BMC Industries, Inc. ("BMC," the "Company," "we," "our" or "us") was established in 1907 as a Minnesota corporation and has developed into a multinational manufacturer and distributor of high volume precision products in two reportable segments: Buckbee-Mears and Optical Products. The Buckbee-Mears group is comprised of Mask Operations and Non-Mask Operations.  Mask Operations produces aperture masks, which are a key component of color television picture tubes.  Non-Mask Operations, formerly "Micro-Technology Operations," is a leading producer of photochemically machined precision parts for medical products, electronics, filtration and automotive applications. Buckbee-Mears operates in a highly price competitive industry, particularly the market for aperture masks, which has impacted the business for several years.  As a result, the group is focused on cost reductions while investing strategically into new product development. During 2002, the Buckbee-Mears group shutdown its Non-Mask Operations facility located in St. Paul, Minnesota and sold a portion of the non-mask sheet etching business. The remaining operations were consolidated into the Mask Operations facilities in Cortland, New York and Mullheim, Germany. Mask Operations also responded during 2002 to dramatically falling prices for computer monitor masks by converting all mask production lines to television aperture masks and exiting the monitor mask market, except for occasional production on a tactical basis.

Optical Products, through Vision-Ease Lens, Inc. and other operating subsidiaries, designs, manufactures and distributes polycarbonate, glass and hard-resin plastic eyeglass lenses for the global optical industry.  Vision-Ease is one of the top global manufacturers of polycarbonate and glass lenses. Polycarbonate is the fastest growing lens material in the optical industry and the Optical Products group is a leader in the design and development of premium polycarbonate products, including progressive, photochromic and polarizing lenses. Similar to the actions taken by Buckbee-Mears, the Optical Products group reduced operating costs in 2002 by closing its Azusa, California production facility and consolidated production into its two remaining manufacturing facilities in Jakarta, Indonesia and Ramsey, Minnesota. 

(b)    Financial Information About Industry Segments.

Financial information about our operating segments for the three most recent fiscal years appear on pages 41-42.

(c)    Narrative Description of Business.

Buckbee-Mears

Products and Marketing. The Buckbee-Mears facilities in Cortland and Mullheim both are ISO 9002 certified, which is a critical prerequisite to supplying products to a broad base of customers. Mask Operations manufactures aperture masks at the Cortland and Mullheim facilities and operates a low-cost mask inspection facility in Tatabanya, Hungary. Non-Mask Operations conducts research, development and specialty manufacturing of precision photo-etched metal parts, in both Cortland and Mullheim.

Two customers of Buckbee-Mears each accounted for more than 10% of our total Company revenues for 2002. Thomson, S.A. of France, including its U.S. based operations, accounted for approximately 19% of our 2002 total Company revenues. Samsung Display Co., Ltd., of South Korea accounted for approximately 13% of our 2002 total Company revenues. Thomson produces televisions in North America and Europe under various trademarks, including RCA and GE.  Samsung produces televisions in the Americas, Europe and Asia and computer monitors in South America and Asia under the Samsung trade name.

Aperture masks are photo-chemically etched fine screen grids found in color television and computer monitor picture tubes and consist of thousands of precise, conically shaped holes designed to focus the electron beam on the proper phosphor color stripe to produce a crisp image.  Aperture masks are made from steel or invar, a nickel and iron alloy, and range in size from 6-inch to 40-inch diagonal dimensions. Buckbee-Mears manufactures aperture masks ranging from 14-inch to 36-inch diagonal dimensions. Our facilities employ an automated, continuous photochemical etching process that we originally developed in the 1950s and licensed to others in subsequent years. We sell aperture masks directly to color television tube manufacturers in North America, Europe and Asia through an in-house sales organization. Sales of aperture masks comprised 52%, 52% and 55% of our consolidated total revenues in 2002, 2001 and 2000, respectively.

