further, we have no commitment or current plans to make dividends or other distributions in 2007 and our financing obligations restrict our ability to pay dividends or other distributions.

We have no equity compensation plans and have not repurchased any of our equity securities.



|Item 6. | Selected Financial Data
|------- | -----------------------

The following table sets forth certain
selected financial information derived from our audited consolidated financial statements for the five-year period ended December 31, 2006. The table should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations, and our financial statements and related notes and other financial information included elsewhere in this Report.



|                                                                         |  |                  |         |   |                  |   |         |                  |  |                  |         |  |                  |         |   |  |   |          |  
|------------------------------------------------------------------------ |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | ---------------- | ------- |  | ---------------- | ------- | - |  | - | -------- | -
|                                                                         |  | December 31,2006 |         |   | December 31,2005 |   |         | December 31,2004 |  | December 31,2003 |         |  | December 31,2002 |        
|                                                                         |  | (in thousands)   |        
|Statement of Operations Data:                                            |  |                  |         |   |                  |   |         |                  |  |                  |         |  |                  |         |   |  |   |          |  
|Net sales                                                                |  | $                | 177,372 |   |                  | $ | 152,904 |                  |  | $                | 155,842 |  | $                | 125,097 |   |  | $ | 130,862  |  
|Cost of goods sold(1)                                                    |  |                  | 148,077 |   |                  |   | 136,275 |                  |  |                  | 130,197 |  |                  | 107,459 |   |  |   | 128,418  |  
|                                                                         |  |                  |         |   |                  |   |         |                  |  |                  |         |  |                  |         |   |  |   |          |  
|Gross profit                                                             |  |                  | 29,295  |   |                  |   | 16,629  |                  |  |                  | 25,645  |  |                  | 17,638  |   |  |   | 2,444    |  
|Selling, general and administrative expenses                             |  |                  | 12,146  |   |                  |   | 10,161  |                  |  |                  | 10,743  |  |                  | 8,469   |   |  |   | 13,765   |  
|Restructuring charges(2)                                                 |  |                  |        |   |                  |   |        |                  |  |                  |        |  |                  |        |   |  |   | 250      |  
|Asset impairment charge                                                  |  |                  | 367     |   |                  |   |        |                  |  |                  | 712     |  |                  |        |   |  |   | 5,816    |  
|                                                                         |  |                  |         |   |                  |   |         |                  |  |                  |         |  |                  |         |   |  |   |          |  
|Operating income (loss)                                                  |  |                  | 16,782  |   |                  |   | 6,468   |                  |  |                  | 14,190  |  |                  | 9,169   |   |  |   | (17,387  | )
|Interest expense                                                         |  |                  | 11,029  |   |                  |   | 11,333  |                  |  |                  | 12,025  |  |                  | 13,812  |   |  |   | 13,926   |  
|Other (income) loss, net                                                 |  |                  | (1,804  | ) |                  |   | 40      |                  |  |                  | 268     |  |                  | (1,207  | ) |  |   | 97,699   |  
|                                                                         |  |                  |         |   |                  |   |         |                  |  |                  |         |  |                  |         |   |  |   |          |  
|Income (loss) before taxes and cumulative change in accounting principle |  |                  | 7,557   |   |                  |   | (4,905  | )                |  |                  | 1,897   |  |                  | (3,436  | ) |  |   | (129,012 | )
|Income tax expense                                                       |  |                  | 596     |   |                  |   | 30      |                  |  |                  | 16      |  |                  |        |   |  |   | 6,835    |  
|                                                                         |  |                  |         |   |                  |   |         |                  |  |                  |         |  |                  |         |   |  |   |          |  
|Income (loss) before effect of cumulative change in accounting principle |  |                  | 6,961   |   |                  |   | (4,935  | )                |  |                  | 1,881   |  |                  | (3,436  | ) |  |   | (135,847 | )
|Cumulative effect of change in accounting principle                      |  |                  |        |   |                  |   |        |                  |  |                  |        |  |                  |        |   |  |   | (4,726   | )
|                                                                         |  |                  |         |   |                  |   |         |                  |  |                  |         |  |                  |         |   |  |   |          |  
|Net income (loss)                                                        |  | $                | 6,961   |   |                  | $ | (4,935  | )                |  | $                | 1,881   |  | $                | (3,436  | ) |  | $ | (140,573 | )
|                                                                         |  |                  |         |   |                  |   |         |                  |  |                  |         |  |                  |         |   |  |   |          |  



17



---

|                                      |  |                  |         |   |                  |   |         |                  |  |   |                  |   |  |                  |         |   |  |   |         |  
|------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ---------------- | - |  | ---------------- | ------- | - |  | - | ------- | -
|                                      |  | December 31,2006 |         |   | December 31,2005 |   |         | December 31,2004 |  |   | December 31,2003 |   |  | December 31,2002 |        
|                                      |  | (in thousands)   |        
|Other Data:                           |  |                  |         |   |                  |   |         |                  |  |   |                  |   |  |                  |         |   |  |   |         |  
|Depreciation and amortization(3)      |  | $                | 4,765   |   |                  | $ | 10,018  |                  |  | $ | 5,494            |   |  | $                | 6,039   |   |  | $ | 8,240   |  
|Capital Expenditures                  |  |                  | 3,028   |   |                  |   | 2,644   |                  |  |   | 2,442            |   |  |                  | 1,985   |   |  |   | 1,681   |  
|Cash flows from operating activities  |  |                  | 9,531   |   |                  |   | 7,242   |                  |  |   | 1,132            |   |  |                  | 8,356   |   |  |   | 9,619   |  
|Cash flows from investing activities  |  |                  | (2,679  | ) |                  |   | (2,291  | )                |  |   | (2,395           | ) |  |                  | (1,956  | ) |  |   | (1,094  | )
|Cash flows from financing activities  |  |                  | (3,208  | ) |                  |   | (4,951  | )                |  |   | (2,701           | ) |  |                  | (3,607  | ) |  |   | (7,376  | )
|Ratio of earnings to fixed charges(4) |  |                  | 1.7     | x |                  |   |        |                  |  |   | 1.2              | x |  |                  |        |   |  |   |        |  
|                                      |  |                  |         |   |                 
|Balance sheet data (at period end):   |  |                  |         |   |                  |   |         |                  |  |   |                  |   |  |                  |         |   |  |   |         |  
|Total assets                          |  | $                | 83,654  |   |                  | $ | 77,510  |                  |  | $ | 89,944           |   |  | $                | 89,328  |   |  | $ | 95,511  |  
|Current debt(5)                       |  |                  | 1,200   |   |                  |   | 4,200   |                  |  |   | 7,700            |   |  |                  | 1,200   |   |  |   | 111,356 |  
|Long-term debt(5)                     |  |                  | 88,100  |   |                  |   | 87,255  |                  |  |   | 88,982           |   |  |                  | 98,968  |   |  |   |        |  
|Total debt                            |  |                  | 89,300  |   |                  |   | 91,455  |                  |  |   | 96,682           |   |  |                  | 100,168 |   |  |   | 111,356 |  
|Stockholders deficit                 |  |                  | (33,121 | ) |                  |   | (41,462 | )                |  |   | (35,199          | ) |  |                  | (37,942 | ) |  |   | (46,115 | )

---

|(1) | Our lightweight fiber fabrics facility in South Hill, VA includes an unfinished 136,000-square foot building. In the fourth quarter of 2005, we determined that there is no actual
useful life of this building because we are very unlikely to finish and use this building. Further, we do not believe that potential buyers could be found as a result of the location of the building and the fact that it is unfinished. As a result,
we have depreciated this asset to its estimated residual value of $0.4 million. The residual value is based on an appraisal obtained from a third party. The effect of this change in estimate, based on a net book value of $5.3 million prior to the
adjustment, was to increase depreciation expense in the fourth quarter 2005 by $4.9 million and decrease gross profit and operating income in the fourth quarter by $4.9 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents costs associated with terminated employees in connection with restructuring plans.
|--- | ---------------------------------------------------------------------------------------------

|(3) | Amounts do not include amortization of debt issuance costs and original issue discount, which is included in interest expense.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(4) | The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. Earnings consist of income before taxes and changes in accounting principles and fixed
charges, excluding capitalized interest. Fixed charges consist of interest expense, capitalized interest, amortization of debt issuance costs and one-third of rental expense (the portion deemed representative of the interest factor). For the years
ended December 31, 2005, 2003 and 2002, our earnings were insufficient to cover fixed charges by $16.6 million, $17.5 million and $143.2 million, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | In 2002, all of our outstanding short and long-term debt was classified as a current liability due to the significant deterioration in our operations and liquidity. The long-term
portion of our outstanding debt was reclassified as long-term debt for 2003, 2004, 2005 and 2006 due to improving cash flows from operations and liquidity beginning in 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion should be read together with our financial statements and related notes contained in this Report. The forward-looking statements under this section are subject to risks and uncertainties that
exist in our operations and business environment. See Forward-Looking Statements and Item 1A. Risk Factors included elsewhere in this Annual Report.



18



---

Overview and Trends Affecting Our Business

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, protective, construction and commercial products. Our glass fiber fabrics are used by our customers in printed circuit boards, which 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.

Results of Operations. Management believes that some of our products, particularly electronic
fabrics, are viewed as commodities by our customers. These products face increased competition from foreign manufacturers, particularly in Asia, that can manufacture similar products that are competitive with ours at significantly lower costs than
we can. Furthermore, it is becoming increasingly difficult to push prices higher with respect to these products, which reduces our overall revenues and results in lower profitability, particularly as our operating costs continue to rise. While this
commoditization trend is generally limited to our electronic fabrics currently, we expect that some of our other products will be viewed in the future as commodities as Asian manufacturers ramp up production of these other goods, which will also put
further pricing pressure on our overall sales.

Since we sell our products primarily in the United States, economic conditions in the U.S., particularly in
sectors such as the automotive, electronics, construction and aviation industries, will significantly affect our revenues for the foreseeable future. Direct imports of glass fiber fabrics into the U.S. have been increasing and the relocation of a
large segment of the electronics industry to Asia has impacted demand for domestically produced glass fiber fabrics used in printed circuit boards. This movement of production outside of North America has significantly reduced demand for certain
types of our products, particularly electronic fabrics, by our U.S. manufacturing customers.

From time to time, our industry also experiences excess
manufacturing capacity, which results in excessive supply of our products. During these periods when supply exceeds demand, pricing for our products tends to fall and results in lower revenues and lower profitability.

Based on publicly available data, we currently expect health care costs to increase significantly for the foreseeable future, which will further increase our general and
administrative costs and reduce our net income. Furthermore, because the average age of our employees and other covered persons is generally higher than other companies, we believe that the Company may be potentially exposed to relatively higher
health care costs each year, particularly to the extent we are responsible for covering catastrophic health care costs up to the maximum annual coverage of $0.1 million per covered person. In addition, because we have a relatively small number of
employees and a limited amount of annual net income, the occurrence of even a small amount of such catastrophic costs during any period would have a magnifying adverse impact on our net income during such period. As a result of the foregoing, even
though we have undertaken and will continue to undertake a variety of measures to control increased health care costs, it is likely that our net income will decline in the future due to such expected increased costs unless otherwise offset by
increased revenues or lower costs in other areas.

Substantially all of our eligible employees have also elected to participate in our defined benefit
pension plan. Because pension obligations are ultimately settled in future periods, the determination of our annual pension expense and pension liabilities is subject to estimates and assumptions, such as the discount rate, which are reviewed
annually and are based on current rates and trends. Due to historically low interest rates, we have had to make higher cash contributions to maintain the funded status of this plan. We cannot predict whether investment returns will be sufficient to
fund all of our future retirement benefits. To the extent our pension plan assets are not sufficient to fund future retirement benefits for our employees, the average age of which is relatively higher than other companies, we would be required to
fund any shortfall using cash generated by our operations.

Liquidity and Financial Condition. 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 required payments on our outstanding Senior Subordinated Notes and the WFF Loan and the funding of capital expenditures and working
capital requirements. If we experience lower net income in the future, we will generate correspondingly lower cash flows from operations and therefore be required to fund more of our short-term liquidity obligations using additional borrowings under
the WFF Loan. If our operating cash flow is not sufficient to meet required payment obligations under our Senior Subordinated Notes and the WFF Loan or we are unable to comply with financial ratios and other covenants under those debt instruments,
we would likely not be able to borrow any further amounts under the WFF Loan, which could adversely affect our ability to fund our operations and capital expenditures, and our lenders, including the holders of our Senior Subordinated Notes, could
accelerate our outstanding debt.



19



---

Further, we do not intend to reserve funds to retire the Senior Subordinated Notes, which are scheduled to mature on January 15, 2009.

Critical Accounting Policies

We have selected accounting policies
that we believe are appropriate to accurately and fairly report our operating results and financial position, and we apply those accounting policies in a consistent manner. The significant accounting policies are summarized in Note 1 to the
financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical and other factors believed to be reasonable under the
circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants, engineers, lawyers and actuaries to assist in our evaluation. We believe the following accounting policies are the most critical
because they involve the most significant judgments and estimates used in preparation of our financial statements:



| |  |  | Revenue Recognition. Revenue from product sales and the related cost of goods sold are recognized at the time both risk of loss and legal title transfer to
the customer, which is at delivery in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) as amended by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104) and Statement of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of Return Exists. Additionally, as required by SFAS 48, revenue is recognized only when the price is substantially
fixed or determinable, the customer is obligated to pay and collectability is reasonably assured, the customer acquiring the product for resale has economic substance apart from that provided by us and we do not have significant obligations for
future performance. The customer may return goods for approved quality reasons. Provisions are made for estimated product returns, claims and allowance.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Allowance for Doubtful Receivables. We maintain an allowance for doubtful receivables for estimated losses resulting from the inability of our trade
customers to make required payments. We provide an allowance for specific customer accounts where collection is doubtful and also provide a general allowance for other accounts based on historical collection and write-off experience. Judgment is
critical because some customers are currently operating in bankruptcy or have experienced financial difficulties. If the financial condition of any of our customers worsens, additional allowances may be required.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inventories.Our inventories are valued at the lower of cost or market value. We evaluate all of our inventory styles to determine obsolete or slow-moving
items. Finished goods are written down based on quality and age. Our methodology recognizes projected inventory losses at the time such losses are anticipated rather than at the time goods are actually sold. The adequacy of this estimate is
dependent on a number of future factors, including, but not limited to, the state of the economy and the level of customer demand. These factors could cause our inventory reserve to change by a material amount in the near term.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Employee Benefits. We sponsor a defined benefit pension plan as a retirement benefit for eligible employees. Because pension obligations will ultimately be
settled in future periods, the determination of annual pension expense and pension liabilities is subject to estimates and assumptions. The principal assumptions used in our estimations are summarized in Note 12 of the financial statements. We
review these assumptions annually and modify them based on current rates and trends.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

One of the critical assumptions in
the actuarial model that is used to calculate our annual pension expense is the discount rate. The rate we use is based on market rates for highly rated corporate debt instruments at our annual valuation date. The discount rate is used to estimate
the present value of our future benefit obligation as of the valuation date. A lower discount rate used in the actuarial model has resulted in a higher present value of benefit obligations and in a higher pension expense for the year ended
December 31, 2006 from 2005 but did not result in a higher liability at year end because of company contributions and favorable returns on plan assets.Differences between actual results and actuarial assumptions are accumulated and
amortized over future periods.

We have a postretirement benefit plan that covers substantially all of our employees. Upon attainment of age
fifty-five and ten years of continuous service, an employee may elect to retire. Employees eligible to retire may choose to



20



---

purchase postretirement health benefits, including medical and dental coverage. Critical assumptions used in the actuarial calculation of our postretirement
benefit obligation include the discount rate and the assumed health care cost trend rate. See Note 12 of the financial statements.

We have
deferred compensation arrangements for certain key executives, which generally provide for payments upon retirement or death. A portion of these obligations are funded through life insurance contracts on behalf of the executives participating in
these arrangements. Critical assumptions used in the calculation of the ultimate liability under these deferred compensation arrangements include future increases in salary and discount rate.



| |  |  | Shipping and Handling Costs. Shipping and handling costs, which consist principally of freight, inspection costs, warehousing costs and internal transfer
costs, are included in cost of goods sold. Revenue received from customers for shipping and handling costs, if any, are included in sales. These revenues are immaterial for all periods presented.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Selling, General and Administrative Expenses.Selling, general and administrative expenses include advertising and promotion costs, administrative and sales
salaries, sales commissions, and professional and consulting fees not directly related to manufacturing activities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Long-lived Assets. Our depreciation and amortization policies reflect judgments on the estimated useful lives of assets. We periodically review the estimated
useful lives of our property and intangible assets as well as review for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of the carrying value of
these assets by comparison to the undiscounted cash flows expected to be generated by these assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deferred Tax Assets Valuation.We record a deferred tax asset or liability when the tax effects of temporary differences result in such balances. A valuation
allowance is recorded if it is more likely than not that some or all of the deferred tax assets will not be realized. During the second quarter 2002, due to our poor operating performance and related liquidity constraints, we recorded a full
valuation allowance against our deferred tax assets. During subsequent years, we have continued to fully reserve for deferred tax assets generated in those periods, primarily net operating loss carry-forwards, due to the uncertainty associated with
the recognition of those deferred tax assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations

The following table summarizes our historical results of operations as a percentage of net sales for the years ended December 31, 2006, 2005 and 2004:



|                                             |  |                        |   |  |       |   |  |       |  
|-------------------------------------------- |  | ---------------------- | - |  | ----- | - |  | ----- | -
|                                             |  | Year EndedDecember 31, |  
|                                             |  | 2006                   |   |  | 2005  |   |  | 2004  |  
|                                             |  |                        |   |  |       |   |  |       |  
|Net sales                                    |  | 100.0                  | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold                           |  | 83.5                   |   |  | 89.1  |   |  | 83.5  |  
|                                             |  |                        |   |  |       |   |  |       |  
|Gross profit                                 |  | 16.5                   |   |  | 10.9  |   |  | 16.5  |  
|Selling, general and administrative expenses |  | 6.8                    |   |  | 6.6   |   |  | 6.9   |  
|Asset impairment charge                      |  | .2                     |   |  |      |   |  | 0.5   |  
|                                             |  |                        |   |  |       |   |  |       |  
|Operating income                             |  | 9.5                    |   |  | 4.3   |   |  | 9.1   |  
|Other (income) expenses:                     |  |                        |   |  |       |   |  |       |  
|Interest expense                             |  | 6.2                    |   |  | 7.4   |   |  | 7.8   |  
|Other (income) expense, net                  |  | (1.0                   | ) |  |      |   |  | 0.1   |  
|                                             |  |                        |   |  |       |   |  |       |  
|Income (loss) before income taxes            |  | 4.3                    |   |  | (3.1  | ) |  | 1.3   |  
|Income tax expense                           |  | 3                      |   |  |      |   |  |      |  
|                                             |  |                        |   |  |       |   |  |       |  
|Net income (loss)                            |  | 4.0                    | % |  | (3.1) | % |  | 1.2   | %
|                                             |  |                        |   |  |       |   |  |       |  

Adjusted EBITDA (EBITDA) herein is defined as net income (loss) before interest expense, income taxes,
depreciation, amortization, extraordinary loss and non-recurring charges. We believe EBITDA is a useful financial performance measure of adjusted earnings for us and is a complement to net income and other financial performance measures provided in
accordance with GAAP. We use EBITDA to measure the financial performance of our business because it excludes expenses such as depreciation, amortization, income taxes and interest expense, which are not indicative of operating performance. By
excluding



21



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interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our operations. By excluding depreciation
and amortization expense, which can vary from asset to asset based on a variety of factors unrelated to our financial performance, we can more accurately assess the financial performance of our business. Our lenders also use EBITDA as a measure of
our performance and covenant compliance.

However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to
maintain or preserve our assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our
borrowings or changes in interest rates. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance,
we reconcile it to net income (loss) which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent net income (loss) and should not be considered as an alternative to operating income or
net income determined in accordance with GAAP. EBITDA does not represent cash flows from operating activities determined in accordance with GAAP, and should not be considered as an indicator of performance or as an alternative to cash flows from
operating activities as an indicator of liquidity. The following table provides a reconciliation of Adjusted EBITDA to net income in thousands:



|                                |  |      |        |      |   |        |      |  |      |        |  |      |        |   |  |   |          |  
|------------------------------- |  | ---- | ------ | ---- | - | ------ | ---- |  | ---- | ------ |  | ---- | ------ | - |  | - | -------- | -
|                                |  | 2006 |        | 2005 |   |        | 2004 |  | 2003 |        |  | 2002 |       
|Net income (loss)               |  | $    | 6,961  |      | $ | (4,935 | )    |  | $    | 1,881  |  | $    | (3,436 | ) |  | $ | (140,573 | )
|Depreciation and amortization   |  |      | 4,765  |      |   | 10,018 |      |  |      | 5,494  |  |      | 6,039  |   |  |   | 12,966   |  
|Interest                        |  |      | 11,029 |      |   | 11,333 |      |  |      | 12,025 |  |      | 13,812 |   |  |   | 13,926   |  
|Income taxes                    |  |      | 596    |      |   | 30     |      |  |      | 16     |  |      |       |   |  |   | 6,835    |  
|                                |  |      |        |      |  
|Non-cash non-recurring charges: |  |      |        |      |   |        |      |  |      |        |  |      |        |   |  |   |          |  
|Reserve on loan to parent       |  |      |       |      |   |       |      |  |      |       |  |      |       |   |  |   | 97,711   |  
|Asset impairment charge         |  |      | 367    |      |   |       |      |  |      | 712    |  |      |       |   |  |   | 5,816    |  
|Retirement settlement charge    |  |      |       |      |   |       |      |  |      |       |  |      |       |   |  |   | 1,386    |  
|                                |  |      |        |      |   |        |      |  |      |        |  |      |        |   |  |   |          |  
|Adjusted EBITDA                 |  | $    | 23,718 |      | $ | 16,446 |      |  | $    | 20,128 |  | $    | 16,415 |   |  | $ | (1,933   | )
|                                |  |      |        |      |   |        |      |  |      |        |  |      |        |   |  |   |          |  

2006 Compared to 2005

Net Sales. Net sales increased $24.5 million, or 16.0%, to $177.4 million in 2006 from $152.9 million in 2005.

