FORM 10-K/A
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ----------------

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended June 30, 2001

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

               For the transition period from _______ to ________
                          Commission file number 23103

                            APPLIED FILMS CORPORATION
             (Exact name of registrant as specified in its charter)

             COLORADO                                  84-1311581
 (State or other jurisdiction of            (I.R.S. Employer Identification No.)
  incorporation or organization)



                   9586 I-25 Frontage Road, Longmont CO 80504
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (303) 774-3200

        Securities registered pursuant to Section 12(b) of the Act: None

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

                   Common Stock, no par value (Title of Class)

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  amendments  to
this Form 10-K. [ ]

The  aggregate  market  value  of the  total  outstanding  common  stock  of the
Registrant,  based on a per  share  price of  $21.00  as of June 29,  2001,  was
$143,486,721.  As of June 29, 2001, there were  outstanding  6,832,701 shares of
the Company's  Common Stock (no par value).  The  aggregate  market value of the
common  stock held by  non-affiliates  of the  Registrant,  based on a per share
price of $21.00 as of June 29, 2001, was $112,699,692.

Documents  Incorporated by Reference:  Portions of the Company's Proxy Statement
for the 2001 Annual Meeting of Shareholders  are  incorporated by reference into
Part III of this Report.
<PAGE>
                                     PART I

ITEM 1:  Business

     The   following   discussion   contains   trend   information   and   other
forward-looking  statements  (including  statements  regarding  future operating
results, future capital expenditures,  new product introductions,  technological
developments   and  industry   trends)  that  involve  a  number  of  risks  and
uncertainties.  Our actual results could differ  materially  from our historical
results of operations  and those  discussed in the  forward-looking  statements.
Factors that could cause actual results to differ  materially  include,  but are
not  limited  to,  those  identified  in "ITEM 7:  Management's  Discussion  and
Analysis  of  Financial  Condition  and Results of  Operations"  and the section
entitled "Risk  Factors." All period  references are to our fiscal periods ended
June 30, 2001, July 1, 2000, or July 3, 1999, unless otherwise indicated.

ITEM 1(a):  General Development of Business

Introduction

We are a leading  provider of thin film  deposition  equipment to the flat panel
display,  the  architectural,  automotive  and  solar  glass,  and the  consumer
products packaging and electronics industries.  We have also developed a barrier
coating  solution  technology  for the plastic  beverage  bottle  industry.  Our
deposition   systems   are  used  to  deposit   thin  films  that   enhance  the
characteristics  of a base  substrate,  such as glass,  plastic,  paper or foil.
These thin films provide conductive, electronic, reflective, filter, barrier and
other properties that are critical elements of our customers' products. Our thin
film  deposition  systems  provide our customers with high yield and throughput,
flexible   modular   configurations,   and   innovative   coating   and  process
technologies.  We also process and sell thin film coated glass to the flat panel
display, or FPD, industry.

We leverage our thin film  expertise,  technology and market presence to address
the evolving demand for more sophisticated,  technologically  advanced thin film
deposition  equipment.  Our  manufacturing  operations  in the United States and
Germany  together with our global sales and support offices enable us to provide
thin film coating solutions to customers throughout the world. We have sold over
80 FPD deposition  systems,  35  architectural  and  automotive  glass thin film
deposition  systems,  and 400 web coating  systems and have sold two systems for
coating plastic bottles. We have over 50 patents and patent applications related
to thin film technologies.

Markets We Serve

Our thin  film  solutions  enable  our  customers  to offer the  latest  product
innovations in the following markets:

Flat Panel Displays.  FPDs are used in a wide variety of consumer and industrial
products,  including  flat panel laptop and desktop  computer  monitors,  plasma
display   televisions,   cellular   telephones,   personal  digital  assistants,
calculators,  pagers,  scientific  instruments,  portable video games,  gasoline
pumps,  automotive  instruments,  point-of-sale  terminals and a number of other
electronic   devices.   Virtually  all  FPDs  require   optically   transparent,
electrically conductive thin films coated on substrates such as glass. Growth in
the  FPD  market  is  driven  by  consumers'  desire  for  increased  access  to
information  in  wireless  and  portable   communication  devices  with  display
capabilities. Consumers also desire to replace heavy, bulky cathode ray tube, or
CRT,  monitors and  televisions  with  thinner,  lighter  FPDs.  The  increasing
affordability of FPDs significantly  expands the potential market.  According to
DisplaySearch,  a flat panel display  market  research  firm,  the FPD market is
expected to grow from  approximately  $24 billion in 2000 to  approximately  $63
billion by 2005, a compounded annual growth rate of approximately 21%.

Architectural,  Automotive  and Solar  Glass.  Thin film coated glass is used in
buildings,  automobiles  and solar energy  applications.  Applying thin films on
glass  significantly  reduces heat  transfer  through the glass,  improving  the
efficiency  of  heating  and  cooling  systems in  buildings  and  vehicles.  In
addition, thin films form conductive layers and are integral components of solar
cells.  Demand for  architectural  and automotive  coated glass is driven by the
need for energy  conservation  in commercial and  residential  construction  and
increasingly,   in  automotive  applications.   The  demand  for  reduced  power
consumption  and  alternative  energy sources also drives demand for solar cells
that use solar glass.

Consumer  Products  Packaging and  Electronics.  Web coating systems are used to
deposit thin films on multi-layer  flexible packaging for consumer food products
and  cigarettes.  Web coating  systems are also used to produce  capacitors  and
other electronic  components.  Thin films are applied to a thin plastic or metal
foil  substrate  to create a  barrier,  extending  shelf life in  consumer  food
products.  Thin films provide the conductive and electronic elements critical to
the  manufacture of certain  electronic  products,  such as capacitors and touch
panel screens. The web coating packaging market is driven by demand for

                                       2
<PAGE>
products  packaged  in  bags  and for  decorative  packaging.  The  web  coating
electronics  market  is  driven  by demand  for  touch  panel  applications  and
capacitors.

Plastic Beverage Bottles.  Polyethylene  terephthalate,  or PET, plastic bottles
are used in the  beverage  industry as an  alternative  to glass  bottles.  Many
bottlers  use glass  instead  of  plastic  because  glass has  superior  barrier
characteristics resulting in a longer product shelf life. Thin films improve the
barrier characteristics of PET bottles, extending the shelf life of beverages by
reducing the rate at which carbonation escapes or contaminants enter the bottle.
The demand for PET bottles with more efficient barrier characteristics is driven
by bottlers' desire to transition away from glass in favor of plastic,  allowing
them to reduce weight,  lower  transportation  and component costs, and increase
safety.  We believe demand for coated PET bottles outside the United States will
be driven by greater barrier  requirements of smaller container sizes and warmer
climates.  According  to  Petrochemical  Consulting  International,   carbonated
beverage bottlers consume 44% of the world's PET bottle production.

Our Thin Film Technology Solutions

Over the past 25 years we have developed  leading thin film technologies that we
leverage to meet our customers' need for sophisticated, technologically advanced
thin film deposition equipment.  We have over 50 patents and patent applications
related to thin film  technologies,  and we continue  to invest in research  and
development.  Historically, we manufactured thin film coated glass and have used
that experience to transition our business to the design and manufacture of thin
film deposition equipment.

Our broad range of thin film deposition equipment solves critical  manufacturing
issues for our customers with innovative  coating and process  technologies.  We
provide in-line or batch, high or low volume,  high-yield  deposition systems to
coat thin films on large, rigid or flexible substrates. Our deposition solutions
are highly specialized for our customers to enhance the electrical,  optical and
barrier qualities of the substrates used in their products.

The  principal  methods of  deposition  that we  integrate  in our  systems  are
physical vapor  deposition,  or PVD,  evaporation,  and plasma enhanced chemical
vapor  deposition,  or PECVD. PVD is a process  technology in which molecules of
coating material are bombarded with ions, or sputtered,  from a target or source
material. The material is then deposited on the substrate as a thin film. In the
evaporation  process, an electrical current is passed through target material in
vacuum until it vaporizes  and is then  deposited  onto the  substrate as a thin
film.  PECVD is a process where plasma, a high energy field, is used to initiate
a chemical  reaction  which  then  deposits  a newly  formed  thin film onto the
substrate.  With each deposition method, the quality of the coatings,  the cycle
time of the  process,  the  utilization  of  materials,  and other  factors  are
controlled by our technology solutions.

Our  equipment  manufacturing  operations  in the  United  States  and  Germany,
together  with our global sales and support  offices,  enable us to provide thin
film deposition  solutions  around the world.  Our knowledge,  understanding  of
customer thin film coating  requirements,  and ongoing  research and development
enable us to make continuous  improvements  that provide our customers with high
value  and  increasingly  advanced  technological  solutions.  The  depth of our
experience  and  technologies  enables  our  customers  to  continue  to develop
innovative products for their current and future markets.

Strategy

Our  objective  is to enhance our  position  as a leading  supplier of thin film
deposition equipment. Key elements of our strategy include:

Focus on High Margin Equipment  Opportunities.  We have successfully implemented
our  strategy  of  transitioning  from  supplying  thin  film  coated  glass  to
manufacturing thin film deposition equipment.  This transition has substantially
improved  our  gross  profit  margins,  as  higher-margin  equipment  sales  now
constitute  greater  than 85% of our  revenues.  We will  continue  to focus our
research and development on process technologies designed to further improve our
margins.

Leverage Our  Leadership  in Our Core  Markets.  We are a market leader with the
largest  installed  base in the FPD,  the  architectural  and  automotive  glass
markets,  and the consumer  products  packaging  and  electronics  markets.  For
example,  we have sold over 80 FPD  deposition  systems,  35  architectural  and
automotive systems,  and 400 web coating systems. We believe our reputation as a
high quality  supplier of thin film deposition  equipment  allows us to build on
our  customer  relationships  to generate  additional  orders as they grow their
businesses in response to market demands and new product offerings. We intend to
utilize our strong technological capabilities to capture additional market share
in these markets.

                                       3
<PAGE>
Target Emerging High Growth Market  Opportunities.  We have recently entered and
are  focusing  our  research  and  development  efforts  on  three  high  growth
markets-solar  cell, organic light emitting diodes, or OLEDs, and barrier coated
PET bottles.  According to PV Industry Roadmap,  a report issued by photovoltaic
industry consortium, the solar cell market is expected to grow 25% over the next
three years. DisplaySearch,  a flat panel display market research firm, predicts
that the OLED  segment of the FPD  market  will grow more than 60% per year over
the next four  years.  Although  the size of the market for  barrier  coated PET
bottles has not been  determined,  we believe it  presents  us with  significant
opportunities due to our strategic  relationships with The Coca-Cola Company and
KRONES AG, a leading supplier of automated bottling equipment. We have installed
equipment in the solar glass and coated PET bottle markets, and are working with
our strategic partners to develop our technologies in each of these areas.

Engage in Strategic  Relationships.  Our strategic relationships have influenced
our technological direction, maximized our research and development investments,
and enhanced the sales, marketing and distribution of our products. For example,
we developed and continue to improve our barrier coating process  technology for
PET bottles in  partnership  with The Coca-Cola  Company and KRONES AG.  Through
collaboration  with  KRONES  AG,  we hope  to  expand  into  other  markets  and
industries.  We also entered into our joint venture in China,  or China JV, with
Nippon Sheet Glass Co., Ltd., or NSG, the world's  largest  supplier of glass to
the FPD market,  through which we coat and distribute glass to the FPD industry.
We will continue to pursue strategic relationships with industry leaders in each
new market we enter.

Continue to Serve Diverse  Markets.  We have applied our thin film technology to
diverse markets  ranging from consumer  packaging for potato chip bags to plasma
displays  for  televisions.  We will  continue  to serve these  diverse  markets
because we believe  this  reduces  our  exposure to the  cyclical  nature of any
individual market.

ITEM 1(b):  Financial Information About Industry Segments

     We supply thin film coated glass  primarily to LCD  manufacturers  and thin
film coating equipment to several markets,  which are currently considered to be
two separate industry  segments.  For further  discussion see "ITEM 8: Financial
Statements and Supplementary Data - Note 12: Segment Information".

ITEM 1(c):  Narrative Description of Business

Products

Our thin film coating systems are used in many different  applications  spanning
four distinct markets. The following table illustrates our principal products:
<TABLE>
                                                    Deposition         Examples of          General Price
                 End Markets and Products             Method     End Market Application       Range(1)
                 ------------------------           ----------   ----------------------     --------------
                 <S>                                <C>          <C>                        <C>
                 Flat Panel Displays:
                   ATX-700                             PVD       Plasma televisions         $4-7 million
                   NEW ARISTO                          PVD       Laptop and desk monitors   $4-7 million
                   BTX                                 PVD       Color cell                 $1-3 million
                                                                 phones/personal
                                                                 Digital assistants

                 Architectural, Automotive and
                   Solar Glass:
                   Terra-G                             PVD       Low-E window glass         $10-20 million
                   A-Series                            PVD       Television screens         $7-15 million
                   SOLARISTO                          PECVD      Solar panels               $4-7 million

                 Consumer Products Packaging
                    and Electronics:
                   Multiweb                            PVD       Touch panels               $4-8 million
                   Top Met                         Evaporative   Cigarette packaging        $1-3 million
                   TOPBEAM                         Evaporative   Potato chip bags           $4-6 million
                   MULTIMET                        Evaporative   Capacitors                 $1-3 million

                 Plastic Beverage Bottles:
                   BESTPET-LG20                     Evaporative  Plastic beverage bottles   $1-3 million
</TABLE>

(1) The price for a  particular  system may be greater or less than the  general
price range, depending on the specific configuration and specifications.

                                       4
<PAGE>
Thin Film Deposition Equipment

Flat Panel Displays

Our flat panel display in-line deposition equipment applies conductive,  optical
and barrier coatings for manufacturing high information content,  color displays
such as high  resolution  liquid crystal  displays,  or LCDs, and plasma display
panels, or PDPs, used in computer monitors and high definition televisions.

ATX-700. Our ATX-700 advanced thin film deposition system provides a solution to
the  increasing  display  size and  low-particulate  requirements  of PDPs.  The
ATX-700  platform is designed to apply  critical  coatings in the plasma display
fabrication  facility.  The system  features near  vertical  sputtering on glass
substrates,  a  minimized  footprint,   lower  particulate  levels  and  robotic
handling.  The ATX-700 is modular and particularly  well suited for handling the
large  sheets of glass  processed  in the  plasma  display  panel  manufacturing
process

NEW  ARISTO.  Our NEW ARISTO is an  advanced  thin film  deposition  system that
accommodates  the  largest  mother  glass  sizes and  meets the low  particulate
requirements of the active matrix LCD and color super twisted  nematic,  or STN,
coated glass markets.  The NEW ARISTO is designed to apply critical  coatings to
the glass  substrate for the active matrix LCD market.  The system features high
throughput, low cost of ownership and the capability for double-sided coatings.

BTX. Our BTX deposition  system consists of a single chamber designed to deposit
high quality thin films on display glass at a very low rate.  The BTX is ideally
suited for color filter  manufacturers  supplying coated substrates to the color
STN market.

Architectural, Automotive and Solar Glass

Our  architectural  and  automotive  thin film  deposition  systems  apply low-E
coatings  on large  glass  substrates  used in  building  glass  and  automotive
windshields.  Our solar glass  coating  systems apply the thin films that create
the conductive layers on substrates used in solar cells.

Terra-G.  Our Terra-G thin film deposition  system is our most advanced  coating
system  designed  for the large  glass  market.  The Terra-G  uses large  planar
magnetron  cathodes and  uniformly  deposits  multiple thin films across a large
area at very high  throughput.  The Terra-G can be up to 150 meters long and can
deposit up to 20 different thin films on a single side during the process.

A-Series.  Our  A-Series  thin film  deposition  system is capable  of  handling
large-sized substrates. The A-Series uses planar magnetron cathodes and deposits
multiple  thin  films on the glass  which is  moving  horizontally  through  the
system. The A-Series can be up to 50 meters long.

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

Consumer Products Packaging and Electronics

Our web  coating  systems  deposit  thin films on  flexible  substrates  used in
various  markets such as food  packaging,  decorative  packaging  or  electronic
applications such as electromagnetic  interference  shielding,  capacitors,  and
touch panel 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 and are used as  conductive  coatings in the  manufacture  of
certain electronic products, such as capacitors and touch panel screens.

Multiweb.  Our Multiweb thin film deposition  system uses PVD processes to apply
thin film conductive coatings primarily for touch panel applications.

Top Met.  Our Top Met web thin film  deposition  system  provides a solution for
coating  metal  materials  on  flexible  substrates.  The Top Met  uses  thermal
evaporation  to deposit  thin film layers of  aluminum  in vacuum onto  flexible
substrates, usually film, paper or textiles in roll format.

                                       5
<PAGE>
TOPBEAM.  Our  TOPBEAM  web thin  film  deposition  system  uses  electron  beam
evaporation technology to produce transparent thin film barrier coatings used in
the food  packaging  industry.  The TOPBEAM web coating system uses high powered
electron beam guns to evaporate metal or metal oxide.

MULTIMET.  Our  MULTIMET  web  thin  film  deposition  system  uses  evaporative
deposition  technology  to deposit thin films on very thin foil at high speed in
vacuum  for the  capacitor  market.  The  MULTIMET  offers  the  ability to mask
specific patterns on substrates.

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 contact with the beverage and does not require
United States Food and Drug Administration approval.

BESTPET-LG20.  Our BESTPET-LG20 system deposits silicon oxide on plastic bottles
at a rate of 20,000 bottles per hour. The system deposits  transparent thin film
coatings on the outside of the bottle using evaporation technology.