Mask Operations is engaged in ongoing efforts to develop future manufacturing and technical expertise in higher margin, television masks for high definition television ("HDTV"), flat, wide screen (16 x 9) and digital applications. We have made significant process capability gains on these advanced mask products, particularly in the flat, widescreen and HDTV categories. The Buckbee-Mears group also achieved substantial growth in sales of aperture masks to new customers in China and other parts of Asia. At the same time, sales of masks were down in North America and Europe. Buckbee-Mears was able to increase its share of mask sales in Asia by redirecting sales efforts to Asia last year when demand for television masks began declining in NAFTA.  Buckbee-Mears is increasing its efforts to grow sales outside North America and Europe in order to offset lower demand in our home markets. The North American and European markets are experiencing declining mask demand due to imports of television sets from China and plant shutdowns by tube and set manufacturers in the US and Europe.   

Non-Mask Operations markets its development capabilities and sells products through in-house sales representatives, independent manufacturer representatives and distributors to customers in the medical, electronics, automotive and filtration applications, including ignition components, medical device components and reusable filtration devices. Over the past few years, Non-Mask Operations has pursued a strategy of leveraging its high-volume precision technologies and production capabilities to attract large end-product manufacturers for joint research and product development projects. These efforts have resulted in the development of new technology and new customers who offer the potential for significant future revenues. In March 2001, Buckbee-Mears signed an agreement with Cordis Corporation, a wholly-owned unit of Johnson & Johnson, for the development and supply of stents. Following two years of development efforts, Buckbee-Mears is working with Cordis to obtain approval of our manufacturing operations in Cortland from the Food and Drug Administration ("FDA"). The group is seeking to expand its development and production of medical products beyond stents by obtaining FDA certification at the Cortland facility. 

Raw Materials. Buckbee-Mears procures raw materials from multiple suppliers. Steel and invar are the main raw materials used by Buckbee-Mears. Our Cortland facility imports all of its steel and invar from suppliers in Japan and Germany. Our Mullheim facility obtains a majority of its steel and invar raw material from a supplier within Germany and the remaining portion from a vendor in Japan. Importation of steel into the United States is subject to certain restrictions imposed by U.S. trade legislation and regulations. In addition, steel imports are the subject of occasional domestic trade disputes and investigations that have resulted in the imposition of tariffs by the U.S. government. We have successfully obtained exclusions from these tariffs to date, most recently as March 2002, based on our inability to source aperture mask steel in the U.S. We do not anticipate difficulty in obtaining steel or any other raw materials. As we increase sales in Asia, however, we are required to use different types of steel than we currently use in our home markets. We do not anticipate that this will cause any production problems or that the steel will not be available but there can be no assurance that shortages or other problems will not occur given the recency of our sales efforts into Asia.  Our inability to obtain these materials would have a material adverse effect on production and results of operations.

Intellectual Property.  We have a number of patents and license rights that are important to the success of our Buckbee-Mears operations. These patents range in their expiration dates from 2003 to 2022. We believe that the loss of any single patent would not have a material adverse effect on our business as a whole. We believe that improvement of existing products and processes and a reliance on trade secrets and unpatented proprietary know-how are as important as patent protection in establishing and maintaining our competitive position.  At the same time, we continue to seek patent protection for our products and processes on a selective basis.  There can be no assurance, however, that any issued patents will provide substantial protection or commercial value.  We require our consultants and employees to agree in writing to maintain the confidentiality of our information and, within certain limits, to assign to us any inventions, and any patent or other intellectual property rights, relating to our business. Technical employees also are required to sign non-compete agreements, which BMC rigorously enforces. In addition, we have an Intellectual Property program that enhances our ability to identify and protect intellectual property from the development stage through the life of our products and processes. Employees from operations, research and development and legal meet on a regular basis to review existing Intellectual Property and strategies for protecting and practicing these assets.

Seasonality.  Buckbee-Mears' revenues and earnings are generally lower in the first and third quarters due to maintenance shutdowns at the Cortland and Mullheim facilities. The seasonality of end products in the television market also affects our annual earnings pattern.

Competition.  The precision etched metal and electroformed parts business is intensely competitive, with no one competitor dominating the market. We are one of five independent mask manufacturers in the world and the only independent mask manufacturer with production facilities in the United States.  Our primary mask competitors operate in Japan, China and Korea. Independent mask manufacturers supply approximately 86%of the global mask market, with BMC among the largest at an estimated 19% of the television mask market share. We supplied approximately 16% of the worldwide demand for television masks in 2002.