Sales of protective fabrics,
which are used in various ballistics applications including personal and vehicle armor, represented 14.4% and 9.4% of our total net sales in 2006 and 2005, respectively. Sales of protective fabrics increased $11.0 million, or 76.7%, for the year
ended December 31, 2006 as compared to the year ended December 31, 2005, due primarily to increased purchases by customers who supply the U.S. military.

Sales of composite fabrics, which are used in various applications, including structural aircraft parts and interiors, have represented approximately one-third of our total net sales over the past two years. Sales of these fabrics increased
$6.6 million, or 13.1%, for the year ended December 31, 2006 as compared to the year ended December 31, 2005 as a result of increased purchases of composite fabrics across the board by North American customers who produce goods for
U.S.-based aircraft manufacturers.

Sales of our filtration fabrics used by industrial customers to control emissions into the environment have represented
20.3% and 19.4% of our total net sales in 2006 and 2005, respectively. Sales of these fabrics increased $6.2 million, or 21.0%, for the year ended December 31, 2006 as compared to the year ended December 31, 2005. This increase is due
primarily to a higher value product mix and a price increase.

Sales of our construction fabrics used for applications such as smoke and fire barrier
curtains, roofing reinforcement, and other construction type products have represented less than 10% of our total net sales over the past two years. Sales of these fabrics increased $1.5 million, or 17.9%, for the year ended December 31, 2006
as compared to the year ended December 31, 2005. This increase is due primarily to improving general economic conditions and increased demand for construction materials.



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Sales of our commercial fabrics used in applications where fire resistance and dimensional stability are critical have
represented less than 10% of our total net sales over the past two years. Sales of these fabrics decreased $1.2 million, or 13.4% for the year ended December 31, 2006 as compared to the year ended December 31, 2005. This decrease is due to
the displacement of glass fabrics by lower cost substitute materials.

Sales of our insulation products, used for high temperature products, have
represented less than 10% of our total net sales during the past two years. Sales of insulation fabrics decreased $0.7 million, or 5.6%, for the year ended December 31, 2006 as compared to the year ended December 31, 2005 due primarily to
the end of a major automotive program.

Sales of our electronics fabrics used in multi-layer and rigid printed circuit boards, coated fabrics and specialty
electronic tapes represented 16.9% and 19.2% of our total net sales in 2006 and 2005, respectively. Buyers of our electronic fabrics are primarily based in North America. Sales of electronic fabrics increased $0.5 million, or 1.9%, for the year
ended December 31, 2006 as compared to the year ended December 31, 2005 due to increased demand in the U. S. market. However, long-term sales of these fabrics will continue to be adversely affected by the movement of electronic industry
production outside North America to lower-cost manufacturers in Asia who generally purchase fabrics from Asian suppliers.

Gross Profit. Gross
profit margins increased to 16.5% in 2006 from 10.9% in 2005 due primarily to higher capacity utilization combined with price increases in several product lines during 2006. In the fourth quarter of 2005, we determined that there was no actual
useful life of an unfinished 136,000-square foot building in our lightweight fiber fabrics facility in South Hill, VA because we are very unlikely to finish and use this building. Further, we did not believe that potential buyers could be found as a
result of the location of the building and the fact that it is unfinished. As a result, we depreciated this asset to its estimated residual value of $0.4 million. The residual value was based on an appraisal obtained from a third party. The effect
of this change in estimate, based on a net book value of $5.3 million prior to the adjustment, was to increase depreciation expense in the fourth quarter of 2005 by $4.9 million and decreased gross profit and operating income in the fourth quarter
of 2005 by $4.9 million.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1.9 million to
$12.1 million, or 6.8% of net sales in 2006, from $10.2 million or 6.6% of net sales, in 2005. This was primarily due to an increase in employee benefits, management fees and consulting fees.

Asset Impairment Charges. In 2006, we recognized a $0.4 million asset impairment charge related to machinery and equipment held at our South Hill heavyweight
fabrics facility. During the fourth quarter of 2006, an agreement was reached to give the related equipment to an affiliate. As a result, the equipment was written down to zero. In 2005, we had no asset impairment charges.

Operating Income. As a result of the aforementioned factors, operating income increased $10.3 million to $16.8 million, or 9.5% of net sales, in 2006 from $6.5
million, or 4.3% of net sales, in 2005.

Other (Income) Expense.Other income increased to $1.8 million, or 1.0% of net sales, in 2006 from $.04
million, or 0% of net sales, in 2005. The increase is due to the settlement of a class action lawsuit during the third quarter of 2006.

Interest
Expense. Interest expense decreased $0.3 million to $11.0 million, or 6.2% of net sales, in 2006 from $11.3 million, or 7.4% of net sales, in 2005, due to the decrease in the total amount of debt outstanding under the WFF Loan partially offset
by an increase in interest rates.

Income Tax Expense (Benefit). The effective tax rates in 2006 and 2005 were 7.9% and (0.6%), respectively. The
difference between the effective tax rate and the statutory tax rate is due to the utilization of tax attributes previously subject to a full valuation allowance along with state taxes. As a result, income tax expense increased $0.6 million for the
year ended December 31, 2006 over the year ended December 31, 3005.

Net Income (Loss). As a result of the aforementioned factors, net
income increased $11.9 million to a net income of $7.0 million in 2006 from a net loss of $4.9 million in 2005.

2005 Compared to 2004

Net Sales. Net sales decreased $2.9 million, or 1.9%, to $152.9 million in 2005 from $155.8 million in 2004.



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Sales of protective fabrics, which are used in various ballistics applications including personal and vehicle armor, have
generally represented less than 10% of our total net sales over the past two years, but have experienced significant increases over that time. Sales of protective fabrics increased $2.6 million, or 21.5%, for the year ended December 31, 2005 as
compared to the year ended December 31, 2004, due primarily to increased purchases by customers who supply the U.S. military to support activities in the Middle East.

Sales of composite fabrics, which are used in various applications, including structural aircraft parts and interiors, have represented approximately one-third of our total net sales over the past two years. Sales of
these fabrics increased $2.6 million, or 5.4%, for the year ended December 31, 2005 as compared to the year ended December 31, 2004 as a result of increased purchases of composite fabrics across the board by North American customers who
produce goods for U.S.-based aircraft manufacturers.

Sales of our filtration fabrics used by industrial customers to control emissions into the
environment have represented approximately 20% of our total net sales over the past two years. Sales of these fabrics increased $1.0 million, or 3.5%, for the year ended December 31, 2005 as compared to the year ended December 31, 2004.
This increase is due primarily to a shift in product mix from sales of lower-priced products to higher-priced products and sales to a customer under a specific utility contract, which accounted for approximately 45% of this increase. This utility
contract terminated in the second quarter of 2005.

Sales of our construction fabrics used for applications such as smoke and fire barrier curtains,
drywall bonding tape, and other construction type products have represented less than 10% of our total net sales over the past two years. Sales of these fabrics decreased $0.5 million, or 5.3%, for the year ended December 31, 2005 as compared
to the year ended December 31, 2004. This is not seen as a significant change.

Sales of our commercial fabrics used in applications where fire
resistance and dimensional stability are critical have represented less than 10% of our total net sales over the past two years. Sales of these fabrics decreased $0.5 million, or 5.4% for the year ended December 31, 2005 as compared to the year
ended December 31, 2004. This is not seen as a significant change.

Sales of our insulation products, used for high temperature products, have
represented approximately 10% of our total net sales during the past several years, but began to decline in 2005. Sales of insulation fabrics decreased $3.8 million, or 24.4%, for the year ended December 31, 2005 as compared to the year ended
December 31, 2004 due primarily to the completion of a major automotive program as well as a 30% reduction in purchases by a customer for major appliance applications, who previously accounted for approximately 17% of sales of our insulation
products. This customer has begun to satisfy its product needs with in-sourced manufacturing.

Sales of our electronics fabrics used in multi-layer and
rigid printed circuit boards, coated fabrics and specialty electronic tapes represented approximately 20% of our total net sales over the past two years. Buyers of our electronic fabrics are primarily based in North America. Sales of electronic
fabrics decreased $4.4 million, or 8.6%, for the year ended December 31, 2005 as compared to the year ended December 31, 2004 due to the movement of electronic industry production outside North America to lower-cost manufacturers in Asia
who generally purchase fabrics from Asian suppliers.

Gross Profit. Gross profit margins decreased to 10.9% in 2005 from 16.5% in 2004. Our
lightweight fiber fabrics facility in South Hill, VA includes an unfinished 136,000-square foot building. In the fourth quarter of 2005, we determined that there is no actual useful life of this building because we are very unlikely to finish and
use this building. Further, we do not believe that potential buyers could be found as a result of the location of the building and the fact that it is unfinished. As a result, we have depreciated this asset to its estimated residual value of $0.4
million. The residual value is based on an appraisal obtained from a third party. The effect of this change in estimate, based on a net book value of $5.3 million prior to the adjustment, was to increase depreciation expense in the fourth quarter of
2005 by $4.9 million and decreased gross profit and operating income in the fourth quarter of 2005 by $4.9 million. We also increased our environmental reserve by $0.3 million. In addition, plant variances were unfavorable due to lower operating
schedules.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $0.5 million to $10.2 million,
or 6.6% of net sales in 2005, from $10.7 million or 6.9% of net sales, in 2004. This was primarily due to a decrease in employee benefits, and consulting and professional fees.

Asset Impairment Charges. In 2004, we recognized a $0.7 million asset impairment charge related to machinery and equipment held at our South Hill heavyweight fabrics facility. A portion of the related equipment
was sold to an affiliate during the fourth



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quarter of 2004. In 2005, we had no asset impairment charges.

Operating Income. As a result of the aforementioned factors, operating income decreased $7.7 million to $6.5 million, or 4.3% of net sales, in 2005 from $14.2 million, or 9.1% of net sales, in 2004.

Interest Expense. Interest expense decreased $0.7 million to $11.3 million, or 7.4% of net sales, in 2005 from $12.0 million, or 7.8% of net sales, in 2004, due
to the retirement of some of our Senior Subordinated Notes.

Income Tax Expense (Benefit). The effective tax rates in 2005 and 2004 were (0.6%) and
0.0%, respectively. Due to the fact that we have a full valuation allowance against our deferred tax assets, we did not realize a tax benefit or incur a tax expense for the years ended December 31, 2005 and December 31, 2004. We incurred
minimal state tax expense in 2005 and 2004.

Net Income (Loss). As a result of the aforementioned factors, net income decreased $6.8 million to a
net loss of $4.9 million from a net income of $1.9 million in 2004.

Balance Sheets  December 31, 2006 Compared to December 31, 2005

Accounts Receivable. Accounts receivable decreased $0.5 million, or 3.0%, from December 31, 2005 to December 31, 2006. This decrease
was a result of the collection of several large past due customer balances.

Inventory. Inventory increased $5.4 million, or 21.7%, from
December 31, 2005 to December 31, 2006. This increase was a result of an increase in sales and manufacturing volumes in 2006.

Other Current
Assets.Other current assets increased $0.6 million, or 435.4%, from December 31, 2005 to December 31, 2006. This increase was primarily the result of an increase in other miscellaneous receivables and prepaid expenses.

Net Property, Plant and Equipment.Net property, plant and equipment decreased $2.3 million, or 7.4%, from December 31, 2005 to December 31, 2006. The
net decrease is primarily the result of depreciation expense of $4.8 million offset by capital expenditures of $3.0 million in 2006.

Our lightweight fiber
fabrics facility in South Hill, VA includes an unfinished 136,000-square foot building. In the fourth quarter of 2005, we determined that there is no actual useful life of this building because we are very unlikely to finish and use this building.
Further, we do not believe that potential buyers could be found as a result of the location of the building and the fact that it is unfinished. As a result, we have depreciated this asset to its estimated residual value of $0.4 million. The residual
value is based on an appraisal obtained from a third party. The effect of this change in estimate, based on a net book value of $5.3 million prior to the adjustment, was to increase depreciation expense in the fourth quarter of 2005 by $4.9 million
and decrease operating income in the fourth quarter by $4.9 million.

Accounts Payable and Accrued Liabilities. Accounts payable and accrued
liabilities increased $3.1 million, or 18.9%, from December 31, 2005 to December 31, 2006. This increase was primarily the result of an increase in trade payables due to higher volumes as well as increased purchases of yarn at year end in
order to guarantee availability of the product and to take advantage of lower costs prior to anticipated price increases and employee benefits due to the accrual of a profit sharing distribution for 2006.

Long Term Debt.Long-term debt increased $0.8 million from December 31, 2005 to December 31, 2006. In 2006, we did not repurchase any of our Senior
Subordinated Notes, but repaid approximately $1.5 million of debt outstanding under the WFF Loan offset by a reload of the term loan of $2.2 million. In 2005, we repurchased $2.8 million principal amount of our Senior Subordinated Notes and repaid
approximately $1.8 million of debt outstanding under the WFF Loan offset by a reload of the term loan of $2.8 million.

Post Retirement and Pension
Obligations.Post retirement and pension obligations decreased $2.3 million, or 35.0%, from 2005 to 2006. This decrease was primarily due to an increase in plan assets due to investment performance as well as a Company contribution of $2.4
million.



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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 the $83.5 million principal
amount of our outstanding Senior Subordinated Notes ($83.9 million net of unamortized discount of $0.4 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,
together with availability under the WFF Loan, 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 Forward-Looking Statements and
Item 1A. Risk Factors.

On June 6, 2003, we entered into the five-year financing agreement with WFF. The WFF Loan is guaranteed by our
parent, NVH, Inc., BGF Services, Inc. and Glass Holdings LLC. The WFF Loan proceeds are used to finance ongoing working capital, capital expenditures, and general corporate needs as well as retire other outstanding debt. The WFF Loan matures on the
earlier of February 28, 2010 or the date that is 180 days prior to the maturity date of the Senior Subordinated Notes. Because the Senior Subordinated Notes are scheduled to mature on January 15, 2009, we expect to be required to refinance
the WFF Loan no later than July 18, 2008. We have not reserved funds nor do we expect to generate sufficient cash flow from operations to repay amounts outstanding under the WFF Loan by July 18, 2008. See Item 1A. Risk
Factors-Because the WFF Loan is senior to and will mature prior to the Senior Subordinated Notes, we may not have enough assets left to pay the holders of our Senior Subordinated Notes.

On April 4, 2005, we executed an amendment to the WFF Loan to increase our total borrowing availability by approximately $5.0 million. The amendment was deemed to
be effective as of March 31, 2005. The amendment provided for the following: (1) reduced the maximum facility size to $25.0 million; (2) reloaded the term loan back to the lesser of $6.0 million or 70% of the orderly liquidation value
of eligible equipment; (3) increased the advance rate on finished goods inventory from 45% to 55%; (4) reduced the Excess Availability to $1.0 million at all times; and (5) released the $0.6 million environmental reserve previously in
place.

On October 31, 2005, we executed an amendment to the WFF Loan to increase our cap on capital expenditures to $3.5 million annually. The
amendment was deemed effective as of June 30, 2005.

On December 1, 2006, we entered into an amendment to the WFF Loan. The amendment provided
for the following: (1) increased the maximum facility size to $27.0 million; (2) reloaded the term loan back to $6.0 million; (3) increased the maximum revolver credit line to $21.0 million; (4) increased the minimum EBITDA
requirements for financial covenants to not less than $15.0 million calculated on a trailing 12 month basis; (5) reduced the spread on interest rates by approximately 100 basis points; and (6) increased the annual cap on capital
expenditures to $4.5 million.

The WFF Loan, as amended, has a maximum revolver credit line of $21.0 million with a letter of credit sub-line of $4.0
million, an inventory sub-line of $10.0 million and a term loan of $6.0 million, of which the principal was fully funded at the amendment date and is being amortized over 60 months.

WFF has a first priority, perfected security interest in our 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%, 55% and 35%, respectively, with inventory to be capped at the lesser of the eligible inventory calculation, $10.0 million or 80% times the percentage of the book value of our inventory that is estimated to be
recoverable upon liquidation; (2) borrowing rates of LIBOR + 2.25% or the Wells Fargo Prime Rate (RR) + 0.00% for the revolver if the trailing twelve month EBITDA exceeds $20.0 million with a 25 basis points increase if the trailing twelve
months EBITDA exceeds $17.0 million but is less than or equal to $20.0 million and a further 25 basis points increase if the trailing twelve months EBITDA is less than or equal to $17.0 million; (3) borrowing rates of LIBOR + 2.5% or RR + .25%
for the term loan with, at all times, a minimum rate of 5% for both facilities; and (4) certain financial covenants including (i) a minimum excess availability at all times, (ii) a minimum trailing twelve month EBITDA level and
(iii) a $4.5 million cap on annual capital expenditures; and (iv) an early termination fee.

In addition to the covenant requirements set forth
above, the WFF Loan does not allow us to pay dividends or distributions on our outstanding capital stock (including to our parent) and limits or restricts our ability to incur additional debt, repurchase securities, make certain prohibited
investments, create liens, transfer or sell assets or merge or consolidate. The WFF Loan permits the



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lenders to accelerate payment of the outstanding principal and accrued and unpaid interest upon certain events of default, including failure to make required
payments of principal and interest when due, uncured violations of the material covenants under the WFF Loan or if an event of default exists under the indenture governing the Senior Subordinated Notes that would permit the trustee or holders to
accelerate payment of the outstanding principal and accrued unpaid interest with respect to the Senior Subordinated Notes.

As of December 31, 2006,
amounts outstanding under the WFF Loan totaled $5.8 million, which consisted solely of $5.8 million under the term loan. As of December 31, 2005, amounts outstanding under the WFF Loan totaled $8.1 million and consisted of $5.1 million under
the term loan and $3.0 million under the revolver. As of December 31, 2006, we had not exercised the LIBOR Rate option on any of the outstanding borrowing amounts. The interest rate as of December 31, 2006 on the amounts outstanding under
the Wells Fargo Prime Rate portion of the term loan was 8.5%. Interest rates on the amounts outstanding under the term loan and revolver as of December 31, 2005 were 8.0%.

Availability under the revolver as of December 31, 2006 and March 12, 2007 was $14.7 million and $20.7 million, respectively. This availability has been reduced by a reserve to allow for the annual interest
payments on the Senior Subordinated Notes. 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 December 31, 2006 and March 12, 2007, the outstanding reserves totaled
$4.0 million and $1.5 million, 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 indenture governing the Senior Subordinated Notes does not allow us to pay dividends or distributions on our outstanding capital stock (including to our parent) and limits or restricts
our ability to incur additional debt, repurchase securities, make certain prohibited investments, create liens, transfer or sell assets, enter into transactions with affiliates, issue or sell stock of a subsidiary or merge or consolidate. In
particular, we are prohibited from incurring additional debt or making certain additional investments unless we maintain a consolidated fixed charge coverage ratio of greater than 2.0 to 1.0. The indenture permits the trustee or the holders of 25%
or more of the Senior Subordinated Notes to accelerate payment of the outstanding principal and accrued and unpaid interest upon certain events of default, including failure to make required payments of principal and interest when due, uncured
violations of the material covenants under the indenture or if lenders accelerate payment of the outstanding principal and accrued unpaid interest due to an event of default with respect to at least $5.0 million of our other debt, such as the WFF
Loan. The original amount of the Senior Subordinated Notes issued was $100.0 million, of which $83.9 million in face amount remains outstanding as of December 31, 2006.

No Senior Subordinated Notes were repurchased in 2006.

In 2005, we purchased $2.9 million (face value) of Senior
Subordinated Notes for $2.8 million plus accrued interest of $0.1 million. This transaction resulted in a gain on extinguishment of debt of $0.1 million. The Senior Subordinated Note purchase was funded by a combination of cash provided by
operations and borrowings under the WFF Loan.

The fair value of the Senior Subordinated Notes as of December 31, 2006 and December 31, 2005 was
approximately $81.4 million and $84.5 million, respectively.

At maturity on January 15, 2009, the entire outstanding principal amount of the Senior
Subordinated Notes becomes due and payable by us. We have not reserved funds nor do we expect to generate sufficient cash flow from operations to repay the Senior Subordinated Notes when they mature. We expect that our ability to repay the Senior
Subordinated Notes at their scheduled maturity will be dependent in whole or in part on refinancing all or a portion of the Senior Subordinated Notes before they mature. We cannot assure you that we will be able to arrange additional financing on
favorable terms, if at all, to pay the principal amount at maturity or the repurchase price when due.

We are in compliance with all of the covenants and
ratios under the WFF Loan and the indenture governing our Senior Subordinated Notes for all periods presented, and expect to remain in compliance for at least the next 12 months. However, this forward-looking statement is subject to risks and
uncertainties. See Forward-Looking Statements and Item 1A. Risk Factors.

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 our Senior Subordinated Notes for cash in open market purchases, privately negotiated transactions or otherwise. Although 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, we believe that WFF would likely consent to spot purchases at a higher price, although no assurances can be
made.



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Net Cash Provided by Operating Activities.Net cash provided by operating activities was $9.5 million for 2006,
compared with $7.2 million in 2005. The increase was primarily the result of an increase in net income, offset by an increase in working capital.

Net
Cash Used in Investing Activities. Net cash used in investing activities was $2.7 million and $2.3 million in 2006 and 2005, respectively, and was the result primarily of purchases of property, plant and equipment.

Net Cash Used In Financing Activities.Net cash used in financing activities was $3.2 million for 2006 compared to $5.0 million for 2005, and was primarily the
result of payments on the revolving credit facility and the term loan.

