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A N N U A L

R E P O R T

A N N U A L R E P O R T
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|FINANCIAL HIGHLIGHTS )
FISCAL YEAR ENDED JUNE

(in thousands except for per share data) 1999* 2000* 2001* 2002* 2003*


STATEMENT OF OPERATIONS DATA

Net Revenues $ 4,616 $ 7,133 $ 96,316 $ 137,142 $ 154,233
Gross Profit 2,696 1,785 21,625 32,568 36,614
Operating profit (loss) (1,526) (3,389) (16,871) (3,755) (3,655)
Net income (loss) from continuing operations (988) 968 (4,670) (431) 1,710
Earnings (loss) from continuing
operations per diluted share $ (0.28) $ 0.21 $ (0.78) $ (0.08) $ 0.15
Weighted-average common
diluted shares outstanding 3,478 4,439 6,414 9,628 11,250

BALANCE SHEET DATA

Working capital $ 11,812 $ 63,785 $ 22,417 $ 81,128 $ 88,684
Total assets 26,159 79,673 167,484 215,108 254,742
Long-term debt 7,180 - 6,483 - -
Shareholders' equity $ 14,658 $ 73,197 $ 89,192 $ 154,570 $ 177,198


*Amounts have been adjusted to show the sale of the Longmont coatings division,
which was completed September 24, 2002.


GERMANY - OPERATIONS AND R&D
Applied Films GmbH & Co. KG
USA - HEADQUARTERS
Applied Films Corporation
KOREA
Applied Films Korea Ltd.
JAPAN
Applied Films Corporation
Japan Branch
BELGIUM
Applied Films Belgium NV
HONG KONG
Applied Films Asia Pacific Ltd.
TAIWAN
Applied Films Corporation
Taiwan Branch
CHINA
Applied Films China Co., Ltd.

applied films 2003 annual report     1
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|Letter to
Shareholders

DEAR SHAREHOLDERS: Our fiscal 2003 was a challenging year with most of the world
economies in either a downturn or a state of turmoil before, during and after
the Iraq war. In addition, the SARs virus affected our major markets in Asia.
Applied Films effectively responded to this challenging market environment by
more than doubling our backlog for equipment orders during the course of the
year. While many other high tech- nology markets continued to languish, our
primary markets of flat panel display, architectural and automotive glass and
electronics and packaging all showed strength during the year. This allowed us
to successfully implement our strategy of servicing diverse markets that share a
need for high throughput, large area deposition equipment. As the bookings
momentum continued throughout the year, we experienced a balance of revenue
between our product groups.

In July 2002, we closed our equipment- manufacturing center in Longmont and
concentrated our manufacturing efforts in one centralized location in Germany
which has a strong team and infrastructure. We also divested a segment of the
business that has been with us since inception when we sold our Longmont coated
glass operations in September 2002. This transaction confirmed our shift from
coating glass for customers, to providing thin film deposition equipment.
Following these changes our revenues from selling process equipment exceeded
95%. Over three years we have completely transitioned a business that was nearly
100% coated glass processing to nearly 100% thin film deposition equipment.

We began the fiscal year with a very low backlog and mounted a sales campaign
that spanned all of our markets and products. From this strategy we realized
record bookings for the fiscal year and four consecutive quarters where new
order bookings exceeded revenue, resulting in a record high backlog of over $100
million at the end of our fiscal year 2003. Market strength in all of our
product areas was the catalyst that drove our bookings performance.

In the second half of the fiscal year we had back to back record revenue
quarters with the fourth quarter revenues exceeding $50 million for the first
time in our history. Reaching this record was particularly challenging since the
strength of the Euro adversely affected our competitive position in several key
strategic markets. Our operations team in Germany implemented cost reduction
strategies early in the year that allowed us to minimize the effect of the
strengthening Euro and maintain our market position in our core markets.

During fiscal 2003, we experienced bookings strength compared to the weakness in
the prior fiscal year as Taiwanese LCD manufacturers began to invest in
Generation 5 active matrix display technology. Early in the year we were faced
with strategic selling decisions as our customers in Taiwan began their phase
one expansions in Generation 5 display technology. We experienced some initial
decline in our gross margin as we pursued market share growth at several key
accounts as our competitor was positioned with a weaker Yen currency.