In addition to competition from other mask manufacturers, Mask Operations competes against rival technologies such as LCD and plasma televisions and projection televisions. Sales of LCD and projection televisions in the U.S. have grown over the last year due to rapidly dropping prices, contributing in the decline in sales of jumbo CRT televisions. Further, many consumers identify HDTV with projection televisions, further contributing to the growth in sales of projection televisions. Nevertheless, rival product technologies such as plasma and LCD are still very expensive compared to CRT technology and therefore we believe they are not a practical substitute to CRT technology for much of the global consumer television market for at least the next 3 to 5 years.

Many producers compete in the market for specialty precision photo-etched and electroformed metal parts that are produced by Non-Mask Operations, including some that also manufacture aperture masks. There is no clear market share leader in this fragmented industry. We compete principally on the basis of price, product quality, product availability and customer service. We also attempt to build preferred supplier and research and development arrangements with customers to best meet their current and new product requirements.  In order to find new products and technology while remaining competitive on existing products, we engage in ongoing cost reduction measures, including the development of automated processes. 

Backlog.  As of December 31, 2002, the firm backlog of Buckbee-Mears sales orders was $7.7 million, compared with $14.9 million as of December 31, 2001.  We expect that all of the December 31, 2002 backlog orders will be filled within the current fiscal year.

Employees . As of March 21, 2003, Buckbee-Mears had approximately 819 employees in the United States and Europe. The majority of U.S. employees are not represented by labor unions. In compliance with local laws, production employees in Europe are represented by labor unions. Labor relations generally are considered to be good and there have been no significant labor disputes in the past ten years.

Optical Products

Products and Marketing.  Optical Products, operating under the Vision-Ease Lens trade name, designs, manufactures and distributes a full line of optical lenses. The Optical Products group shares its headquarters with the corporate office of BMC in Richfield, Minnesota. Vision-Ease has a polycarbonate processing laboratory in France, two distribution centers in the U.S. and distribution centers in Canada and England. Optical Products consolidated its manufacturing operations in early 2002 through the closure of its production and distribution facility in Azusa, California and the transfer of those operations to our two remaining production facilities in Ramsey and Jakarta.

Vision-Ease manufactures lenses in two principal materials, polycarbonate and glass, and sources high-index and hard-resin plastic lenses from third party suppliers. The group purchases most of its hard-resin and high-index plastic lenses from a single source. Within each of these lens materials, we offer single-vision lenses, which have a constant corrective power at all points; multi-focal lenses, which have two or more distinct areas of different corrective power; progressive lenses, which are a type of multi-focal lens with a continuous gradient of different corrective power without the line or "jump" generally associated with other multi-focal lenses; and prescription lenses that are used primarily for sunwear. We also produce lenses with features such as anti-reflective and varying levels of scratch-resistant coatings to meet increasing demand for products from customers.

We sell predominantly semi-finished lenses to wholesale optical laboratories or retail outlets with on-site laboratories across the U.S. and Europe. The labs then finish the lens by grinding and polishing the inside surface of the lens according to the prescription provided by the optometrist or ophthalmologist. After processing, the lens is edged and inserted into a frame by either the wholesale laboratory or a retail optical dispenser. We also sell finished single-vision lenses to wholesale laboratories and retail outlets. These finished lenses are ready to be edged and inserted into frames without laboratory surfacing. We also sell semi-finished and finished lenses to a number of OEM customers. We sell prescription polarizing lenses to manufacturers of sunglasses as well as our wholesale and retail customer base.  Vision-Ease generally sells its products to wholesale laboratories through independent sales representatives and to retail outlets through an in-house sales staff.

The Optical Products group established a lens laboratory in France to pursue growth of polycarbonate in the European market. This operation consists of administration/customer service in Noiseau, France and a processing facility in Brou, France. The Brou laboratory specializes in grinding, and applying hard-coatings as well as anti-reflective coatings to polycarbonate lenses for sale in the European market.  Over the course of 2000 to 2002, we qualified our polycarbonate products and laboratory processing capabilities with retailers and OEM partners in Europe.  