Commitments and Contingencies

Environmental Matters. The Company is in the final phases of an Environmental Protection Agency (EPA)-supervised self-implementing remediation program
at its Altavista facility. The remediation program has been conducted under EPA rules at 40 C.F.R. §761.61, promulgated under the Toxic Substances Control Act, that set forth self-implementing cleanup standards for certain contamination by
polychlorinated biphenyls, or PCBs. PCBs were discovered at the Altavista facility during a 1998 environmental site assessment, and the EPA was notified. These PCBs were initially identified in the area of the former location of a heat
transfer oil tank that the previous owner of the facility had removed before Porcher Industries acquired the Company in 1988. 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, in groundwater, 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 Town of
Altavistas water treatment plant. Interim measures were taken in 1999 and 2000, and have been taken periodically since then, to control PCB migration and minimize exposure.

In 2003, the Company submitted to the EPA a final Site Characterization Report, or SCR, documenting the assessment of the property and the sites drainage ditch. In May 2004, the EPA approved the SCR.
A draft cleanup plan was submitted to the EPA in September 2004 and a final proposed remediation plan was provided to the EPA for its review in December 2005. The EPA approved the plan in May 2006.

The remediation plan was generally designed to achieve PCB levels in remaining soils within the area covered by the plan at or below 25 parts per million (ppm), which is
consistent with standards set forth in the EPA rules for low occupancy sites. The remediation plan covered property owned by the Company and off-site areas owned by third parties, including the portion of the drainage ditch running from
the property off-site to the western edge of adjacent railroad tracks. The portion of the drainage ditch east of the railroad tracks was not included within the scope of the voluntary cleanup. Although this eastern portion of the drainage ditch
generally exhibited significantly lower PCB levels than were present in the western portion of the drainage ditch, the exclusion of this area means that soils and/or sediments with PCBs above 25 ppm will remain in this area even after completion of
the plan.

The cleanup was divided into a storm water management phase, a soil remediation phase, and a post-cleanup reconstruction phase. The storm water
management phase was completed during the second quarter of 2006. The Company has requested reimbursement from the Town of Altavista for 80% of the costs borne in this project as the scope of work centers primarily on site utilities. The Town of
Altavista has agreed to a total reimbursement of $0.4 million, which is to be paid in equal installments over the next seven years. Payments began in January 2007. A discounted receivable of $0.3 million has been recorded at December 31, 2006.
The soil remediation phase of the cleanup started in November 2006 and was completed in March 2007. The reconstruction phase has begun following completion of the soil remediation. The Company plans to place deed restrictions on the Altavista
property, including restrictions limiting the propertys use consistent with a low occupancy area within the meaning of the EPA rules.

The implementation of the remediation plan has not completely eliminated PCBs from the area subject to the plan; as noted above, the plan is designed to achieve PCB levels in remaining soils at or below 25 ppm. Further, the remediation plan
itself provided for contingencies under which PCBs would remain in place above 25 ppm. While future EPA and/or the Virginia Department of Environmental Quality (DEQ) enforcement actions could potentially require further cleanup of the
site, the Companys voluntary remediation program has lessened the likelihood of such enforcement actions.

A reserve of $2.1 million for the
environmental issues at the Altavista facility has been recorded at December 31, 2006 which reflects the accepted bid from the contractor for the soil remediation work of $2.3 million plus estimated additional expenses to be



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incurred for testing and post-cleanup reconstruction. The reserve has been reduced by expenses incurred to date. Remediation costs are estimates, subject to
the EPAs comments on the remediation plan and to other factors that may arise in the remediation process. Contingencies that may affect the accuracy of these estimates include:



| |  |  | The portion of the drainage ditch east of the railroad tracks is outside the scope of the self-implemented cleanup. There has been no indication whether the State
or EPA will seek to require the Company to undertake work in this drainage ditch. No cleanup plan or estimate for this work has been developed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The construction estimates are inherently based on assumptions about the total quantity of soil to be removed and disposed, as bids are based on unit costs for
removal, transportation, and disposal. The extensive SCR was used as a basis for estimating quantities of soil to be excavated, transported, and deposited in proper landfills, but verification sampling upon excavation will be necessary and it is
possible that greater quantities of impacted soil than are currently estimated will require removal. Transportation and disposal costs are approximately two-thirds of the estimated cost of the project. Accordingly, a material increase in the
quantity of soil removed in excess of the currently-estimated amounts would correspondingly materially increase the cleanup cost.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Utilities may exist in and around the dig site that could be damaged. While all efforts will be made to avoid damaging utilities, any such damage may cause part or
all work at the plant to be suspended until such utilities can be restored. While not adding greatly to the project cost, the indirect cost of such an interruption through lost revenue could be material.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Completion of the remediation plan has addressed impacted soils at the site but will not preclude possible further action by the EPA under other environmental statutes
and rules or by Virginia. The Company is aware that the DEQ is calculating Total Maximum Daily Loads (TMDLs) for pollutants in water bodies. Samples have been taken for PCBs over large expanses of the Staunton River into which the storm water
discharges. It is not certain whether DEQs sampling may result in additional claims regarding areas downstream of the Companys property including in the portion of the drainage ditch east of the railroad track or in the Staunton River.

In addition, a 1998 Phase Two Environmental Site Assessment at the Cheraw, South Carolina facility revealed reportable levels of 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 Department of Health and Environmental Control (DHEC).
Upon review of the data with DHEC, it was determined that chlorinated solvent residuals constitute the sole remediation concern. With DHEC oversight and approval, the Company is pursuing a Monitored Natural Attenuation strategy, which includes
periodic groundwater monitoring. Work includes semi-annual monitoring and reporting. Recent tests show reduced levels of solvent concentrations. The Company may review the data again with DHEC and recommend reducing the frequency of testing to
annually to reduce costs. No action other than continued monitoring for this facility is anticipated at this time. As of December 31, 2006 and December 31, 2005, the Company had a reserve of $0.1 million for the above-described
environmental issues at the Cheraw facility.

As these environmental cleanups progress, the Company may need to revise the reserves for Altavista and
Cheraw but it is unable to derive a more precise estimate at this time, as actual costs remain uncertain. 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.

Health Care Costs. Based on publicly available data, we currently expect health care costs to increase significantly for the foreseeable future, which will further increase our general and administrative costs and reduce our net
income. Furthermore, because the average age of our employees and other covered persons is generally higher than other companies, we believe that the Company may be potentially exposed to relatively higher health care costs each year, particularly
to the extent we are responsible for covering catastrophic health care costs up to the maximum annual coverage of $0.1 million per covered person. In addition, because we have a relatively small number of employees and a limited amount of annual net
income, the occurrence of even a small amount of such catastrophic costs during any period would have a magnifying adverse impact on our net income during such period. As a result of the foregoing, even though we have undertaken and will continue to
undertake a variety of measures to control increased health care costs, it is likely that our net income will decline in the future due to such expected increased costs unless otherwise offset by increased revenues or lower costs in other areas.



29



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Pension Plan Costs. Substantially all of our eligible employees have also elected to participate in our defined
benefit pension plan. Because pension obligations are ultimately settled in future periods, the determination of our annual pension expense and pension liabilities is subject to estimates and assumptions, such as the discount rate, which are
reviewed annually and are based on current rates and trends. Due to historically low interest rates, we have had to make higher cash contributions to maintain the funded status of this plan. We expect this trend may continue in the future, which we
would fund using cash flows from operations or borrowings under the WFF Loan. We cannot predict whether investment returns will be sufficient to fund all of our future retirement benefits. To the extent our pension plan assets are not sufficient to
fund future retirement benefits for our employees, the average age of which is relatively higher than other companies, we would be required to fund any shortfall using cash generated by our operations. Furthermore, at any time, the federal laws
governing pension plans or the administrative interpretations of those laws may be amended in a manner that could increase our pension plan costs and liabilities.

Contractual Obligations

Following is a summary of our contractual obligations as of December 31, 2006:



|                                  |  |                                           |        |      |   |        |  |      |        |            |   |       |  |   |       |  |   |        
|--------------------------------- |  | ----------------------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---------- | - | ----- |  | - | ----- |  | - | -------
|                                  |  | Payments due by year Dollars in thousands
|                                  |  | 2007                                      |        | 2008 |   | 2009   |  | 2010 |        | Thereafter |   | Total
|Debt(1)                           |  | $                                         | 1,200  |      | $ | 4,557  |  | $    | 83,900 |            | $ |      |  | $ |      |  | $ | 89,657 
|Interest on debt(2)               |  |                                           | 8,936  |      |   | 8,834  |  |      | 358    |            |   |      |  |   |      |  |   | 18,128 
|Finance obligation(3)             |  |                                           | 458    |      |   | 472    |  |      | 492    |            |   | 576   |  |   | 820   |  |   | 2,818  
|Deferred compensation payments(4) |  |                                           | 118    |      |   | 102    |  |      | 95     |            |   | 95    |  |   | 167   |  |   | 577    
|Purchase obligations(5)           |  |                                           |       |      |   |       |  |      |       |            |   |      |  |   |      |  |   |       
|Operating leases                  |  |                                           | 639    |      |   | 480    |  |      | 207    |            |   | 198   |  |   | 243   |  |   | 1,767  
|                                  |  |                                           |        |      |   |        |  |      |        |            |   |       |  |   |       |  |   |        
|Total(6)                          |  | $                                         | 11,351 |      | $ | 14,445 |  | $    | 85,052 |            | $ | 869   |  | $ | 1,230 |  | $ | 112,947
|                                  |  |                                           |        |      |   |        |  |      |        |            |   |       |  |   |       |  |   |        

---

|(1) | The $83.9 million Senior Subordinated Notes are scheduled to mature in 2009. Amounts due in 2007 through 2009 consist of principal payments on the term loan with WFF. No amounts
were outstanding under the revolver portion of the WFF Loan at December 31, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The interest relates to the Senior Subordinated Notes and the WFF term loan. The term loan carries a variable interest rate. A reasonable future estimated interest rate was used and
applied to the average outstanding balance of the term loan.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Finance obligation represents payments due under a financing arrangement for the sale and leaseback of our corporate headquarters facility.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Amounts shown do not include expected future payments to officers who have not yet retired. Such amounts, if and to the extent payable, are determined upon a salary-based formula
set forth in such contracts and described under Executive Compensation  Deferred Compensation Arrangements. A $2.1 million liability is recorded on the balance sheet as of December 31, 2006 to reflect expected future payments
to officers who will retire in the future. Since the future payment of any such amounts depends upon the occurrence of certain events that are currently unknown (such as relevant retirement dates, etc.), we do not have any indication of when and
over what timeframe such amounts will be paid.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | We have not historically entered into purchase commitments or obligations for raw materials or other items used in production. The principal materials used to manufacture our
products are glass, aramid and carbon yarns. We purchase these raw materials on an as-needed basis pursuant to purchase orders from a number of different suppliers. These purchase orders do not represent an obligation to purchase any raw materials.
In fact, ordinary course orders can be canceled at any time. Accordingly, we do not believe that we have any purchase obligations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | There are no current required minimum payments with respect to the defined benefit pension plan or the postretirement benefit plan.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

Off-Balance Sheet Arrangements

We currently have no off-balance
sheet arrangements.



30



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Outlook for 2007

The
following section contains forward-looking statements about our plans, strategies and prospects during 2007. 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 Forward-Looking Statements.

Looking ahead to 2007:



| |  |  | Sales trends during January, February and March 2007 increased from the average monthly sales for the last quarter of 2006. However, we expect sales to be somewhat
lower for the full year in 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We plan to continue our efforts to maintain our inventory level consistent with sales. However, there can be no assurance that sales will continue at this same
level during the remainder of 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Related Party Transactions

See Item 13. Certain Relationships and Related Transactions, and Director Independence.

Impact of
Inflation

We generally attempt to pass cost increases on to our customers. Costs are affected by, among other things, inflation, and we may experience
the effects of inflation in future periods. We believe, however, that inflation has not had a material impact on us during the past three years.

Recently Issued Accounting Standards

FIN 48, Accounting for Uncertainty in Income Taxes, was issued in June 2006. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. We will adopt FIN 48 in the first quarter of 2007. We are continuing to evaluate the impact that adoption of FIN 48 may have on our results of operations, cash flows and financial position.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS
No. 158). SFAS No. 158 requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their balance sheet and recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost. SFAS No. 158 also requires additional disclosures in the notes to
financial statements. For BGF, SFAS No. 158 is effective as of the end of fiscal years ending after June 15, 2007. The Company is currently assessing the impact of SFAS No. 158 on its financial statements. However, based on the
current funded status of our defined benefit pension, the Company would be required to increase its total liability by $3.9 million for pension and postretirement medical benefits, which would result in an estimated decrease to stockholders
equity of approximately $3.6 million, net of taxes, in the Companys balance sheet. This estimate may vary from the actual impact of implementing SFAS No. 158. The ultimate amounts recorded are highly dependent on a number of assumptions,
including the discount rates in effect at December 31, 2007, the actual rate of return on our pension assets for 2007 and the tax effects of the adjustment. Changes in these assumptions since the Companys last measurement date could
increase or decrease the expected impact of implementing SFAS No. 158 in the financial statements at December 31, 2007.

In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is



31



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effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact,
if any of SFAS 159 on its financial statements.



|Item 7A. | 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
Forward-Looking Statements.

Our financing arrangements are subject to market risks. Our Senior Subordinated Notes bear a 10.25% fixed interest
rate and our WFF Loan is subject to 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 WFF Loan. The WFF Loan
bears 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 March 12, 2007 and December 31, 2006 was approximately $83.1 million and $81.4
million, respectively. If the interest rate on outstanding borrowings under our WFF Loan as of December 31, 2006 is 100 basis points higher or lower during 2007, our interest rate expense would be increased or decreased by $0.1 million. As of
December 31, 2006, we were not party to any derivative financial instruments.



|Item 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

See Page F-1 of the
financial reports included herein.



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 9A. | Controls and Procedures
|-------- | -----------------------

Our management, including our President
and CFO, do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been
detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions.

Changes In Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining internal control over financial reporting designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:



| |  |  | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts
and expenditures are being made only in accordance with authorizations of management and directors; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32



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| |  |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There were no changes in our internal control over financial reporting during the fourth quarter of
2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Disclosure 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, and that such information is accumulated and communicated to our management, including our
President and CFO, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our President and CFO, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based upon this evaluation, our President and CFO have concluded that our disclosure controls and procedures were effective as of December 31, 2006. Our management has
concluded that the financial statements in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.



|Item 9B. | Other Information
|-------- | -----------------

None.



33



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PART III



|Item 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

The names,
ages and positions of our directors and executive officers are set forth below. Our director is also a director of NVH, Inc. and Nouveau Verre Holdings, Inc., and NVH, LLC. The director is elected annually by our sole stockholder and holds office
until his successor is elected and qualified or until his earlier removal or resignation.



|                   |  |     |  |                                                                         |  | 
|------------------ |  | --- |  | ----------------------------------------------------------------------- |  | 
|Name               |  | Age |  | Positions with BGF                                                      |  | 
|Philippe Porcher   |  | 53  |  | Chairman of the Board, Sole Director                                    |  | 
|James R. Henderson |  | 69  |  | President                                                               |  | 
|Philippe R. Dorier |  | 50  |  | Senior Vice President, Chief Financial Officer, Secretary and Treasurer |  | 

Philippe Porcher was named our Chairman of the Board and Chief Executive Officer in July 2002. Previous to
that, he served as Vice Chairman since April 1998. He has also served as Vice President of Porcher Industries since March 1993. Before becoming Vice President of Porcher Industries, Mr. Porcher served as Director of Porcher Industries
industrial division. Since 1998, Mr. Porcher has served as President of the Executive Board of Porcher Industries.

James R. Henderson was
named President of BGF in May 2002. Prior to that, he was Executive Vice President Sales and Merchandising since 1989. Before joining BGF, Mr. Henderson was employed for 31 years with United Merchants and Manufacturers, Inc., a company engaged
in the textile business. Mr. Henderson served as the Senior Vice President of United Merchants and Manufacturers, President of their Uniglass Division, and as Chairman of the Board of Uniteds Marglass subsidiary in England.

Philippe R. Dorier has been our Senior Vice President, Chief Financial Officer, Secretary and Treasurer since 1993. From 1988 to 1993, he served as our Vice
President International Audit. From 1984 until 1988, Mr. Dorier served as the Vice President of Finance of Babolat VS, S.A., and from 1980 until 1983, as the Administration and Finance Manager of Syva-Biomerieux S.A. Since 1998, Mr. Dorier
has served as a member of the Executive Board of Porcher Industries.

Disclosure and Corporate Governance. We are an indirect, wholly owned
subsidiary of Porcher Industries, S.A. As a result, we have no publicly-traded equity. However, even though we are no longer required by the Securities Exchange Act to file annual, quarterly and current reports with the SEC, the indenture governing
our Senior Subordinated Notes requires us to nonetheless file such reports. According to the SEC, this means that we are a voluntary filer. As a result, because we are not an issuer for purposes of the Sarbanes-Oxley Act,
many of its substantive governance reforms do not apply to us. Furthermore, since none of our securities, including our Senior Subordinated Notes, are listed for trading on any national securities exchange, we are not required to comply with any
listing standards or corporate governance reforms of any national securities exchange or automated quotation system.

However, because we continue to file
or furnish reports with the SEC, most of the enhanced disclosure rules enacted under the Sarbanes-Oxley Act and related SEC rulemaking do apply to this annual report. Accordingly, we disclose below certain additional information regarding our
corporate governance.

As permitted by Delaware law with respect to single shareholder corporations, our board consists of only one director, Philippe
Porcher. Accordingly, our board has not established any board committees and does not intend to do so. Because Mr. Porcher is also our Chief Executive Officer, he would not be deemed to be an independent director. Mr. Porcher is not a
financial expert under the SEC rules. We have not established a formal procedure whereby interested persons can communicate with our board regarding auditing matters or other issues. However, we nonetheless encourage investors and other
interested parties to contact us at (336) 545-0011 with questions, comments, or requests for additional information.

We have adopted a code of
conduct and ethics that applies to our chief executive officer, chief financial officer and controller. Our code of conduct and ethics can be found on our website, www.bgf.com.



34



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|Item 11. | Executive Compensation
|-------- | ----------------------

Summary Compensation
Table

The following table shows, for the fiscal year ended December 31, 2006, the compensation paid to or earned by our Named Executive Officers.



|                                                                                                      |  |      |  |            |         |     |                         |   |         |                                                |  |                       |        |  |       |        |     |  |   |        
|----------------------------------------------------------------------------------------------------- |  | ---- |  | ---------- | ------- | --- | ----------------------- | - | ------- | ---------------------------------------------- |  | --------------------- | ------ |  | ----- | ------ | --- |  | - | -------
|Name and Principal Position                                                                           |  | Year |  | Salary (1) |         |     | Non-EquityIncentivePlan |   |         | Change inPension Valueand DeferredCompensation |  | All OtherCompensation |        |  | Total
|Philippe Porcher Chairman of the Board, Chief Executive Officer and Director and Former Vice Chairman |  | 2006 |  | $          | 120,000 | (2) |                         | $ | 139,335 | (5)                                            |  |                       |       |  |       |       |     |  | $ | 259,335
|James R. Henderson President and Former Executive Vice President Sales and Merchandising              |  | 2006 |  | $          | 258,840 |     |                         | $ | 183,657 | (5)                                            |  | $                     | 73,853 |  | $     | 22,058 | (3) |  | $ | 538,408
|Philippe R. Dorier Senior Vice President, Chief Financial Officer, Secretary and Treasurer            |  | 2006 |  | $          | 201,360 |     |                         | $ | 139,335 | (5)                                            |  | $                     | 24,259 |  | $     | 20,193 | (4) |  | $ | 385,147

---

|(1) | Includes the following amounts deferred at the election of the following executive officers pursuant to BGFs 401(k) plan in 2006, respectively: Mr. Dorier $20,000;
and Mr. Henderson $20,000.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents a management fee paid by BGF Services, Inc., an affiliate of BGF, to Philippe Porcher and reimbursed by BGF to cover services provided by Philippe Porcher to BGF. See
Item 13. Certain Relationships and Related Transactions, and Director Independence.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents personal use of a company car of $13,258 in 2006 and 2006 profit sharing of $8,800 paid in 2007.
|--- | -----------------------------------------------------------------------------------------------------------

|(4) | Represents personal use of a company car of $12,139 in 2006 and 2006 profit sharing of $8,054 paid in 2007.
|--- | -----------------------------------------------------------------------------------------------------------

|(5) | Represents a bonus for 2006 paid in 2007. For Mr. Dorier and Mr. Porcher, this bonus was paid for by BGF Services and reimbursed by BGF to BGF Services in the form of
management fees to cover services rendered to BGF. See Item 13. Certain Relationships and Related Transactions, and Director Independence.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Compensation Discussion and Analysis

Unless the context otherwise requires, references in this section to
Named Executive Officers generally mean James R. Henderson, our President and Philippe R. Dorier, our Senior Vice President, Chief Financial Officer, Secretary and Treasurer. Compensation for Philippe Porcher, our Chairman of the Board,
Chief Executive Officer and Director has remained consistent for the last 11 years at $120,000 in annual base salary.

Compensation
Decisionmaking. Our Board of Directors generally sets our compensation philosophy and makes specific compensation decisions with respect to the Named Executive Officers. The board generally does not seek input from outside compensation
consultants with respect to annual compensation decisions. None of our Named Executive Officers has an employment agreement with us.