We also  supply our GMS Tester  which is a leading  technology  for  testing the
barrier improvement factor for PET bottles.  These systems use gas and vacuum to
test the permeability of PET bottles.

Thin Film Coated Glass

TN and STN Coated Glass. We are a leading  producer of twisted  nematic,  or TN,
and STN coated glass that is used for low  resolution  black and white LCDs. Our
customers  incorporate  these LCDs into consumer  products that include cellular
phones,  personal digital assistants and electronic  instruments.  To produce TN
and STN coated glass, we use our proprietary  in-line coating systems to deposit
thin films on high  quality  glass  panels.  We then package and ship the coated
glass panels to our customers for incorporation into their products.

Sales, Marketing and Customers

We have sales offices in the United States, Germany, Hong Kong, Belgium, Taiwan,
Korea,  Japan and China.  The sales cycle for thin film deposition  equipment is
long,  involving  multiple  visits to and by the customer and up to 15 months of
technical sales effort. We usually sell our thin film deposition  equipment on a
progress  payment  basis.  We generally  sell our thin film coated glass on open
account,  most of which are insured, or backed by letter of credit. Our customer
payment history has been excellent.

In fiscal 2001, our ten largest customers accounted for approximately 35% of our
net  revenues.  Approximately  67% of our fiscal 2001 net revenues  were derived
from exports to our customers outside of the United Sates and Europe,  primarily
to Asia. The demand for FPD thin film coated glass is primarily in Asia, and our
customers for thin film deposition  equipment have  historically been located in
Japan, Korea, China, Taiwan, Europe and the United States.

Customer Service

We provide  customer  technical  assistance to support our customers.  Technical
assistance  is an  important  factor  in our  business  as most of our thin film
deposition equipment is used in critical phases of our customers' manufacturing.
Field engineers install the systems,  perform preventive  maintenance and repair
services,  and are available for assistance in solving  customer  problems.  Our
global  presence  permits us to provide  these  functions  in  proximity  to our
customers.  We also maintain local spare part supply centers to facilitate quick
support.

We provide  maintenance  during the product  warranty  period,  usually one year
following product  acceptance,  and thereafter perform  maintenance  pursuant to
individual  orders issued by the customer.  Our customer service  operations are
also responsible for customer training programs, spare parts sales and technical
publications. In appropriate circumstances,  we will send technical personnel to
customer  locations to support the  customers  for  extended  periods of time to
optimize the use of the equipment for the customer's specific processes.

Manufacturing, Facilities and Suppliers

Our Longmont,  Colorado headquarters contains  approximately 127,000 square feet
and  includes  general  offices,   research  and  development  facilities,   and
manufacturing  and  production  facilities.  This  facility  is  leased  from an
independent third party.

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<PAGE>
We design and manufacture  thin film coating  equipment and produce coated glass
at this facility.  In Longmont, we currently operate two coated glass production
lines and four development lines for developing coating and equipment processes.
We can concurrently build multiple systems at our Longmont facility.

Our Alzenau,  Germany  manufacturing  facility  contains  approximately  169,000
square feet and includes general offices,  research and development  facilities,
and  manufacturing  and production  facilities.  This facility is leased from an
independent  third  party.  We  design  and  manufacture  thin  film  deposition
equipment and can  concurrently  build multiple thin film deposition  systems at
this facility.

We also  lease  61,000  square  feet  of  space  in the  Unaxis  Hanau,  Germany
manufacturing  facility in which we design and manufacture  thin film deposition
equipment.  We are in the  process  of  transferring  operations  from  Hanau to
Alzenau and anticipate  that this transfer will be complete by the end of fiscal
2002.

Our China JV glass coating facilities are incorporated into the glass production
facilities owned by NSG and contain approximately 60,000 square feet.

In addition to our Longmont,  Alzenau,  Hanau and China JV  facilities,  we have
leased  warehouse space in Japan and Hong Kong from which we supply coated glass
customers  on a  just-in-time  basis.  We also have sales  offices in the United
States, Germany, Belgium, Hong Kong, Korea, Japan, Taiwan, and China.

We  have  multiple  sources  for  the  principal  components  of our  deposition
equipment manufacturing  operations. In our coated glass business, the raw glass
that we use represents our most significant material cost. The required quality,
in terms of thickness, flatness and visible imperfections,  limits the number of
available  suppliers.  Four companies worldwide  currently  manufacture to these
quality standards. We currently purchase glass from three of these suppliers. We
are vulnerable to increased costs of raw glass. We have multiple sources for our
other primary raw materials used in the process for thin film coated glass.

Competition

The key  competitive  factors in each of our markets are performance and process
technology, technical capability and systems design, product uniformity, yields,
target utilization and throughput, after-sales support and service and price. We
believe we are competitive with respect to each of these factors. In each of our
markets, we compete primarily with two or three companies, which vary from small
to large in terms of the amount of their net revenues and range of products.

Our primary competitors are as follows:

Flat Panel Display Deposition Equipment. For FPD thin film deposition equipment,
we chiefly compete against Ulvac  Technologies,  Inc. of Japan,  and Anelva Ltd.
Japan.

Architectural, Automotive and Solar Glass Deposition Equipment. In manufacturing
architectural  and automotive glass  deposition  systems,  we primarily  compete
against Von Ardenne, AG, a German thin film coatings company, and British Oxygen
Coating Technologies Corporation,  located in California. In manufacturing solar
glass deposition  systems,  we primarily compete against Ulvac  Technologies and
Von Ardenne.

Consumer  Products  Packaging and  Electronics  Deposition  Equipment.  Our most
significant   competitors   for  web  coating   systems   are  Valmet   General,
headquartered in the United Kingdom, and Von Ardenne.

Plastic Beverage Bottle Deposition  Equipment.  In the coated PET bottle market,
we compete  with the Sidel  division of  Tetra-Pak  (Swiss)  SA, an  established
manufacturer  in  Switzerland.  Our arc  evaporation  process  applies a barrier
coating  to  the  outside  of  the  bottle,  while  Tetra-Pak's  chemical  vapor
deposition process coats a barrier layer on the inside of the bottle.

Thin Film Coated Glass.  Our primary  competitors for thin film coated glass are
The Samsung  Corning,  Co., Ltd, Merck Japan Ltd. and Shenzhen  Wellight Coating
Glass Co., Ltd.

Our markets are highly  competitive.  Many of our competitors have substantially
greater financial, technical, marketing and sales resources than we have.

                                       7
<PAGE>
Research and Development

We have  approximately  49  engineers  and  scientists  involved in research and
development.  We will continue to emphasize  improvements  in current  equipment
technology,  the  development  of new  film  deposition  capabilities,  and  the
modification  of thin film material  properties.  The foundations of our success
are  based  on  engineering   solutions,   extensive   experience   with  vacuum
technologies,  and  the  depth  of our  commercial  deposition  experience.  Our
customer  oriented  solutions  include  cost  effective  thin  film  deposition,
simplified process control,  and innovative  deposition  equipment  designs.  We
continue to build on these  traditions in the development of process control and
deposition design which lower the cost of ownership to the customer.

Our  research  and  development  expertise  includes a wide range of  deposition
technologies, including:

  -  Thermal evaporation by direct heating for organics and inorganics;

  -  Electron beam evaporation for dielectrics;

  -  Direct current,  radio frequency and radio  frequency  superimposed  direct
     current magnetron for reactive and non-reactive sputtering;

  -  Alternating current magnetron (TwinMag) for fully reactive sputtering;

  -  Hollow cathode source for highly reactive coatings;

  -  Direct current, radio frequency and microwave sources for PECVD;

  -  Cleaning with direct current glow  discharge,  radio frequency etch and ion
     assisted etch; and

  -  High speed depositing of barrier layers on PET bottles.

We are  strategically  partnered  with  The  Coca-Cola  Company  in the  ongoing
development of barrier thin film  deposition  equipment for coating PET bottles.
We license from The Coca-Cola Company certain aspects of the technology,  and we
own certain intellectual property related to barrier coating for PET bottles. We
are jointly  researching  and  developing  improved thin film barrier  coatings.
KRONES  AG  supplies  and  works  with  us in the  development  of the  bottling
technology used in our BESTPET deposition equipment.  These partnerships help us
maximize our research and development investments in this technology.

Our research and development expenditures were $1.0 million in fiscal 1999, $1.4
million in fiscal 2000 and $6.4 million in fiscal 2001.

Intellectual Property

We use a combination of patent, copyright, trademark and trade secret protection
as well as non-disclosure agreements and licensing arrangements to establish and
protect our  proprietary  rights.  Steps taken by us to protect our  proprietary
rights may not be adequate to prevent  misappropriation  of such rights or third
parties from  independently  developing a  functionally  equivalent  or superior
technology. We have over 50 patents and patent applications.

We license  certain  intellectual  property to Balzers  Process Systems GmbH, an
indirect subsidiary of Unaxis under an irrevocable,  royalty-free, perpetual and
worldwide license agreement. Under the license agreement Balzers Process Systems
has the  exclusive  right  until  December  31,  2002,  to use the  intellectual
property to make and sell products in the areas of:

  -  dry etch applications;

  -  TFT displays;

  -  cluster tools; and

  -  stationary sputtering.

                                       8
<PAGE>
We also license certain intellectual  property from Balzers Process Systems. The
license is irrevocable, royalty-free, perpetual and worldwide. Under the license
agreement  we have the  exclusive  right until  December  31,  2002,  to use the
intellectual property to make and sell products in the areas of:

  -  architectural glass coating and inline automotive glass coating;

  -  web coating for capacitors and decorative and packaging applications;

  -  diffusion barriers for certain bottles and containers; and

  -  certain display  coating  systems used to coat the non-active  portion of a
     display.

After  December 31,  2002,  neither  party has an  exclusive  field under either
license and either party is able to use the intellectual  property to compete in
all markets.

We are in the process of transferring the intellectual  property acquired in the
LAC acquisition.

Certain patents and other  intellectual  property  related to PET bottle coating
technology are licensed from The Coca-Cola  Company.  KRONES AG supplies  bottle
handling  components  and  works  with  us  to  improve  the  bottling  handling
technology used in our BESTPET system.

Strategic Relationships with KRONES AG and The Coca-Cola Company

We have  strategic  relationships  with The  Coca-Cola  Company and KRONES AG to
develop and produce thin film deposition  equipment to apply barrier coatings to
the outside of plastic  bottles.  In July 1997,  we entered  into a  development
agreement  with The Coca-Cola  Company to cooperate in developing  equipment and
processes for use in depositing thin films on the outside of plastic bottles. We
proceeded to design and construct a prototype machine.

We then entered into a  Commercialization  Agreement with The Coca-Cola  Company
and  KRONES  AG  effective   September  2000  which  specifies  our  rights  and
responsibilities with respect to this process and technology. We are responsible
for  manufacturing  the thin film  deposition  equipment,  or BESTPET  equipment
including the integration of the bottle handling  components supplied by KRONES.
KRONES  is  responsible  for  selling  and  servicing  the  BESTPET   deposition
equipment.  Until  September 1, 2002,  The  Coca-Cola  Company is the  exclusive
distributor of BESTPET systems, and after September 1, 2002, systems may be sold
to The Coca-Cola  Company or to third parties.  After  September 1, 2002, we and
KRONES may sell to any third  parties,  provided  that KRONES and The  Coca-Cola
Company   will   receive   royalty   payments   on  third   party   sales.   The
Commercialization  Agreement  continues in effect until August 31, 2005. Even if
the agreement is not renewed, we will retain a worldwide,  non-exclusive license
of the intellectual property related to thin film deposition on plastic bottles.

We continue to improve our barrier coating  process  technology and believe that
our strategic  relationship with The Coca-Cola Company and KRONES AG presents us
with significant opportunities.

The LAC Acquisition

We acquired the LAC business from Unaxis  effective  December 31, 2000.  The LAC
acquisition  expanded our  capabilities  in the FPD market and enabled our entry
into three new  product  markets:  architectural,  automotive  and solar  glass,
consumer products  packaging and electronics and PET plastic bottles.  Under the
Share Purchase and Exchange Agreement,  Unaxis made certain  representations and
warranties to us concerning the business we acquired and agreed to indemnify us,
subject to certain  limitations,  for certain costs or other  liabilities we may
incur in excess of $100,000 in  connection  with the  operations of the business
purchased prior to the closing date or arising out of the reorganization done by
Unaxis prior to the acquisition.  We must make indemnification  claims regarding
tax or  environmental  claims by December  31, 2005.  All other  indemnification
claims must be made by us before  September 30, 2002.  Unaxis is not required to
indemnify  us,  however,  if the cost or  liability  was  reflected in the final
closing  balance  sheet  used to  determine  the  final  purchase  price for the
acquisition.   Unaxis'  contractual  obligation  with  respect  to  breaches  of
representations and warranties is limited to $15.0 million.

In addition,  Unaxis agreed that,  until  December 31, 2002, it will not compete
with  the  LAC  business  we  acquired.   We  also  agreed  to  license  certain
intellectual  property  from  Unaxis,  and  Unaxis  agreed  to  license  certain
intellectual  property  from us.  After  December  31,  2002,  Unaxis is free to
compete with us in our markets with certain intellectual property related to our
deposition technology.

                                       9
<PAGE>
The agreement  also provides for board  representation  for Unaxis as long as it
holds at least 10.0% of the total outstanding shares of common stock. Unaxis has
preemptive  rights to maintain  its  ownership  percentage  in the event that we
issue  additional  shares or take other  corporate  action  that  decreases  its
ownership percentage.

China Joint Venture

In fiscal 1999, we entered into a joint venture with NSG, a major Japanese glass
manufacturer,  to supply the low and high resolution  coated glass market from a
production base in Suzhou, China. The China JV was formed as a limited liability
company under the laws of the People's  Republic of China.  We are 50%-50% joint
venture  partners  with NSG, and the term of the China JV is 50 years.  Profits,
dividends,  risks and losses are also shared by the  partners in  proportion  to
their equity contributions.  The total investment plan for our China JV involves
$27.1 million, of which $19.6 million is currently in equity and $7.5 million in
debt.  Each party has made $3.2 million  equity  contribution  in cash,  and the
balance was derived from the conversion of retained earnings to paid in capital.

Our  strategy  for the China JV has involved the transfer of the majority of our
thin film coated glass  manufacturing  capacity to China.  In the second half of
calendar 2000, we transferred another thin film coating system from our Longmont
facility to the China JV facilities,  bringing the number of coating  systems to
three.  The China JV's  location  in Asia allows us to produce  coated  glass in
facilities  immediately adjacent to our primary source of raw glass, NSG, and in
close  proximity to our Asian customer base.  This  arrangement  has reduced our
labor, shipping and freight costs while allowing us to improve customer service.
We intend to continue to leverage the China JV's strategic position by expanding
its manufacturing capacity in the future,  including an announced expansion into
the color STN  market by the  China JV that will be  producing  low  temperature
indium tin oxide  glass by  December  2001.  We will also  continue  to evaluate
business opportunities that strengthen our position with our customers.

Employees

As of June 30,  2001,  we  employed  approximately  642 people,  including  both
permanent and temporary employees.  Our United States workforce of approximately
200  people is  non-union.  We employ  approximately  398 people in  Germany,  a
majority  of  whom  is   represented  by  a  works  council  that  has  employee
representation.  Most  companies  in Germany are required to be  represented  by
works  councils.  We  negotiate  wages and  benefits  annually  with our  German
workforce.  We have 44 people in sales and customer  service in other  countries
around the world. We consider our relationship with our employees to be good.

We operate under a  participative  management  system which we believe  enhances
productivity by emphasizing  individual  employee  opportunity and participation
both in operating  decisions and in our profitability.  We believe this emphasis
assists with enhanced  productivity,  cost control,  and product quality and has
helped us attract and retain capable employees.

Environmental Regulations

Our operations create a small amount of hazardous waste. The amount of hazardous
waste we  produce  may  increase  in the  future  depending  on  changes  in our
operations.  The general  issue of the disposal of hazardous  waste has received
increasing focus from federal,  state and local governments and agencies both in
the United  States and Germany and has been  subject to  increasing  regulation.
Based on regulations currently in effect, compliance with these regulations will
not have a material impact on our capital expenditures,  earnings or competitive
position.

Trademarks

ATX-7000,  NEW ARTISTO, BTX, Terra-G,  A-Series,  SOLARISTO,  Multiweb,  TopMet,
TOPBEAM, MULTIMET,  BESTPET, GMS Tester and TwinMag are trademarks or registered
trademarks  of  ours.  Coca-Cola  is a  registered  trademark  of The  Coca-Cola
Company. KRONES is a registered trademark of KRONES AG.

                                       10
<PAGE>
                                   Management

Executive Officers and Directors

Our executive officers and directors are as follows:
<TABLE>
                         Name                              Age               Position
                         ----                             ----               --------
                         <S>                              <C>   <C>
                         Thomas T. Edman.............      39   Director, President and Chief Executive Officer
                         Graeme Hennessey............      63   Vice President-- Sales and Marketing
                         Lawrence D. Firestone.......      43   Chief Financial Officer, Treasurer and Secretary
                         Helmut Frankenberger........      44   Executive Vice President-- Thin Film Systems
                         Jim Scholhamer..............      34   Vice President-- Operations
                         Cecil Van Alsburg...........      64   Director, Chairman of the Board
                         John S. Chapin..............      60   Director
                         Chad D. Quist...............      39   Director(1)
                         Richard P. Beck.............      68   Director(1)
                         Vincent Sollitto, Jr........      53   Director(1)
                         Aitor Galdos................      46   Director
----------
</TABLE>
(1) Member of the Audit and Compensation Committees.