We produce semi-finished glass, multi-focal and finished and semi-finished single-vision glass lenses at our Jakarta facility. In 2001, we transferred the production of specialty glass lens products from our former St. Cloud, Minnesota production facility to the Jakarta facility. We complete our product offerings through low cost OEM sourcing arrangements for hard-resin and high-index plastic lenses, most of which are produced under a contract with a single manufacturer in Southeast Asia. These sourcing arrangements allow Vision-Ease to focus manufacturing capabilities on higher-margin products while offering a complete line of lens products at cost competitive prices.

Intellectual Property.   Vision-Ease holds a growing portfolio of patents protecting certain products and manufacturing processes.  These patents have expiration dates ranging from 2003 to 2022. Vision-Ease has built a strong patent position in certain product categories, including polycarbonate polarizing and photochromic lenses, dyes and production processes. We believe the loss of any single patent would not have a material adverse effect on our business as a whole. We believe that improvement of existing products and processes, the development of new lens products and a reliance on trade secrets and unpatented proprietary know-how are as important as patent protection in establishing and maintaining our competitive position. At the same time, we continue to seek patent protection for our products and processes on a selective basis. There can be no assurance, however, that any issued patents will provide substantial protection or commercial value. We require our consultants and employees to agree in writing to maintain the confidentiality of our information and, within certain limits, to assign to us any inventions, and any patent or other intellectual property rights, relating to our business. We also require technical employees to sign non-compete agreements, which we rigorously enforce. The Optical Products group owns several trademarks, including SunRx®, Tegra®, Diamonex®, Vivid™, Outlook™, Continua® and SunSport®. As part of our marketing strategy to build sales of branded products, Vision-Ease has increased the use of trademarks during the past few years. Although there are no assurances as to the strength or scope of our trademarks, we believe that these trademarks have been and will be useful in developing and protecting market recognition for our products. In addition, we have an Intellectual Property program that enhances our ability to identify and protect intellectual property from the development stage through the life of our products and processes. Employees from operations, research and development and legal meet on a regular basis to review existing Intellectual Property and strategies for protecting and practicing these assets.

The Optical Products group has dedicated the significant portion of its research and development time and resources during the past several years to premium, higher-margin polycarbonate lens products. With the guidance of patent counsel, we developed significant proprietary technology and know-how, which we sought to protect through patent claims when appropriate. During 2002, the Optical Products group received several returns on these investments.  In addition to our ability to use the technology for production of lenses, several outside parties signed license agreements with Vision-Ease and agreed to pay a royalty in return for the right to practice certain patent claims issued to Vision-Ease.  Vision-Ease also signed a license agreement with Younger Optics in March 2003, which resulted in a settlement of a lawsuit brought by Vision-Ease against Younger Optics in May 2002. We expect to make continued investments in product and process design and development for all lens materials as well as leverage our core technologies to diversify into new and non-optical products.

Competition.  The ophthalmic lens industry is highly competitive. We compete principally on the basis of product offerings, product quality, customer service and pricing. Vision-Ease is the third largest ophthalmic lens manufacturer and distributor in North America, with a substantially smaller share of the global lens market. Our largest competitors are Essilor International and Sola International Inc., who have a combined share of approximately 60% of the ophthalmic lens sales in North America and 50% of the world-wide lens market. Many of our competitors, particularly Essilor and Sola, have greater financial resources than Vision-Ease with which to fund research and development, marketing and capital expenditures. These competitors also own and operate a substantial number of domestic vertically integrated wholesale laboratories. 

In addition to direct competition with other manufacturers of eyeglass lenses, we compete indirectly with manufacturers of contact lenses and providers of medical procedures for the correction of visual impairment. Contact lenses are not, however, perfect substitutes for lenses because of the difficulty of developing progressive or bifocal contact lenses for presbyopia.  In addition, contact lens wearers also tend to own eyeglasses or sunwear. A number of companies have developed, or are developing, surgical equipment or implants used to correct refractive error, including myopia, hyperopia and astigmatism. These procedures are ineffective at correcting presbyopia, which affects the vast majority of people above the age of 45, and is a major cause of demand for Vision-Ease's progressive and other multi-focal lenses. There can be no assurance, however, that current medical procedures, or ones developed in the future, will not materially impact demand for our lenses.