The expanded presence of LCD televisions has opened up new markets for our
equipment and new technical challenges as glass sizes migrate up to Generation 6
(approximately 1500mmx1800mm) and Generation 7 (approximately 1900mmx2200mm)
mother glass sizes to address the main stream of the television market.

In the architectural and automotive glass markets, our Terra-G(TM) thin film
deposition equipment platform gained wide acceptance as we booked orders from
many geographies during the fiscal year. Our customers moved ahead with

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|investments that had previously been delayed in fiscal 2002. These investments
were driven by the need for Low-E and solar coatings on glass used in building
construction. China is gearing up construction for the Beijing Olympics and in
the U.S., states such as California are continuing to implement energy
conservation incentives and mandates,that contribute to this demand.

Our consumer packaging and electronics group had another outstanding year. We
experienced continued growth in demand for packaging web coaters from China and
other parts of Southeast Asia, as well as investments for web coaters in the
capacitor market.

During fiscal 2003 we experienced a setback in the BESTPET(R) product roll out.
The enactment of restrictive pack- aging legislation in Germany postponed trials
for the atmospheric topcoat developed by our partner, Krones. This protective
topcoat was designed to achieve a three to five times shelf life improvement in
a filled plastic bottle when applied over our BESTPET(R) solution, but Krones'
atmospheric topcoat process did not work in a production environment. Over a
three year development period we successfully demonstrated that our BESTPET(R)
technology can successfully coat 20,000 plastic bottles per hour in vacuum. We
have re-evaluated our product and have identified alternative vacuum based
coating methods to apply the topcoat, and we believe can be coupled with our
proven BESTPET(R) process to create a commercially viable product.

During the spring of our fiscal year, SARs emerged as a major concern in many
countries where we conduct our business. We worked effectively with our
customers to overcome this crisis and experienced minimal delays at our
equipment installations. In the display market, we were able to continue key
installations through great efforts by our employees and the use of creative
alternative communication strategies to overcome challenges presented by travel
restrictions to the region. We were pleased with the strength in bookings
activity from China this year despite the SARS crisis. We are currently
expanding our office in China with plans to continue to stay ahead of the growth
in this market with a strong local sales and service presence.

Looking ahead we continue to be excited about the prospects for our key develop-
ment programs. Our VES 400(TM) platform for the OLED market has achieved
superior operating efficiencies using our proprietary deposition techniques and
we are currently developing the automated mask solution for this platform which
is critical to developing a successful color OLED device. We are partnering in a
technology development program that we believe will produce a viable solution to
this major production repeatability requirement. After completion of this
development, we expect to introduce our solution as a true high volume color
OLED production platform.

The Solar area of our business looks very promising as well. The recent
blackouts in the United States, provide additional evidence of market need for
cost effective solar energy. Our development in solar is focused on
cost-effective thin film solutions that represent enabling factors for the
commercialization of solar technology. We are working with leading energy
companies to develop these solutions and hope to continue to register growth in
revenue for these technologies as our partners migrate from lab coaters to large
scale coating operations.

Finally, the unprecedented pace of movement in the TFT display market from 5th
generation to 6th and 7th generation technologies has required rapid development
of machine platforms to handle the larger glass sizes. Our design and process
teams have risen to the challenge of launching these three platforms in the same
year with development of equipment to handle substrates exceeding two meters
square and production rates that are far more demanding than prior generations.
We have increased research and development investments during the year, and much
of that growth has centered on the flat panel display area as we continue to
meet the demands of future generation sizes, and explore innovative solutions to
meet the stringent requirements of the display market. We believe our future
lies in the successful commercialization of our development programs as we
broaden our product offerings in order to serve new customers in high growth
markets.

We are pleased with our overall performance during fiscal year 2003. To
continue our growth path we must meet many future challenges as the requirements
grow for advanced technology solutions that address the diverse needs of our
customers. We believe that our talented employees and strong technology base
will allow us to successfully meet these challenges. We thank you for your past
support and look forward to a continuing relationship.

Best Regards,



THOMAS T. EDMAN
President and Chief Executive Officer




RICHARD P. BECK
Chairman of the Board


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|Flat Panel Displays


THIN FILM DEPOSITION EQUIPMENT )


FLAT PANEL DISPLAYS: Our flat panel display (FPD) deposition equipment applies
conductive, optical and barrier coatings for manufacturing high information
content color displays, such as high-resolution liquid crystal displays (LCDs)
used in computer monitors and plasma televisions.