Thomas T. Edman has been  employed by our company since June 1996 and has served
as our President  and Chief  Executive  Officer  since May 1998.  From June 1996
until May 1998, Mr. Edman served as Chief  Operating  Officer and Executive Vice
President.  Mr.  Edman has served as a director of our company  since July 1998.
From 1993 until  joining our company,  he served as General  Manager of the High
Performance  Materials  Division  of  Marubeni  Specialty  Chemicals,   Inc.,  a
subsidiary of a major Japanese trading corporation. Mr. Edman has a bachelors of
arts  degree in East  Asian  studies  (Japan)  from Yale and  received a masters
degree in business  administration  from The Wharton School at the University of
Pennsylvania.

Graeme  Hennessey has served as our Vice  President - Sales and Marketing  since
April 1993 and is currently also  President of Applied Films Asia Pacific.  From
1980 until he joined  our  company,  Mr.  Hennessey  was  employed  by  Donnelly
Corporation  as a product line manager  where he was  responsible  for sales and
marketing as well as  manufacturing.  Mr.  Hennessey  has a bachelors of science
degree in physics from Catholic  University  of America and a masters  degree in
physics from Fordham University.

Lawrence D. Firestone has served as our Chief Financial  Officer,  Treasurer and
Secretary  since July 1999.  From March 1996 until  March  1999,  Mr.  Firestone
served as Vice President and Chief  Operating  Officer of Avalanche  Industries,
Inc., a custom cable and harness manufacturer.  From 1993 to 1996, Mr. Firestone
served as Director of Finance and  Operations  for the Woolson  Spice and Coffee
Company,  a gourmet coffee roasting and distribution  company,  and from 1988 to
1993, as Vice President and Chief Financial Officer for TechniStar  Corporation,
a manufacturer of robotic automation equipment. From 1981 to 1988, Mr. Firestone
served in various  capacities and finally as Vice President and Chief  Financial
Officer at  Colorado  Manufacturing  Technology,  a contract  manufacturer  that
specialized  in PC board and cable  assembly.  Mr.  Firestone has a bachelors of
science degree in business/accounting from Slippery Rock State College.

Helmut  Frankenberger  has served as our  Executive  Vice  President - Thin Film
Systems  since  the  LAC  acquisition  on  December  31,  2000.   Prior  to  the
acquisition,  Mr.  Frankenberger served as President of Balzers Process Systems,
located in Germany,  since 2000,  and the Vice  President  of Large Area Display
Division since 1999.  From 1997 through 1998, he served as the Division  Manager
of Display Products,  and from 1996 through 1997, served as the Division Manager
of Data  Storage at Balzers  Process  Systems.  Prior to 1987 Mr.  Frankenberger
served in various capacities  related to sales,  marketing and equipment service
for  Leybold   Deutschland  in  Germany,   Japan  and  the  United  States.  Mr.
Frankenberger  obtained his bachelors  degree in electronic and computer science
from University Darmstadt in Germany.

Jim  Scholhamer  has been  employed  by us since  August  1997.  Mr.  Scholhamer
currently is the Vice  President - Operations and was previously the Director of
Operations  for Thin Film Coatings.  From 1992 until he joined the Company,  Mr.
Scholhamer  held the titles of  Manufacturing  Manager and  Process  Engineer at
Viratec  Thin  Films,  Inc.,  located  in  Minnesota.  From  1989 to  1992,  Mr.
Scholhamer served as Production Manager and Process Engineer at Ovonic Synthetic
Materials,  Inc., a division of Energy Conversion Devices,  located in Michigan.
Mr.  Scholhamer  has a  bachelors  of  science  degree in  engineering  from the
University of Michigan.

Cecil Van Alsburg  co-founded  Applied Films Lab, Inc. in 1976 and served as our
President and Chief Executive Officer from 1976 to May 1998. Mr. Van Alsburg has
also  served as a  director  of our  company  since its  inception  and has been
Chairman of the Board since  January  1998.  Prior to 1976,  Mr. Van Alsburg was
employed  in various  capacities  by Donnelly

                                       11
<PAGE>
Corporation,  where he had worked since 1957.  Mr. Van Alsburg  majored in civil
engineering and architecture at The University of Michigan.

John S. Chapin  co-founded  Applied  Films Lab,  Inc. in 1976 and served as Vice
President - Research, Corporate Secretary from 1976 to November 2000. Mr. Chapin
has also served as a director of our company since its inception.  Mr. Chapin is
the inventor of the planar  magnetron and  co-inventor of a reactive  sputtering
process control. Mr. Chapin has a bachelors of science degree in geophysics from
the Colorado School of Mines and a masters degree in electrical engineering from
the University of Colorado.

Chad D. Quist has been a director of our company since April 1997.  Mr. Quist is
the  President of  Information  Products,  Inc., a  wholly-owned  subsidiary  of
Donnelly  Corporation.  Mr.  Quist has been  employed  by  Donnelly  since 1995.
Information  Products,  Inc. is a leading  supplier of glass  components for the
touch screen industry.  From 1989 to 1995, Mr. Quist served as Vice President of
Fisher-Rosemont,  Inc., an industrial  instrumentation  company. Mr. Quist has a
bachelors degree in engineering from Stanford University and a masters degree in
business  administration  from  the  Kellogg  Graduate  School  of  Business  at
Northwestern University.

Richard P. Beck has been a director of our company  since May 1998.  Since 1992,
Mr. Beck has served as Chief Financial  Officer of Advanced  Energy  Industries,
Inc., a manufacturer of power  conversion and control  systems.  Since 1995, Mr.
Beck has also served as a director of Advanced Energy Industries, Inc. From 1987
to 1992, Mr. Beck served as Executive Vice President and Chief Financial Officer
of Cimage  Corporation,  a  computer  software  company.  Mr.  Beck  serves as a
director of Photon Dynamics, Inc. and TTM Incorporated. Mr. Beck has a bachelors
of science degree in accounting and a masters degree in business  administration
in finance from Babson College.

Vincent Sollitto, Jr. has been a director of our company since October 1999. Mr.
Sollitto has been  President and Chief  Executive  Officer since June 1996 and a
member of the Board of Directors since July 1996 at Photon  Dynamics,  Inc. From
August  1993 to 1996,  Mr.  Sollitto  was the General  Manager of Business  Unit
Operations for Fujitsu Microelectronics, Inc. From April 1991 to August 1993, he
was the  Executive  Vice  President of  Technical  Operations  at  Supercomputer
Systems,  Incorporated.  Mr.  Sollitto  spent  21 years  in  various  management
positions at IBM,  including  Director of Technology and Process.  Mr.  Sollitto
serves on the boards of Irvine Sensors  Corporation and Ultratech  Stepper.  Mr.
Sollitto is a graduate of Tufts  College where he received a bachelor of science
degree in electrical engineering.

Aitor Galdos has been a director of our company since  January  2001,  following
the LAC  acquisition.  Mr.  Galdos has served as Vice  President  and  Corporate
Development  Manager at Unaxis  Corporation  since  1999,  and served in various
positions, including Division Manager of Development of TFT Displays Division at
Unaxis  (formerly  Balzers)  since 1988.  Our Board of  Directors  is  currently
comprised of seven  directors,  divided into three  classes.  Messrs.  Edman and
Sollitto serve in the class whose term expires in 2003;  Messrs.  Beck and Quist
serve in the class whose term expires in 2002; and Messrs.  Van Alsburg,  Chapin
and Galdos serve in the class whose term expires in 2001.  Directors are elected
for a three-year term.  Other than Mr. Galdos,  each director holds office until
that  director's  successor  has been duly elected and  qualified.  Selection of
nominees for the Board of Directors is made by the entire Board of Directors.

Mr. Van  Alsburg  has  notified  the Board that he will retire and not stand for
re-election at the October 2001 annual meeting of shareholders.

Mr.  Galdos was  appointed  to serve on our Board of  Directors  pursuant  to an
agreement  giving  Unaxis the right to nominate one director as long as they own
10% or more of our  outstanding  common  stock,  subject  to  certain  terms and
conditions.  Unaxis no longer owns 10% or more of our outstanding  common stock,
and Mr.  Galdos  will not be  nominated  for  re-election  at the  October  2001
meeting.

Executive Officers

The Board of Directors elects executive  officers on an annual basis.  Executive
officers serve at the pleasure of the board.

ITEM 1 (d):  Information About Foreign Operations

     See "ITEM 1(c): Narrative Description of Business -- Sales, Marketing,  and
Customers" and "China Joint Venture".

ITEM 2:  Properties

     See "ITEM 1 (c): Manufacturing, Facilities and Suppliers"

                                       12
<PAGE>
ITEM 3:  Legal Proceedings

     From time to time, we may be subject to litigation  and claims  incident to
our  business.  As of the date of this report,  we are not involved in any legal
proceedings  which,  if  not  settled  in  our  favor,  would,  individually  or
collectively, have a material adverse impact on our financial condition.

ITEM 4:  Submission of Matters to a Vote of Security Holders

     No matters  were  submitted  during the fourth  quarter of fiscal 2001 to a
vote of our Shareholders.

                                  Risk Factors

You should carefully  consider the following risk factors and other  information
contained or  incorporated by reference in this report before deciding to invest
in our common  stock.  Investing in our common  stock  involves a high degree of
risk. The risks and  uncertainties  described  below may not be the only ones we
face. If any of the following risks actually occur, our business could be harmed
and the trading price of our common stock could decline, and you may lose all or
part of your investment.  Please see "Forward-Looking  Statements" on page 35 of
this report.

Our  quarterly  revenues and  operating  results  fluctuate  due to a variety of
factors, which may result in volatility or a decrease in the price of our common
stock.

We have  experienced  and may  continue  to  experience  significant  annual and
quarter-to-quarter  fluctuations  in our  operating  results  as a  result  of a
variety of factors including:

  -  the cyclical nature of the capital equipment market;

  -  fluctuation  in customer  demand,  which is influenced by general  economic
     conditions in the industries and geographic markets we serve;

  -  our product and revenue mix;

  -  competition, including competitive pressures on prices of our products;

  -  the length and variability of the sales cycle for our products;

  -  manufacturing and operational issues;

  -  the timing of customer orders;

  -  issues  related to new  product  development  and  introduction,  including
     increased  research,   development  and  engineering  costs  and  marketing
     expenses;

  -  the timing of the recognition of revenues from capital equipment orders and
     the accuracy of the estimation of our costs;

  -  sales and marketing  issues,  including our concentration on a small number
     of customers; and

  -  fluctuations in foreign currency exchange rates.

These factors are difficult or impossible to forecast.

Our  business  could be  adversely  affected  by the  cyclical  nature of market
conditions in the industries we serve.

Our business  depends on the purchasing  requirements of  manufacturers  of flat
panel displays, or FPDs, and our customers in the architectural,  automotive and
solar  glass,   the  consumer   products   packaging  and  electronics  and  the
polyethylene  terephthalate,  or PET,  plastic bottle markets.  Certain of these
markets,  in particular the FPD market,  have been subject to dramatic  cyclical
variations  in product  supply and demand.  The timing,  length and  severity of
these cycles are difficult to predict.  In some cases,  these cycles have lasted
more  than a year.  Manufacturers  may  contribute  to these  cycles by over- or
under-investing in manufacturing  capacity and equipment.  We may not be able to
respond effectively to these industry cycles.

                                       13
<PAGE>
Downturns in the industry often occur in connection with, or in anticipation of,
maturing  product cycles and declines in general economic  conditions.  Industry
downturns have been  characterized  by reduced demand for equipment,  production
over-capacity and accelerated decline in average selling prices. During a period
of declining demand, we must be able to quickly and effectively reduce expenses,
and this ability is limited by our need for continued  investment in engineering
and research and development and extensive  ongoing customer service and support
requirements.  In  addition,  although  we order  materials  and  components  in
response to firm orders,  the long lead time for production and delivery of some
of our  products  creates  a risk  that we may incur  expenditures  or  purchase
inventories  for  products  which we  cannot  sell or for  which  orders  may be
cancelled.

In fiscal 2001, we experienced a downturn in the FPD market, and there can be no
assurance when or if demand for thin film transistors, or TFTs or plasma display
panels  will  increase.  Unfavorable  economic  conditions  that  relate  to the
consumer  electronics or other industries in which we operate, or that result in
reductions  in  capital  expenditures  by our  customers,  could have a material
adverse  effect on our  business,  operating  results,  financial  condition and
prospects.

Our industry is subject to rapid technological change, and we may not be able to
forecast or respond to commercial and technical trends.

Our growth strategy and future success is dependent upon  commercial  acceptance
of products  incorporating  technologies we have developed and are continuing to
develop.  The  market  for thin  film  coated  glass  and thin  film  deposition
equipment  is  characterized  by rapid  change  and  frequent  introductions  of
enhancements  to  existing  products.  Technological  trends  have  had and will
continue to have a significant impact on our business. Our results of operations
and  ability  to remain  competitive  are  largely  based  upon our  ability  to
accurately   anticipate  customer  and  market  requirements.   Our  success  in
developing,  introducing  and selling new and enhanced  products  depends upon a
variety of factors, including:

  -  accurate technology and product selection;

  -  timely and efficient completion of product design and development;

  -  timely  and  efficient   implementation   of  manufacturing   and  assembly
     processes;

  -  product performance in the field; and

  -  product support and service and effective sales and marketing.

We may  not be  able  to  accurately  forecast  or  respond  to  commercial  and
technological trends in the industries in which we operate.

Technological  changes,  process  improvements,  or operating  improvements that
could adversely affect us include:

  -  development of new technologies by our competitors;

  -  changes in product requirements of our customers;

  -  changes in the way  coatings  are  applied to glass,  paper,  metal foil or
     plastic bottles;

  -  development  of new materials  that improve the  performance  of the coated
     substrate; and

  -  improvements in the alternatives to our technologies.

We may not have sufficient funds to devote to research and  development,  or our
research and development efforts may not be successful in developing products in
the time, or with the  characteristics,  necessary to meet customer needs. If we
do not  adapt  to  such  changes  or  improvements,  our  competitive  position,
operations and prospects would be materially adversely affected.

                                       14
<PAGE>
We have  limited  resources to allocate to research  and  development,  and must
allocate  our  resources  among  a  variety  of  projects.  Because  of  intense
competition in our industry, the cost of failing to invest in strategic products
is high. If we fail to adequately invest in research and development,  we may be
unable to compete effectively in the markets in which we operate.

Our products generally have long sales cycles and implementation  periods, which
increase  our costs in  obtaining  orders  and extend  the  effects of  economic
downturns.

We derive a substantial  portion of our net revenues  from  complex,  customized
products  that are a  significant  capital  expenditure  for our  customers  and
typically  require long lead times.  Because of the  significance of the product
purchase decision,  prior to placing an order,  prospective  customers generally
commit significant resources to test and evaluate our products and often require
a significant number of product presentations and demonstrations before reaching
a sufficient level of confidence in the product's  performance and compatibility
with the customer's  specific  requirements.  The sales cycle of our products is
typically six to 15 months or more, requiring us to invest significant marketing
and  engineering  resources  in  attempting  to  make  sales  and  delaying  the
generation of revenue.  Following  periods of economic downturn during which the
sales  process may have been  suspended,  the long sales cycle will lengthen the
period  following  economic  recovery before we will begin to receive  revenues.
Long sales cycles also subject us to other risks, including customers' budgetary
constraints,  internal  acceptance reviews and cancellations.  The time required
for our  customers to  incorporate  our products  into their systems can also be
lengthy  and  require  significant  on-site  engineering  support.  Because  our
customers'  final payment  obligations are not triggered until ultimate  product
acceptance,  any delay in  acceptance  could  postpone  our receipt of the final
10-15% of the purchase price.

We may need additional funds to finance our future growth,  and if we are unable
to obtain such funds, we may not be able to expand our business as planned.

Our acquisition of the Large Area Coatings,  or LAC,  division of Unaxis Holding
AG, or Unaxis,  on December 31, 2000,  required us to use available  cash and to
draw down all available  borrowings  under our credit  facility.  We may require
substantial additional capital to finance our future growth and fund our ongoing
research and development  activities.  Our capital  requirements  depend on many
factors,  including acceptance of and demand for our products, and the extent to
which we invest in new technology and research and development projects.

To the  extent  that our  existing  sources  of  liquidity  and cash  flow  from
operations  are  insufficient  to fund  our  activities,  we may  need to  raise
additional  funds. If we raise  additional  funds through the issuance of equity
securities,  the  percentage  ownership  of our existing  shareholders  would be
diluted.  If we finance our  capital  requirements  through  issuance of debt or
preferred stock, we may incur significant interest or dividend costs. Additional
bank or other financing may not be available to us when needed or, if available,
may not be available on terms favorable to us.

Failure to  successfully  integrate  the LAC  business  may reduce the  expected
return on our investment,  decrease our operating  results and divert  corporate
resources.

On December 31, 2000,  we completed  the LAC  acquisition.  The LAC business had
revenues for the 12 months  ended  December 31,  2000,  of  approximately  $94.0
million, which was significantly greater than our revenues of $53.8 million over
the same period. Because of the size of the acquired operations and the presence
of the LAC  business in products  and markets  different  from those in which we
have  historically  operated,  the  management  of  growth  represented  by this
acquisition  will be  expensive  and time  consuming,  and puts  pressure on our
existing infrastructure. The process of integrating the acquired operations will
require  significant  management  and  financial  resources  and may  result  in
unforeseen operating difficulties.  Prior to the LAC acquisition, we had limited
experience managing production  operations outside the United States. Our future
performance may be adversely affected if we fail to successfully  manage the LAC
business  operations  in Germany and related  sales  offices.  Some of the risks
associated with the LAC acquisition include:

  -  Unexpected loss of key employees or customers;

  -  Conforming  the  standards,  processes,  procedures and controls of the LAC
     business with our operations;

  -  Coordinating new product and process development;

  -  Costs of operating, marketing, research and development, human resource and
     accounting functions in both our United States and German operations;

  -  Resolving disputes the LAC business has or may have with certain customers;

                                      15
<PAGE>
  -  Hiring additional management and other critical personnel; and

  -  Increasing   the  scope,   geographic   diversity  and  complexity  of  our
     operations.