Raw Materials.  Vision-Ease procures raw materials from multiple suppliers.  There are multiple domestic and foreign sources of high-quality, optical grade polycarbonate resin. We obtain most of our hard-resin plastic lenses from a single source in Southeast Asia. In addition, we source film used in the production of polarizing lenses from a single source in Japan. The importation of raw materials and products into and out of foreign territories is subject to certain trade restrictions imposed by foreign and United States trade regulations that could result in the disruption of supply.  Although we do not anticipate any disruption to our supply of raw materials or lenses produced or sourced outside the U.S., the inability to obtain these supplies could have a material adverse effect on Vision-Ease's results of operations.

Backlog and Inventory.  Due to the importance in the ophthalmic lens industry of rapid turnaround time from order to shipment, the backlog of sales orders is not material. We maintain a significant amount of inventory, however, in order to satisfy the rapid response time and complete product offerings in glass, hard resin plastic and polycarbonate demanded by our customers.

Seasonality.  Earnings are generally lower in the first and fourth quarter due to the seasonality of retail eyewear sales, the end product of our lenses.

Employees.  As of March 21, 2003, Vision-Ease had approximately 1,586 employees in the United States, Europe and Indonesia. None of the employees in the United States are represented by labor unions.  In compliance with local laws, production employees in Europe and Indonesia are represented by labor unions.  Labor relations are considered to be good at all operations and there have been no significant labor disputes in this group's history of operations.

Environmental

As part of our manufacturing processes in both the Buckbee-Mears and Optical Products groups, we use chemical substances that must be handled in accordance with federal, state, local and foreign environmental and safety laws and regulations. These processes also generate wastewater and wastes, some of which are classified as hazardous under applicable environmental laws and regulations. The wastewater is treated using on-site wastewater treatment systems. We employ systems for either disposing of wastes in accordance with applicable laws or regulations or recycling the chemicals we use through the manufacturing process. Environmental and other government agencies monitor the wastes and the wastewater treatment systems to ensure compliance with applicable standards. Although we attempt to operate within all applicable laws and follow sound environmental procedures, environmental regulations place responsibility for waste on the generator even after proper disposal. There can be no assurance, therefore, that we will not incur future liability for waste disposal despite our best efforts. As of March 21, 2003, we were involved in a total of seven (7) environmental investigations and/or remedial actions in which final settlement had not been reached, of which one (1) relates to a discontinued operation, four (4) relate to Buckbee-Mears operations and two (2) relate to Optical Products operations.

To the extent possible with the amount of information available at this time, we have evaluated our responsibility for costs and related liability with respect to these investigations/remedial actions, have recorded accruals for our estimated liability in accordance with generally accepted accounting principles, and are of the opinion that our liability with respect to these matters should not have a material adverse effect on our financial position or the results of our operations. In arriving at this conclusion, we have considered, among other things, historical costs to address these matters; the factors, such as volume and relative toxicity, ordinarily applied to allocated defense and remedial costs; the probable costs to be paid by the other potentially responsible parties; total projected remedial costs, if known; existing technology; and currently applicable laws and regulations. A portion of the costs and related liability for certain matters has been or will be covered by insurance or third parties.

We estimate that Buckbee-Mears incurred approximately $2.9 million in 2002, $5.3 million in 2001 and $5.4 million in 2002 on expenditures, including capital expenditures, related to efforts to comply with applicable laws and regulations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. We anticipate that Buckbee-Mears will spend approximately $2.5 million in 2003 and $0.6 million in 2004 on capital expenditures for environmental control facilities and response costs.  Vision-Ease incurred approximately $0.1 million in 2002, $0.2 million in 2001 and $0.1 million in 2000 on expenditures, including capital expenditures, related to efforts to comply with applicable laws and regulations regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. We estimate that Vision-Ease will make approximately $0.1 million in capital expenditures for environmental control facilities during each of 2003 and 2004.

(d)     Financial Information About Geographic Areas.

Financial information about our operations in different geographic areas for the three most recent fiscal years appears on page 43.