35



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Compensation Objectives and Components. Compensation for Named Executive Officers is based largely on the
following principles:



| |  |  | compensation must be competitive with that offered by other companies that compete with us to attract and retain the best possible executive talent;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | differences in executive compensation should reflect differing levels of responsibility and performance within our organization; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | performance-based compensation focuses employees on critical business objectives, controls fixed costs and aligns pay with performance through performance-leveraged
incentive opportunities.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Base Salary. Base salaries for all of our Named Executive Officers are determined by position,
which takes into consideration the scope of job responsibilities and competitive market compensation paid by other companies for similar positions. Base salaries are driven by market competition to attract and retain high quality employees. The base
salary for each of our Named Executive Officers is targeted near the at market pay levels for executive officers in similar positions and with similar responsibilities at other similar manufacturing companies nationwide. Our overall
approach to setting base salaries is to balance our need to retain high-quality employees while controlling the annual growth of our operating expenses.

In determining to increase the base salaries of our Named Executive Officers for 2006, the board considered, among other things, our planned operating budget, individual job performance and expectations and the pay practices of other
similarly situated manufacturing companies. The base salaries earned by our Named Executive Officers were approximately 4% higher in 2006 as compared to 2005. Base salaries are reviewed for adjustment annually. Individual base salaries for Named
Executive Officers will be approximately 4% higher in 2007 as compared to 2006. For information about the base salaries of our Named Executive Officers, see Summary Compensation Table.

Annual Non-Equity Incentive Compensation Program. Our Named Executive Officers participate in an annual non-equity incentive compensation program pursuant
to which they are eligible to earn cash payments based on our operating performance. This component of our executive compensation program is designed to reward our Named Executive Officers with additional cash compensation to the extent one or more
specific metrics are achieved during the most recently completed year. Because payouts under our annual non-equity incentive compensation program are linked to performance criteria that are communicated to our Named Executive Officers at the
beginning of each year, these awards are considered to be non-equity incentive plan compensation rather than bonuses under SEC disclosure rules.

Each
year, approximately 20 of our officers and employees are eligible to earn payouts under our non-equity incentive program. For 2006, the targeted aggregate amount of funds available for payout under the program was equal to approximately 4.6% of our
EBITDA goal (excluding the eligibility of Mr. Dorier to receive a payout from an affiliated company). Each participant in the program is eligible to receive a payout equal to a certain percentage of the pool, assuming we meet at least our
targeted level of EBITDA. In determining each participants percentage interest, the board considers the employees ability to influence our overall performance. The more senior the employees position within the company, the greater
the portion of compensation that varies with performance. The award percentages have remained consistent over the past several years. In 2006, the award percentages were 13.8% for Mr. Henderson and 10.5% for Mr. Dorier. Although the amount
of Mr. Doriers payout is based on a percentage of the available pool, such amounts are paid by BGF Services. The amount for Mr. Porcher is also paid by BGF Services.

For eligible employees to earn any payout under the annual non-equity incentive program, we must exceed a threshold level of at least 80% of the EBITDA goal. If our actual EBITDA is not at least 80% of the goal, then
no payouts are made. If our actual EBITDA is at least 80% but less than 100% of the goal, then the total funds available under the pool is reduced by 10% of the deficit. For eligible employees to earn the full payout, we must exceed a target level
of at least 100% of the EBITDA goal. If our actual EBITDA is more than 100% of the goal, then the total funds available under the pool is increased by 10% of the surplus. There is no maximum amount that can be paid out under the annual non-equity
incentive compensation program if our actual EBITDA exceeds the goal. For 2006, because our actual EBITDA exceeded the goal, the bonus pool for 2006 was equal to 5.8% of actual EBITDA. Cash payouts for amounts earned in 2006 under the annual
non-equity incentive program were made in February 2007.

The board sets the threshold and target levels for our annual non-equity incentive program prior
to or near the beginning of each year as part of our budgeting process, which provides our Named Executive Officers with direct line of sight to be able to focus



36



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their personal efforts to the achievement of the metrics. The EBITDA goal is set at the beginning of each year after a disciplined budgeting process
involving our management and our parent company at a level which we believe is an aggressive, but realistic goal.

The Estimated Possible Payouts
Under Non-Equity Incentive Plan Awards columns in the table under Grants of Plan-Based Awards reflect the threshold and target dollar amounts that our Named Executive Officers were eligible to earn under our annual non-equity
incentive compensation program for 2006. The Non-Equity Incentive Plan Compensation column in the table under Summary Compensation Table reflects actual dollar amounts earned under our annual non-equity incentive compensation
program by our Named Executive Officers for 2006.

Grants of Plan-Based Awards Table

The table below sets forth information with respect to non-equity incentive awards granted in 2006 to the Named Executive Officers:



|                   |  |            |  |                                                                   |  |            |  |            
|------------------ |  | ---------- |  | ----------------------------------------------------------------- |  | ---------- |  | -----------
|                   |  |            |  | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards
|Name               |  | Grant Date |  | Threshold ($)                                                     |  | Target ($) |  | Maximum ($)
|Philippe Porcher   |  | 01/01/06   |  | $  84                                                             |  | $105       |  | N/A        
|James R. Henderson |  | 01/01/06   |  | $110                                                              |  | $138       |  | N/A        
|Philippe R. Dorier |  | 01/01/06   |  | $  84                                                             |  | $105       |  | N/A        

Deferred Compensation Agreements. We have entered into Deferred Compensation Agreements with our
executives and we are the guarantor of Mr. Doriers Deferred Compensation Agreement with BGF Services. The agreements provide for both pre-retirement survivor benefits, as well as post-retirement benefits to the executive. The agreements
also contain a non-competition provision. Generally, under each of the agreements, if the executive dies before the age of 65, his beneficiary or, if none, his estate will receive monthly payments for a 10-year period of an amount equal to 50% of
the greater of:



| | (1) | the executives monthly base salary in effect on the January 1 prior to his death; or
| | --- | -------------------------------------------------------------------------------------



| | (2) | the executives average monthly base salary on January 1 of the five years prior to his death.
| | --- | ----------------------------------------------------------------------------------------------

This amount is decreased progressively if the executive dies after the age of 60 but before 65. The agreements also provide for post-retirement benefits in the form of:



| | (1) | monthly payments over 10 years, the sum of which is equal to the applicable percentage multiplied by the greater of (a) the executives annual base salary on
January 1 immediately preceding or concurrent with his retirement of (b) the average of the executive annual base salary on January 1 of the five years prior to his retirement. The applicable percentage is 15%. If the executive
dies prior to receiving all of the monthly payments, the payments are made to his designated beneficiary, or, if none, his estate. Reduced benefits are paid if the executive retires prior to age 65; and
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | a payment on death equal to three-quarters of his annual base salary on the January 1 immediately preceding or concurrent with this retirement.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------

The estimated accrued benefits payable under Deferred Compensation Agreements at normal retirement age as of December 31, 2006 for the executive officers
Mr. Henderson and Mr. Dorier were $380,000 and $189,000, respectively. The Deferred Compensation program is funded through life insurance policies for each of the Named Executive Officers. The change in present value for the deferred
compensation balances for Mr. Henderson and Mr. Dorier is $25,982 and $1,852, respectively. These amounts are included in the Summary Compensation Table above.

Retirement System. The Retirement System of BGF Industries, Inc. covers substantially all employees of BGF after they have completed one year of service. Employees with five or more years of service are
entitled to benefits beginning at normal retirement age. This plan also provides reduced benefits to participants electing to retire early, beginning at age 55. Participants are required to contribute three percent of covered compensation per year
and interest is credited on employee contributions. In general, the normal retirement benefit is payable as an annuity. Participants may also elect a lump-sum distribution of their accrued benefit.



37



---

Normal retirement benefits are determined by reference to an employees accumulated contributions.
Accumulated contributions are the sum of all required employee contributions plus interest credited on the contributions, compounded annually at the rate of 120% of the federal mid-term rate in effect under section 1274 of the Internal Revenue Code
for the first month of the plan year. In general, the annual normal retirement benefit is equal to 50% of the accumulated employee contributions, plus 1.5% of employee plan compensation up to $6,600 for the plan year 1989.

The estimated annual benefits payable upon retirement at normal retirement age for the executive officers is as follows: Mr. Henderson$39,083 and
Mr. Dorier$72,474. These calculations are based on 2006 compensation, assume benefits are payable as a straight-life annuity, and assume that each individual will work until age 65. Mr. Philippe Porcher does not participate in the
Retirement System. The aggregate change in the actuarial present value of the accumulated benefit from 2005 to 2006 was $47,871 for Mr. Henderson and $22,407 for Mr. Dorier. These amounts are included in the Summary Compensation
Table above.

401(k) Plan. The Employees Profit Sharing and Tax Savings Plan of BGF Industries, Inc. covers most employees of
BGF. After completing one hour of service, employees may defer up to 50% of their compensation as defined by the plan each year, subject to Internal Revenue Code limitations. We may, in our discretion, match employees elective deferrals up to
a specified limitation each year and may make a discretionary employer contribution for employees that have completed one year of service. All contributions are 100% vested and non-forfeitable at all times. Benefits are payable after separation from
service in a lump sum in cash.

Pension Benefit Table

The following table discloses the Retirement System information for our Named Executive Officers for the year ended December 31, 2006.



|                     |  |                                           |  |                                 |  |                                     |         |                                 |     
|-------------------- |  | ----------------------------------------- |  | ------------------------------- |  | ----------------------------------- | ------- | ------------------------------- | ----
|Name                 |  | Plan Name                                 |  | Number of YearsCredited Service |  | Present Value ofAccumulated Benefit |         | Payments DuringLast Fiscal Year
|Philippe Porcher (1) |  |                                          |  |                                |  |                                     |        |                                 |    
|James R. Henderson   |  | Retirement System of BGF Industries, Inc. |  | 11.0                            |  | $                                   | 474,948 |                                 | None
|Philippe R. Dorier   |  | Retirement System of BGF Industries, Inc. |  | 16.5                            |  | $                                   | 159,583 |                                 | None

---

|(1) | Philippe Porcher does not participate in the Retirement Plan of BGF Industries, Inc.
|--- | ------------------------------------------------------------------------------------

Compensation of Directors

Our director did not receive separate compensation for his services as a director in 2006.

Compensation Committee Interlocks and Insider Participation

Mr. Philippe Porcher, who serves as both an executive officer and as the sole member of the board of directors of BGF Industries, Inc., serves as the President of the Executive Board of Porcher Industries, S.A. Mr. Philippe
Porcher also serves as an executive officer and chairman of the Board of Directors of NVH, Inc., Nouveau Verre Holdings, Inc., NVH, LLC, Glass Holdings, LLC and BGF Services, Inc. He also served as an executive officer of the former Glass Holdings
Corp and AGY Holding Corp. and was the Chairman of the Board of the former Glass Holdings Corp, AGY Holding Corp. and Advanced Glassfiber Yarns LLC.

Mr. Philippe Dorier serves as an executive officer of BGF Industries, Inc. and as a member of the Executive Board of Porcher Industries, S.A. whose members are equivalent to executive officers. Mr. Philippe Dorier also serves as
an executive officer and director of NVH, Inc., Nouveau Verre Holdings, Inc., NVH, LLC, and BGF Services, Inc. He also served as an executive officer of the former Glass Holdings Corp and AGY Holding Corp. and was a director of the former Glass
Holdings Corp, AGY Holding Corp. and Advanced Glassfiber Yarns LLC.



38



---

|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The following table sets forth the beneficial ownership of BGFs outstanding common stock as of December 31, 2006 for each person or group known to our management to be holding more than 5% of the common
stock and for each director and executive officer named in the Executive Compensation table and all of our directors and executive officers as a group.

All shares of BGFs issued and outstanding common stock are held by NVH, Inc., which is a wholly owned subsidiary of Nouveau Verre Holdings, Inc., which is a wholly owned subsidiary of Porcher Industries, S.A. The address of Porcher
Industries is Porcher Industries, S.A., Badinières, 38300 Bourgoin-Jallieu, France.

As reflected in the graphic below the table, Mr. Robert
Porcher may be deemed to beneficially own 56.05% of the outstanding capital stock of Porcher Industries, and thus BGF, through (1) his 7.22% direct ownership interest in Porcher Industries and (2) his ownership interest in
Société Civile des Terres Froides. Mr. Robert Porchers address is c/o Porcher Industries, S.A., Badinières, 38300 Bourgoin-Jallieu, France.

Mr. Robert Porchers 56.05% interest includes a 0.7% interest of his son, Philippe Porcher, an executive officer and sole director of BGF, in Société Civile des Terres Froides. Mr. Robert
Porcher controls the voting and investment of these shares. The asterisk aside the name of Philippe Porcher represents this interest.



|                                                            |  |                  |   |  | 
|----------------------------------------------------------- |  | ---------------- | - |  | 
|Name of Beneficial Owner                                    |  | Percent of Class |   |  | 
|Porcher Industries                                          |  | 100.00           | % | 
|Robert T. Porcher                                           |  | 56.05            | % | 
|Philippe Porcher                                            |  | *                |   | 
|Philippe R. Dorier                                          |  |                 |   | 
|James R. Henderson                                          |  |                 |   | 
|All directors and executive officers as a group (5 persons) |  | 56.05            | % | 

We have no equity compensation plans.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

We are wholly owned by Porcher Industries, S.A. through NVH, Inc., a U.S. holding company. In July, 2004, our previous parent, Glass Holdings Corp., converted to a limited liability company 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. Porcher Industries owned a 15% interest in AGY Holding Corp., a major supplier of BGF, through Nouveau Verre Holdings,
LLC, a 100% subsidiary of Nouveau Verre Holdings, Inc. In April 2006, AGY Holding Corp. was sold to a private equity investment firm. As a result, Porcher Industries no longer retains an interest in AGY Holding Corp. Glass Holdings LLC owns 100% of
BGF Services, Inc. We have ongoing financial, managerial and commercial agreements and arrangements with Porcher Industries, NVH, Inc. and other wholly-owned subsidiaries of NVH, Inc., as well as other affiliates of Porcher Industries, S.A.
Mr. Robert Porcher, our former Chairman of the Board and Chief Executive Officer, beneficially owns a controlling interest in Porcher Industries and Mr. Philippe Porcher, our current Chairman of the Board and Chief Executive Officer also
owns an interest in Porcher Industries. See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We pay management fees to BGF Services, Inc., a wholly owned subsidiary of Glass Holdings LLC that cover the periodic management services of certain Porcher Industries employees and the full time services of Philippe Dorier, our Chief
Financial Officer. We also reimburse BGF Services for the costs associated with automobiles provided to Messrs. Philippe Porcher and Dorier. In connection with these arrangements with BGF Services, we incurred expenses of $0.9 million in 2006. BGF
Services does not derive a profit from this arrangement and therefore these terms cannot be considered comparable to those that would be provided to third parties.

Porcher Industries and its French parent company provide general management and strategic planning advice to us in exchange for management fees that reimburse these companies for a portion of the compensation of Robert Porcher, Philippe
Porcher and other employees who allocate their time among us and other Porcher Industries affiliates. In 2006, we incurred $0.6 million in management fees for such services.



39



---

We purchase semi-finished and finished products from Porcher Industries and its affiliates. We purchased $3.0 million of
these products in 2006. We sell finished goods and occasionally unfinished goods directly to Porcher and its affiliates. In 2006, we billed Porcher Industries and its affiliates $1.7 million for these goods. Porcher Industries billed us for
commissions for sales of our products in Asia, Europe, and Australia of $0.1 million in 2006. We believe that prices and commissions paid or received by us for these transactions are comparable to those paid to third parties.

We and certain of our affiliates (collectively referred to as the Porcher Group) have agreed to amend and restate the terms of the supply agreement
originally dated April 2, 2004 between the Porcher Group and AGY Holding Corp (AGY). Under the terms of this new agreement that becomes effective January 1, 2007, we have an economic incentive, but not an obligation, to
purchase yarn from AGY. We purchased approximately $39.8 million of raw materials from AGY in the twelve months ended December 31, 2006. We believe that each of these arrangements is on terms no more favorable than those that would be provided
to third parties.

See also Note 16 to the financial statements filed as part of this Annual Report in Item 15.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

PricewaterhouseCoopers LLP
has served as the independent registered public accounting firm of BGF since 1994 and is considered by our management to be well qualified. We have been advised by that firm that neither it nor any member thereof has any financial interest, direct
or indirect, in us or any of our subsidiaries in any capacity.

Audit Fees. We paid PricewaterhouseCoopers LLP $238,000 in audit fees for services
rendered in the fiscal year ended December 31, 2006 as compared to $190,000 in audit fees during the fiscal year ended December 31, 2005.

Audit-Related Fees. We did not pay PricewaterhouseCoopers LLP any amount for audit-related services rendered in 2006 or 2005.

Tax
Fees. We paid PricewaterhouseCoopers LLP $133,000 in 2006 for tax services rendered as compared to $131,000 in 2005. These tax services generally included tax return preparation, tax compliance, tax planning and tax advice.



40



---

PART IV



|Item 15. | Exhibits and Financial Statement Schedules
|-------- | ------------------------------------------



|1. | FINANCIAL STATEMENTS
|-- | --------------------

See Index on page F-1.



|2. | FINANCIAL STATEMENT SCHEDULE
|-- | ----------------------------

See Index on page
F-1.



|(a) | Documents Incorporated by Reference or Filed with this Report:
|--- | --------------------------------------------------------------

EXHIBITS



|            |  |                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                             
|3.1(1)      |  | Certificate of Incorporation of BGF Industries, Inc., as amended                                                                                                                                                                   
|            | 
|3.2(1)      |  | Bylaws of BGF Industries, Inc., as amended                                                                                                                                                                                         
|            | 
|4.1(1)      |  | Indenture, dated as of January 21, 1999, among BGF Industries, Inc. and The Bank of New York, as trustee, relating to $100 million principal amount of 101/4% Senior Subordinated Notes Due 2009                                   
|            | 
|4.2(1)      |  | Form of 101/4% Series A and Series B Senior Subordinated
Notes due 2009 (included in Exhibit 4.1)                                                                                                                                  
|            | 
|10.1(1)     |  | Deferred Compensation Agreement, dated April 16, 1990, by and between BGF, Industries, Inc. and James R. Henderson (2)                                                                                                             
|            | 
|10.2(1)     |  | Deferred Compensation Agreement, dated January 28, 1993, by and between BGF Services, Inc. and Philippe Dorier(2)                                                                                                                  
|            | 
|10.3(1)     |  | Lease, dated March 20, 1996, between E.R. English, Sr., as lessor, and BGF Industries, Inc., as lessee                                                                                                                             
|            | 
|10.4(1)     |  | Purchase Order (Lease), dated November 26, 1996, between K&C Brokerage, as lessor, and BGF Industries, Inc., as lessee                                                                                                             
|            | 
|10.5(1)     |  | Lease, dated November 1, 1991, by and between H.V. Johns, Jr., as lessor, and BGF Industries, Inc. as lessee                                                                                                                       
|            | 
|10.6(1)     |  | Promissory Note, dated September 30, 1998, from Glass Holdings Corp. to BGF Industries, Inc. for the original principal amount of $135,043,844.62                                                                                  
|            | 
|10.7(1)     |  | Promissory Note, dated December 23, 1998, from Glass Holdings Corp. to BGF Industries, Inc. for the original principal amount of $2,681,000                                                                                        
|            | 
|10.8(3)     |  | Lease Agreement, dated October 1, 2000 by and between Edgar J.T. Perrow and BGF Industries, Inc.                                                                                                                                   
|            | 
|10.9(4)     |  | $5 million intercompany note between Glass Holdings Corp. and BGF Industries, Inc. dated August 14, 2002                                                                                                                           
|            | 
|10.10(4)    |  | Lease Agreement, dated November 26, 2002 by and between Davidson Industrial Properties, LLC and BGF Industries, Inc.                                                                                                               
|            | 
|10.11(5)    |  | Loan and Security Agreement by and among BGF Industries, Inc. as Borrower, The Lenders that are Signatories Hereto as the Lenders, and Wells Fargo Foothill, Inc. as the Arranger and
Administrative Agent Dated as of June 6, 2003
|            | 
|10.12(6)    |  | Lease Agreement, dated October 27, 2003 by and between Schwarz and Schwarz, Inc. and BGF Industries, Inc.                                                                                                                          



41



---

|         |  |                                                                                       
|-------- |  | --------------------------------------------------------------------------------------
|         | 
|10.13(7) |  | Second Amendment to the Loan and Security Agreement, dated July 30, 2004              
|         | 
|10.14(8) |  | Third Amendment to the Loan and Security Agreement, dated March 31, 2005              
|         | 
|10.15(9) |  | Fourth Amendment to the Loan and Security Agreement, dated June 30, 2005              
|         | 
|10.16    |  | Fifth Amendment to the Loan and Security Agreement, dated December 1, 2006            
|         | 
|12       |  | Statement of Computation of Ratios                                                    
|         | 
|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
|         | 
|99.1     |  | Reconciliation of net income to adjusted EBITDA                                       

---

|(1) | Filed as part of the Companys Registration Statement (333-72321) and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------

|(2) | Management contract or compensatory plan or arrangement.
|--- | --------------------------------------------------------

|(3) | Filed as part of the Companys Form 10K for the fiscal year ended December 31, 2000 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(4) | Filed as part of the Companys Form 10K for the fiscal year ended December 31, 2002 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(5) | Filed as part of the Companys Form 8-K dated June 6, 2003 and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------

|(6) | Filed as part of the Companys Form 10K for the fiscal year ended December 31,2003 and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(7) | Filed as part of the Companys Form 10Q for the fiscal quarter ended June 30, 2004 and incorporated herein by reference.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(8) | Filed as part of the Companys Form 8-K dated April 4, 2005 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------

|(9) | Filed as part of the Companys Form 8-K dated October 31, 2005 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------