The  realization of anticipated  operating  results may prove  difficult and the
combined   businesses  may  fail  to  achieve  the  expected   benefits  of  the
transaction.

The LAC acquisition may be more expensive and less profitable than anticipated.

The  purchase  price  for the  LAC  acquisition  is  subject  to a  post-closing
adjustment  based on the net equity of the LAC business as of the closing  date.
We and Unaxis are evaluating and  negotiating  the final net equity and purchase
price adjustment.  We have accrued $7.5 million of the remaining  purchase price
owed to Unaxis.  However the final  purchase  price  adjustment  may exceed $7.5
million.  If we and  Unaxis  are  unable  to agree on the final  purchase  price
adjustment, an independent arbitrator will make the final decision.

The LAC business was not  profitable  for the years ended  December 31, 1999 and
2000,  and there can be no assurance that the LAC business will be profitable in
future  years.  The  success of the LAC  acquisition  will depend in part on our
ability to impose discipline on the LAC operations and financial results, and to
manage its future growth.

We may discover  problems or liabilities  in the LAC operations  that we had not
anticipated  and which are not covered by  indemnification  from  Unaxis.  These
liabilities could negatively affect our financial results.

Because the LAC business was  previously  operated as parts of two  divisions of
Unaxis,  the costs of operating the LAC business as a stand alone entity without
the corporate support of Unaxis may not have been appropriately accounted for in
the LAC historical financial  statements,  and may be significantly greater than
initially  estimated.  The  operation  of the LAC  business  may  result  in our
incurring operating costs and expenses significantly greater than we anticipated
prior to the acquisition.

Unaxis is not prohibited  from  competing  with us after two years,  which could
interfere  with our ability to fully  benefit from the LAC  acquisition  and the
intellectual property rights we acquired.

In the acquisition, Unaxis agreed not to compete with us for two years after the
closing and granted us an exclusive license to use certain intellectual property
rights for two  years.  After the two year  period,  the  intellectual  property
license  continues  but  on a  non-exclusive  basis,  and  Unaxis  is no  longer
restricted  from  competing  in our  markets.  Because  Unaxis  is the  owner or
licensee of certain intellectual  property rights used by us in our products, it
may be in a position  to  compete  with us in the  markets we serve.  The use by
Unaxis of its  intellectual  property  to compete  with us could have a material
adverse effect on our financial results.

We face  competition  or  potential  competition  from  companies  with  greater
resources  than ours,  and if we are unable to  compete  effectively  with these
companies, our market share may decline and our business could be harmed.

The market for thin film  deposition  equipment is highly  competitive.  We face
substantial  competition  from  established  companies in many of the markets we
serve.   Some  of  our   competitors   have  greater   financial,   engineering,
manufacturing  and marketing  resources,  broader product  offerings and service
capabilities  and larger installed  customer bases than we do. As a result,  our
competitors may be able to respond more quickly to new or emerging  technologies
or  market  developments  by  devoting  greater  resources  to the  development,
promotion  and sale of products  which could  impair sales of our  products.  In
addition, their greater capabilities in these areas may enable them to:

  -  better withstand periodic economic downturns;

  -  compete more effectively on the basis of price and technology;

  -  more quickly develop enhancements to and new generations of products; and

  -  more effectively retain existing customers and obtain new customers.

Many of our customers and potential customers that purchase deposition equipment
are large  companies that require global support and service for their thin film
deposition equipment. Our larger competitors have more extensive infrastructures
than we do,  which  could  place us at a  disadvantage  when  competing  for the
business of global  manufacturers  and other  purchasers of thin film deposition
equipment.

                                       16
<PAGE>
In  addition,  new  companies  may in the future  enter the  markets in which we
compete, further increasing competition.

We  believe  that our  ability to  compete  successfully  depends on a number of
factors, including:

  -  performance of our products;

  -  quality of our products;

  -  reliability of our products;

  -  cost of owning and using our products;

  -  our ability to ship products on the schedule required;

  -  quality of the technical service we provide;

  -  timeliness of the services we provide;

  -  our success in developing new products and enhancements;

  -  existing market and economic conditions; and

  -  price of our products and our competitors' products.

Many of these  factors are outside  our  control.  We may not be able to compete
successfully  in the  future,  and  increased  competition  may  result in price
reductions,  reduced  profit  margins,  loss of market  share,  and inability to
generate cash flows that are sufficient to maintain or expand our development of
new products.

Due to our significant level of export revenues,  we are subject to operational,
financial  and  political  risks  such  as  unexpected   changes  in  regulatory
requirements,   tariffs,  political  and  economic  instability,   outbreaks  of
hostilities and adverse tax consequences.

Export revenues to customers outside of our manufacturing  centers in the United
States and Europe  represented  approximately  85% of our net revenues in fiscal
1999,  93% of our net  revenues  in fiscal  2000 and 67% of our net  revenues in
fiscal 2001.  The  principal  international  markets into which we and our China
joint venture,  or China JV, sell our products are China  (including Hong Kong),
Korea,  Japan,  Taiwan and Malaysia.  Banking and currency problems in Asia have
had and may continue to have an adverse  impact on our revenues and  operations.
Our  operations  in  China  will  be  subject  to  the  economic  and  political
uncertainties  affecting  that  country.  For example,  the Chinese  economy has
experienced  significant  growth in the past  decade,  but such  growth has been
uneven  across  geographic  and economic  sectors and has recently been slowing.
This  growth may  continue to  decrease,  and any  slowdown  may have a negative
effect  on our  business.  We  believe  international  sales  will  continue  to
represent a  significant  portion of our sales,  and that we will continue to be
subject to the normal risks of conducting business  internationally.  Such risks
include:

  -  foreign exchange risks;

  -  inflation or deflation in foreign economies;

  -  the burdens of complying with a wide variety of foreign laws;

  -  unexpected  changes  in  regulatory  requirements  and  the  imposition  of
     government controls;

  -  political and economic instabilities;

  -  export license requirements;

  -  protective trade activities, such as tariffs and other barriers;

                                       17
<PAGE>
  -  the risk of business interruption;

  -  difficulties in accounts receivable collections;

  -  inability to protect intellectual property rights;

  -  difficulties in staffing and managing foreign sales operations; and

  -  potentially adverse tax consequences.

We conduct  business in foreign  currencies,  and  fluctuation  in the values of
those currencies  could result in foreign exchange losses and negatively  affect
our competitive position.

In fiscal 2001,  approximately  6% of our net revenues were  denominated in yen,
54%  were  denominated  in  marks  and 40%  were  denominated  in  dollars.  Any
strengthening  of the dollar in relation to the currencies of our competitors or
customers, or strengthening or weakening of the yen or mark in relation to other
currencies in which our customers or  competitors do business,  could  adversely
affect our  competitiveness,  as our  products  will  become more  expensive  to
customers  outside the United States and less competitive with products produced
by competitors outside the United States. A strengthening of the dollar or other
competitive  factors could put pressure on us to denominate a greater portion of
our Japanese sales in yen,  thereby  increasing our exposure to  fluctuations in
the  dollar-yen  exchange  rate.  Our China JV transacts much of its business in
Chinese Yuan  Renminbi.  While this  currency has  remained  fairly  constant in
value,  any devaluation of the Chinese Yuan Renminbi would adversely  affect our
business,  operating results, financial conditions and prospects.  Foreign sales
also expose us to  collection  risks in the event it becomes more  expensive for
our  foreign   customers  to  convert  their  local   currencies  into  dollars.
Fluctuations in exchange rates could adversely  affect our competitive  position
or result in foreign exchange losses, either of which could materially adversely
affect our business, operating results, financial conditions and prospects.

The assets,  liabilities  and operating  expenses of our German  operations  are
reported in German  marks or euros.  Our  financial  statements,  including  our
consolidated  financial  statements,  are expressed in dollars.  The translation
exposures  that result  from the  inclusion  of  financial  statements  that are
expressed in functional  currencies other than dollars are not hedged. These net
translation  exposures are taken into  stockholders'  equity.  As a result,  our
operating  results are exposed to  fluctuations of German marks or euros against
the dollar. As of June 30, 2001, the unrealized  translation adjustment was $7.0
million,  which was primarily  attributable to the goodwill and other intangible
assets from the LAC acquisition that are denominated in German marks.

We derive a  significant  portion of our  revenue  from  large  sales to a small
number of large customers,  and if we are not able to retain these customers, or
if they reschedule,  reduce or cancel orders,  our revenues would be reduced and
our financial results would suffer.

Our ten  largest  customers  accounted  for 35% of our gross  revenues in fiscal
2001. Sales to our largest customers have varied significantly from year to year
and will  continue to fluctuate in the future.  We may not be able to retain our
key customers,  or these  customers may cancel  purchase orders or reschedule or
decrease  their level of  purchases  from us. If a large  order were  delayed or
cancelled,  our  revenues  would  significantly  decline,  and the loss of, or a
significant  reduction of purchases by, one or more of our significant customers
would materially  adversely affect our business,  operating  results,  financial
condition and prospects.  In addition,  any difficulty in collecting amounts due
from one or more key  customers  could harm our financial  results.  There are a
limited number of potential customers in each of our markets, and we expect that
sales to a relatively  small number of customers  will continue to account for a
high percentage of our revenues in those markets in the foreseeable future.

The failure of our strategic  partners to devote adequate resources to marketing
and  distributing  our  products  could limit our ability to grow or sustain our
revenues and earnings.

The success of our strategy to develop emerging high growth market opportunities
depends on the level of sales,  marketing  and  distribution  support we receive
from our  strategic  partners.  For example,  we have little  experience  in the
market  for  barrier  coated  plastic  bottles.  We have  developed  PET  bottle
deposition  equipment for this market in partnership with The Coca-Cola  Company
and KRONES AG. Until  September 1, 2002, The Coca-Cola  Company is the exclusive
distributor of BESTPET systems, and after September 1, 2002, systems may be sold
to The  Coca-Cola  Company  or to third  parties.  We are  relying  on KRONES to
provide the necessary sales,  marketing and distribution  support of our product
to expand our share of the PET bottle  market.  The  failure of KRONES to devote
adequate  resources  to marketing  and  distributing  our PET bottle  deposition
equipment could limit our ability to grow or sustain our revenues and earnings.

                                       18
<PAGE>
If we are unable to continue to  introduce  new  products,  our results  will be
adversely affected.

We  believe  our  future  growth  depends  significantly  upon  our  ability  to
successfully introduce new products,  such as our BESTPET deposition systems. We
are subject to the risks inherent in the development of new products,  including
risks  associated with  attracting and servicing a customer base,  manufacturing
products in a  cost-effective  and  profitable  manner,  and training  qualified
engineering, manufacturing, service and marketing personnel. Product development
is based on our expectations  regarding future growth of target markets,  but it
is  difficult  to  anticipate  the  direction  of  future  growth  and to design
equipment to meet the needs of a changing  market.  Changes in technology  could
render our products less attractive. If the market for our new products fails to
grow,  or grows more  slowly than  anticipated,  we may be unable to realize the
expected  return on our  investment  in product  development,  and our business,
operating  results,  financial  condition  and  prospects  could  be  materially
adversely  affected.  Among other  markets,  we are  anticipating  growth in the
plastic bottle market.  If  commercialization  of that technology  develops more
slowly than we expect, if the market demand fails to develop as anticipated,  or
if alternative  technologies  are more  successful in meeting market needs,  our
future results will be negatively affected.

We  manufacture  all of our  products  at four  facilities,  and  any  prolonged
disruption in the  operations of those  facilities or a demand for products that
exceeds the  manufacturing  capacity at such  facilities,  could have a material
adverse effect on our revenues.

We  produce  all of our  products  in our  manufacturing  facilities  located in
Longmont, Colorado, Alzenau and Hanau, Germany, and the facilities leased by the
China JV in Suzhou,  China.  Any prolonged  disruption in the  operations of our
manufacturing  facilities,  whether  due to  technical  or  labor  difficulties,
destruction  of or  damage  as a result  of a fire or any  other  reason,  could
seriously harm our ability to satisfy our customer order deadlines. In addition,
if  customer  demand for  equipment  exceeds the  manufacturing  capacity of our
facilities,  the growth in our  revenues  could be  negatively  affected.  If we
cannot timely deliver our systems, our revenues could be adversely affected.

If we deliver  systems  with  defects or that fail to meet  specifications,  our
credibility  will be harmed and the market  acceptance  and sales of our systems
will decrease.

Our systems are complex,  are often  customized  and  sometimes  have  contained
defects or failed to meet  contractual  specifications.  Most of our systems are
uniquely  designed for the  particular  customer,  and are frequently new models
with features that have not previously  been tested.  If we deliver systems with
defects  or  fail  to  meet  specifications,  our  credibility  and  the  market
acceptance and sales of our systems could be harmed. In addition, if our systems
contain  defects  or fail  to  meet  specifications,  we may  incur  contractual
penalties  and be  required  to expend  significant  capital  and  resources  to
alleviate such problems.  Such problems could also damage our relationships with
specific  customers,  impair  market  acceptance  of our products and  adversely
affect our gross profit margins and operating results.

We depend on the continuing operations of our joint venture partner in China.

Results of our coated glass operations will depend  significantly on the results
of the China JV with Nippon Sheet Glass Co., Ltd., or NSG, in China. The results
of the China JV depend on the continuing  cooperation of NSG. The success of the
China JV is  subject  to a number of risks,  over many of which we have  limited
control.  We rely on NSG to house  the China JV  within  its  glass  fabrication
facility and to supply  glass to the China JV. We also rely on NSG's  management
personnel to manage the day-to-day  operations of the China JV, and the managing
director  of the China JV is  employed  by NSG as well as by the China JV. We do
not have employment  agreements  with any management  personnel at the China JV.
The China  JV's  future  success  will be  dependent  in part on our  ability to
continue to effectively  participate in the China JV and manage our relationship
with NSG. Our business,  operating results,  financial condition or growth could
be materially  adversely affected if NSG ceases to supply glass to the China JV,
focuses its management and operational efforts on other activities or terminates
the joint venture.

Our  operations  and  assets  in China are  subject  to  significant  political,
economic,  legal and other uncertainties in China. China currently does not have
a comprehensive  and highly developed system of laws,  particularly with respect
to foreign investment activities and foreign trade.  Enforcement of existing and
future laws and contracts is uncertain, and implementation and interpretation of
laws may be  inconsistent.  We could also be  adversely  affected by a number of
factors,  including inadequate development or maintenance of infrastructure or a
deterioration of the general political, economic or social environment in China.

                                       19
<PAGE>
The coated glass market is highly  competitive and subject to pricing  pressures
which could adversely affect our operating results.

The market to supply thin film coated glass to liquid crystal  display,  or LCD,
manufacturers is highly competitive.  Many of our competitors have substantially
greater  financial,  technical,  marketing  and  sales  resources  than we have.
Additional  competitors may enter our markets,  certain of which may offer lower
prices.  Prices for much of our low  resolution  thin film coated glass products
supplied to the LCD market  declined in past  years,  with a 29% price  decrease
during fiscal 1999. We have experienced  further pricing pressures and decreased
demand in fiscal 2001, and we may in the future experience  pricing pressures as
a result of a decline in industry demand, excess inventory levels,  increases in
industry capacity or the introduction of new technologies. Many of our customers
are under  continuous  pressure  to reduce  prices and we expect to  continue to
experience downward pricing pressures on our thin film coated glass products. We
are frequently  required to commit to price  reductions  before we know that the
cost reductions  required to maintain  profitability can be achieved.  To offset
declining  sales prices,  we must achieve  manufacturing  efficiencies  and cost
reductions  and obtain  orders for higher volume  products.  If we are unable to
offset declining sales prices, our gross margins on coated glass will decline.

Our  ability to compete  could be  jeopardized  if we are unable to protect  our
intellectual property rights from challenges by third parties.

Our  success  and ability to compete  depend in large part upon  protecting  our
proprietary  technology.  We rely on a  combination  of  patent,  trade  secret,
copyright and trademark laws,  non-disclosure  and other contractual  agreements
and technical measures to protect our proprietary  rights.  These agreements and
measures  may not be  sufficient  to protect  our  technology  from  third-party
infringements,  or to protect us from the claims of others. We have not formally
recorded, in the applicable offices, our ownership of the patents we acquired in
the LAC acquisition, nor have we filed our registered patents and trademarks for
patent or trademark protection in all of the jurisdictions in which such filings
may be made. There can be no assurance that the steps taken by us to protect our
proprietary rights will be adequate to prevent  misappropriation  of such rights
or that third parties will not independently  develop a functionally  equivalent
or superior technology.  Patents issued to us may be challenged,  invalidated or
circumvented; our rights granted under those patents may not provide competitive
advantages to us; and third parties may assert that our products  infringe their
patents,  copyrights or trade  secrets.  Third parties could also  independently
develop  functionally  equivalent or superior technology and similar products or
could  duplicate our products.  Monitoring  unauthorized  use of our products is
difficult  and we cannot be certain  that the steps we have  taken will  prevent
unauthorized  use of  our  technology.  If  competitors  are  able  to  use  our
technology, our ability to compete effectively could be harmed.

Claims or litigation regarding intellectual property rights could seriously harm
our business or require us to incur significant costs.