(e)    Risk Factors

Potential Pension Contribution Obligation.  Our German subsidiary has a noncontributory defined benefit pension plan covering substantially all of its employees.  As allowed under German law, this plan is not funded. We pay benefits under this plan from revenue generated from the current operations of the German subsidiary. The accrued liability for this plan currently is approximately $12 million.  Given the strong competition in the aperture mask industry, there is a risk that current operations of the German subsidiary cannot cover the ongoing pension payments to retirees. If there were an immediate funding obligation, the German subsidiary would not have sufficient funds to meet the funding requirement. This would have a material adverse impact on the subsidiary as well as financial condition and results of operations of BMC on a consolidated basis.

The Company also has a defined benefit pension plan remaining from our former Vision-Ease Ft. Lauderdale, Florida facility and another plan covering former union employees of our former Buckbee-Mears facility in St. Paul. Both of these plans currently are underfunded due to poor performance of the financial markets during the past few years. Assuming current market conditions, we anticipate that we will be required to make a funding contribution to these plans in 2004. If the value of the assets in these plans continues to decline, we may be required to make a contribution to the plans in 2003.  If that occurs, we may not have sufficient cash on hand or available funds under our credit facility to make the contribution. A current year funding obligation likely also would result in a violation of the covenants under our credit facility. Although we would attempt to obtain a waiver of a covenant violation and obtain additional financing if necessary, there can be no assurance that these efforts would be successful.

Loss of Home Market Advantage . Buckbee-Mears is the only aperture mask manufacturer in North America and one of only two independent mask manufacturers in Europe. As a result, we have maintained a home market advantage over our Asian-based competitors through advantages such as lower transportation costs, faster response times, availability on short notice to meet with our customers and lower costs through the avoidance of importation duties.  This advantage has slowly diminished during the past few years as our customers have closed plants in the U.S. and Europe and moved production to Mexico, China and other countries with a lower cost base. During 2002, our customers closed two plants in the U.S. and one again in 2003. We have developed a strategy to replace this lost business in our home markets, including efforts to grow sales in Asia, particularly in China. We have succeeded in developing new sales in Asia but not at the same rate as our sales have declined in our home markets. The rapid departure of our remaining customers from our home markets or financial difficulties of one of these customers would have an adverse impact on our Buckbee-Mears group if we are not able to successfully replace that business with profitable business in other areas of the world. 

Pricing and Margins.  Many market and economic factors, as well as internal operating performance, have adversely affected, and could continue to affect, our financial performance and projected future results. Since both of our business groups supply components to manufacturers of end products, imbalances in supplies and demand at all levels of product distribution could have, and in some instances have had, a significant impact on our pricing, and margins and inventory levels. Capacity expansions by aperture mask manufacturers helped create this type of imbalance in the mask market a few years ago, which resulted in pricing pressures that continue to impact the Buckbee-Mears group's performance. In addition, margins are affected by the need to develop new technology. Our ability to meet the market demand for new products in a timely fashion requires the investment of resources, which, coupled with pricing pressures, decrease our margins. To offset these pressures and costs, we have implemented several cost reduction measures and are pursuing sales of higher margin products and have taken major steps to reduce our fixed and variable costs in all of our operations, including the transfer of additional lens manufacturing to our Jakarta facility and yield improvement initiatives. These efforts may not be enough to improve revenues, operating performance or margins while remaining competitive in our markets. 

Reliance on key customers.  Both Optical Products and Buckbee-Mears rely on sales to key customers for a large share of sales. Although we strive to differentiate our products and services from those of the competition, we may lose customers due to a number of reasons, including vertical integration of customers into the operations of our competitors, our inability to meet pricing requirements or performance standards and bankruptcy or insolvency of one of these customers. The loss of any of these key customers could have a material adverse effect on the results of our operating groups as well as our consolidated financial condition and results of operations. 

Competition/New Product Development and Introduction.  Each of our operations faces competition from other companies in the same technology as well as competition with alternative technologies. As a result, both Vision-Ease and Buckbee-Mears invest significantly in new product development. Vision-Ease has invested substantial resources towards new lens offerings, particularly in polycarbonate. These efforts have resulted in many new products that have experienced success to date, including our Tegra ®  high-performance polycarbonate product line, Outlook&trdmk; progressive lenses, and SunRx ® polarizing sunwear.  Buckbee-Mears continues its efforts to develop new high-volume product opportunities such as its development efforts in stents. In addition, Buckbee-Mears will continue to dedicate resources towards development of HDTV and multimedia masks. Our long-term success depends on our ability to develop and bring to market these and other new products and technologies at competitive prices and quality in order to compete in each of the markets we serve. There are no assurances, however, that we will succeed in these efforts, that the products of a competitor, for example Trivex, which competes with polycarbonate as a lens material, will not become widely accepted in the industry at the cost of polycarbonate, or that alternative technologies, such as laser eye surgery and LCD televisions, will not replace our products entirely.