42



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE



|                                                                                                              |  |         
|------------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                              |  | Page No.
|FINANCIAL STATEMENTS                                                                                          |  |         
|                                                                                                              | 
|Report of Independent Registered Public Accounting Firm                                                       |  | F-2     
|                                                                                                              | 
|Balance Sheets as of December 31, 2006 and 2005                                                               |  | F-3     
|                                                                                                              | 
|Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2006, 2005 and 2004 |  | F-4     
|                                                                                                              | 
|Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                                 |  | F-5     
|                                                                                                              | 
|Statements of Stockholders Deficit for the years ended December 31, 2006, 2005 and 2004                      |  | F-6     
|                                                                                                              | 
|Notes to Financial Statements                                                                                 |  | F-7     
|                                                                                                              | 
|FINANCIAL STATEMENT SCHEDULE                                                                                  |  |         
|                                                                                                              | 
|Valuation and Qualifying Accounts                                                                             |  | S-1     



F-1



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

of BGF Industries, Inc.:

In our opinion, the financial statements listed in
the index appearing under Item 15(1) on page 41 present fairly, in all material respects, the financial position of BGF Industries, Inc. at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under
Item 15(2) on page 41 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

/S/ PRICEWATERHOUSECOOPERS LLP

Greensboro, North Carolina

March 28, 2007



F-2



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

BALANCE SHEETS

(dollars in
thousands, except share data)



|                                                                                                           |  |                   |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                           |  | December 31, 2006 |         |   | December 31, 2005 |  
|ASSETS                                                                                                     |  |                   |         |   |                   |   |         |  
|                                                                                                           |  |                  
|Current assets:                                                                                            |  |                   |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                  |  | $                 | 3,644   |   |                   | $ |        |  
|Trade accounts receivable, less allowance for returns and doubtful accounts of $575 and $396, respectively |  |                   | 15,552  |   |                   |   | 16,034  |  
|Inventories                                                                                                |  |                   | 30,328  |   |                   |   | 24,913  |  
|Other current assets                                                                                       |  |                   | 787     |   |                   |   | 147     |  
|Assets held for sale                                                                                       |  |                   | 245     |   |                   |   | 245     |  
|                                                                                                           |  |                   |         |   |                   |   |         |  
|Total current assets                                                                                       |  |                   | 50,556  |   |                   |   | 41,339  |  
|Net property, plant and equipment                                                                          |  |                   | 29,338  |   |                   |   | 31,667  |  
|Deferred income taxes                                                                                      |  |                   | 1,230   |   |                   |   | 1,218   |  
|Other noncurrent assets, net                                                                               |  |                   | 2,530   |   |                   |   | 3,286   |  
|                                                                                                           |  |                   |         |   |                   |   |         |  
|Total assets                                                                                               |  | $                 | 83,654  |   |                   | $ | 77,510  |  
|                                                                                                           |  |                   |         |   |                   |   |         |  
|                                                                                                           |  |                  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                      |  |                   |         |   |                   |   |         |  
|                                                                                                           |  |                  
|Current liabilities:                                                                                       |  |                   |         |   |                   |   |         |  
|Cash overdraft                                                                                             |  | $                 |        |   |                   | $ | 886     |  
|Accounts payable                                                                                           |  |                   | 7,993   |   |                   |   | 5,625   |  
|Accrued liabilities                                                                                        |  |                   | 11,194  |   |                   |   | 10,504  |  
|Deferred income taxes                                                                                      |  |                   | 1,230   |   |                   |   | 1,218   |  
|Short-term borrowings                                                                                      |  |                   |        |   |                   |   | 3,000   |  
|Current portion of long-term debt                                                                          |  |                   | 1,200   |   |                   |   | 1,200   |  
|                                                                                                           |  |                   |         |   |                   |   |         |  
|Total current liabilities                                                                                  |  |                   | 21,617  |   |                   |   | 22,433  |  
|Long-term debt, net of discount of $356 and $524, respectively                                             |  |                   | 88,100  |   |                   |   | 87,255  |  
|Finance obligation                                                                                         |  |                   | 2,818   |   |                   |   | 2,758   |  
|Postretirement benefit and pension obligations                                                             |  |                   | 4,240   |   |                   |   | 6,526   |  
|                                                                                                           |  |                   |         |   |                   |   |         |  
|Total liabilities                                                                                          |  |                   | 116,775 |   |                   |   | 118,972 |  
|                                                                                                           |  |                   |         |   |                   |   |         |  
|Commitments and contingencies (Note 15)                                                                    |  |                   |         |   |                   |   |         |  
|                                                                                                           |  |                  
|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                                                                                        |  |                   | (68,121 | ) |                   |   | (75,082 | )
|Accumulated other comprehensive loss                                                                       |  |                   |        |   |                   |   | (1,380  | )
|                                                                                                           |  |                   |         |   |                   |   |         |  
|Total stockholders deficit                                                                                |  |                   | (33,121 | ) |                   |   | (41,462 | )
|                                                                                                           |  |                   |         |   |                   |   |         |  
|Total liabilities and stockholders deficit                                                                |  | $                 | 83,654  |   |                   | $ | 77,510  |  
|                                                                                                           |  |                   |         |   |                   |   |         |  

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



F-3



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)



|                                              |  |                                 |         |   |      |   |         |      |  |   |        
|--------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | -------
|                                              |  | For the Year Ended December 31,
|                                              |  | 2006                            |         |   | 2005 |   |         | 2004
|Net sales                                     |  | $                               | 177,372 |   |      | $ | 152,904 |      |  | $ | 155,842
|Cost of goods sold                            |  |                                 | 148,077 |   |      |   | 136,275 |      |  |   | 130,197
|                                              |  |                                 |         |   |      |   |         |      |  |   |        
|Gross profit                                  |  |                                 | 29,295  |   |      |   | 16,629  |      |  |   | 25,645 
|Selling, general and administrative expenses  |  |                                 | 12,146  |   |      |   | 10,161  |      |  |   | 10,743 
|Asset impairment charge                       |  |                                 | 367     |   |      |   |        |      |  |   | 712    
|                                              |  |                                 |         |   |      |   |         |      |  |   |        
|Operating income                              |  |                                 | 16,782  |   |      |   | 6,468   |      |  |   | 14,190 
|Interest expense                              |  |                                 | 11,029  |   |      |   | 11,333  |      |  |   | 12,025 
|Other (income) loss, net                      |  |                                 | (1,804  | ) |      |   | 40      |      |  |   | 268    
|                                              |  |                                 |         |   |      |   |         |      |  |   |        
|Income (loss) before income taxes             |  |                                 | 7,557   |   |      |   | (4,905  | )    |  |   | 1,897  
|Income tax expense                            |  |                                 | 596     |   |      |   | 30      |      |  |   | 16     
|                                              |  |                                 |         |   |      |   |         |      |  |   |        
|Net income (loss)                             |  | $                               | 6,961   |   |      | $ | (4,935  | )    |  | $ | 1,881  
|                                              |  |                                 |        
|Other comprehensive income (loss) net of tax: |  |                                 |         |   |      |   |         |      |  |   |        
|Minimum pension liability adjustment          |  |                                 | 1,380   |   |      |   | (1,328  | )    |  |   | 518    
|Reclassification to earnings                  |  |                                 |        |   |      |   |        |      |  |   |       
|                                              |  |                                 |         |   |      |   |         |      |  |   |        
|Total comprehensive income (loss)             |  | $                               | 8,341   |   |      | $ | (6,263  | )    |  | $ | 2,399  
|                                              |  |                                 |         |   |      |   |         |      |  |   |        

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



F-4



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

STATEMENTS OF CASH FLOWS

(dollars in
thousands)



|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                        |  | For the Year Ended December 31, |        
|                                                                                        |  | 2006                            |         |   | 2005 |   |         | 2004 | 
|Cash flows from operating activities:                                                   |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                       |  | $                               | 6,961   |   |      | $ | (4,935  | )    |  | $ | 1,881   |  
|Adjustment to reconcile net income (loss) to net cash provided by operating activities: |  |                                 |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                            |  |                                 | 4,765   |   |      |   | 10,018  |      |  |   | 5,494   |  
|Amortization of noncurrent assets                                                       |  |                                 | 843     |   |      |   | 840     |      |  |   | 852     |  
|Amortization of discount on notes                                                       |  |                                 | 168     |   |      |   | 169     |      |  |   | 186     |  
|Write-off of debt issuance costs                                                        |  |                                 |        |   |      |   | 38      |      |  |   | 143     |  
|Asset impairment charge                                                                 |  |                                 | 367     |   |      |   |        |      |  |   | 712     |  
|(Gain) Loss on disposal of equipment                                                    |  |                                 | (124    | ) |      |   | 69      |      |  |   | 91      |  
|(Gain) Loss on debt cancellation                                                        |  |                                 |        |   |      |   | (50     | )    |  |   | 224     |  
|Noncash interest on finance obligation                                                  |  |                                 | 60      |   |      |   | 124     |      |  |   | 67      |  
|Change in operating assets and liabilities:                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|Trade accounts receivable, net                                                          |  |                                 | 482     |   |      |   | 463     |      |  |   | (3,418  | )
|Other current assets                                                                    |  |                                 | (640    | ) |      |   | 104     |      |  |   | 696     |  
|Inventories                                                                             |  |                                 | (5,415  | ) |      |   | 2,182   |      |  |   | (4,956  | )
|Current income tax refundable                                                           |  |                                 | (208    | ) |      |   |        |      |  |   | 428     |  
|Other assets                                                                            |  |                                 | (92     | ) |      |   | (84     | )    |  |   | (73     | )
|Accounts payable                                                                        |  |                                 | 2,368   |   |      |   | (255    | )    |  |   | 768     |  
|Accrued liabilities                                                                     |  |                                 | 897     |   |      |   | (1,083  | )    |  |   | (2,874  | )
|Postretirement benefit and pension obligations                                          |  |                                 | (901    | ) |      |   | (358    | )    |  |   | 911     |  
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                               |  |                                 | 9,531   |   |      |   | 7,242   |      |  |   | 1,132   |  
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                   |  |                                 |         |   |      |   |         |      |  |   |         |  
|Purchases of property, plant and equipment                                              |  |                                 | (3,028  | ) |      |   | (2,644  | )    |  |   | (2,442  | )
|Proceeds from sale of equipment                                                         |  |                                 | 349     |   |      |   | 353     |      |  |   | 47      |  
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                   |  |                                 | (2,679  | ) |      |   | (2,291  | )    |  |   | (2,395  | )
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                   |  |                                 |         |   |      |   |         |      |  |   |         |  
|Cash overdraft                                                                          |  |                                 | (886    | ) |      |   | 374     |      |  |   | 512     |  
|Payments on term loan                                                                   |  |                                 | (1,542  | ) |      |   | (1,821  | )    |  |   | (1,251  | )
|Proceeds from revolving credit facility                                                 |  |                                 | 12,400  |   |      |   | 37,800  |      |  |   | 21,700  |  
|Payments on revolving credit facility                                                   |  |                                 | (15,400 | ) |      |   | (41,300 | )    |  |   | (15,200 | )
|Proceeds from term loan                                                                 |  |                                 | 2,220   |   |      |   | 2,760   |      |  |   |        |  
|Payment received on loan to parent                                                      |  |                                 |        |   |      |   |        |      |  |   | 344     |  
|Purchases of Senior Subordinated Notes                                                  |  |                                 |        |   |      |   | (2,764  | )    |  |   | (8,806  | )
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                                   |  |                                 | (3,208  | ) |      |   | (4,951  | )    |  |   | (2,701  | )
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                    |  |                                 | 3,644   |   |      |   |        |      |  |   | (3,964  | )
|Cash and cash equivalents at beginning of period                                        |  |                                 |        |   |      |   |        |      |  |   | 3,964   |  
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalent at end of period                                               |  | $                               | 3,644   |   |      | $ |        |      |  | $ |        |  
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosures of cash flow information:                                      |  |                                 |         |   |      |   |         |      |  |   |         |  
|Cash (paid) during the year for interest                                                |  | $                               | (9,525  | ) |      | $ | (10,597 | )    |  | $ | (11,198 | )
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Cash received (paid) for income taxes                                                   |  | $                               | (856    | ) |      | $ | (36     | )    |  | $ | 388     |  
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of non-cash investing and financing activities:                 |  |                                 |         |   |      |   |         |      |  |   |         |  
|Property and equipment financed in accounts payable                                     |  | $                               | 9       |   |      | $ | 46      |      |  | $ |        |  
|                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  

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



F-5



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

STATEMENTS OF STOCKHOLDERS DEFICIT

(dollars in thousands)



|                                   |  |              |   |                 |   |                     |  |   |                |   |  |                                   |      |   |                             |   |        |   |  |   |         |  
|---------------------------------- |  | ------------ | - | --------------- | - | ------------------- |  | - | -------------- | - |  | --------------------------------- | ---- | - | --------------------------- | - | ------ | - |  | - | ------- | -
|                                   |  | Common Stock |   | Paid-In Capital |   | Accumulated Deficit |  |   | Loan to Parent |   |  | AccumulatedOtherComprehensiveLoss |      |   | Total Stockholders Deficit |  
|Balances, December 31, 2003        |  | $            | 1 |                 | $ | 34,999              |  | $ | (72,028        | ) |  | $                                 | (344 | ) |                             | $ | (570   | ) |  | $ | (37,942 | )
|Net income                         |  |              |  |                 |   |                    |  |   | 1,881          |   |  |                                   |     |   |                             |   |       |   |  |   | 1,881   |  
|Payment received on loan to parent |  |              |  |                 |   |                    |  |   |               |   |  |                                   | 344  |   |                             |   |       |   |  |   | 344     |  
|Other comprehensive income         |  |              |  |                 |   |                    |  |   |               |   |  |                                   |     |   |                             |   | 518    |   |  |   | 518     |  
|                                   |  |              |   |                 |   |                     |  |   |                |   |  |                                   |      |   |                             |   |        |   |  |   |         |  
|Balances December 31, 2004         |  |              | 1 |                 |   | 34,999              |  |   | (70,147        | ) |  |                                   |     |   |                             |   | (52    | ) |  |   | (35,199 | )
|Net loss                           |  |              |  |                 |   |                    |  |   | (4,935         | ) |  |                                   |     |   |                             |   |       |   |  |   | (4,935  | )
|Other comprehensive loss           |  |              |  |                 |   |                    |  |   |               |   |  |                                   |     |   |                             |   | (1,328 | ) |  |   | (1,328  | )
|                                   |  |              |   |                 |   |                     |  |   |                |   |  |                                   |      |   |                             |   |        |   |  |   |         |  
|Balances December 31, 2005         |  |              | 1 |                 |   | 34,999              |  |   | (75,082        | ) |  |                                   |     |   |                             |   | (1,380 | ) |  |   | (41,462 | )
|Net income                         |  |              |  |                 |   |                    |  |   | 6,961          |   |  |                                   |     |   |                             |   |       |   |  |   | 6,961   |  
|Other comprehensive income         |  |              |  |                 |   |                    |  |   |               |   |  |                                   |     |   |                             |   | 1.380  |   |  |   | 1,380   |  
|                                   |  |              |   |                 |   |                     |  |   |                |   |  |                                   |      |   |                             |   |        |   |  |   |         |  
|Balances December 31, 2006         |  | $            | 1 |                 | $ | 34,999              |  | $ | (68,121        | ) |  | $                                 |     |   |                             | $ |       |   |  | $ | (33,121 | )
|                                   |  |              |   |                 |   |                     |  |   |                |   |  |                                   |      |   |                             |   |        |   |  |   |         |  

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



F-6



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)



|1. | Summary of Significant Accounting Policies
|-- | ------------------------------------------

Basis of
Presentation.BGF Industries, Inc. is a wholly owned subsidiary of NVH, Inc. In July 2004, the Companys previous 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 wholly owned subsidiary of Porcher Industries, S.A. These financial statements include the accounts of BGF Industries, Inc. BGF manufactures high-quality
glass, aramid and carbon fiber fabrics for use in a variety of electronic, composite, insulation, construction, filtration, and commercial applications. The principal market is the United States.

Cash and Cash Equivalents.For purposes of the statements of cash flows, BGF considers cash on hand, cash deposited in financial institutions and money market
accounts with maturities of less than ninety days at date of purchase to be cash equivalents. These are stated at cost, which approximates market value. The book overdrafts in bank accounts consist of outstanding checks, which have not been
presented to a bank for payment.

Accounts Receivable.The Company does not require collateral on sales and evaluates the collectibility of its
accounts receivable based on a number of factors. An allowance for doubtful accounts is recorded based on a customers ability and likelihood to pay based on managements review of the facts.

Inventories.Inventories are stated at the lower of cost or market value. Cost is determined using the first-in, first-out (FIFO) method. The Company records
provisions for slow-moving and obsolete inventories and for lower of cost or market issues associated with its inventories. The adequacy of this estimate is dependent on a number of future factors, including but not limited to the state of the
economy and the level of customer demand. These factors could cause the inventory reserve to change by a material amount in the near term.

Property,
Plant and Equipment.Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation of property, plant and equipment is calculated principally on the straight-line method over the estimated useful lives of the
assets. Leased property meeting certain criteria is capitalized and the present value of the related lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on the straight-line method. Repairs and
maintenance costs are expensed as incurred; major replacements and improvements are capitalized. When assets are retired or sold, the cost and related accumulated depreciation are removed from the accounts with any resulting gain or loss reflected
in operations.

The estimated useful lives of the assets are as follows:



|                           |  |            
|-------------------------- |  | -----------
|Buildings and improvements |  | 15-50 years
|Machinery and equipment    |  | 3-20 years 

Long-lived assets. In the event that facts and circumstances indicate that the cost of long-lived assets
may not be recoverable, the estimated future undiscounted cash flows is compared to the assets carrying value and if less, an impairment loss is recognized in an amount by which the carrying value exceeds its fair value. In the event that
facts and circumstances indicate that the useful life of a long-lived asset has changed, the Company will revise the assets depreciation or amortization.

Income Taxes.Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases based on enacted tax laws and statutory rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the legislation is enacted. A valuation allowance



F-7



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)



|1. | Summary of Significant Accounting Policies  (Continued)
|-- | --------------------------------------------------------



against deferred tax assets is required if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.

Other Noncurrent Assets. Debt issuance costs are amortized over the terms of the respective debt agreements using the
interest method. BGF evaluates intangible assets for impairment annually (and in interim periods if certain events occur indicating that the carrying value is impaired) through a comparison of fair value to carrying value.

Revenue Recognition.Revenue from product sales and the related cost of goods sold are recognized at the time both risk of loss and legal title transfer to the
customer, which is at delivery in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) as amended by Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
104) and Statement of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Rights of Return Exists. Additionally, revenue is recognized only when the price is substantially fixed or determinable,
the customer is obligated to pay and collectibility is reasonably assured, the customer acquiring the product for resale has economic substance apart from that provided by us and we do not have significant obligations for future performance. The
customer may return goods for approved quality reasons. Provisions are made for estimated product returns, claims and allowance.

Financial Instruments.BGF may selectively enter into interest rate protection agreements to mitigate changes in interest rates on its variable rate borrowings. None of these agreements may be used for speculative or trading purposes. The fair value of BGFs
interest rate swap agreements, if any, are the estimated amount BGF would have to pay or receive to terminate the swap agreement as of the reporting date, taking into account current interest rates. The interest rate swaps are accounted for as
hedges on the basis that such derivatives reduce the risk of changes in interest rates on BGFs variable rate debt. The interest differentials from these swaps are recorded in interest expense. There are no interest rate swaps as of
December 31, 2006 or 2005.

BGF may enter into foreign currency exchange contracts to manage exposures related to specific foreign currency
transactions or anticipated cash flows. There are no foreign currency exchange contracts as of December 31, 2006 or 2005.

Rates currently available
to BGF for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. The fair value of BGFs long-term debt is further discussed in Note 9.

Pension Plans and Other Postretirement Benefits.BGF has a contributory defined benefit pension plan covering most employees. Pension expense for the plan is determined using the projected unit credit method.
BGF also provides certain retirement health care benefits, the estimated cost for which is accrued within the employees active service lives. BGFs customary funding policy of these plans is to contribute amounts permitted by the Internal
Revenue Code and in conformance with ERISA guidelines.

Shipping and Handling Costs. Shipping and handling costs, which consist principally of
freight, inspection costs, warehousing costs and internal transfer costs, are included in cost of goods sold. Revenue received from customers for shipping and handling costs, if any, are included in sales. These revenues are immaterial for all
periods presented.

Research and Development.Research and development expenses comprise the following types of costs incurred in performing
research and development activities: salaries and benefits, allocated overhead and facility occupancy costs, contract services and other outside costs. Research and development costs are expensed as incurred and were approximately $825, $776 and
$731 for the years ended December 31, 2006, 2005 and 2004, respectively.



F-8



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS

(dollars in thousands)



|1. | Summary of Significant Accounting Policies  (Continued)
|-- | --------------------------------------------------------



Advertising and Promotion.BGF expenses advertising and promotion costs as incurred and these costs are included as selling, general and administrative expenses.
Such amounts were not material for 2006, 2005, and 2004.

Selling, General and Administrative Expenses. Selling, general and administrative expenses
include advertising and promotion costs, administrative and sales salaries, sales commissions, and professional and consulting fees not directly related to manufacturing activities.

Other (Income) Expense.Other income increased to ($1,804) in 2006 from other expense of $40 in 2005 due to the settlement of a class action lawsuit during the third quarter of 2006.

Foreign Currency Transactions. Gains (losses) resulting from foreign currency transactions are included in other income or other expenses, and amounted to $(69),
$(116) and $60 in 2006, 2005, and 2004, respectively.

Other Comprehensive Income (Loss). BGF records certain items in other comprehensive income
(loss) in accordance with FAS 130 Reporting Comprehensive Income. Due to the Companys current tax position, the tax affect of these items in other comprehensive income is minimal.

Use of Estimates.The preparation of the financial statements in conformity with generally accepted accounting principles in the United States 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 financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Reclassification. Certain previously reported amounts have been reclassified to conform
with the current presentation.



|2. | Liquidity and Financial Condition
|-- | ---------------------------------

The Company had net income of
$6,961 for the year ended December 31, 2006 and had a $33,121 stockholders deficit as of December 31, 2006. In the year ended December 31, 2005, the Company had net loss of $4,935 and had a $41,462 stockholders deficit as
of December 31, 2005.