In recent  years,  there has been  significant  litigation  in the United States
involving  patents  and other  intellectual  property  rights.  We could  become
subject to litigation in the future either to protect our intellectual  property
rights or as a result  of  allegations  that we  infringe  others'  intellectual
property rights.

From time to time, we have received claims of  infringement  from third parties.
Any claims  that our  products  infringe  proprietary  rights  would force us to
defend ourselves and possibly our customers or manufacturers against the alleged
infringement.  These claims and any  resulting  lawsuit,  if  successful,  could
subject  us to  significant  liability  for  damages  and  invalidation  of  our
proprietary rights. These lawsuits, regardless of their success, would likely be
time-consuming  and  expensive to resolve and would divert  management  time and
attention.  Any potential  intellectual property litigation could force us to do
one or more of the following:

  -  lose our proprietary rights;

  -  stop  manufacturing or selling our products that incorporate the challenged
     intellectual property;

  -  obtain  from  the  owner of the  infringed  intellectual  property  right a
     license to sell or use the relevant  technology,  which  license may not be
     available on reasonable terms or at all and may involve significant royalty
     payments;

  -  pay  damages,   including  treble  damages  and  attorney's  fees  in  some
     circumstances; or

  -  redesign those products that use such technology.

                                       20
<PAGE>
If we are forced to take any of the  foregoing  actions,  our business  could be
severely harmed.

Our efforts to protect our  intellectual  property may be less effective in some
foreign countries where  intellectual  property rights are not as well protected
as in the United States.

In fiscal 2001, 67% of our revenue was derived from sales in foreign  countries,
including certain countries in Asia such as Taiwan,  Korea, China and Japan. The
laws of some foreign countries do not protect our proprietary rights to as great
an extent as do the laws of the United States,  and many United States companies
have encountered  substantial  problems in protecting their  proprietary  rights
against infringement in such countries.  For example,  Taiwan is not a signatory
of the Patent Cooperation Treaty, which is designed to specify rules and methods
for defending  intellectual  property  internationally.  In many instances,  the
publication  of a patent prior to the filing of a patent  application  in Taiwan
would  invalidate  the  ability  of a  company  to  obtain a patent  in  Taiwan.
Similarly, in contrast to the United States where the contents of patents remain
confidential during the patent prosecution process, the contents of a patent are
published  upon  filing,  which  provides  competitors  an  advance  view of the
contents  of a patent  application  prior  to the  establishment  of the  patent
rights.  There is a risk that our means of protecting our proprietary rights may
not be  adequate in these  countries.  For  example,  our  competitors  in these
countries may independently develop similar technology or duplicate our systems.
If we fail to adequately  protect our intellectual  property in these countries,
it would be easier  for our  competitors  to sell  competing  products  in those
countries.

If we fail to comply with  environmental  regulations,  our operations  could be
suspended.

We use  hazardous  chemicals  in producing  our  products.  As a result,  we are
subject to a variety of local, state and federal governmental regulations in the
U.S.  and  Germany  relating  to the  storage,  discharge,  handling,  emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture our products,  compliance with which is expensive.  Environmental
claims  against  us or  our  failure  to  comply  with  any  present  of  future
regulations could result in:

  -  the assessment of damages or imposition of fines against us;

  -  the suspension of production of our products; or

  -  the cessation of our operations.

New regulations  could require us to acquire costly  equipment or to incur other
significant expenses.  Our failure to control the use or adequately restrict the
discharge of hazardous substances could subject us to future liabilities,  which
could negatively impact our earnings and financial position.

The loss of key  personnel  could  adversely  affect  our  ability to manage our
business.

Our future  success  will  depend  largely  upon the  continued  services of our
executive officers and certain other key employees.  The loss of the services of
one or more of the executive  officers or other key employees  could  materially
adversely  affect our business.  We do not have  employment  agreements  with or
key-man life insurance on any of our executive  officers or other key employees.
Our future  success  will  depend in part upon our ability to attract and retain
additional  qualified  managers,  engineers and other  employees.  Our business,
operating results,  financial condition or growth could be materially  adversely
affected  if we were  unable to  attract,  hire,  assimilate,  and  train  these
employees in a timely manner.

Our stock price may fluctuate significantly.

The market  price of our common stock has been,  and we expect will  continue to
be, subject to significant  fluctuations.  For example, the closing market price
of our common stock fluctuated from $24.00 on January 3, 2001, to a low of $7.69
on April 4, 2001, and then to $20.25 on August 30, 2001.  Factors  affecting our
market price include:

  -  the limited number of shares of common stock available for purchase or sale
     in the public markets;

  -  quarterly variations in our results of operations;

  -  failure to meet earnings estimates;

  -  changes in earnings estimates or buy/sell recommendations by analysts;

                                       21
<PAGE>
  -  the operating and stock price performance of comparable companies;

  -  developments in the financial markets;

  -  the  announcement  of new  products  or product  enhancements  or  business
     results by us or our competitors; and

  -  general market conditions or market  conditions  specific to the industries
     in which we operate.

Recent  stock  prices for many  technology  companies  have  fluctuated  in ways
unrelated or  disproportionate  to the operating  performance  of the companies.
Those fluctuations and general economic,  political and market conditions,  such
as recessions or international currency  fluctuations,  may adversely affect the
market price of our common stock.  The market price at any  particular  date may
not remain the market price in the future.

The terms of the Series A Convertible  Preferred  Stock may have adverse  market
effects on our common stock price and could result in issuance of common  shares
at a price that could dilute a shareholders ownership.

The conversion of the Series A Convertible Preferred Stock into common stock and
the exercise of the related  warrants at their current  conversion  and exercise
prices  would  result  in the  issuance  of  582,278  shares  of  common  stock,
representing  approximately  8.5% of our currently  outstanding  shares.  We are
required  under the terms of agreements  entered into at the time of issuance of
the Series A Convertible  Preferred Stock to maintain an effective  registration
statement  at all times  permitting  unrestricted  resale of these  shares.  The
continuing ability of the holders of these securities to sell all of their stock
could  decrease  the price of our common  stock and  encourage  hedged  sales by
owners of the Series A Convertible  Preferred  Stock or others.  Hedged or short
sales could place further downward pressure on the price of our common stock..

The  documents  relating to the issuance of the Series A  Convertible  Preferred
Stock  specify  a number of  circumstances  in which  the  Series A  Convertible
Preferred  Stock would be  convertible  into common stock at  conversion  prices
based on the lower of the  conversion  or market  price  then in  effect.  These
circumstance include, among others:

  -  the Company's equity market  capitalization is less than $50 million for 20
     consecutive trading days;

  -  the nonpayment of dividends on the Series A Convertible  Preferred Stock in
     a timely manner;

  -  our failure to deliver  shares of our common stock upon  conversion  of the
     Series A  Convertible  Preferred  Stock  or upon  exercise  of the  related
     warrants after a proper request;

  -  our failure to maintain at all times a registration  statement covering the
     resale of the shares of common stock  underlying  the Series A  Convertible
     Preferred Stock and related warrants; and

  -  a change in control or bankruptcy event.

The conversion of the Series A Convertible  Preferred Stock at conversion prices
that are lower than the current  conversion  price could  result in  substantial
dilution to the interests of holders of our common stock.

The  uncertainties  related to our stock price and the potential for significant
dilutive  issuances of common stock upon  conversion of the Series A Convertible
Preferred  Stock could impair our ability to raise  capital  through the sale of
equity securities.

Future sales of our common stock may cause our stock price to decline.

All of our  outstanding  shares of common  stock,  other  than  shares  owned by
affiliates,  are freely tradable  without  restriction or further  registration.
Affiliates  must  comply  with the  volume and other  requirements  of Rule 144,
except for the holding period  requirements,  in the sale of their shares. Sales
of substantial  amounts of common stock by our  stockholders,  including  shares
issued upon the exercise of outstanding  options, or even the potential for such
sales, may have a depressive  effect on the market price of our common stock and
could  impair  our  ability  to raise  capital  through  the sale of our  equity
securities.

Some anti-takeover provisions may affect the price of our common stock.

Our articles of incorporation and bylaws contain various  provisions,  including
notice  provisions,  provisions  for  staggered  terms of office of the board of
directors,  fair  price  provisions,  and  provisions  authorizing  us to  issue
preferred  stock,  that may make it more difficult for a third-party to acquire,
or may discourage acquisition bids for, our company. Such provisions could limit
the price  that  certain  investors  would be  willing  to pay in the future for
shares of our common stock.

                                       22
<PAGE>
We may issue additional shares and dilute your ownership percentage.

Some  events  over which you have no control  could  result in the  issuance  of
additional  shares  of our  common  stock,  which  would  dilute  the  ownership
percentage of holders of our common  stock.  We may issue  additional  shares of
common stock or preferred stock:

  -  to raise additional capital or finance acquisitions;

  -  upon the exercise or conversion of outstanding options, warrants and shares
     of convertible preferred stock; and/or

  -  in lieu of cash payment of dividends.

In addition,  the rights of holders of common stock may be adversely affected by
the rights of holders  of any  preferred  stock that may be issued in the future
that would be senior to the rights of the holders of the common stock.


                                       23
<PAGE>
                                     PART II

ITEM 5:  Market for Registrant's Common Stock and Related Security Holder
         Matters

Our common stock has been traded on the Nasdaq  National Market under the symbol
"AFCO" since November 21, 1997. The following table sets forth, for the quarters
indicated,  the high and low  sale  prices  per  share  of our  common  stock as
reported on the Nasdaq National Market.
<TABLE>
                                                                  High        Low
                                                                --------    -------
                 <S>                                            <C>         <C>
                 Fiscal 2000:
                   First Quarter............................    $   4.00    $   3.13
                   Second Quarter...........................       14.75        3.00
                   Third Quarter............................       35.75       12.88
                   Fourth Quarter...........................       39.88       13.13
                 Fiscal 2001:
                   First Quarter............................    $  42.00    $  21.06
                   Second Quarter...........................       37.94       14.75
                   Third Quarter............................       25.25       10.06
                   Fourth Quarter...........................       22.50        7.69
                 Fiscal 2002:
                   First Quarter (through August 24, 2001...    $  25.30    $  17.50
</TABLE>

On August 24,  2001,  the last  reported  sale price of our common  stock on the
Nasdaq  National  Market was $22.05  per share and there were  approximately  70
stockholders  of  record  of the  common  stock.  We  estimate  that  there  are
approximately 2,983 beneficial owners of the common stock.

                                       24
<PAGE>
ITEM 6:  Selected Consolidated Financial Data

This section  presents our selected  historical  financial data. You should read
carefully the financial statements included in this report,  including the notes
to the financial  statements.  The selected data in this section is not intended
to replace the financial statements.

We derived the balance  sheet data for the years ended July 1, 2000 and June 30,
2001, and our  consolidated  statement of operations  data for each of the three
years in the period ended June 30, 2001, from the audited consolidated financial
statements in this report.  Those  financial  statements  were audited by Arthur
Andersen LLP,  independent  auditors.  The consolidated balance sheet data as of
June 28, 1997, June 27, 1998 and July 3, 1999 and the consolidated  statement of
operations  data for the years  ended June 28,  1997 and June 27, 1998 have been
derived from audited consolidated  financial statements that are not included in
this report.
<TABLE>

                                                                      Fiscal Year Ended
                                                  -------------------------------------------------------
                                                   June 28,   June 27,    July 3,     July 1,   June 30,
                                                     1997       1998       1999        2000       2001
                                                  ---------  ---------- ----------  ---------- ----------

                                                                      (in thousands, except per share data)
   <S>                                            <C>         <C>        <C>         <C>       <C>
   Consolidated Statement of Operations Data:
   Net revenues...............................    $ 34,050    $ 53,041   $ 31,523    $ 42,292  $ 112,715
   Cost of goods sold.........................      27,352      42,150     27,070      36,633     90,021
                                                  --------    --------   --------    --------  ---------
   Gross profit...............................       6,698      10,891      4,453       5,659     22,694
   Operating expenses:
     Selling, general and administrative......       2,996       5,067      3,760       4,324     16,027
     Research and development.................         749       1,243      1,044       1,409      6,484
     Amortization of goodwill and other
      intangible Assets.......................          --          --         --          --     16,536
                                                  --------    --------   --------    --------  ---------
   Operating income (loss)....................       2,953       4,581       (351)        (74)   (16,353)
   Interest income (expense)..................        (822)       (496)      (553)        447      1,034
   Other income (expense), net................          95         252         40         272        805
   Equity in earnings of joint venture........          --          --        382       2,381      4,421
                                                  --------    --------   --------    --------  ---------
   Income (loss) before income taxes and
    cumulative effect of change in
    accounting principle......................       2,226       4,337       (482)      3,026    (10,093)
   Income tax benefit (provision).............        (605)     (1,480)       258          97      5,760
                                                  --------    --------   --------    --------  ---------
   Income (loss) before cumulative effect of
   change in accounting principle.............       1,621       2,857       (224)      3,123     (4,333)
   Cumulative effect of change in accounting
     Principle................................          --          --         --         (50)        --
                                                  --------    --------   --------    --------  ---------
   Net income (loss)..........................       1,621       2,857       (224)      3,073     (4,333)
   Preferred dividends........................          --          --         --          --       (367)
                                                  --------    --------   --------    --------  ---------
   Net income (loss) applicable to common
     Stockholders.............................    $  1,621    $  2,857   $   (224)   $  3,073  $  (4,700)
                                                  ========    ========   ========    ========  =========
   Net income (loss) per common share
     Basic....................................    $   0.58    $   0.90   $  (0.06)   $   0.72  $   (0.73)
                                                  =========   ========   ========    ========  ==========
     Diluted..................................    $   0.58    $   0.85   $  (0.06)   $   0.69  $   (0.73)
                                                  =========   ========   ========    ========  ==========
   Weighted average common shares outstanding
     Basic....................................       2,796       3,181      3,478       4,255      6,414
                                                  ========    ========   ========    ========  =========
     Diluted..................................       2,814       3,375      3,478       4,439      6,414
                                                  ========    ========   ========    ========  =========
</TABLE>

<TABLE>
                                                                  June 28,   June 27,    July 3,    July 1,   June 30,
                                                                    1997       1998       1999       2000       2001
                                                                  --------  ---------  ---------  ---------  -------
                                                                                    (in thousands)
                     <S>                                          <C>        <C>        <C>        <C>       <C>
                     Consolidated Balance Sheet Data:
                     Working capital...........................   $  5,534   $ 10,747   $ 11,812   $ 63,785  $ 15,684
                     Total assets..............................     21,541     28,697     30,195     87,478   169,426
                     Long-term debt, net of current portion....      6,448      4,175      7,180         --     6,483
                     Total stockholders' equity................      6,740     14,826     14,658     73,197    89,192
</TABLE>
                                       25
<PAGE>
ITEM 7:  Management's Discussion and Analysis of Financial Condition and Results
         of Operation

                      Management's Discussion and Analysis
                 of Financial Condition and Results of Operation

You should read this discussion together with the financial statements and other
financial   information   included  in  this   report.   This  report   contains
forward-looking  statements  that involve  risks and  uncertainties.  Our actual
results  may differ  materially  from  those  indicated  in the  forward-looking
statements. Please see "Forward-Looking Statements" elsewhere in this report.

Overview

We are a leading  provider of thin film  deposition  equipment to the flat panel
display,  the  architectural,  automotive  and  solar  glass,  and the  consumer
products packaging and electronics industries.  We have also developed a barrier
coating  solution  technology  for the plastic  beverage  bottle  industry.  Our
deposition systems deposit thin films that enhance the characteristics of a base
substrate,  such as glass,  plastic,  paper or foil.  These thin  films  provide
conductive,  electronic,  reflective,  filter, barrier and other properties that
are  critical  elements of our  customers'  products.  Our thin film  deposition
systems provide our customers with high yield and throughput,  flexible  modular
configurations, and innovative coating and process technologies. We also process
and sell thin film coated glass to the flat panel display, or FPD, industry.

Our operations and financial  position have been  significantly  affected by two
corporate transactions that were implemented to advance our strategic transition
from lower gross  profit  margin  sales of coated  glass to higher  gross profit
margin  sales of thin film  deposition  equipment.  In 1998,  we entered  into a
50%-50% joint venture, our China JV, with Nippon Sheet Glass Co., Ltd. to supply
the low and high  resolution  coated  glass  market  from a  production  base in
Suzhou, China. The China JV began operations in April of 1999. In December 2000,
we completed the  acquisition  of the Large Area Coatings,  or LAC,  division of
Unaxis  Holding AG, or Unaxis,  which  reported  revenues of  approximately  $94
million for the twelve  months  ended  December 31,  2000.  The LAC  acquisition
expanded our product  offering for the FPD industry.  The LAC  acquisition  also
enabled our entry into three new product markets: architectural,  automotive and
solar glass,  consumer  products  packaging  and  electronics  and  polyethylene
terephthalate, or PET, plastic bottle.

We formed  the China JV in order to  produce  coated  glass at lower cost and in
closer  proximity to our source of raw glass and to our largely  Asian  customer
base.  We buy  coated  glass  manufactured  by the China JV and resell it to our
customers in Asia.  While our sales of these products  appear as revenues on our
consolidated financial statements, because of the 50%-50% ownership structure of
the  China  JV,  the  revenues  and  expenses  of the  China JV  itself  are not
consolidated  and do not  appear  as  revenues  and  expenses  in our  financial
statements.  The benefit of the lower cost structure of the China JV is captured
in the net income of the China JV, 50% of which  appears as "Equity in  earnings
of joint venture" on our consolidated statements of operations.