THE NEW ARISTO(TM): Our NEW ARISTO(TM) is an advanced thin film deposition
system that accommodates large glass sizes up to Gen 7, and meets the low
particulate requirements of the active matrix LCD market. The NEW ARISTO(TM) is
designed to apply critical conductive and reflective coatings used in this
market. The system features high throughput and low cost of ownership.


THE VES 400(TM): Our VES 400(TM) is a new vertical in-line machine for the OLED
market. This machine is equipped with a linear etch source and linear
evaporation sources for organic materials and metals. Superior layer uniformity
and the highest material utilization are essential features for cost efficient
mass production. The machine is also equipped with magnetron sputter sources, to
deposit dielectric or metal layers. We are now partnering to develop the
automatic masking system necessary to make the VES 400(TM) a strong entry into
the color OLED display market.


NET REVENUES


($ in thousands)        1999       2000       2001        2002          2003

COATED GLASS*                                 11,124      6,085         6,159
EQUIPMENT               4,617      7,133      85,192      131,057       148,074

*Adjusted to reflect the sale of the Longmont coating division, which was
completed on September 24, 2002.
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|CONSUMER PRODUCTS PACKAGING AND ELECTRONICS )


NET REVENUES*                                   SHAREHOLDERS'             EQUITY

(In millions for Fiscal Year End)                    (In millions for Fiscal Year End)


5        7        96       137       154          15       73       89      155        177


99       00       01       02         03          99       00       01       02         03

* Amounts have been adjusted to show the operating results of the Longmont
Coatings Division, which was sold on September 24, 2002, as discontinued
operations.


Our web coating systems deposit thin films on flexible substrates used in
various markets such as food and decorative packaging, and electronic
applications such as electromagnetic interference shielding, capacitors, and
touch panel applications. For packaging applications, thin films are applied to
a thin plastic or metal foil substrate to create a barrier to promote freshness
and extend shelf life in consumer products. Thin films provide the conductive
and electronic elements critical to the manufacture of certain electronic
products, such as capacitors and touch panel screens.

TOPMET(TM): Our TopMet(TM) thin film deposition high vacuum web coating system
provides a solution for coating metal materials on flexible substrates.
TopMet(TM) is recognized as the leader in vacuum web roll-to-roll coating
system. The met- allized substrates are used primarily for flexible packaging,
labels, holograms and other applications. Visual appeal and good barrier
properties extend the freshness and shelf life, making this system a success.

MULTIMET(TM): Our MULTIMET(TM)high
vacuum metallizer offers a modular thin
film deposition system based on thermal


evaporation technology. The system is used to deposit thin films on very thin
foil substrates at high speed in vacuum for the capacitor market. Capacitors are
used in a variety of electronic devices such as computers, televisions, washing
machines, lights and motors. The modularity of the MULTIMET(TM) offers the
flexibility to exchange coating sources quickly and allows us to adjust the
machine for different electronic market applications.

TOPBEAM(R): Our TOPBEAM(R) system uses electron beam evaporation technology to
produce transparent barrier coatings for packaging applications. The TOPBEAM(R)
provides high flexibility for different coatings used in the packaging industry.

MULTIWEB(TM): Our MULTIWEB(TM) thin film deposition system uses sputter
processes to apply conductive as well as dielectric coatings in a roll-to-roll
process on flexible substrates. The main areas of application are window films,
touch panels, antireflective and anti-reflective/ static multilayer coatings for
TV screens and other displays, printed circuit boards and confidential layer
stacks for security applications (anti-counterfeiting, anti-theft).

applied films 2003 annual report     5
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|RESEARCH AND DEVELOPMENT                                           SALES BY REGION

(In millions for Fiscal Year End)                                  (FY 2003 - In millions)


                                                                                              Europe           $45
                                                                                              U.S.A.           $11
                                                                                              Asia             $98

                                                                   SALES BY TYPE
1.0              1.2        6.3           9.2        12.3
                                                                   (FY 2003 - In millions)
                                                                                              Equipment        $98
99               00          01           02          03                                      Coated
                                                                                              Glass             $6

Solar Control Coatings


ARCHITECTURAL, AUTOMOTIVE AND SOLAR GLASS


Our architectural and automotive thin film deposition systems apply Low-E
coatings and solar control coatings on large glass substrates used in architec-
tural applications and automotive windows. Our thin film deposition systems for
solar cell manufacturing cover a wide range of photovoltaic applications ranging
from metal and conductive layer coatings for the electrodes over amorphous
silicon coatings for Thin Film Solar Cells, to sputtered silicon nitride used as
an anti-reflective and passive layer for polycrystalline solar cells.