On June 6, 2003, the Company entered into a five year financing arrangement with Wells Fargo Foothill, Inc.
(WFF). See Note 9 for details concerning this arrangement.

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 WFF
loan. (See Note 9). While the Companys performance in 2006 has enabled it to meet its financial obligations, there can be no assurance that the Company will be able to sustain its current level of operations. The Company continues to evaluate
its current business plan in light of the current market conditions.



|3. | Inventories
|-- | -----------



|                                      |  |                   |        |   |                   |   |        |  
|------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -
|                                      |  | December 31, 2006 |        |   | December 31, 2005 |  
|Inventories consist of the following: |  |                   |        |   |                   |   |        |  
|Supplies                              |  | $                 | 1,702  |   |                   | $ | 1,837  |  
|Raw materials                         |  |                   | 4,599  |   |                   |   | 2,010  |  
|Stock-in-process                      |  |                   | 3,617  |   |                   |   | 3,684  |  
|Finished goods                        |  |                   | 22,602 |   |                   |   | 19,832 |  
|                                      |  |                   |        |   |                   |   |        |  
|Total inventories  gross             |  |                   | 32,520 |   |                   |   | 27,363 |  
|Less: writedowns                      |  |                   | (2,192 | ) |                   |   | (2,450 | )
|                                      |  |                   |        |   |                   |   |        |  
|Total inventories  net               |  | $                 | 30,328 |   |                   | $ | 24,913 |  
|                                      |  |                   |        |   |                   |   |        |  



F-9



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)



|4. | Other Current Assets
|-- | --------------------

Other current assets consist of the
following:



|                                    |  |                   |     |                   |   |    
|----------------------------------- |  | ----------------- | --- | ----------------- | - | ---
|                                    |  | December 31, 2006 |     | December 31, 2005
|Prepaid Insurance                   |  | $                 | 267 |                   | $ | 79 
|Miscellaneous non-trade receivables |  |                   | 502 |                   |   | 55 
|Other                               |  |                   | 18  |                   |   | 13 
|                                    |  |                   |     |                   |   |    
|Total other current assets          |  | $                 | 787 |                   | $ | 147
|                                    |  |                   |     |                   |   |    

Miscellaneous non-trade receivables consists of $337 and $0 at December 31, 2006 and 2005, respectively, due
from the Town of Altavista as reimbursement in the storm water phase of the Companys environmental remediation and $72 and $0 at December 31, 2006 and 2005, respectively, due from an insurance claim. The remaining balances of $93 and $55
at December 31, 2006 and 2005, respectively, are made up of affiliated and miscellaneous employee advances.



|5. | Assets Held for Sale
|-- | --------------------

In September 2004, the Companys board
made the decision to hold for sale the land and building of the South Hill heavyweight fabrics facility. In June 2006, the Company made the decision to hold for sale equipment at the same facility. As of December 31, 2006, the equipment that
was held for sale was either sold or written down as an asset impairment. The remaining assets have a net book value as of December 31, 2006 and 2005 of $245 and have been classified as a current asset on the balance sheets. A contract to sell
the land and building has been initiated in the first quarter of 2007. See Note 20 related to Subsequent Events for further details.



|6. | Net Property, Plant and Equipment
|-- | ---------------------------------

Net property, plant and
equipment consist of the following:



|                                    |  |                   |         |   |                   |   |         |  
|----------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                    |  | December 31, 2006 |         |   | December 31, 2005 |  
|Land                                |  | $                 | 2,879   |   |                   | $ | 2,873   |  
|Buildings                           |  |                   | 37,981  |   |                   |   | 38,113  |  
|Machinery and equipment             |  |                   | 82,851  |   |                   |   | 82,771  |  
|                                    |  |                   |         |   |                   |   |         |  
|Gross property, plant and equipment |  |                   | 123,711 |   |                   |   | 123,757 |  
|Less: accumulated depreciation      |  |                   | (94,373 | ) |                   |   | (92,090 | )
|                                    |  |                   |         |   |                   |   |         |  
|Net property, plant and equipment   |  | $                 | 29,338  |   |                   | $ | 31,667  |  
|                                    |  |                   |         |   |                   |   |         |  

It is the Companys policy to periodically review the estimated useful lives of its fixed assets. This review
during the fourth quarter of 2005 indicated that the actual useful life of an unfinished manufacturing building located in South Hill, Virginia was zero because it was very unlikely to be finished and used by the Company. Further, the Company did
not believe that potential buyers could be found as a result of the location of the building and the fact that it was unfinished. As a result, the Company depreciated the asset to its estimated residual value of $388. The Company determined the
residual value based on an appraisal from a third party. The effect of this change in estimate, based on a net book value of $5,332 prior to the adjustment, was to increase depreciation expense in the fourth quarter of 2005 by $4,944 and decrease
gross profit and operating income in the fourth quarter 2005 by $4,944.



F-10



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)



|6. | Net Property, Plant and Equipment  (Continued)
|-- | -----------------------------------------------



During the fourth quarter of 2006, the Company entered into an agreement to give certain equipment at the South Hill heavyweight fabrics facility to an affiliate. As a
result, the Company recorded a $275 write-down to reduce the carrying value of the remaining machinery and equipment to zero.

The Company has a financing
agreement for its corporate headquarters facility. Included in net property, plant and equipment is land and building with a net book value of $2,178 and $2,275 as of December 31, 2006 and 2005, respectively, related to this facility. (See Note
10).



|7. | Other Noncurrent Assets, Net
|-- | ----------------------------

Other noncurrent assets consist of
the following:



|                                        |  |                   |        |   |                   |   |        |  
|--------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -
|                                        |  | December 31, 2006 |        |   | December 31, 2005 |  
|Debt issuance costs                     |  | $                 | 5,645  |   |                   | $ | 5,619  |  
|Accumulated amortization                |  |                   | (4,240 | ) |                   |   | (3,408 | )
|                                        |  |                   |        |   |                   |   |        |  
|                                        |  |                   | 1,405  |   |                   |   | 2,211  |  
|Security deposits                       |  |                   | 525    |   |                   |   | 555    |  
|Unrecognized pension prior service cost |  |                   |       |   |                   |   | 5      |  
|Other noncurrent assets                 |  |                   | 600    |   |                   |   | 515    |  
|                                        |  |                   |        |   |                   |   |        |  
|Total other noncurrent assets, net      |  | $                 | 2,530  |   |                   | $ | 3,286  |  
|                                        |  |                   |        |   |                   |   |        |  

Amortization of deferred financing charges of $832, $840 and $852 for the years ended December 31, 2006, 2005
and 2004, respectively, has been included in interest expense.

In 2004, the Company purchased $9,000 (face amount) of Senior Subordinated Notes. (See Note
9). As a result of this transaction, debt issuance costs related to the original issuance of these notes of $150 were written off to interest expense.

In
2005, the Company purchased $2,850 (face amount) of Senior Subordinated Notes. (See Note 9). As a result of this transaction, debt issuance costs related to the original issuance of these notes of $37 were written off to interest expense.



|8. | Accrued Liabilities
|-- | -------------------

Accrued liabilities consist of the following:



|                                                                            |  |                   |        |                   |   |       
|--------------------------------------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------
|                                                                            |  | December 31, 2006 |        | December 31, 2005
|Interest                                                                    |  | $                 | 3,996  |                   | $ | 4,010 
|Environmental                                                               |  |                   | 2,218  |                   |   | 2,880 
|Profit sharing                                                              |  |                   | 1,288  |                   |   |      
|Payroll                                                                     |  |                   | 547    |                   |   | 610   
|Other employee benefits, including current portion of deferred compensation |  |                   | 1,603  |                   |   | 1,186 
|Medical benefits                                                            |  |                   | 622    |                   |   | 691   
|Other                                                                       |  |                   | 920    |                   |   | 1,127 
|                                                                            |  |                   |        |                   |   |       
|Total accrued liabilities                                                   |  | $                 | 11,194 |                   | $ | 10,504
|                                                                            |  |                   |        |                   |   |       



F-11



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)



|8. | Accrued Liabilities - (Continued)
|-- | ---------------------------------



Current contribution to retirement plan. Minimum required employer contributions to the retirement plan are $0 for 2006, 2005 and 2004. (See Note 12.)

Profit Sharing. The Company declared a profit sharing contribution in the amount of $876 for 2004, which was paid in the first quarter of 2005. The Company did
not declare a profit sharing award for 2005. In 2006, the Company declared a profit sharing contribution in the amount of $1,288, including payroll taxes, to be paid during the first quarter of 2007.

Environmental Matters. The Company is in the final phases of an Environmental Protection Agency (EPA)-supervised self-implementing remediation program
at its Altavista facility. The remediation program has been conducted under EPA rules at 40 C.F.R. §761.61, promulgated under the Toxic Substances Control Act, that set forth self-implementing cleanup standards for certain contamination by
polychlorinated biphenyls, or PCBs. PCBs were discovered at the Altavista facility during a 1998 environmental site assessment, and the EPA was notified. These PCBs were initially identified in the area of the former location of a heat
transfer oil tank that the previous owner of the facility had removed before Porcher Industries acquired the Company in 1988. 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, in groundwater, 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 Town of
Altavistas water treatment plant. Interim measures were taken in 1999 and 2000, and have been taken periodically since then, to control PCB migration and minimize exposure.

In 2003, the Company submitted to the EPA a final Site Characterization Report, or SCR, documenting the assessment of the property and the sites drainage ditch. In May 2004, the EPA approved the SCR.
A draft cleanup plan was submitted to the EPA in September 2004 and a final proposed remediation plan was provided to the EPA for its review in December 2005. The EPA approved the plan in May 2006.

The remediation plan was generally designed to achieve PCB levels in remaining soils within the area covered by the plan at or below 25 parts per million (ppm), which is
consistent with standards set forth in the EPA rules for low occupancy sites. The remediation plan covered property owned by the Company and off-site areas owned by third parties, including the portion of the drainage ditch running from
the property off-site to the western edge of adjacent railroad tracks. The portion of the drainage ditch east of the railroad tracks was not included within the scope of the voluntary cleanup. Although this eastern portion of the drainage ditch
generally exhibited significantly lower PCB levels than were present in the western portion of the drainage ditch, the exclusion of this area means that soils and/or sediments with PCBs above 25 ppm will remain in this area even after completion of
the plan.

The cleanup was divided into a storm water management phase, a soil remediation phase, and a post-cleanup reconstruction phase. The storm water
management phase was completed during the second quarter of 2006. The Company has requested reimbursement from the Town of Altavista for 80% of the costs borne in this project as the scope of work centers primarily on site utilities. The Town of
Altavista has agreed to a total reimbursement of $396 which is to be paid in equal installments over the next seven years. Payments began in January 2007. A discounted receivable of $337 has been recorded at December 31, 2006. The soil
remediation phase of the cleanup started in November 2006 and was completed in March 2007. The reconstruction phase has begun following completion of the soil remediation. The Company plans to place deed restrictions on the Altavista property,
including restrictions limiting the propertys use consistent with a low occupancy area within the meaning of the EPA rules.

The
implementation of the remediation plan has not completely eliminated PCBs from the area subject to the plan; as



F-12



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)



|8. | Accrued Liabilities  (Continued)
|-- | ---------------------------------



noted above, the plan is designed to achieve PCB levels in remaining soils at or below 25 ppm. Further, the remediation plan itself provided for
contingencies under which PCBs would remain in place above 25 ppm. While future EPA and/or the Virginia Department of Environmental Quality (DEQ) enforcement actions could potentially require further cleanup of the site, the
Companys voluntary remediation program has lessened the likelihood of such enforcement actions.

A reserve of $2,098 for the environmental issues at
the Altavista facility has been recorded at December 31, 2006 which reflects the accepted bid from the contractor for the soil remediation work of $2,321 plus estimated additional expenses to be incurred for testing and post-cleanup
reconstruction. The reserve has been reduced by expenses incurred to date. Remediation costs are estimates, subject to the EPAs comments on the remediation plan and to other factors that may arise in the remediation process. Contingencies that
may affect the accuracy of these estimates include:



| |  |  | The portion of the drainage ditch east of the railroad tracks is outside the scope of the self-implemented cleanup. There has been no indication whether the State
or EPA will seek to require the Company to undertake work in this drainage ditch. No cleanup plan or estimate for this work has been developed.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The construction estimates are inherently based on assumptions about the total quantity of soil to be removed and disposed, as bids are based on unit costs for
removal, transportation, and disposal. The extensive SCR was used as a basis for estimating quantities of soil to be excavated, transported, and deposited in proper landfills, but verification sampling upon excavation will be necessary and it is
possible that greater quantities of impacted soil than are currently estimated will require removal. Transportation and disposal costs are approximately two-thirds of the estimated cost of the project. Accordingly, a material increase in the
quantity of soil removed in excess of the currently-estimated amounts would correspondingly materially increase the cleanup cost.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Utilities may exist in and around the dig site that could be damaged. While all efforts will be made to avoid damaging utilities, any such damage may cause part or
all work at the plant to be suspended until such utilities can be restored. While not adding greatly to the project cost, the indirect cost of such an interruption through lost revenue could be material.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Completion of the remediation plan has addressed impacted soils at the site but will not preclude possible further action by the EPA under other environmental statutes
and rules or by Virginia. The Company is aware that the DEQ is calculating Total Maximum Daily Loads (TMDLs) for pollutants in water bodies. Samples have been taken for PCBs over large expanses of the Staunton River into which the storm water
discharges. It is not certain whether DEQs sampling may result in additional claims regarding areas downstream of the Companys property including in the portion of the drainage ditch east of the railroad track or in the Staunton River.

In addition, a 1998 Phase Two Environmental Site Assessment at the Cheraw, South Carolina facility revealed reportable levels of 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 Department of Health and Environmental Control (DHEC).
Upon review of the data with DHEC, it was determined that chlorinated solvent residuals constitute the sole remediation concern. With DHEC oversight and approval, the Company is pursuing a Monitored Natural Attenuation strategy, which includes
periodic groundwater monitoring. Work includes semi-annual monitoring and reporting. Recent tests show reduced levels of solvent concentrations. The Company may review the data again with DHEC and recommend reducing the frequency of testing to
annually



F-13



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)



|8. | Accrued Liabilities - (Continued)
|-- | ---------------------------------



to reduce costs. No action other than continued monitoring for this facility is anticipated at this time. As of December 31, 2006 and December 31,
2005, the Company had a reserve of $120 for the above-described environmental issues at the Cheraw facility.

As these environmental cleanups progress, the
Company may need to revise the reserves for Altavista and Cheraw but it is unable to derive a more precise estimate at this time, as actual costs remain uncertain. 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 2006, the Company approved a management bonus of $1,327 which is to be paid during the first quarter of 2007. In 2005 and 2004, the
Company approved a management bonus of $904 and $1,215, respectively, which was paid in the first quarter of the subsequent year.

Employee
severance. During the first quarter of 2005, the Company eliminated nine salary positions at its South Hill lightweight fabrics facility, which resulted in approximately $383 of non-recurring severance costs. All of these costs were paid as
of December 31, 2005.



|9. | Debt
|-- | ----

Debt consists of the following:



|                                                                                     |  |                   |        |                   |   |       
|------------------------------------------------------------------------------------ |  | ----------------- | ------ | ----------------- | - | ------
|                                                                                     |  | December 31, 2006 |        | December 31, 2005
|Term loan                                                                            |  | $                 | 5,756  |                   | $ | 5,079 
|Senior Credit Facility:                                                              |  |                   |        |                   |   |       
|Revolving Credit Facility                                                            |  |                   |       |                   |   | 3,000 
|Senior Subordinated Notes, net of unamortized discount of$356 and $524, respectively |  |                   | 83,544 |                   |   | 83,376
|                                                                                     |  |                   |        |                   |   |       
|Total debt                                                                           |  |                   | 89,300 |                   |   | 91,455
|Current Maturities                                                                   |  |                   | 1,200  |                   |   | 4,200 
|                                                                                     |  |                   |        |                   |   |       
|Long-term debt                                                                       |  | $                 | 88,100 |                   | $ | 87,255
|                                                                                     |  |                   |        |                   |   |       

On June 6, 2003, the Company obtained a five-year financing arrangement with Wells Fargo Foothill, Inc.
(WFF).

On April 4, 2005, the Company executed an amendment to the WFF Loan to increase its total borrowing availability by approximately
$5,000. The amendment was deemed to be effective as of March 31, 2005. The amendment provided for the following: (1) reduced the maximum facility size to $25,000; (2) reloaded the term loan back to the lesser of $6,000 or 70% of the
orderly liquidation value of eligible equipment; (3) increased the advance rate on finished goods inventory from 45% to 55%; (4) reduced the Excess Availability to $1,000 at all times; and (5) released the $550 environmental reserve
previously in place.

On October 31, 2005, the Company executed an amendment to the WFF Loan to increase its cap on capital expenditures to $3,500
annually. The amendment was deemed effective as of June 30, 2005.

On December 1, 2006, the Company entered an amendment to the WFF Loan. The
amendment provided for the following: (1) increased the maximum facility size to $27,000; (2) reloaded the term loan back to $6,000; (3) increased the maximum revolver credit line to $21,000; (4) increased the



F-14



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

9. Debt
 (Continued)



minimum EBITDA requirements for financial covenants to not less than $15,000 calculated on a trailing 12 month basis; (5) reduced the spread on interest
rates by approximately 100 basis points; and (6) increased the annual cap on capital expenditures to $4,500.

The WFF Loan, as amended, has a maximum
revolver credit line of $21,000 with a letter of credit sub-line of $4,000, an inventory sub-line of $10,000 and a term loan of $6,000, of which the principal was fully funded at the amendment date and is being amortized over 60 months.

WFF has a first priority, perfected security interest in our 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%, 55% and 35%, respectively, with inventory to be capped at the lesser of the eligible inventory calculation, $10,000 or 80% times the percentage of the book value of
our inventory that is estimated to be recoverable upon liquidation; (2) borrowing rates of LIBOR + 2.25% or the Wells Fargo Prime Rate (RR) + 0.00% for the revolver if the trailing twelve months EBITDA exceeds $20,000 with a 25 basis points
increase if the trailing twelve months EBITDA exceeds $17,000 but is less than or equal to $20,000 and a further 25 basis points increase if the trailing twelve months EBITDA is less than or equal to $17,000 ; (3) borrowing rates of LIBOR +
2.5% or RR + .25% for the term loan with, at all times, a minimum rate of 5% for both facilities; and (4) certain financial covenants including (i) a minimum excess availability at all times, (ii) a minimum trailing twelve month
EBITDA level and (iii) a $4,500 cap on annual capital expenditures; and (iv) an early termination fee.

In addition to the covenant requirements
set forth above, the WFF Loan does not allow the Company to pay dividends or distributions on its outstanding capital stock (including to its parent) and limits or restricts the Companys ability to incur additional debt, repurchase securities,
make certain prohibited investments, create liens, transfer or sell assets or merge or consolidate without the consent of the lender. The WFF Loan permits the lenders to accelerate payment of the outstanding principal and accrued and unpaid interest
upon certain events of default, including failure to make required payments of principal and interest when due, uncured violations of the material covenants under the WFF Loan or if an event of default exists under the indenture governing the Senior
Subordinated Notes that would permit the trustee or holders to accelerate payment of the outstanding principal and accrued unpaid interest with respect to the Senior Subordinated Notes.

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, NVH, Inc. and two of NVH, Inc.s subsidiaries, Glass Holdings LLC and BGF Services, Inc. As of December 31, 2006 amounts outstanding under the WFF Loan totaled $5,756 which consisted solely of $5,756 under the term loan. As of
December 31, 2005, amounts outstanding under the WFF Loan totaled $8,079 and consisted of $5,079 under the term loan and $3,000 under the revolver. As of December 31, 2006, the Company had not exercised its LIBOR Rate option on any of its
borrowings on the term loan or the revolver. The interest rate as of December 31, 2006 on the amounts outstanding under the Wells Fargo Prime Rate portion of the term loan was 8.5%. Interest rates on the amounts outstanding under the term loan
and revolver as of December 31, 2005 were 8.0%.

Availability under the revolver at December 31, 2006 and December 31, 2005 was $14,651 and
$11,677, respectively. This availability has been reduced by a reserve to allow for the annual interest payments on the Senior Subordinated Notes. The reserve for interest payments is increased by $165 a week in 2006 and 2005, and is reset to $0
when such payment is made. As of December 31, 2006 and December 31, 2005, the total outstanding reserves amounted to $3,969 and $3,804, 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 $83,900 in face amount remains outstanding, as a result of repurchases made by the Company in 2003, 2004 and 2005.



F-15



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

9. Debt
 (Continued)



On June 23, 2005, the Company purchased $2,850
(face value) of Senior Subordinated Notes for $2,765 plus accrued interest of $128. This transaction resulted in a net gain on extinguishment of debt of $50.

In 2004, the Company purchased $9,000 (face value) of Senior Subordinated Notes for $8,740 plus accrued interest of $264. This transaction resulted in a loss on extinguishment of debt of $224. The Senior Subordinated Note purchase was
funded by a combination of cash provided by operations and borrowings under the WFF Loan.

The indenture governing the Senior Subordinated Notes does not
allow the Company to pay dividends or distributions on its outstanding capital stock (including to its parent) and limits or restricts the Companys ability to incur additional debt, repurchase securities, make certain prohibited investments,
create liens, transfer or sell assets, enter into transactions with affiliates, issue or sell stock of a subsidiary or merge or consolidate without the consent of the trustee or a certain percentage of the holders. In particular, the Company is
prohibited from incurring additional debt or making certain additional investments unless it maintains a consolidated fixed charge coverage ratio of greater than 2.0 to 1.0. The indenture permits the trustee or the holders of 25% or more of the
Senior Subordinated Notes to accelerate payment of the outstanding principal and accrued and unpaid interest upon certain events of default, including failure to make required payments of principal and interest when due, uncured violations of the
material covenants under the indenture or if lenders accelerate payment of the outstanding principal and accrued unpaid interest due to an event of default with respect to at least $5,000 of other debt of the Company, such as the WFF Loan.