Litigation.  We are subject to the normal risks of litigation and other proceedings that affect business operations, including environmental liability for past or present environmental practices, product liability, workers' compensation and personal injury. Although we do not anticipate that any claims will result in liability that could have a materially adverse effect on our financial condition and results of operations, there are no assurances that we will not incur such liability in the future given the uncertainty of litigation.

Sources of Supply.  The primary raw material used to produce masks is steel. The primary raw materials used to manufacture optical products are polycarbonate resin, glass blanks, including photochromic glass, polarizing film and plastic resins. Significant changes in the markets for these materials, including pricing and availability, could have a material adverse impact on our financial results. The main ingredient in plastic resins is petroleum. It is unknown what effect, if any, the war in Iraq will have on the availability and price of oil. A prolonged military engagement or damage to oil reserves could put upward pressure on petroleum prices as well as affect supply. In addition, Vision-Ease relies on a single source manufacturer for its polarizing film and photochromic glass. We have negotiated agreements for these materials, including an agreement for ongoing supply of polarizing film with the manufacturer, as well a backup supply of the film through rights to film of another customer of the manufacturer.  There is no assurance, however, that these agreements will provide sufficient film availability to meet future production requirements or that the manufacturer will not experience production problems that stop the flow of film. In addition, Optical Products obtains the majority of its hard-resin plastic lenses from a foreign supply arrangement and all of its glass lenses and a portion of its polycarbonate lenses from its Jakarta operations.  Factors affecting the supply of these products, in particular political instability in Indonesia, as well as any interruption of the supply of raw materials to our other operations, could have a material adverse impact on our results of operations.

Foreign Currency.  We transact business in currencies other than U.S. dollars. The primary currencies used include the euro, Japanese yen, British pound, Canadian dollar, Hungarian forint, Indonesian rupiah and South Korean won. Our primary competitors in the mask market are located in Asia. Changes in the currency exchange rates between the U.S. dollar and the euro compared to Asian currencies affect Mask Operations' pricing competitiveness. Although we take steps to reduce this risk through cross-currency swaps and other hedging transactions, we are subject to the risk of adverse fluctuations in currency exchange rates, which may result, and have resulted, in pricing pressures and reductions in profitability due to currency conversion or translation.

International Markets. Buckbee-Mears has a manufacturing facility located in Mullheim, Germany and an aperture mask inspection facility in Tatabanya, Hungary. Vision-Ease has optical lens laboratory operations in France, a supply arrangement with hard-resin plastic lens manufacturer in Southeast Asia, and a joint venture in Indonesia for glass and polycarbonate lens manufacturing. In addition, we have many international customers and are dedicating significant resources to increase business with international customers at all of our operations. Our international operations and sales could be adversely affected by the war in Iraq, governmental regulations, political instability, economic changes or instability and competitive conditions in other countries in which, and with which, we conduct business.  Economic difficulty has been experienced in Asia during the recent past and globally during the past few years, which serves as an example of international conditions that can adversely affect financial performance. Future downturns in the global economy or in certain areas of the world could affect our operations without advance warning. Further, there are no assurances that our efforts to grow our business in international markets, such as our efforts to penetrate sales of polycarbonate lenses in Europe through laboratory operations, will be successful.

NYSE Continued Listing. In August 2002, we received a notice of failure to comply with the continued listing requirements of the New York Stock Exchange relating to the price of BMC common stock dropping below $1.00 for 30 consecutive trading days. We brought the stock in compliance with the $1.00 minimum share price requirement within the required six-month period. There is no assurance, however, that we will remain within all of the listing requirements. There are a number of ongoing requirements, including minimum total shareholder equity and minimum aggregate market value requirements that could be triggered if our performance slips or the economy fails to improve.  These listing requirements are more difficult to correct, which could then result in the delisting of BMC common stock from the NYSE. A delisting could impact the market for and value of shares of BMC common stock.