TERRA-G(TM): Our Terra-G(TM) thin film deposition system is our most advanced
coating system designed for the architectural and automotive glass market.
High process stability, maximum process flexibility due to its modular design
and an intelligent maintenance concept enable the glass manufacturers to produce
functional glass with increased layer performance at reduced costs.


The Terra-G(TM) uses large planar or rotary magnetron cathodes and uniformly
deposits multiple thin films across a large area at very high throughput rates.
The Terra-G(TM) can be up to 130 meters long and can deposit complex layer
stacks of different materials on a single sheet of glass at cycle times as short
as 20 seconds.

With the Terra-G(TM) system our customers are able to produce coated glass with
superior thermal and optical properties and solar control layers with new,
brighter colors. Terra-G(TM) is a state of the art solution for high quality
coating at high speed for technically demanding coating processes, such as low
emissivity and solar control coatings. Apart from its modular design a whole
series of innovative details renders the Terra-G(TM) system very attractive for
our customers.
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|ATON(TM)-SERIES: With our ATON(TM)-Series we introduce an innovative SiN sputter
deposition system for the photovoltaic market. This machine is designed for the
mass production of anti-reflective passivation layers for polycrystalline
silicon solar cells. With its modular design and ability to accommodate various
substrate sizes it offers unparalleled production flexibility. ATON(TM) is a
reliable production system which can be operated continuously for more than one
week, and at a low cost of ownership. For the Solar Cell manufacturers this
means higher uptime, more throughput and higher productivity.

SOLARISTO(TM): Our SOLARISTO(TM) thin film deposition system, a derivative of
the NEW ARISTO(TM), is a vertical in-line system that handles medium-sized
substrates. The SOLARISTO(TM) uses planar magnetron cathodes and a linear PECVD
process for the deposition of multiple thin films on the substrate, which is
moving vertically through the system. The SOLARISTO(TM) can be up to 50 meters
long and can be modified to coat on both sides of the substrate.

Solar cell markets continue to develop innovative technologies that allow for
the generation of power, using surfaces of buildings, such as window glass and
rooftops. We believe this technology can play a significant role as a future
alter- native energy source, reducing the world's dependence on petroleum based
energy sources. We are currently developing deposition technology and equipment
for the solar cell market and we believe that the use of thin films in solar
power generation will continue to expand.


applied films 2003 annual report         7
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|B E S T P E T(R)


 ( PLASTIC BEVERAGE BOTTLES


Our PET bottle barrier coating processes enhance the material properties of PET
bottles, which extends the shelf life of beverages and other products. Our
barrier coating does not come in con- tact with the beverage and does not
require United States Food and Drug Administration approval. This will allow
bottlers to migrate away from heavy, expensive glass bottles into lighter, less
expensive plastic or PET bottles.

BESTPET(R)LG 20: Our BESTPET(R)LG 20
system deposits silicon oxide on the
outside of the bottles at a rate of


20,000 bottles per hour using evaporation technology. We also supply our GMS
Tester(TM), which is a leading tech- nology for testing the barrier improvement
factor for PET bottles.

Our current technology achieves a barrier improvement factor of 2-3 times that
of uncoated bottles and we are currently developing an additional protective
topcoat to target a process capable of delivering a barrier improvement greater
than three times that of an uncoated bottle.

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|CORPORATE INFORMATION )
CORPORATE HEADQUARTERS

Applied Films Corporation
9586 I-25 Frontage
Road, Suite 200
Longmont, Colorado 80504
U.S.A
Tel: +1-303-774-3200
Fax: +1-303-678-9275

STOCKHOLDER INFORMATION

The Company's common stock is traded on the NASDAQ National Market under the
symbol AFCO.