The fair value of the Senior Subordinated Notes as of December 31, 2006 and December 31, 2005 was $81,383 and $84,530, respectively.

The Company has been in compliance with all of the covenants and ratios under the WFF Loan and the indenture governing its Senior Subordinated Notes for all periods
presented.

10. Finance Obligation

In November 2002,
the Company entered into a financing agreement for its corporate headquarters facility located in Greensboro, North Carolina whereby the Company sold the facility to a third party and entered into a leasing arrangement for the use of this facility.
The cash proceeds received from the transaction were $2,550. The initial term of the lease arrangement is seven years with three five-year renewals. The agreement provides that the Company may repurchase the building for $3,400 in the second year of
the arrangement and continuing through year five, with repurchase options in years 7, 12, 17 and 22 of the agreement. As a result of the repurchase options, the transaction was accounted for as a financing in accordance with SFAS 98 Accounting
for Leases. Accordingly, the Company continues to carry the property on its balance sheet and records depreciation on the property. The proceeds received on the sale were recorded as a financing obligation on the balance sheet with payments
made to the lessor recorded to interest expense and the finance obligation based on the amortization of the obligation. The balance of the finance obligation as of December 31, 2006 and 2005 was $2,818 and $2,758, respectively, which includes
accrued interest.



F-16



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

10.
Finance Obligation (Continued)



Under the terms of the lease
arrangement, BGF is committed to the following minimum payments at December 31, 2006:



|           |  |   |      
|---------- |  | - | -----
|2007       |  | $ | 458  
|2008       |  |   | 472  
|2009       |  |   | 492  
|2010       |  |   | 576  
|Thereafter |  |   | 820  
|           |  |   |      
|           |  | $ | 2,818
|           |  |   |      

The payments due under the agreement reset to fair market rental rates upon BGFs execution of each five-year
renewal term.

11. Income Taxes

Income tax expense
(benefit) consists of the following:



|        |  |         |     |          |   |       |  |   |    
|------- |  | ------- | --- | -------- | - | ----- |  | - | ---
|        |  | 2006   
|        |  | Current |     | Deferred |   | Total
|Federal |  | $       | 439 |          | $ | 0     |  | $ | 439
|State   |  |         | 157 |          |   | 0     |  |   | 157
|        |  |         |     |          |   |       |  |   |    
|        |  | $       | 596 |          | $ | 0     |  | $ | 596
|        |  |         |     |          |   |       |  |   |    
|        | 
|        |  | 2005   
|        |  | Current |     | Deferred |   | Total
|Federal |  | $       | 0   |          | $ | 0     |  | $ | 0  
|State   |  |         | 30  |          |   | 0     |  |   | 30 
|        |  |         |     |          |   |       |  |   |    
|        |  | $       | 30  |          | $ | 0     |  | $ | 30 
|        |  |         |     |          |   |       |  |   |    
|        | 
|        |  | 2004   
|        |  | Current |     | Deferred |   | Total
|Federal |  | $       | 0   |          | $ | 0     |  | $ | 0  
|State   |  |         | 16  |          |   | 0     |  |   | 16 
|        |  |         |     |          |   |       |  |   |    
|        |  | $       | 16  |          | $ | 0     |  | $ | 16 
|        |  |         |     |          |   |       |  |   |    

A reconciliation of the difference between the federal statutory rate and the effective income tax rate as a
percentage of income before taxes is as follows:



|                                           |  |       |   |  |       |    |  |       |  
|------------------------------------------ |  | ----- | - |  | ----- | -- |  | ----- | -
|                                           |  | 2006  |   |  | 2005  |    |  | 2004  |  
|Federal statutory tax rate                 |  | 34.0  | % |  | 34.0  | %  |  | 34.0  | %
|State income taxes, net of federal benefit |  | 2.6   |   |  | 3.2   |    |  | 3.5   |  
|Valuation allowance                        |  | (32.3 | ) |  | (35.5 | )  |  | (40.1 | )
|Other                                      |  | 3.6   |   |  | (2.3  | )  |  | 3.4   |  
|                                           |  |       |   |  |       |    |  |       |  
|                                           |  | 7.9   | % |  | (0.6  | )% |  | 0.8   | %
|                                           |  |       |   |  |       |    |  |       |  



F-17



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

11.
Income Taxes  (Continued)



The tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:



|                                     |  |              |        |   |      |   |        |  
|------------------------------------ |  | ------------ | ------ | - | ---- | - | ------ | -
|                                     |  | December 31, |       
|                                     |  | 2006         |        |   | 2005 |  
|Deferred tax assets:                 |  |              |        |   |      |   |        |  
|Inventories                          |  | $            | 935    |   |      | $ | 1,256  |  
|Accrued liabilities                  |  |              | 1201   |   |      |   | 1,436  |  
|Accounts receivable                  |  |              | 189    |   |      |   | 233    |  
|Tax credits                          |  |              | 27     |   |      |   | 1,186  |  
|Accrued retirement liabilities       |  |              | 1,680  |   |      |   | 2,027  |  
|Net operating loss carry forward     |  |              | 121    |   |      |   | 1,003  |  
|                                     |  |              |        |   |      |   |        |  
|                                     |  |              | 4,153  |   |      |   | 7,141  |  
|Valuation allowance                  |  |              | (3,818 | ) |      |   | (6,790 | )
|                                     |  |              |        |   |      |   |        |  
|                                     |  |              | 335    |   |      |   | 351    |  
|                                     |  |              |        |   |      |   |        |  
|Depreciation                         |  |              | (335   | ) |      |   | (882   | )
|Other                                |  |              |       |   |      |   | 531    |  
|                                     |  |              |        |   |      |   |        |  
|Total gross deferred tax liabilities |  |              | (335   | ) |      |   | (351   | )
|                                     |  |              |        |   |      |   |        |  
|Net deferred tax asset               |  | $            |       |   |      | $ |       |  
|                                     |  |              |        |   |      |   |        |  

The Company is included in the consolidated federal tax return of Nouveau Verre Holdings, Inc. Pursuant to a tax
sharing agreement, BGF is required to make tax sharing payments to Nouveau Verre Holdings, Inc. with respect to BGFs pro rata share of consolidated federal income tax liabilities which does not differ significantly from that which would be
determined on a stand alone basis.

During 2002, BGF recorded interest income earned under the terms of the loan agreement with Glass Holdings for tax
purposes. BGF did not record this income for financial reporting purposes, which results in a deferred tax asset. BGF recorded a full valuation allowance against this and other deferred tax assets of approximately $56,477 in the second quarter of
2002 as it is more likely than not that their benefits will not be realized in the future. Additionally, no deferred tax assets were recognized in 2003. During 2004, the intercompany loan was distributed to Glass Holdings as a dividend. Thereupon,
the related deferred tax assets for the intercompany loan and the related interest income were reversed. Since a full valuation allowance was established for the intercompany loan and the related interest income, the reversal of the associated tax
assets had no tax impact.

12. Employee Benefits

Defined Contribution Plan. BGF has a 401(k) savings plan for all employees. Company contributions, if any, are made at the discretion of BGFs Board of Directors. BGF allows participants an election of receiving their profit
sharing, when applicable, in cash or as an employer contribution to the 401(k) plan. There were no Company contributions for 2005. In 2006 the Company declared a contribution of $1,288, including payroll taxes, that was paid in the first quarter of
2007.

Defined Benefit Pension Plan and Postretirement Benefits.BGF has a defined benefit pension plan covering substantially all of its employees.
Participating employees are required to contribute to the pension plan. In order to continue to provide all distribution options allowed by the defined benefit plan, the Company accelerated its 2005 contributions and paid $2,400 into the plan on
July 17, 2006. The Company also accelerated its 2004 contributions and paid $2,310 into the defined benefit plan on July 14, 2005 and $190 into the plan on September 1, 2005. Based on the current pension funding requirements for the
year ended December 31, 2006, there are no additional required contributions to the 2006 plan year.



F-18



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

12.
Employee Benefits  (Continued)



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 may choose to purchase
postretirement health benefits, including medical and dental coverage. There are no plan assets for the postretirement benefit plan.

The discount rate
used in the actuarial model is based on market rates for highly rated corporate debt instruments at the annual valuation date. The discount rate is used to estimate the present value of the future benefit obligation as of the valuation date. A lower
discount rate used in the actuarial model has resulted in a higher present value of benefit obligations and in an increase in pension expense of $78 at year ended December 31, 2006 from year ended December 31, 2005; however, the liability
did not increase because of company contributions and a favorable return on plan assets.Differences between actual results and actuarial assumptions are accumulated and amortized over future periods.

The Company uses a December 31 measurement date for its plans.

Net
periodic costs for pension benefits and other postretirement benefits for the year ended December 31 were comprised of:



|                                                    |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|--------------------------------------------------- |  | ---------------- | ------ | - | ----------------------- | - | ------ | -------- |  | - | -------- | - |  | - | ------ | -
|                                                    |  | Pension Benefits |        |   | Post-RetirementBenefits |  
|                                                    |  | 12/31/06         |        |   | 12/31/05                |   |        | 12/31/06 |  |   | 12/31/05 |  
|Change in projected benefit obligation:             |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|Projected benefit obligation at beginning of year   |  | $                | 26,009 |   |                         | $ | 21,891 |          |  | $ | 2,554    |   |  | $ | 1,786  |  
|Service cost                                        |  |                  | 1,343  |   |                         |   | 1,182  |          |  |   | 74       |   |  |   | 98     |  
|Interest cost                                       |  |                  | 1,359  |   |                         |   | 1,347  |          |  |   | 76       |   |  |   | 118    |  
|Actuarial (gain) loss                               |  |                  | (801   | ) |                         |   | 2,645  |          |  |   | (1,117   | ) |  |   | 587    |  
|(Benefits paid)                                     |  |                  | (1,231 | ) |                         |   | (1,858 | )        |  |   | (240     | ) |  |   | (194   | )
|Plan Participant Contributions                      |  |                  | 887    |   |                         |   | 802    |          |  |   | 123      |   |  |   | 159    |  
|                                                    |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|Projected benefit obligation at end of year         |  | $                | 27,566 |   |                         | $ | 26,009 |          |  | $ | 1,470    |   |  | $ | 2,554  |  
|Accumulated benefit obligation at end of year       |  | $                | 22,952 |   |                         | $ | 21,207 |          |  |   | N/A      |   |  |   | N/A    |  
|                                                    |  |                  |        |  
|Change in plan assets:                              |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|Fair value of plan assets at beginning of year      |  | $                | 18,710 |   |                         | $ | 16,218 |          |  | $ |         |   |  | $ |       |  
|Actual return on plan assets                        |  |                  | 2,653  |   |                         |   | 1,048  |          |  |   |         |   |  |   |       |  
|(Benefits paid)                                     |  |                  | (1,231 | ) |                         |   | (1,858 | )        |  |   | (240     | ) |  |   | (194   | )
|Employer contributions                              |  |                  | 2,400  |   |                         |   | 2,500  |          |  |   | 116      |   |  |   | 35     |  
|                                                    |  |                  |        |  
|Plan participant contributions                      |  |                  | 887    |   |                         |   | 802    |          |  |   | 124      |   |  |   | 159    |  
|                                                    |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|Fair value of plan assets at end of year            |  | $                | 23,419 |   |                         | $ | 18,710 |          |  | $ |         |   |  | $ |       |  
|                                                    |  |                  |        |  
|Net amount recognized:                              |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|Funded status                                       |  | $                | (4,147 | ) |                         | $ | (7,299 | )        |  | $ | (1,470   | ) |  | $ | (2,554 | )
|Unrecognized prior service cost                     |  |                  |       |   |                         |   | 5      |          |  |   | (357     | ) |  |   |       |  
|Unrecognized net (gain) or loss                     |  |                  | 3,927  |   |                         | $ | 6,182  |          |  |   | (173     | ) |  |   | 541    |  
|                                                    |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|Net amount recognized                               |  | $                | (220   | ) |                         | $ | (1,112 | )        |  | $ | (2,000   | ) |  | $ | (2,012 | )
|                                                    |  |                  |        |  
|Amount recognized in the balance sheet consists of: |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|Accrued benefit cost                                |  |                  | N/A    |   |                         | $ | (2,497 | )        |  | $ | (2,000   | ) |  | $ | (2,012 | )
|Prepaid benefit cost                                |  |                  | (220   | ) |                         |   | N/A    |          |  |   | N/A      |   |  |   | N/A    |  
|Intangible asset                                    |  |                  |       |   |                         |   | 5      |          |  |   | N/A      |   |  |   | N/A    |  
|Accumulated other comprehensive income              |  |                  |       |   |                         |   | 1,380  |          |  |   | N/A      |   |  |   | N/A    |  
|                                                    |  |                  |        |   |                         |   |        |          |  |   |          |   |  |   |        |  
|Net amount recognized                               |  | $                | (220   | ) |                         | $ | (1,112 | )        |  | $ | (2,000   | ) |  | $ | (2,012 | )



F-19



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

12.
Employee Benefits  (Continued)



Additional liability and
accumulated other comprehensive income for pension benefits:



|                                                                                          |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|----------------------------------------------------------------------------------------- |  | ---------------- | ------------------------------------ | - | ----------------------- | - | ------------------------------------ | -------- |  | - | ------------------ | - |  | - | ------------------- | -
|                                                                                          |  | Pension Benefits |                                      |   | Post-RetirementBenefits |  
|                                                                                          |  | 12/31/06         |                                      |   | 12/31/05                |   |                                      | 12/31/06 |  |   | 12/31/05           |  
|Minimum liability:                                                                        |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|Fair value of assets at measurement date                                                  |  | $                | 23,419                               |   |                         | $ | 18,710                               |          |  |   |                    |   |  |   |                     |  
|Accumulated benefit obligation at measurement date                                        |  |                  | 22,953                               |   |                         |   | 21,207                               |          |  |   |                    |   |  |   |                     |  
|                                                                                          |  |                  |                                      |  
|Required minimum liability                                                                |  |                  |                                     |   |                         |   | 2,497                                |          |  |   |                    |   |  |   |                     |  
|Prepaid (accrued) at fiscal year end                                                      |  |                  | (220                                 | ) |                         |   | (1,112                               | )        |  |   |                    |   |  |   |                     |  
|                                                                                          |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|Additional liability at fiscal year end                                                   |  |                  |                                     |   |                         |   | 1,385                                |          |  |   |                    |   |  |   |                     |  
|                                                                                          |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|                                                                                          |  |                  |                                      |  
|Intangible asset:                                                                         |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|Unrecognized prior service cost                                                           |  |                  |                                     |   |                         |   | 5                                    |          |  |   |                    |   |  |   |                     |  
|Maximum intangible asset, but not less than 0                                             |  |                  |                                     |   |                         |   | 5                                    |          |  |   |                    |   |  |   |                     |  
|Actual intangible asset                                                                   |  |                  |                                     |   |                         |   | 5                                    |          |  |   |                    |   |  |   |                     |  
|                                                                                          |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|Accumulated other comprehensive income                                                    |  | $                |                                     |   |                         | $ | 1,380                                |          |  |   |                    |   |  |   |                     |  
|                                                                                          |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|                                                                                          |  |                  |                                      |  
|Weighted average assumptions used to determine benefit obligations at end of fiscal year: |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|Discount rate                                                                             |  |                  | 5.75                                 | % |                         |   | 5.50                                 | %        |  |   | 5.75               | % |  |   | 5.50                | %
|Expected long-term rate of return on plan assets                                          |  |                  | 7.50                                 | % |                         |   | 7.50                                 | %        |  |   | N/A                |   |  |   | N/A                 |  
|Rate of annual compensation increases                                                     |  |                  | 2.50                                 | % |                         |   | 2.50                                 | %        |  |   | N/A                |   |  |   | N/A                 |  
|Health care cost trend on covered charges                                                 |  |                  | N/A                                  |   |                         |   | N/A                                  |          |  |   | 9.5%grading to5.0% |   |  |   | 10.0%grading to5.0% |  
|Assumptions used to determine net periodic pension cost for fiscal year:                  |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|Discount rate                                                                             |  |                  | 5.50                                 | % |                         |   | 6.00                                 | %        |  |   | 5.75               | % |  |   | 6.00                | %
|Expected long-term rate of return on plan assets                                          |  |                  | 7.50                                 | % |                         |   | 8.00                                 | %        |  |   | N/A                |   |  |   | N/A                 |  
|Rate of annual compensation increases                                                     |  |                  | 2.50% through2008 and 4.0%thereafter |   |                         |   | 2.50% through2008 and 4.0%thereafter |          |  |   | N/A                |   |  |   | N/A                 |  
|Health care cost trend on covered charges                                                 |  |                  | N/A                                  |   |                         |   | N/A                                  |          |  |   | 9.5%grading to5.0% |   |  |   | 10.0%grading to5.0% |  
|Net periodic pension cost:                                                                |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|Service cost                                                                              |  | $                | 1,344                                |   |                         | $ | 1,182                                |          |  | $ | 74                 |   |  | $ | 98                  |  
|Interest cost                                                                             |  |                  | 1,359                                |   |                         |   | 1,347                                |          |  |   | 76                 |   |  |   | 117                 |  
|(Expected return on plan assets)                                                          |  |                  | (1,426                               | ) |                         |   | (1,274                               | )        |  |   |                   |   |  |   |                    |  
|Amortization of prior service cost                                                        |  |                  | 5                                    |   |                         |   | 7                                    |          |  |   | (40                | ) |  |   |                    |  
|Recognized net actuarial (gain) or loss                                                   |  |                  | 226                                  |   |                         |   | 168                                  |          |  |   | (6                 | ) |  |   |                    |  
|                                                                                          |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  
|Total net periodic pension cost                                                           |  | $                | 1,508                                |   |                         | $ | 1,430                                |          |  | $ | 104                |   |  | $ | 215                 |  
|                                                                                          |  |                  |                                      |   |                         |   |                                      |          |  |   |                    |   |  |   |                     |  



F-20



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

12.
Employee Benefits  (Continued)



|                                                                                |  |                  |        |   |                                |   |        |          |  |   |          |   |  |   |        |  
|------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ------------------------------ | - | ------ | -------- |  | - | -------- | - |  | - | ------ | -
|                                                                                |  | Pension Benefits |        |   | Post-RetirementBenefits        |  
|                                                                                |  | 12/31/06         |        |   | 12/31/05                       |   |        | 12/31/06 |  |   | 12/31/05 |  
|Increase (decrease) in minimum liability included in other comprehensive income |  | $                | (1,380 | ) |                                | $ | 1,328  |          |  |   | N/A      |   |  |   | N/A    |  
|                                                                                |  |                  |        |  
|Reconciliation of (accrued)/prepaid pension cost:                               |  |                  |        |   |                                |   |        |          |  |   |          |   |  |   |        |  
|Accrued pension cost as of end of prior year                                    |  | $                | (1,112 | ) |                                | $ | (2,182 | )        |  | $ | (2,012   | ) |  | $ | (1,832 | )
|Contributions during the fiscal year                                            |  |                  | 2,400  |   |                                |   | 2,500  |          |  |   | 116      |   |  |   | 35     |  
|(Net periodic pension cost for the fiscal year)                                 |  |                  | (1,508 | ) |                                |   | (1,430 | )        |  |   | (104     | ) |  |   | (215   | )
|                                                                                |  |                  |        |   |                                |   |        |          |  |   |          |   |  |   |        |  
|Accrued pension cost as of fiscal year end                                      |  | $                | (220   | ) |                                | $ | (1,112 | )        |  | $ | (2,000   | ) |  | $ | (2,012 | )
|                                                                                |  |                  |        |   |                                |   |        |          |  |   |          |   |  |   |        |  
|                                                                                |  |                  |        |  
|Effect of one-percentage point increase in health care cost Trend on:           |  |                  |        |   |                                |   |        |          |  |   |          |   |  |   |        |  
|Service and interest cost components of FAS 106 cost                            |  |                  | N/A    |   |                                |   | N/A    |          |  |   | 20       |   |  |   | 31     |  
|Accumulated post-retirement benefit obligation                                  |  |                  | N/A    |   |                                |   | N/A    |          |  |   | 146      |   |  |   | 224    |  
|                                                                                |  |                  |        |  
|Effect of one-percentage point decrease in health care cost trend on:           |  |                  |        |   |                                |   |        |          |  |   |          |   |  |   |        |  
|Service and interest cost components of FAS 106 cost                            |  |                  | N/A    |   |                                |   | N/A    |          |  |   | (17      | ) |  |   | (26    | )
|Accumulated post-retirement benefit obligation                                  |  |                  | N/A    |   |                                |   | N/A    |          |  |   | (128     | ) |  |   | (194   | )
|                                                                                |  |                  |        |  
|Plan asset allocation for the defined benefit plan is as follows:               |  |                  |        |   |                                |   |        |          |  |   |          |   |  |   |        |  
|                                                                                |  |                  |       
|                                                                                |  |                  |        |   | Percentage of PlanAssets as of |   |        |          | 
|Asset Category                                                                  |  | TargetAllocation |        |   | 12/31/06                       |   |        | 12/31/05 |  |   |          |  
|Equity securities                                                               |  |                  | 65     | % |                                |   | 66     | %        |  |   | 65       | % |  |   |        |  
|Debt securities                                                                 |  |                  | 35     | % |                                |   | 34     | %        |  |   | 35       | % |  |   |        |  
|Other                                                                           |  |                  | 0      | % |                                |   | 0      | %        |  |   | 0        | % |  |   |        |  
|                                                                                |  |                  |        |   |                                |   |        |          |  |   |          |   |  |   |        |  
|Total                                                                           |  |                  | 100    | % |                                |   | 100    | %        |  |   | 100      | % |  |   |        |  

Investment policy and strategy: The policy is to place equal emphasis on the balance of
current income needs and the long-term growth of principal. A Balanced Growth investment approach will be used. The Fund may invest in a combination of stocks, bonds, and cash equivalent securities.