The following  table sets forth our net revenues (net of returns and allowances)
by our major product  categories and industry segments for the last three fiscal
years:
<TABLE>
                                                                             Fiscal year ended
                                                                  -------------------------------------------
                                                                  July 3, 1999   July 1, 2000   June 30, 2001
                                                                  ------------   ------------   -------------
                                                                                 (in thousands)
                              <S>                                    <C>            <C>          <C>
                              Thin film coated glass..........       $26,906        $35,159      $  27,523
                              Thin film coating equipment.....         4,617          7,133         85,192
                                                                     -------        -------      ---------
                              Total net revenues..............       $31,523        $42,292      $ 112,715
                                                                     =======        =======      =========
</TABLE>

The  following  table  sets  forth our net  revenues  as a  percentage  of total
revenues by our major  product  categories  and  industry  segments for the last
three fiscal years:
<TABLE>
                                                                             Fiscal year ended
                                                                 -----------------------------------------
                                                                 July 3, 1999  July 1, 2000  June 30, 2001
                                                                 ------------  ------------  -------------
                              <S>                                    <C>           <C>          <C>
                              Thin film coated glass........          85.4%         83.1%        24.4%
                              Thin film coating equipment...          14.6%         16.9%        75.6%
                                                                     -----         -----        -----
                              Total net revenues............         100.0%        100.0%       100.0%
                                                                     =====         =====        =====
</TABLE>

Revenues  for thin  film  coating  equipment  are  generally  recognized  on the
percentage-of-completion  method,  measured by the percentage of the total costs
incurred  in  relation to the  estimated  total  costs to be  incurred  for each
contract.  Coated glass revenues and related costs are recognized  when products
are shipped to the customer.

                                       26
<PAGE>
The sales cycle for thin film  coating  equipment  is long,  involving  multiple
visits to and by the customer and up to 15 months of technical sales effort.  We
operate with a backlog of new and in-process equipment orders. Coating equipment
backlog was $8.8 million at the end of fiscal 2000, and $99.2 million at the end
of fiscal  2001.  Backlog is  comprised of sales  denominated  in U.S.  dollars,
German marks and Japanese yen, and,  unless  hedged,  is subject to  fluctuation
depending  on changes in the  valuation  of the foreign  currencies  against the
dollar.  Customers usually make a non-refundable deposit ranging from 20% to 35%
of the total  purchase  price at the time the order is placed and make  progress
payments  during the period of  manufacture.  We usually  receive  approximately
80%-85% of the purchase price in cash or letter of credit prior to shipment.  We
generally ship our thin film coated glass within 30 days of receipt of the order
and therefore we do not customarily have a backlog of coated glass sales.

In fiscal 2000,  93% of our revenues  were  generated  from exports to customers
outside of our  manufacturing  center in the United  States,  compared to 67% of
revenues from exports to customers outside of our  manufacturing  centers in the
United States and Europe for fiscal 2001.

We sell most of our glass  and  equipment  products  to  customers  in the local
currency  of  the  location  of  manufacture.  Accordingly,  sales  of  products
manufactured in Longmont,  Colorado or purchased from the China JV for resale to
our customers are denominated in U.S. dollars and sales of products manufactured
in Germany are  denominated  in German  marks or euros,  except in each case for
sales of glass to certain  Japanese  customers which are denominated in Japanese
yen.  Gross  sales in Japanese  yen and German  marks were  approximately  $12.7
million and $0.0,  respectively,  for fiscal  2000,  and $6.9  million and $61.5
million,  respectively,  for fiscal 2001. Currently,  we engage in international
currency hedging  transactions to mitigate our foreign exchange exposure related
to sales of certain equipment,  and the effects of foreign exchange rate changes
on foreign  currency  transactions  have not been  significant  to date. We also
purchase raw glass from certain Japanese  suppliers in transactions  denominated
in  yen,  which   partially   offsets   foreign   currency   exchange  risks  on
yen-denominated coated glass sales. Our purchases of raw material denominated in
Japanese yen were approximately $2.4 million in fiscal 2000 and $1.8 million for
fiscal 2001. As of June 30, 2001,  accounts  receivable  denominated in Japanese
yen and German  marks were  approximately  $1.3  million  and $4.7  million,  or
approximately 10% and 39%,  respectively,  of total accounts  receivable.  As of
June 30, 2001,  accounts  payable  denominated  in Japanese yen and German marks
were  approximately  $900,000 and $5.8  million,  or  approximately  7% and 45%,
respectively,  of total accounts payable. We are generally paid by customers for
Japanese yen denominated sales within 15 to 45 days following the date of sale.

Results of Operations

The  following  table  sets  forth  information  derived  from the  consolidated
statements  of  operations  expressed  as a  percentage  of net revenues for the
periods indicated.
<TABLE>
                                                                                  Fiscal Year Ended
                                                                           ------------------------------
                                                                             July 3,   July 1,   June 30,
                                                                              1999      2000       2001
                                                                           ---------  --------  ---------
                          <S>                                                <C>       <C>        <C>
                          Consolidated Statement of Operations Data:
                          Net revenues.................................      100.0%    100.0%     100.0%
                          Cost of goods sold...........................       85.9      86.6       79.9
                                                                             -----     -----      -----
                          Gross profit.................................       14.1      13.4       20.1
                          Operating expenses:
                            Selling, general and administrative........       11.9      10.2       14.2
                            Research and development...................        3.3       3.3        5.7
                            Amortization of goodwill and other
                               intangible assets.......................        --         --       14.7
                                                                             ----      -----      -----
                          Operating loss...............................       (1.1)     (0.1)     (14.5)
                          Interest income (expense)....................       (1.8)      1.1        0.9
                          Other income.................................        0.2       0.6        0.7
                          Equity in earnings of joint venture..........        1.2       5.6        3.9
                                                                             -----     -----      -----
                          Income (loss) before income taxes............       (1.5)      7.2       (9.0)
                          Income tax benefit...........................        0.8       0.2        5.1
                                                                             -----     -----      -----
                          Income (loss) before cumulative effect of
                          change in accounting principle...............       (0.7)      7.4       (3.9)
                          Cumulative effect of change in accounting            --       (0.1)       --
                                                                             ----      -----      ----
                          principle....................................
                          Net income (loss)............................       (0.7)%     7.3%      (3.9)%
                                                                             =====     =====      =====
</TABLE>

Year Ended June 30, 2001 Compared to Year Ended July 1, 2000

Net Revenues. Net revenues increased 166.5% from $42.3 million in fiscal 2000 to
$112.7 million in fiscal 2001 as a result of the LAC acquisition.

                                       27
<PAGE>
Net revenues  from thin film coating  equipment  increased  from $7.1 million in
fiscal  2000  to  $85.2  million  in  fiscal  2001,  due  primarily  to the  LAC
acquisition.  In the second half of fiscal  2001,  over 85% of our  revenues was
generated from equipment, compared with approximately 25% for the second half of
fiscal 2000,  when  revenues  from the sale of the ATX-700  systems  began to be
recognized.  During  fiscal 2000 and early  fiscal 2001,  we sold three  ATX-700
systems and  recognized  revenue on a percentage of  completion  basis on two of
those systems in the second half of fiscal 2000, with the remainder in the first
quarter of fiscal 2001.

Thin film coated glass  revenues  decreased  21.7% from $35.2  million in fiscal
2000 to $27.5  million  in fiscal  2001.  This  reduction  was caused by reduced
demand for super twisted  nematic,  or STN, glass used in cellular phones due to
excess  inventory  of  handsets.  In addition,  during  fiscal 2001,  we shifted
production capacity for manufacturing  coated glass to the China JV by selling a
coating machine previously used in our Longmont,  Colorado facility to the China
JV, shifting revenues to the China JV and reducing our coated glass revenues.

Gross Profit.  Gross profit  increased from $5.7 million in fiscal 2000 to $22.7
million in fiscal 2001, largely driven by the shift in product mix from glass to
equipment   revenues  and  the  increased   revenues   resulting  from  the  LAC
acquisition.  Gross profit margins were 13.4% in fiscal 2000 and 20.1% in fiscal
2001.  Equipment revenues generally have higher gross profit margins than coated
glass revenues.

Selling,  General  and  Administrative.   Selling,  general  and  administrative
expenses  increased  from $4.3 million in fiscal 2000 to $16.0 million in fiscal
2001.  The  substantial  increase  in  fiscal  2001  resulted  largely  from the
additional   administrative,   sales  and  marketing   personnel  from  the  LAC
acquisition.   As  a  percentage   of  net   revenues,   selling,   general  and
administrative  expenses  were  10.2% in fiscal  2000 and 14.2% in fiscal  2001.
While we expect some  synergies  in the  combination  of  marketing  forces,  we
project  selling,  general and  administrative  expenses as a percentage  of net
revenues to remain at levels  similar to those we experienced in the second half
of fiscal 2001.

Research and  Development.  Research and development  expenses  increased 360.2%
from $1.4 million in fiscal 2000 to $6.5  million in fiscal  2001.  Research and
development expenses consist primarily of salaries, outside contractor expenses,
lab expenses,  and other  expenses  related to our ongoing  product  development
efforts. The increase in research and development expenses resulted largely from
the additional  staff and research and development  operations in Germany.  As a
percentage  of net  revenues,  research and  development  expenses  were 3.3% in
fiscal  2000  and  5.7% in  fiscal  2001.  Because  of the  significant  product
development  opportunities,  particularly  in the PET  bottle,  OLED  and  solar
markets,  we expect  research  and  development  expenses  as a  percent  of net
revenues for fiscal 2002 to remain at levels  similar to those we experienced in
the second half of fiscal 2001.

Amortization  of  Goodwill  and  Other  Intangible   Assets.   In  fiscal  2001,
amortization  of  goodwill  and  other  intangible   assets  was  $16.5  million
consisting  of $5.0 million of  amortization  of goodwill  and other  intangible
assets and an $11.5  million  write-off of in-process  research and  development
purchased in the LAC  acquisition.  We had no amortization of goodwill and other
intangible assets in fiscal 2000.

Interest Income. Interest income was $447,000 in fiscal 2000 and $1.0 million in
fiscal 2001. The increase in interest  income was generated  from  investment of
the remaining  proceeds of our $55.5 million common stock offering  completed in
March 2000.

Other Income. Other income increased from $272,000 in fiscal 2000 to $805,000 in
fiscal 2001. Other income is comprised of realized foreign currency  translation
adjustments  and royalties  earned from the China JV. We receive a 2% royalty on
all sales by the China JV, payable quarterly.

Equity in Earnings of Joint Venture.  Our equity in earnings of the China JV was
$2.4  million in fiscal  2000 and $4.4  million  in fiscal  2001.  The  increase
results from the transition of manufacturing capacity to the China JV.

Income  Tax  Benefit.   We  recorded  a  tax  benefit   during  fiscal  2001  of
approximately $5.7 million.  The tax benefit reflects the tax effect of goodwill
and other intangible assets, tax-free investment and interest income, and equity
in earnings of the joint venture that is not subject to taxation. For German tax
purposes,  the amount  reported as goodwill and other  intangible  assets on our
balance sheet and the amount of  in-process  research and  development  that was
charged  to  expense,  will be fully  amortized  over 15 years and will be fully
deductible  as  amortized.  The income tax benefit for fiscal 2000 was  $97,000,
representing  an effective tax rate of negative 3.3%. This benefit was primarily
derived  from the  reversal  in fiscal  2000 of the income tax accrual in fiscal
1999 on the equity  income from the China JV due to the  determination  that the
earnings  would not be distributed  for the  foreseeable  future.  Other factors
contributing  to the  relatively  low  effective  tax rate in  fiscal  2000 were
tax-free  investment and interest  income and current year equity in earnings of
the China JV that are not subject to tax.

                                       28
<PAGE>
Year Ended July 1, 2000 Compared to Year Ended July 3, 1999

Net Revenues.  Net revenues increased 34.2% from $31.5 million in fiscal 1999 to
$42.3  million in fiscal 2000 due to the growth during fiscal 2000 in the coated
glass segment of the market as well as the growth in equipment  revenues arising
from the sales of the ATX-700  systems.  Thin film coated glass sales  increased
from $26.9 million in fiscal 1999 to $35.2  million in fiscal 2000,  mainly as a
result of the increase in STN glass demand used in cellular phones in the second
half of fiscal 2000. We recorded no revenues from the sale of ATX-700 systems in
fiscal 1999, and the fiscal 1999 revenue from equipment  sales was from the sale
to the China JV of a refurbished coating system that had previously been used in
our Longmont operations.

Gross Profit.  Gross profit  increased  from $4.5 million in fiscal 1999 to $5.7
million in fiscal 2000,  driven by higher  margin sales of the ATX-700  systems.
Gross profit margins were 14.1% in fiscal 1999 and 13.4% in fiscal 2000.

Selling,  General  and  Administrative.   Selling,  general  and  administrative
expenses  increased  from $3.8  million in fiscal 1999 to $4.3 million in fiscal
2000.  As a percentage  of net  revenues,  selling,  general and  administrative
expenses were 11.9% in fiscal 1999 and 10.2% in fiscal 2000.

Research and Development. Research and development expenses increased 35.0% from
$1.0  million in fiscal 1999 to $1.4  million in 2000.  As a  percentage  of net
revenues, research and development expenses were 3.3% in each of fiscal 1999 and
2000.

Interest Income (Expense). Interest income (expense) was ($553,000) for 1999 and
$447,000 for fiscal 2000. The interest income  generated in fiscal 2000 was from
investment of remaining  proceeds from the $55.5 million  common stock  offering
completed  in March  2000.  In fiscal  1999,  we  incurred  interest  expense on
outstanding borrowings under our credit facility,  approximately $7.2 million of
which was outstanding at July 3, 1999. We increased borrowings in fiscal 1999 to
fund the $3.2 million up-front capital requirement of the China JV.

Other  Income.  Other  income was $40,000 in fiscal 1999 and  $272,000 in fiscal
2000. Other income represents realized foreign currency translation adjustments,
and, in addition in fiscal 2000, royalties earned from the China JV.

Equity in Earnings of Joint Venture. Our equity in earnings of the China JV were
$382,000 in fiscal 1999 and $2.4 million in fiscal 2000. The China JV only began
operations in the fourth  quarter of fiscal 1999, so the results for that period
reflect start-up operations.

Income Tax Benefit.  We recorded a $258,000 tax benefit  during  fiscal 1999. We
received a refund of  $522,000  in fiscal  1999 for  estimated  payments  and we
applied the tax loss carryback to previous fiscal years.  The income tax benefit
for fiscal 2000 was  $97,000,  representing  an  effective  tax rate of negative
3.3%.

                                       29
<PAGE>
Quarterly Results of Operations

The following table sets forth summary unaudited quarterly financial information
for the eight fiscal quarters ended June 30, 2001. In the opinion of management,
such  information  has been prepared on the same basis as the audited  financial
statements  appearing  elsewhere  in this  report  and  reflects  all  necessary
adjustments  (consisting of only normal recurring  adjustments)  necessary for a
fair  presentation of unaudited  quarterly results when read in conjunction with
the audited  financial  statements and notes thereto.  The operating results for
any quarter are not necessarily  indicative of results for any future period and
any trends reflected in such results may not continue in the future. Our results
of operations may be subject to significant quarterly variations.
<TABLE>
                                             Fiscal 2000 Quarter Ended                        Fiscal 2001 Quarter Ended
                                 ------------------------------------------------ ---------------------------------------------
                                   Oct. 2,     Jan. 1,    April 1,      July 1,    Sept. 30,   Dec. 30,    March 31,    June 30,
                                    1999        2000        2000         2000        2000        2000        2001         2001
                                ----------- ----------- -----------  ----------- ----------- ----------- -----------  ---------
  <S>                             <C>         <C>         <C>          <C>         <C>         <C>        <C>           <C>
                                                                   (unaudited, in thousands)
  Net revenues.............       $ 7,388     $ 8,308     $11,759      $14,837     $16,870     $10,309    $  44,981     $40,528
  Cost of goods sold.......         6,475       7,042      10,301       12,815      14,322       9,861       35,293      30,518
                                  -------     -------     -------      -------     -------     -------    ---------     -------
  Gross profit.............           913       1,266       1,458        2,022       2,548         448        9,688      10,010
  Operating expenses:
    Selling, general and
      Administrative.......           809         902       1,084        1,529       1,689       1,536        6,354       6,446
    Research and
      Development..........           349         315         360          385         413         485        2,632       2,955
    Amortization of goodwill
      and other intangible
      assets...............            --          --          --           --          --          --       13,969       2,568
                                  -------     -------     -------      -------     -------     -------    ---------     -------
  Operating income (loss)..          (245)         49          14          108         446      (1,573)     (13,267)     (1,959)
  Interest income
    (expense)..............          (139)       (101)         32          655         536         666          (90)        (78)
  Other income (expense)...           180          14         125          (47)        107         230          108         358
  Equity earnings in
    Affiliate..............           449         369         697          866       1,285       1,647        1,041         448
                                  -------     -------     -------      -------     -------     -------    ---------     -------
  Income (loss) before income
    Taxes..................           245         331         868        1,582       2,374         970      (12,208)     (1,231)
  Income tax benefit
    (provision)............           (83)        343         (61)        (102)       (120)        483        5,399          (2)
                                  -------     -------     -------      -------     -------     -------    ---------     -------
  Net income (loss) before
    Cumulative effect of
    Change in accounting
    Principle..............           162         674         807        1,480       2,254       1,453       (6,809)     (1,233)
  Cumulative effect of change
    in accounting
    principle..............           (50)         --          --           --          --          --           --          --
                                  -------     -------     -------      -------     -------     -------    ---------     -------
  Net income (loss)........       $   112     $   674     $   807      $ 1,480     $ 2,254     $ 1,453    $  (6,809)    $(1,233)
                                  =======     =======     =======      =======     =======     =======    =========     =======
  Net income (loss) per share
    Basic..................       $  0.03     $  0.19     $  0.20      $  0.25     $  0.37     $  0.24    $   (1.03)    $ (0.21)
    Diluted................       $  0.03     $  0.18     $  0.18      $  0.24     $  0.36     $  0.23    $   (1.03)    $ (0.21)
  Weighted average common
    Shares outstanding
    Basic..................         3,489       3,491       4,005        6,037       6,041       6,052        6,752       6,809
    Diluted................         3,489       3,741       4,382        6,265       6,279       6,267        6,752       6,809
</TABLE>