TRANSFER AGENT

Computershare Trust Company, Inc.
350 Indiana Street, Suite 800
Golden, CO 80401

ANNUAL MEETING

October 22, 2003
8:00 a.m. Mountain Time
Applied Films Corporation
9586 I-25 Frontage Road, Suite 200
Longmont, Colorado 80504

INDEPENDENT AUDITORS

Ernst & Young, LLP
370 17th Street, Suite 3300
Denver, Colorado 80202

GENERAL COUNSEL

Varnum, Riddering, Schmidt & Howlett LLP
P.O. Box 352
Grand Rapids, MI 49501-0352


BOARD OF DIRECTORS

RICHARD P. BECK**
Chairman of the Board

THOMAS T. EDMAN
President and Chief Executive Officer

JOHN S. CHAPIN
Director

VINCENT SOLLITTO, JR.**
President and Chief Executive Officer Brillian
Corporation

CHAD D. QUIST**
President
Optera Incorporated
Subsidiary of Magna Donnelly

ALLEN H. ALLEY**
President, Chief Executive Officer, Chairman Pixelworks, Inc.
(NASDAQ: PXLW)

DANIEL C. MOLHOEK, ESQ.
Secretary to the Board
Varnum, Riddering, Schmidt & Howlett LLP

**Member of Audit, Compensation, Nominating and Corporate
Governance Committees


EXECUTIVE OFFICERS

THOMAS T. EDMAN
President and Chief Executive Officer

LAWRENCE D. FIRESTONE
Chief Financial Officer, Senior Vice President, Secretary and
Treasurer

JAMES P. SCHOLHAMER
Senior Vice President, Operations

GRAEME L. HENNESSEY
Vice President, Sales & marketing


                                                                                                       trademark of The Coca Cola
                                                                                                       Company.
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|( CORPORATE PROFILE

Applied Films was founded in 1976 to develop thin film technology for coatings
on substrates for the display market. Over the last 5 years, we have retained
our original strategy of being the leader in thin film processes, but we have
shifted our focus from coating substrates to manufacturing thin film deposition
equipment. We have sold over 90 flat panel display systems, 50 architectural and
automotive glass systems and 500 web coaters.



 With our equipment manufacturing facility in Germany, research and devel-
 opment centers in Germany and the U.S. and global sales and service locations
 in eight countries, we deliver to our customers leading edge technology.
 Through our dedication to quality, process, and excellence, we strive to be the
 best in thin film deposition equipment.


( AT A GLANCE
TICKER [NASDAQ]: AFCO

FOUNDED: 1976

EMPLOYEES: 506

NET REVENUES: $154 Million

SHARES OUTSTANDING
AT 6.28.03: 11.2 Million

BUSINESS: Leading manufacturer of
thin film deposition equipment
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|USA
Applied Films Corporation
9586 I-25 Frontage Road
Longmont, CO 80504, USA

Tel: +1 303 774 3200
Fax: +1 303 678 9275

GERMANY
Applied Films GmbH & Co. KG
Siemensstrasse 100
63755 Alzenau,
Germany

Tel: +49 6023 92 6000
Fax: +49 6023 92 6200

HONG KONG
Applied Films Asia Pacific Ltd.
Suite 631, Ocean Centre
Harbour City, Tsim Sha Tsui
Kowloon, Hong Kong

Tel: +852 2110 5880
Fax: +852 2110 0220

BELGIUM
Applied Films Belgium NV
Leuvensesteenweg, 542/9A
1930 Zaventem
Belgium

Tel: +32 2 709 7990
Fax: +32 2 720 5934

CHINA
Applied Films China Co., Ltd.
Room 1801, Harbour Ring Plaza
18 Xi Zang Zhong Road, Shanghai
China

Tel: +86 21 5385 2988
Fax: +86 21 5385 3889

JAPAN
Applied Films Corporation
Japan Branch
3-2-1 Shinjuku
Shinjuku-Ku
Tokyo, Japan 160-0022

Tel: +81 3 3225 1337
Fax: +81 3 3225 1343

KOREA
Applied Films Korea, Ltd.
#720, Life-Officetel
Bldg. 61-3 Yoido-dong
Yongdeungpo-gu
Seoul, Korea, 150-731

Tel: +82 2 786 1376
Fax: +82 2 786 2376

TAIWAN
Applied Films Corporation
Taiwan Branch
3F., No. 85
Kung-Ming Sixth Road
Chu Bei City
Hsinchu County, Taiwan, ROC

Tel: +886 3 553 4222
Fax: +886 3 553 6502

www.appliedfilms.com
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