The Fund should achieve a balance between the dual objectives of preservation of current income and capital appreciation. The fund manager will actively
manage the portfolio and may adjust the asset allocation between different asset classes in an effort to add value.

Determination of
expected long-term rate of return: The expected long-term rate of return for the plans total assets is based on the expected return of each of the above categories, weighted based on the median of the target allocation for each class.

There are no plan assets for the post-retirement benefit plan.

Cash Flows Contributions: There are no required contributions for the defined benefit plan during 2007, attributable to 2006.



F-21



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

12.
Employee Benefits  (Continued)



The following benefit payments
reflecting expected future service are to be paid as follows:



|                      |  |                 |        |                         |   |      
|--------------------- |  | --------------- | ------ | ----------------------- | - | -----
|Fiscal Year(s) Ending |  | PensionBenefits |        | Post-retirementBenefits
|12/31/07              |  | $               | 834    |                         | $ | 61   
|12/31/08              |  |                 | 1,927  |                         |   | 72   
|12/31/09              |  |                 | 2,381  |                         |   | 88   
|12/31/10              |  |                 | 2,354  |                         |   | 95   
|12/31/11              |  |                 | 2,038  |                         |   | 107  
|12/31/12 to 12/31/16  |  |                 | 14,731 |                         |   | 646  
|                      |  |                 |        |                         |   |      
|Total                 |  | $               | 24,265 |                         | $ | 1,069
|                      |  |                 |        |                         |   |      



|                                                                                                                        |  |                  |               |                          |   |               |  |          |      |  |   |     
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------------- | ------------------------ | - | ------------- |  | -------- | ---- |  | - | ----
|                                                                                                                        |  | Pension Benefits |               | Post-Retirement Benefits
|                                                                                                                        |  | 12/31/06         |               | 12/31/05                 |   | 12/31/06      |  | 12/31/05
|Other accounting items:                                                                                                 |  |                  |               |                          |   |               |  |          |      |  |   |     
|                                                                                                                        |  |                  |               |                         
|Market-related value of assets                                                                                          |  | $                | 23,412        |                          | $ | 18,710        |  | $        |     |  | $ |    
|                                                                                                                        |  |                  |               |                         
|Amortization of prior service cost                                                                                      |  |                  | Straight Line |                          |   | Straight Line |  |          | N/A  |  |   | N/A 
|                                                                                                                        |  |                  |               |                         
|Employer commitments to make future plan amendments (that serve as the basis of the employers accounting for the plan) |  |                  | None          |                          |   | None          |  |          | None |  |   | None

Deferred Compensation Benefits. BGF has deferred compensation arrangements for certain key executives,
which generally provide for payments upon retirement or death. The amounts accrued under this arrangement were $2,139 and $2,136 as of December 31, 2006 and 2005, respectively, and are reflected in postretirement benefit and pension obligations
and the current portion is reflected in accrued liabilities. The Company funds a portion of these obligations through life insurance contracts on behalf of the executives participating in these arrangements. Net cash surrender value included in
other non-current assets was $566 and $469 at December 31, 2006 and 2005, respectively. Expenses related to these arrangements, including premiums and changes in cash surrender value, were $(14), $611 and $(61) for the years ended
December 31, 2006, 2005 and 2004, respectively.

13. Concentrations

BGFs cash and cash equivalents are placed in major domestic and international banks. Deposits in such banks may exceed federally insured limits.

Substantially all of BGFs raw materials are purchased from four suppliers. In the event these suppliers are unable or unwilling to deliver glass, aramid or carbon yarns, the business, financial condition and
results of operations could be materially adversely affected.

Substantially all of BGFs trade accounts receivable are due from companies in the
electronics, composites, insulation, filtration, construction and commercial industries. Management periodically performs credit evaluations of its customers and generally does not require collateral. Credit losses have historically been within
managements expectations.



F-22



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

13.
Concentrations  (Continued)



The following table presents a summary
of sales of significant customers as a percentage of BGFs net sales:



|           |  |      |   |  |      |   |  |      |  
|---------- |  | ---- | - |  | ---- | - |  | ---- | -
|           |  | 2006 |   |  | 2005 |   |  | 2004 |  
|Customer A |  | 13.1 | % |  | 12.5 | % |  | 14.4 | %
|           |  |      |   |  |      |   |  |      |  
|Customer B |  | 9.0  | % |  | 6.8  | % |  | 5.7  | %
|           |  |      |   |  |      |   |  |      |  
|Customer C |  | 9.5  | % |  | 4.8  | % |  | .4   | %
|           |  |      |   |  |      |   |  |      |  

14. Segment Information

BGF operates in one business segment that manufactures specialty woven and non-woven fabrics for use in a variety of industrial and commercial applications. BGFs principal market is the United States. The nature
of the markets, products, production processes and distribution methods are similar for substantially all of the Companys products.

Net sales by
geographic area are presented below, with sales based on the location of the customer. BGF does not have any long-lived assets outside the United States.



|              |  |      |         |      |   |         |  |   |        
|------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|              |  | 2006 |         | 2005 |   | 2004   
|United States |  | $    | 164,680 |      | $ | 142,281 |  | $ | 145,860
|Foreign       |  |      | 12,692  |      |   | 10,623  |  |   | 9,982  
|              |  |      |         |      |   |         |  |   |        
|              |  | $    | 177,372 |      | $ | 152,904 |  | $ | 155,842
|              |  |      |         |      |   |         |  |   |        

15. Commitments and Contingencies

As discussed in Note 8, the Company has environmental exposures associated with two of its manufacturing facilities.

Health Care Costs. Based on publicly available data, the Company currently expects health care costs to increase significantly for the foreseeable future, which will further increase its general and administrative costs and reduce
its net income. Furthermore, because the average age of the Companys employees and other covered persons is generally higher than other companies, the Company believes that it may be potentially exposed to relatively higher health care costs
each year, particularly to the extent that it is responsible for covering catastrophic health care costs up to the maximum annual coverage of $125 per covered person. In addition, because the Company has a relatively small number of employees and a
limited amount of annual net income, the occurrence of even a small amount of such catastrophic costs during any period would have a magnifying adverse impact on its net income during such period. As a result of the foregoing, even though the
Company has undertaken and will continue to undertake a variety of measures to control increased health care costs, it is likely that its net income will decline in the future due to such expected increased costs unless otherwise offset by increased
revenues or lower costs in other areas.

Pension Plan Costs. Substantially all of the Companys eligible employees have elected to participate
in its defined benefit pension plan. Because pension obligations are ultimately settled in future periods, the determination of the annual pension expense and pension liabilities is subject to estimates and assumptions, such as the discount rate,
which are reviewed annually and are based on current rates and trends. Due to historically low interest rates we have had to make higher cash contributions to maintain the funded status of this plan. The Company expects this trend may continue in
the future, which it would fund using cash flows from operations or borrowings under the WFF Loan. The Company cannot predict whether investment returns will be sufficient to fund all of its future retirement benefits. To the extent the pension plan
assets are not sufficient to fund future retirement benefits for the employees, the average age of which is relatively higher than other companies, the Company would be required to fund any shortfall using cash generated by its operations.
Furthermore, at any time, the federal laws governing pension plans or the administrative interpretations of those laws may be amended in a manner that could increase our pension plan costs and liabilities.



F-23



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

15.
Commitments and Contingencies  (Continued)



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 on the
Companys financial position or results of operations.

As permitted by Delaware law, the Company has entered into indemnification agreements pursuant
to which the Company indemnifies its directors and officers for certain events or occurrences while the director or officer is, or was, serving at the Companys request, in such capacity. The maximum potential amount of future payments that the
Company could be required to make under these agreements is limited. As a result of its insurance coverage, the Company believes that the estimated fair value of the Companys indemnification agreements with directors and officers is minimal.
No liabilities have been recorded for these agreements as of December 31, 2006 and 2005.

Operating Leases.The Company leases facilities and
equipment under operating lease agreements. Generally, these leases contain renewal options under cancelable and non-cancelable operating leases. Rent expense amounted to $1,091, $1,152 and $1,214 for the years ended December 31, 2006, 2005 and
2004, respectively. Under the terms of non-cancelable operating leases, the Company is committed to the following future minimum lease payments at December 31, 2006:



|            |  |   |    
|----------- |  | - | ---
|Fiscal Year |  |  
|2007        |  | $ | 639
|2008        |  |   | 480
|2009        |  |   | 207
|2010        |  |   | 198
|Thereafter  |  |   | 243

16. Related Party Transactions

Related party balances at December 31, 2006, 2005, and 2004 and transactions for the years ended December 31 were as follows:



|                                                                                      |  |      |        |      |   |        |  |   |       
|------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                                                      |  | 2006 |        | 2005 |   | 2004  
|Trade accounts receivable from Porcher                                                |  | $    | 158    |      | $ | 37     |  | $ | 144   
|                                                                                      |  |      |        |      |   |        |  |   |       
|Trade accounts receivable from other affiliated companies                             |  | $    | 358    |      | $ | 188    |  | $ | 607   
|                                                                                      |  |      |        |      |   |        |  |   |       
|Sales to Porcher and affiliates                                                       |  | $    | 1,673  |      | $ | 352    |  | $ | 349   
|                                                                                      |  |      |        |      |   |        |  |   |       
|Fees to a subsidiary of Glass Holdings                                                |  | $    | 850    |      | $ | 720    |  | $ | 1,367 
|                                                                                      |  |      |        |      |   |        |  |   |       
|Fees to an affiliate included in accounts payable                                     |  | $    | 9      |      | $ | 16     |  | $ | 767   
|                                                                                      |  |      |        |      |   |        |  |   |       
|Fees to an affiliate of Porcher                                                       |  | $    | 645    |      | $ |       |  | $ |      
|                                                                                      |  |      |        |      |   |        |  |   |       
|Due from affiliate in other current assets                                            |  | $    |       |      | $ |       |  | $ | 3     
|                                                                                      |  |      |        |      |   |        |  |   |       
|Purchases from Porcher and affiliated companies, excluding AGY Holding Corp.          |  | $    | 3,002  |      | $ | 516    |  | $ | 4,254 
|                                                                                      |  |      |        |      |   |        |  |   |       
|Affiliated purchases included in accounts payable                                     |  | $    | 781    |      | $ | 577    |  | $ | 599   
|                                                                                      |  |      |        |      |   |        |  |   |       
|Payable to AGY Holding Corp.                                                          |  | $    | 2,188  |      | $ | 847    |  | $ | 739   
|                                                                                      |  |      |        |      |   |        |  |   |       
|Receivable from AGY Holding Corp.                                                     |  | $    |       |      | $ |       |  | $ | 5     
|                                                                                      |  |      |        |      |   |        |  |   |       
|Reimbursable expenses and lease income from AGY Holding Corp.                         |  | $    |       |      | $ | 25     |  | $ | 1,227 
|                                                                                      |  |      |        |      |   |        |  |   |       
|Purchases from AGY Holding Corp.                                                      |  | $    | 39,776 |      | $ | 30,426 |  | $ | 25,543
|                                                                                      |  |      |        |      |   |        |  |   |       
|Commissions to Porcher                                                                |  | $    | 43     |      | $ | 44     |  | $ | 70    
|                                                                                      |  |      |        |      |   |        |  |   |       
|Commissions to Porcher affiliates                                                     |  | $    | 119    |      | $ | 33     |  | $ |      
|                                                                                      |  |      |        |      |   |        |  |   |       
|Receivable from sale of manufacturing equipment to an affiliate of Porcher Industries |  | $    |       |      | $ |       |  | $ | 600   
|                                                                                      |  |      |        |      |   |        |  |   |       

The fees to a subsidiary of Glass Holdings for 2004 of $1,367 include a one-time management fee of $767. The fees
paid to an affiliate of Porcher are management fees.



F-24



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

16.
Related Party Transactions(Continued)



In July 2004, the
Companys previous 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, S.A.

In September 2004, the Company entered into an agreement to sell certain equipment at the South Hill
heavyweight fabrics facility to an affiliate for $600. The equipment was recorded at $371, which is fair value less estimated selling costs, as of September 30, 2004 and was reclassified as a current asset on the balance sheet. An asset
impairment charge of $250 was recognized as of September 30, 2004. The final transaction took place in December 2004 and the asset impairment charge was revised to $180 based on actual selling costs.

On December 10, 2002, Advanced Glassfiber Yarns LLC , a major supplier and affiliate of BGF, filed for protection under Chapter 11 of the U. S. bankruptcy code. On
April 2, 2004, AGY Holding Corp. (AGY) emerged from bankruptcy. As part of AGYs reorganization, the glass yarn operation at the South Hill facility was closed effective September 30, 2004 and the supply agreement relating
to this facility with BGF was terminated. Porcher Industries, which owns BGF through a US holding company, previously owned a 51% interest in Advanced Glassfiber Yarns LLC. 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, 2007. The supply agreement which has been extended through 2009, provides
BGF with an economic incentive, but not an obligation, to purchase yarn from AGY. On April 7, 2006, AGY Holding Corp. was sold to a private equity investment firm. As a result, Porcher Industries no longer retains an interest in AGY Holding
Corp.

During the first quarter of 2003, the Companys parent at that time, Glass Holdings Corp., 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 Corp. The remaining balance of $5,995 reduced the Companys income tax
receivable. An additional $500 from Glass Holdings Corp. 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 Corp. 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.

The
Company is the guarantor of an executives deferred compensation agreement with a subsidiary of Glass Holdings LLC.



F-25



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

17.
Quarterly Financial Information (Unaudited)



The Company has set forth
selected quarterly financial data for the years ended December 31, 2006 and 2005.



|                 |  |       |        |        |   |        |  |        |        |  |   |       
|---------------- |  | ----- | ------ | ------ | - | ------ |  | ------ | ------ |  | - | ------
|2006 by Quarter  |  | First |        | Second |   | Third  |  | Fourth
|Net sales        |  | $     | 45,899 |        | $ | 46,323 |  | $      | 43,672 |  | $ | 41,478
|Gross profit     |  |       | 8,143  |        |   | 7,804  |  |        | 6,687  |  |   | 6,661 
|Operating income |  |       | 5,187  |        |   | 4,395  |  |        | 3,562  |  |   | 3,638 
|Net income       |  |       | 2,393  |        |   | 1,456  |  |        | 2,451  |  |   | 661   



|                        |  |       |        |   |        |   |        |  |        |        |  |   |        |  
|----------------------- |  | ----- | ------ | - | ------ | - | ------ |  | ------ | ------ |  | - | ------ | -
|2005 by Quarter         |  | First |        |   | Second |   | Third  |  | Fourth |       
|Net sales               |  | $     | 37,045 |   |        | $ | 41,728 |  | $      | 36,664 |  | $ | 37,467 |  
|Gross profit (loss)     |  |       | 4,839  |   |        |   | 6,613  |  |        | 5,402  |  |   | (225   | )
|Operating income (loss) |  |       | 2,304  |   |        |   | 3,844  |  |        | 3,198  |  |   | (2,878 | )
|Net income (loss)       |  |       | (717   | ) |        |   | 948    |  |        | 378    |  |   | (5,544 | )

18. Recent Accounting Pronouncements

FIN 48, Accounting for Uncertainty in Income Taxes, was issued in June 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We will adopt FIN 48 in the first quarter of 2007. We are continuing to evaluate the impact
that adoption of FIN 48 may have on our results of operations, cash flows and financial position.

In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 requires that employers recognize on a prospective basis the funded status of their defined benefit pension and
other postretirement plans on their balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net
periodic benefit cost. SFAS No. 158 also requires additional disclosures in the notes to financial statements. For BGF, SFAS No. 158 is effective as of the end of fiscal years ending after June 15, 2007. The Company is currently
assessing the impact of SFAS No. 158 on its financial statements. However, based on the current funded status of our defined benefit pension and postretirement medical plans, the Company would be required to increase its total liability by
$3,900 for pension, which would result in an estimated decrease to stockholders equity of approximately $3,600, net of taxes, in the Companys balance sheet. This estimate may vary from the actual impact of implementing SFAS No. 158.
The ultimate amounts recorded are highly dependent on a number of assumptions, including the discount rates in effect at December 31, 2007, the actual rate of return on our pension assets for 2007 and the tax effects of the adjustment. Changes
in these assumptions since the Companys last measurement date could increase or decrease the expected impact of implementing SFAS No. 158 in the financial statements at December 31, 2007.



F-26



---

BGF INDUSTRIES, INC.

(a wholly owned subsidiary of NVH, Inc.)

NOTES TO FINANCIAL STATEMENTS(Continued)

(dollars in thousands)

18.
Recent Accounting Pronouncements (Continued)



In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective as of
the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact, if any of SFAS 159 on its financial statements.

19. Subsequent Events

On February 26, 2007 the Company entered
into a real estate contract (the contract) to sell its South Hill, VA heavyweight fabrics facility. The contract provides for (i) a selling price of $340, (ii) a renewal term of December 31, 2013 for the lease of its
warehousing and non woven manufacturing facility in Altavista, VA and (iii) a sixty day due diligence period for the buyer prior to closing. No assurance can be given at this point that the proposed transaction will close under the above
disclosed terms or at all.

On February 13, 2007, a significant customer of the Company filed for protection under Chapter 7 of the US Bankruptcy
Code. As a result, the Company increased its allowance for doubtful accounts for this customer as of December 31, 2006 to $272. The remaining unreserved accounts receivable balance for this customer is $56 at December 31, 2006. However,
given the high level of uncertainty this early in the procedure, no assurance can be given as to the amount the Company will recover, if any.



F-27



---

Schedule IIValuation and Qualifying Accounts

(In thousands)



|                                                                                                                       |  |                              |       |                             |   |                                     |  |            |   |                         |   |       |  |   |      
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | --------------------------- | - | ----------------------------------- |  | ---------- | - | ----------------------- | - | ----- |  | - | -----
|                                                                                                                       |  |                              |       | Column C                    |   |                                     |  |           
|Column A                                                                                                               |  | Column B                     |       | Additions                   |   | Column D                            |  | Column E  
|                                                                                                                       |  | Balance atBeginning ofPeriod |       | Charged toCosts andExpenses |   | Charged(Credited) toOther Accounts) |  | Deductions |   | Balance atEnd of Period
|Allowance for doubtful accounts, returned goods and discounts deducted from accounts receivable in the balance sheets: |  |                              |       |                             |   |                                     |  |            |   |                         |   |       |  |   |      
|Year ended December 31, 2006                                                                                           |  | $                            | 396   |                             | $ | 190                                 |  | $          |  |                         | $ | 10    |  | $ | 576  
|Year ended December 31, 2005                                                                                           |  | $                            | 366   |                             | $ | 234                                 |  | $          |  |                         | $ | 204   |  | $ | 396  
|Year ended December 31, 2004                                                                                           |  | $                            | 344   |                             | $ | 122                                 |  | $          |  |                         | $ | 100   |  | $ | 366  
|                                                                                                                       |  |                              |       |                             |  
|Allowance for obsolete inventory:                                                                                      |  |                              |       |                             |   |                                     |  |            |   |                         |   |       |  |   |      
|Year ended December 31, 2006                                                                                           |  | $                            | 2,450 |                             | $ | 920                                 |  | $          |  |                         | $ | 1,178 |  | $ | 2,192
|Year ended December 31, 2005                                                                                           |  | $                            | 2,209 |                             | $ | 3,174                               |  | $          |  |                         | $ | 2,933 |  | $ | 2,450
|Year ended December 31, 2004                                                                                           |  | $                            | 2,363 |                             | $ | 2,033                               |  | $          |  |                         | $ | 2,187 |  | $ | 2,209
|                                                                                                                       |  |                              |       |                             |  
|Restructuring Reserve:                                                                                                 |  |                              |       |                             |   |                                     |  |            |   |                         |   |       |  |   |      
|Year ended December 31, 2006                                                                                           |  | $                            |      |                             | $ |                                    |  | $          |  |                         | $ |      |  | $ |     
|Year ended December 31, 2005                                                                                           |  | $                            |      |                             | $ |                                    |  | $          |  |                         | $ |      |  | $ |     
|Year ended December 31, 2004                                                                                           |  | $                            | 16    |                             | $ |                                    |  | $          |  |                         | $ | 16    |  | $ |     
|                                                                                                                       |  |                              |       |                             |  
|Environmental Reserve:                                                                                                 |  |                              |       |                             |   |                                     |  |            |   |                         |   |       |  |   |      
|Year ended December 31, 2006                                                                                           |  | $                            | 2,880 |                             | $ | 300                                 |  | $          |  |                         | $ | 962   |  | $ | 2,218
|Year ended December 31, 2005                                                                                           |  | $                            | 2,696 |                             | $ | 340                                 |  | $          |  |                         | $ | 156   |  | $ | 2,880
|Year ended December 31, 2004                                                                                           |  | $                            | 2,736 |                             | $ |                                    |  | $          |  |                         | $ | 40    |  | $ | 2,696



S-1



---

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 on March 28, 2007.



BGF INDUSTRIES, INC.By:

/s/ James R. HendersonJames R. HendersonPresident


Pursuant to the requirements of the Securities Exchange Act of 1934, this report had been signed by the
following persons on behalf of the Registrant in the capacities indicated on March 28, 2007.



|                                          |  |                                                                     
|----------------------------------------- |  | --------------------------------------------------------------------
|Signature                                 |  | Title                                                               
|                                          | 
|/s/ Philippe Porcher Philippe Porcher     |  | Chairman of the Board of Directors                                  
|                                          | 
|/s/ James R. Henderson James R. Henderson |  | President (Principal Executive Officer)                             
|                                          | 
|/s/ Philippe R. Dorier Philippe R. Dorier |  | Chief Financial Officer (Principal Financial and Accounting Officer)