                                       30
<PAGE>
The following table sets forth the above  unaudited  information as a percentage
of net revenues.
<TABLE>
                                            Fiscal 2000 Quarter Ended                        Fiscal 2001 Quarter Ended
                                ------------------------------------------------ ---------------------------------------------
                                   Oct. 2,     Jan. 1,    April 1,      July 1,    Sept. 30,   Dec. 30,    March 31,    June 30,
                                    1999        2000        2000         2000        2000        2000        2001         2001
                                ----------- ----------- -----------  ----------- ----------- ----------- -----------  --------
                                                                          (unaudited)
  <S>                              <C>         <C>         <C>          <C>         <C>         <C>         <C>          <C>
  Net revenues.............        100.0%      100.0%      100.0%       100.0%      100.0%      100.0%      100.0%       100.0%
  Cost of goods sold.......         87.6        84.8        87.6         86.4        84.9        95.7        78.5         75.3
                                   -----       -----       -----        -----       -----       -----       -----        -----
  Gross profit.............         12.4        15.2        12.4         13.6        15.1         4.3        21.5         24.7
  Operating expenses:
    Selling, general and
      Administrative.......         11.0        10.8         9.2         10.3        10.0        14.9        14.1         15.9
    Research and
      Development..........          4.7         3.8         3.1          2.6         2.5         4.7         5.9          7.3
    Amortization of goodwill
      and other intangible
      assets...............           --          --          --           --          --          --        31.0          6.3
                                   -----       -----       -----        -----       -----       -----       -----        -----
  Operating income (loss)..         (3.3)        0.6         0.1          0.7         2.6       (15.3)      (29.5)        (4.8)
  Interest income
    (expense)..............         (1.9)       (1.2)        0.3          4.4         3.2         6.5        (0.2)        (0.2)
  Other income (expense)...          2.4         0.2         1.1         (0.2)         .7         2.2         0.2          0.9
  Equity earnings in
    Affiliate..............          6.1         4.4         5.9          5.8         7.6        16.0         2.3          1.1
                                   -----       -----       -----        -----       -----       -----       -----        -----
  Income (loss) before income
    Taxes..................          3.3         4.0         7.4         10.7        14.1         9.4       (27.2)        (3.0)
  Income tax benefit
    (provision)............         (1.1)        4.1        (0.5)        (0.7)       (0.7)        4.7        12.0           --
                                   -----       -----       -----        -----       -----       -----       -----        -----
  Net income (loss) before
    Cumulative effect of
    Change in accounting
    Principle..............          2.2         8.1         6.9         10.0        13.4        14.1       (15.2)        (3.0)
  Cumulative effect of change
    in accounting
    principle..............         (0.7)         --          --           --          --          --          --           --
                                   -----       -----       -----        -----       -----       -----       -----        -----
  Net income (loss)........          1.5%        8.1%        6.9%        10.0%       13.4%       14.1%      (15.2)%       (3.0)%
                                   =====       =====       =====        =====       =====       =====       =====        =====
</TABLE>

Our quarterly  results of operations may be subject to significant  fluctuations
due to  several  factors,  including  the timing of  orders,  manufacturing  and
customer  budget  cycles and  general  economic  conditions  as they  affect the
industries   which  use  our  products.   The  volume  of  equipment   sales  is
significantly  dependent on our customers' capital spending  patterns.  Prior to
the LAC  acquisition  on December 31, 2000,  our coated glass products were used
primarily in calculators,  cell phones and personal digital assistants,  and our
equipment products were used primarily in plasma  televisions.  Certain of these
industries  have  experienced  fluctuations,  both in  increased  and  decreased
demand, as a result of general market conditions.  With the LAC acquisition,  we
now are selling  products into a wider variety of geographic and product markets
that may be sensitive to different market forces.

The increase in quarterly sales during the second half of fiscal 2000 was driven
by the demand for STN coated glass and recognition of revenue on the two ATX-700
systems that were sold during the year.  Revenues in the first quarter of fiscal
2001  increased $2.4 million as the result of an equipment sale to the China JV,
the final  recognition of revenue on the ATX-700 systems sold in fiscal 2000 and
continuing strong demand for STN coated glass. Revenues in the second quarter of
fiscal  2001  decreased  as the  demand  for STN coated  glass  dropped  off and
equipment revenues decreased.

We acquired  the LAC business at the  beginning  of the third  quarter of fiscal
2001. In the third quarter of fiscal 2001,  equipment  revenues  recognized on a
percentage  of  completion  basis were higher than usual due to higher levels of
product  completion in the web coater group.  In the second half of fiscal 2001,
coated glass revenues continued to be negatively  affected by reduced demand for
STN glass used in cellular phones and PDAs.

In the third  quarter of fiscal 2001,  we wrote-off  $11.5  million of purchased
in-process  research and  development,  and in the third and fourth  quarters of
fiscal 2001 amortized a portion of the goodwill and other intangible assets from
the LAC  acquisition.  Because  we  principally  used  available  cash  and bank
borrowings  to fund the LAC  acquisition,  interest  income in the first half of
fiscal 2001 changed to interest expense in the second half of fiscal 2001, as we
incurred interest expense under our credit facility.

During the second half of fiscal 2001,  cell phone  manufacturers  experienced a
surplus  inventory  of handsets  and reduced  their  demand for STN coated glass
causing our China JV's earnings to fall  dramatically and reducing  revenues and
margins for glass sold through our Longmont  operations.  This industry downturn
negatively  affected  earnings of the China JV for the third and fourth quarters
of fiscal 2001.  From  inception  through the second quarter of fiscal 2001, the
equity  earnings in the joint  venture grew  substantially  from $449,000 in the
first  quarter of fiscal  2000 to $1.6  million in the second  quarter of fiscal
2001.

                                       31
<PAGE>
Liquidity and Capital Resources

We have funded our operations with cash generated from operations, proceeds from
public  offerings of our common stock, a private offering of preferred stock and
bank  borrowings.  Cash  provided by operating  activities  was $3.9 million for
fiscal 2000  compared to $20.2  million for fiscal 2001. As of June 30, 2001, we
had cash and cash equivalents of approximately $26.2 million and working capital
of $15.7 million.

The purchase price for the LAC  acquisition was $65.5 million and 673,353 shares
of our common stock, subject to final purchase price adjustments. As of June 30,
2001,  we have paid $58.0  million in cash and have accrued an  additional  $7.5
million subject to final purchase price  adjustments.  The acquired LAC business
will  increase the amount of working  capital we need to conduct our business in
future periods.

The purchase price of the LAC acquisition was financed  through  available cash,
bank borrowings and the issuance of $10.0 million of Preferred Stock.

The $10.0 million of Preferred Stock bears a 7% dividend until October 16, 2001,
and then  increases to 8.5% unless certain  conditions are satisfied.  Dividends
are  payable in cash by adding the  dividend  amount to the stated  value of the
Preferred  Stock.  The  Preferred  Stock is  convertible  into common stock at a
conversion  price of $19.75 per share.  Purchasers of Preferred  Stock and their
agent also received warrants to purchase an aggregate of 75,949 shares of common
stock with an exercise  price of $22.33 per share.  In addition,  our  placement
agent  received  warrants  to  purchase  17,468  shares of common  stock with an
exercise  price of  $20.09  per  share.  We have the  right  to  repurchase  the
Preferred Stock at 114% of the stated value, plus accrued dividends.

Our  $11.5  million  credit  facility  with a  commercial  bank  will  expire on
September 17, 2002. As of June 30, 2001, we had $9.0 million outstanding in both
borrowing and letters of credit, compared with no outstanding borrowings on July
1, 2000. Approximately $2.5 million of the outstanding borrowings and letters of
credit under this  facility at such date  represents  letters of credit that are
credit  support for our  guarantee of the debt of the China JV, which amount was
increased to $5.0 million subsequent to June 30, 2001. We are required under the
terms of the China JV to provide  credit  support on a several  basis for 50% of
the China JV's bank  indebtedness.  The China JV currently  has a $10.0  million
revolving  credit  facility  with  Sumitomo  Bank,  for which we must  provide a
secured guaranty covering $5.0 million.  This level of borrowing  represents the
use  of the  entire  available  credit  under  this  facility.  Interest  on the
outstanding  borrowings was 6.0% at June 30, 2001. The credit facility generally
restricts   our  ability  to  make  capital   expenditures,   incur   additional
indebtedness,  enter into capital leases or guarantee obligations.  To remain in
compliance with the credit  agreement,  we must also maintain certain  financial
ratios.  At June 30,  2001,  we were in  compliance  with  all of the  financial
covenants  in our credit  facility.  We intend to keep the  facility in place to
fund future working capital needs.

Capital  expenditures  were  $484,000 in fiscal 2000 and $1.4 million for fiscal
2001. We anticipate capital expenditures of approximately $2.0 million in fiscal
2002.  All of our  capital  expenditure  have  consisted  primarily  of expenses
related to product development.

Cash used by  investing  activities  was $21.1  million in fiscal 2000 and $42.0
million in fiscal 2001.

We believe that our working  capital and operating needs will continue to be met
by cash from operations and borrowings under the existing credit  facility.  Our
capital  requirements  depend on a number of factors,  including  the amount and
timing of orders we receive, the timing of payments received from customers, and
capital requirements  associated with new product  introductions.  If we require
additional capital, we may consider various alternatives such as additional bank
financing or the public or private sale of debt or equity securities.  There can
be no assurance that we will be able to raise such funds on  satisfactory  terms
if and when such funds are needed.

Recent Financial Accounting Standards Board Statement

In July 2001, the Financial  Accounting  Standards Board issued SFAS No. 141 and
No. 142  "Accounting for Business  Combinations  and Accounting for Goodwill and
Other  Intangible  Assets."  These   pronouncements   establish  new  accounting
standards  for  goodwill  acquired in a business  combination.  It  continues to
require  recognition of goodwill as an asset but does not permit amortization of
goodwill as previously required by Accounting  Principles Board, or APB, Opinion
No. 17, "Intangible Assets." Furthermore, certain intangible assets that are not
separable from goodwill may not be amortized under the new standards.

                                       32
<PAGE>
SFAS Nos. 141 and 142 establish a new method of testing  goodwill for impairment
and  require  that  goodwill  be  separately   tested  for  impairment  using  a
fair-value-based  approach.  The provisions  apply not only to goodwill  arising
from  acquisitions  completed  after June 30,  2001 but also to the  unamortized
balance of goodwill at the date of  adoption.  We adopted  the  standard  early,
effective  July 1, 2001.  We have not fully  evaluated  the impact  upon  future
operating  results  from  the  proposed  standard.   However,   based  upon  the
preliminary  allocation of the purchase price paid in the LAC  acquisition,  had
SFAS Nos. 141 and 142 been adopted in fiscal  2001,  we would not have  recorded
the full  amortization  expense related to goodwill and intangibles from the LAC
acquisition, which was approximately $5.0 million for fiscal 2001.

In April 1998,  the AICPA  issued SOP 98-5  "Reporting  on the Costs of Start-up
Activities." SOP 98-5 provides  guidance on the financial  reporting of start-up
costs and organization costs and requires such costs to be expensed as incurred.
Generally,  initial application of SOP 98-5 should be reported as the cumulative
effect of a change in accounting principle.  SOP 98-5 is effective for financial
statements for fiscal years beginning  after December 15, 1998.  Through the end
of fiscal 1999,  we had been  deferring  certain  start-up  costs related to the
China JV. A charge for the  application  of SOP 98-5 was recorded as a change in
accounting principle during fiscal 2000.

In  June  1998,  the  FASB  issued  SFAS  No.  133  "Accounting  for  Derivative
Instruments and Hedging  Activities."  SFAS No. 133  establishes  accounting and
reporting  standards  requiring  that  every  derivative  instrument  (including
certain derivative  instruments  embedded in other contracts) be recorded on the
balance sheet as either an asset or liability  measured at its fair value.  SFAS
No. 133  requires  that  changes in the  derivative's  fair value be  recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting  for  qualifying  hedges  allows a  derivative's  gains and losses to
offset related results on the hedged item in the income statement,  and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No.
137 and SFAS No. 138, are effective for all fiscal  quarters of all fiscal years
beginning  after June 15, 2000. The adoption of SFAS No. 133, as amended by SFAS
No. 137 and SFAS No.  138,  did not have a material  impact on our  consolidated
financial statements.

ITEM 7A:  Quantitative and Qualitative Disclosures about Market Risk

Market Risk Exposure

Market risk represents the risk of loss that may impact our financial  position,
results of operations or cash flows due to adverse  changes in financial  market
prices.  We are exposed to market risk through interest rates.  This exposure is
directly related to our normal funding and investing activities.

Approximately  $6.5  million  of our  borrowed  debt is  subject  to  changes in
interest  rates;  however,  we do not use  derivatives to manage this risk. This
exposure is linked primarily to the Eurodollar rate and secondarily to the prime
rate.  We believe that a moderate  change in either the  Eurodollar  rate or the
prime  rate  would not  materially  affect our  operating  results or  financial
condition.  A 1% change in interest rates would result in an approximate $65,000
annual impact on pre-tax  income based on the amount of debt subject to interest
rate fluctuations at June 30, 2001.

Foreign Exchange Exposure

We are exposed to foreign exchange risk associated with accounts  receivable and
payable  denominated in foreign  currencies,  primarily in Japanese yen. At June
30,  2001,  we  had  approximately  $1.3  million  in  accounts  receivable  and
approximately  $900,000 of accounts  payable  denominated  in Japanese yen. A 1%
change in exchange  rates would  result in an  approximate  $4,000 net impact on
pre-tax income based on the foreign currency denominated accounts receivable and
accounts payable balances at June 30, 2001.

Sales of products  manufactured  in Germany are  denominated  in German marks or
euros,  except for sales of equipment to certain  Japanese  customers  which are
denominated  in Japanese yen.  Currently,  we engage in  international  currency
hedging  transactions to mitigate our foreign exchange exposure related to sales
of  certain  equipment,  and the  effects of foreign  exchange  rate  changes on
foreign currency transactions have not been significant to date.

Notwithstanding the above, actual changes in interest rates and foreign exchange
rates could adversely affect our operating results or financial  condition.  The
potential impact depends upon the magnitude of the rate change.

                                       33
<PAGE>
We are exposed to changes in interest rates and foreign currency  exchange rates
primarily in our cash,  foreign currency  transactions and operating  results of
our foreign affiliates.

International  manufacturing  operations  are  primarily  based in  Germany  and
constitute a significant  portion of our revenues and identifiable  assets. Most
of these identifiable assets are based in German marks. International operations
result  in a  large  volume  of  foreign  currency  commitment  and  transaction
exposures and significant foreign currency net asset exposures.

Our cash  position  includes  amounts  denominated  in foreign  currencies.  The
repatriation of cash balances from certain of our affiliates  could have adverse
consequences  to the  statement  of  operations  as  well  as tax  consequences.
However,  those balances are generally  available without legal  restrictions to
fund ordinary business operations.

Effective  January 1, 1999,  eleven of fifteen member  countries of the European
Union  established  permanent  rates of exchange  between the members'  national
currencies and a new common currency,  the "euro." In this first phase, the euro
is  available  for  non-cash  transactions  in the  monetary,  capital,  foreign
exchange and interbank  markets.  National  currencies will continue to exist as
legal tender and may continue to be used in  commercial  transactions  until the
euro currency is issued in January 2002 and the participating  members' national
currencies  are withdrawn by July 2002.  Our European  operations are located in
Germany which is participating in this monetary union.

We anticipate  benefiting from the  introduction of the euro through a reduction
of foreign currency  exposure and  administrative  costs on transactions  within
Europe.  We have commenced  conversion of our European  operations from marks to
the euro.  The change in  functional  currency is  proceeding  as planned and is
expected to be completed by the end of calendar 2001.

Any costs  associated  with the  introduction  of the euro will be  expensed  as
incurred.  We do not  believe  that the  introduction  of the euro  will  have a
material impact on our results of operations or financial condition.

            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     The discussions in this Report on Form 10-K and the documents  incorporated
herein by reference  which are not  statements  of  historical  fact  (including
statements  in the future tense and those which include terms such as "believe,"
"will,"  "expect," and  "anticipate")  contain  forward-looking  statements that
involve  risks and  uncertainties.  The Company's  actual  future  results could
materially  differ from those discussed.  Factors that could cause or contribute
to such  differences  include,  but are not  limited  to, the effect of changing
worldwide economic conditions, such as those in Asia, the risk of overall market
conditions,  product demand and market  acceptance  risk,  risks associated with
dependencies  on  suppliers,  the impact of  competitive  products  and pricing,
technological and product  development  risks, and other factors including those
discussed in ITEM 1 above in this Report and in the Management's  Discussion and
Analysis of Financial  Condition and Results of Operations in ITEM 7, as well as
those discussed  elsewhere in this Report and the documents  incorporated herein
by reference.