Manufacturing Yields/Customer Service Levels/Fill Rates.  During the first half of 2002, Vision-Ease experienced production problems at its Ramsey facility that coincided with the shutdown of its Azusa production facility and the transfer of production from the Azusa plant to Vision-Ease's facilities in Ramsey and Jakarta. Customer service, fill rates and sales suffered as a result.  Vision-Ease was able to improve its performance and return to historic fill rates. Sales are increasing in response to Vision-Ease's efforts to improve customer service and due to limited ability to source certain products from other manufacturers. If Vision-Ease were to experience a similar situation again, the impact could have a material impact on the long-term performance of the group as customers would be less likely to view Vision-Ease as a reliable source of products.

Bank Covenant Compliance. Our senior credit facility requires compliance with a number of financial and non-financial covenants, including, but not limited to, a maximum debt to EBITDA ratio, a minimum EBITDA to interest expense ratio, a minimum amount of net worth, and a maximum level of capital expenditures. In addition, there are provisions in the current credit agreement that require significant step-downs of certain of these covenant during fiscal year 2003. Given recent financial performance and depending on future business conditions, there is no assurance that we will successfully maintain these covenants in the future. In the event of a covenant default, we would make every effort to secure a waiver from the bank group and/or seek to amend and restate the credit facility to modify the existing covenant levels. A covenant default, if not cured, would have a material impact on our ability to borrow additional funds.

Liquidity.  In September 2002, the company, with its lenders, amended and restated its senior credit facilities and extended the termination date of the facilities to May 2004. The amendment and restatement of the credit facilities also included a monthly borrowing base calculation (which has limited, and may limit in the future, the Company's ability to borrow the full amount of the revolving portion of the facilities) and scheduled quarterly term loan amortization payments of $2.5 million in September and December 2002, and $3.5 million payable quarterly beginning in March 2003. Although we have made significant reductions in debt levels, the outstanding debt can fluctuate significantly during a quarter. As a result, the Company's liquidity position has been constrained and it is possible that our future funding requirements may exceed the credit available under the revolving facilities.  Although we implement working capital initiatives as necessary to manage cash flow tightly, and are in the process of evaluating alternative longer-term financing sources, there is no assurance that these efforts will be sufficient to meet ongoing needs, or that we will be successful in obtaining alternative financing arrangements. Continued weakness in the economy or the markets for our products could intensify the strain on current liquidity.

Item 2. Properties

The following table sets forth certain information regarding our principal production facilities:

We lease approximately 14,000 square feet in suburban Minneapolis, Minnesota for the corporate headquarters of both BMC and the Optical Products group. We lease approximately 82,000 square feet for customer service, administration and distribution in St. Cloud, Minnesota pursuant to a lease that expires in 2005.  The plant lease in St. Paul expires in February 2004. We are negotiating with the landlord of the St. Paul building to obtain an early release.  During 2002, Vision-Ease exercised an option to purchase the property at its former operations in Azusa for $1.00.  We have listed the property for sale and have retained a broker to assist with the sale. The facility in Jakarta is owned by P.T. Vision-Ease Asia, of which Vision-Ease Lens, Inc. owns 85% and our local partner owns 15%. We believe our existing facilities are sufficient to meet our current and foreseeable production and other needs.

In addition to the properties listed above, we lease space for a distribution center outside London, England, a lens processing laboratory in Brou, France and other smaller domestic and international administrative offices. For additional information concerning our leased properties, see Note 8 to Notes to Consolidated Financial Statements on page 35.

Item 3. Legal Proceedings

With regard to certain environmental and other legal matters, see Item 1(c) "Narrative Description of Business - "Buckbee-Mears - Environmental" and "Optical Products - Environmental" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Other than as disclosed in the other referenced sections of this report, there are no material pending or threatened legal, governmental, administrative or other proceedings to which we are a party or of which any of our property is subject.

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

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by the report.

Part II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

BMC's common stock is listed on the New York Stock Exchange under the ticker symbol "BMM". The table below sets forth the high and low reported sales prices of BMC stock by quarter for the years 2002 and 2001. At March 21, 2003, there were approximately 976 stockholders of record.