                                       34
<PAGE>
ITEM 8:  Financial Statements and Supplementary Data

                   Applied Films Corporation and Subsidiaries

                   Index To Consolidated Financial Statements

                                                                            Page
Historical:

  Applied Films Corporation and Subsidiaries

    Consolidated Balance Sheets as of June 30, 2001 and July 1, 2000......... 37
    Consolidated Statements of Operations for the fiscal years
      ended June 30, 2001, July 1, 2000, and July 3, 1999.................... 38
    Consolidated Statements of Stockholders' Equity for the fiscal years
      ended June 30, 2001, July 1, 2000, and July 3, 1999.................... 39
    Consolidated Statements of Cash Flows for the fiscal years ended
     June 30, 2001, July 1, 2000, and July 3, 1999........................... 40
    Notes to Consolidated Financial Statements............................... 41





                                       35
<PAGE>
Report of Independent Public Accountants

To the Stockholders of Applied Films Corporation:

We have audited the  accompanying  consolidated  balance sheets of APPLIED FILMS
CORPORATION (a Colorado  corporation)  and  subsidiaries as of June 30, 2001 and
July  1,  2000  and  the  related   consolidated   statements   of   operations,
stockholders'  equity and cash flows for the fiscal  years ended June 30,  2001,
July  1,  2000,  and  July  3,  1999.   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Films Corporation and subsidiaries, as of June 30, 2001 and July 1, 2000 and the
consolidated  results  of their  operations  and their cash flows for the fiscal
years ended June 30, 2001,  July 1, 2000,  and July 3, 1999, in conformity  with
accounting principles generally accepted in the United States.

                                                     /s/ ARTHUR ANDERSEN LLP

Denver, Colorado
July 19, 2001.


                                     36
<PAGE>
                   Applied Films Corporation and Subsidiaries

                           Consolidated Balance Sheets
<TABLE>
                                                                                   June 30,       July 1,
                                                                                     2001          2000
                                                                                 ------------  --------
                                                                                    (in thousands, except
                                                                                         share data)
                        <S>                                                        <C>           <C>
                        ASSETS
                        CURRENT ASSETS:
                          Cash and cash equivalents..........................      $ 26,236      $ 32,058
                          Marketable securities..............................            --        20,167
                          Accounts and trade notes receivable, net of
                           allowance of $1,142 and $188......................        12,267         6,273
                          Costs and profit in excess of billings.............        29,717         4,571
                          Due from Joint Venture.............................            --           219
                          Inventories, net of allowance of $613 and $261.....        16,599        10,006
                          Assets held for sale...............................            --         2,251
                          Prepaid expenses and other.........................           836           187
                          Deferred tax asset, net............................           989           480
                                                                                   --------      --------
                                 Total current assets........................        86,644        76,212
                        Property, plant and equipment, net of accumulated
                          depreciation of $9,998 and $8,479..................         7,746         5,320
                        Goodwill and other intangible assets, net of
                        accumulated amortization of $5,036 and $0............        58,097            --
                        Investment in Joint Venture..........................         9,852         5,746
                        Deferred tax asset, net..............................         6,780           136
                        Other assets.........................................           307            64
                                                                                   --------      --------
                                 Total assets................................      $169,426      $ 87,478
                                                                                   ========      ========


                        LIABILITIES AND STOCKHOLDERS' EQUITY
                        CURRENT LIABILITIES:
                          Trade accounts payable.............................      $ 13,063      $  9,971
                          Accrued expenses...................................        39,841         2,138
                          Accrued pension benefit obligation.................         6,876            --
                          Income taxes payable...............................            --            98
                          Billings in excess of revenue......................         8,716            --
                          Current portion of:
                                 Deferred revenue............................           279           164
                                 Deferred gain...............................            56            56
                          Deferred tax liability.............................         2,129            --
                                                                                   --------      --------
                                 Total current liabilities...................        70,960        12,427
                        Long-term debt.......................................         6,483            --
                        Deferred revenue, net of current portion.............         2,202         1,210
                        Deferred gain, net of current portion................           589           644
                                                                                   --------      --------
                                 Total liabilities...........................        80,234        14,281
                                                                                   --------      --------

                        STOCKHOLDERS' EQUITY:
                          Series A Convertible Preferred Stock, no par value,
                            1,000,000 shares authorized; 1,000 and 0 shares
                            outstanding at June 30, 2001 and July 1, 2000,
                            respectively.....................................         8,571            --
                          Common Stock, no par value, 40,000,000 shares
                           authorized, 6,832,701 and 6,040,856 shares issued
                           and outstanding at June 30, 2001 and July 1, 2000,
                           respectively......................................        83,207        64,959
                          Warrants and stock options.........................           876            --
                          Other cumulative comprehensive loss................        (7,020)          (20)
                          Retained earnings..................................         3,558         8,258
                                                                                   --------      --------
                                 Total stockholders' equity..................        89,192        73,197
                                                                                   --------      --------
                                 Total liabilities & stockholders' equity....      $169,426      $ 87,478
                                                                                   ========      ========
</TABLE>
          See Accompanying Notes to Consolidated Financial Statements.

                                       37
<PAGE>
                   Applied Films Corporation and Subsidiaries

                      Consolidated Statements of Operations
<TABLE>
                                                                                For The Fiscal Years Ended
                                                                        ---------------------------------------
                                                                           June 30,        July 1,       July 3,
                                                                             2001           2000          1999
                                                                        -------------  ------------- ---------
                                                                          (in thousands, except per share data)
                 <S>                                                      <C>             <C>           <C>
                 Net revenues.......................................      $ 112,715       $42,292       $31,523
                 Cost of goods sold.................................         90,021        36,633        27,070
                                                                          ---------       -------       -------
                 Gross profit.......................................         22,694         5,659         4,453
                 Operating expenses:
                   Selling, general and administrative expenses.....         16,027         4,324         3,760
                   Research and development expenses................          6,484         1,409         1,044
                   Amortization of goodwill and other intangible
                    assets..........................................         16,536            --            --
                                                                          ---------       -------       -------
                 Income (loss) from operations......................        (16,353)          (74)         (351)
                 Other (expense) income:
                   Interest income (expense)........................          1,034           447          (553)
                   Other income.....................................            805           272            40
                   Equity in earnings of Joint Venture..............          4,421         2,381           382
                                                                          ---------       -------       -------
                 Income (loss) before income taxes and cumulative
                 effect of change in accounting principle...........        (10,093)        3,026          (482)
                 Income tax benefit.................................          5,760            97           258
                                                                          ---------       -------       -------
                 Income (loss) before cumulative effect of change in
                   accounting principle.............................         (4,333)        3,123          (224)
                                                                          ---------       -------       -------
                 Cumulative effect of change in accounting principle,
                 net of taxes.......................................             --           (50)           --
                 Net income (loss)..................................         (4,333)        3,073          (224)
                                                                          ---------       -------       -------
                 Preferred stock dividends..........................           (367)           --            --
                                                                          ---------       -------       -------
                 Net income (loss) applicable to common stockholders      $  (4,700)      $ 3,073       $  (224)
                                                                          =========       =======       =======
                 Net income (loss) per common share:
                   Basic............................................      $   (0.73)      $  0.72       $ (0.06)
                                                                          =========       =======       ========
                   Diluted..........................................      $   (0.73)      $  0.69       $ (0.06)
                                                                          =========       =======       ========
                 Weighted average common shares outstanding:
                   Basic............................................          6,414         4,255         3,478
                                                                          =========       =======       =======
                   Diluted..........................................          6,414         4,439         3,478
                                                                          =========       =======       =======
</TABLE>

          See Accompanying Notes to Consolidated Financial Statements.

                                       38
<PAGE>
                   Applied Films Corporation and Subsidiaries
<TABLE>
                                            Consolidated Statements of Stockholders' Equity
                               For the Fiscal Years Ended June 30, 2001, July 1, 2000, and July 3, 1999

                                                                              Other                                          Total
                                                                            Cumulative     Common                            Stock-
                                   Common Stock         Preferred Stock   Comprehensive    Stock     Deferred     Retained  holder's
                                 Shares      Amount     Shares   Amount    Gain(Loss)     Warrants  Compensation  Earnings   Equity
                                 ------      ------     ------   ------   -------------   --------  ------------  --------  --------
                                                                        (in thousands, except share data)
<S>                              <C>         <C>         <C>    <C>         <C>           <C>        <C>        <C>         <C>
Balances, June 27, 1998          3,472,688   $ 9,424      --   $    --     $    --       $  --        $ (7)     $ 5,409     $14,826
----------------------           ---------   -------   -----   -------     -------       -----        ----      -------     -------
  Net (loss)................           --         --      --        --          --          --          --         (224)       (224)
  ESPP stock issuance.......       10,564         33      --        --          --          --          --           --          33
  Exercise of stock options.        3,806         16      --        --          --          --          --           --          16
  Amortization of deferred
    compensation............           --         --      --        --          --          --           7           --           7
                                 --------    -------   -----   -------     -------       -----        ----      -------     -------

Balances, July 3, 1999           3,487,058     9,473      --        --          --          --          --        5,185      14,658
----------------------           ---------   -------   -----   -------     -------       -----        ----      -------     -------
  Net income................           --         --      --        --          --          --          --        3,073       3,073
  ESPP stock issuance.......        5,481         39      --        --          --          --          --           --          39
  Stock options, including
    income tax benefits of
    $253....................       48,317        383      --        --          --          --          --           --         383
  Issuance of shares in
    connection with secondary
    offering (net of offering
    costs of $461)..........    2,500,000     55,064      --        --          --          --          --           --      55,064
  Comprehensive income:
    Unrealized gain (loss) on
      foreign currency
      translation...........           --         --      --        --         (20)         --          --           --         (20)
                                 --------    -------   -----   -------     -------       -----        ----      -------     -------

Balances, July 1, 2000           6,040,856    64,959      --        --         (20)         --          --        8,258      73,197
----------------------           ---------   -------   -----   -------     -------       -----        ----      -------     -------
  Net income................           --         --      --        --          --          --          --       (4,333)     (4,333)
  ESPP stock issuance.......        3,916         55      --        --          --          --          --           --          55
  Stock options, including
    income tax benefits of
    $515....................      114,576        847      --        --          --          --          --           --         847
  Issuance of stock in
    connection with
    acquisition of LAC......      673,353     17,346      --        --          --          --          --           --      17,346
  Issuance of Series A
    Convertible Preferred
    Stock...................           --         --   1,000     8,571          --          --          --           --       8,571
  Issuance of common stock
    warrants in connection
    with issuance of Series A
    Consertible Preferred
    Stock...................           --         --      --        --          --         876          --           --         876
  Preferred stock dividends.           --         --      --        --          --          --          --         (367)       (367)
  Comprehensive income:
    Unrealized gain (loss) on
      foreign currency
      translation...........           --         --      --        --      (7,000)         --          --           --      (7,000)
                                 --------    -------   -----   -------     -------       -----        ----      -------     -------
Balances, June 30, 2001          6,832,701   $83,207   1,000   $ 8,571     $(7,020)      $ 876        $ --       $ 3,558    $89,192
-----------------------          ---------   -------   -----   -------     -------       -----        ----       -------    -------
</TABLE>
  The accompanying notes are an integral part of these consolidated statements.

                                       39
<PAGE>
                   Applied Films Corporation and Subsidiaries
<TABLE>
                      Consolidated Statements of Cash Flows

                                                                               For The Fiscal Years Ended
                                                                          ------------------------------------
                                                                            June 30,      July 1,     July 3,
                                                                              2001         2000        1999
                                                                          -----------  ----------- -----------
                     <S>                                                  <C>          <C>          <C>
                                                                                     (in thousands)
                     Cash Flows from Operating Activities:
                       Net income (loss)...............................    $  (4,333)   $   3,073    $  (224)
                       Adjustments to reconcile net income (loss) to
                         net cash flows from operating activities--
                         Depreciation..................................        2,094        1,826      1,759
                         Amortization of deferred compensation & new
                          cash compensation expense....................          143           --          7
                         Amortization of deferred gain on lease and
                          Joint Venture................................         (334)        (220)      (108)
                         Amortization of goodwill and other intangible
                          assets.......................................       16,536           --         --
                         Deferred income tax (benefit) provision.......       (4,509)        (628)       530
                         Equity in earnings of affiliate...............       (4,106)      (2,217)      (330)
                         Deferred gain on equipment sale to Joint
                          Venture......................................        1,386           --      1,588
                         Cost of equipment sale to Joint Venture.......        2,251           --      1,693
                         Changes in:
                           Accounts and trade notes receivable, net....        4,224         (991)       385
                           Costs and profits in excess of billings.....       (7,203)      (3,011)        --
                           Inventories.................................        8,469       (1,872)     1,903
                           Prepaid expenses and other..................          299          622        253
                           Accounts payable and accrued expenses.......       (3,339)       6,503     (2,534)
                           Billings in excess of revenue...............        8,716           --         --
                           Income taxes (receivable) payable...........          (98)         809     (1,002)
                                                                           ---------    ---------    -------
                             Net cash flows from operating activities..       20,196        3,894      3,920
                                                                           ---------    ---------    -------

                     Cash Flows from Investing Activities:
                       Purchases of property, plant, and equipment.....       (1,350)        (484)    (2,800)
                       Acquisition of LAC..............................      (60,857)          --         --
                       Purchase of assets held for sale................           --         (369)        --
                       Investment in Joint Venture.....................           --           --     (3,236)
                       Purchases of marketable securities..............           --      (21,367)        --
                       Proceeds from sale of marketable securities.....       20,167        1,200         --
                       Other...........................................           --          (64)        --
                                                                           ---------    ---------    -------
                             Net cash flows from investing activities..      (42,040)     (21,084)    (6,036)
                                                                           ---------    ---------    -------

                     Cash Flows from Financing Activities:
                       Proceeds from borrowings of long-term debt......       18,862        3,623     12,747
                       Repayment of long-term debt.....................      (12,379)     (11,024)    (9,598)
                       Stock issuance on stock purchase plan, and stock
                         options.......................................          387          422         49
                       Proceeds from issuance of preferred stock and
                         warrants, net.................................        9,304           --         --
                       Proceeds from secondary offering................           --       55,525         --
                       Dividends paid on preferred stock...............         (322)          --         --
                       Offering costs..................................           --         (461)        --
                                                                           ---------    ---------    -------
                             Net cash flows from financing activities..       15,852       48,085      3,198
                                                                           ---------    ---------    -------
                     Effect of exchange rate changes on cash and cash
                       equivalents.....................................          170           --         --
                     Net (decrease) increase in cash...................       (5,822)      30,895      1,082
                     Cash and cash equivalents, beginning of period....       32,058        1,163         81
                                                                           ---------    ---------    -------
                     Cash and cash equivalents, end of period..........    $  26,236    $  32,058    $ 1,163
                                                                           =========    =========    =======

                     Supplemental cash flow information:
                       Cash paid for interest, net of amounts
                         capitalized...................................    $     489    $     366    $   735
                                                                           =========    =========    =======
                       Cash received for income taxes, net.............    $     (15)   $    (560)   $  (100)
                                                                           =========    =========    =======
</TABLE>

  The accompanying notes are an integral part of these consolidated statements.

                                       40
<PAGE>
                    Applied Films Corporation and Subsidiary

                   Notes to Consolidated Financial Statements

NOTE 1. COMPANY ORGANIZATION AND OPERATIONS

Applied Films  Corporation  (the  "Company" or "AFCO") is a leading  provider of
thin film deposition  equipment to the Flat Panel Display ("FPD") industry,  the
Architectural,  Automotive and Solar Glass industry,  the Web Packaging industry
and are  pursuing the market for  coatings on PET  (polyethylene  terephthalate)
bottles.  The Company's high volume,  large area deposition  systems are used by
its customers to deposit thin films that enhance the material  properties of the
base substrate.  These thin films provide  conductive,  electronic,  reflective,
filter,  barrier  and other  properties  that  become  critical  elements of the
composition of its customers' products.

Additionally,  the Company  sells coated glass  substrates  to the FPD industry.
These products are used by its customers as a component in the  manufacturing of
black and white liquid crystal displays ("LCD").

Since  inception  in 1976,  the  Company  has  manufactured  its own  deposition
equipment for use in our coated glass production process. In 1996, when high end
flat panel technologies  demanded that LCD manufacturers process their own glass
substrates  in their  factory,  the Company  expanded  its product  offerings to
include its proprietary deposition equipment. Since that time, the Company began
investing in the commercialization of thin film deposition equipment and coating
processes for the high end of the LCD market. The recent growth in the equipment
side of the  business  has been  enhanced  by an  acquisition  of the  Company's
largest competitor at the end of calendar 2000.

On December 31, 2000,  the Company  acquired  the Large Area  Coatings  division
("LAC") of Unaxis. The LAC division is now operating as Applied Films Germany, a
wholly-owned  subsidiary of the Company with  manufacturing in Alzenau,  Germany
and sales and service  offices in Asia,  Europe and the United  States.  Applied
Films Germany designs,  manufactures  and sells large area coating  equipment in
four product  areas with global  markets.  The  principal  Applied Films Germany
product areas are display,  architectural glass, automotive glass, solar and web
coaters. The Company is also pursuing the market for coatings on PET bottles for
soft drinks and other beverage markets.

Joint Venture

In June of 1998, the Company formed a 50/50 Joint Venture (the "Joint  Venture")
in China with Nippon Sheet Glass Co. ("NSG") to process, sell and export certain
types of thin film coated glass (Note 5).

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying  consolidated  financial statements include the accounts of the
Company  and  its  wholly-owned  subsidiaries.  All  intercompany  accounts  and
transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosures  of contingent  assets and  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.

Joint Venture Income Taxes

During fiscal year 2000, the Company determined that the earnings from the Joint
Venture  would not be  distributed  to the Company for the  foreseeable  future;
therefore,  a  provision  for U.S.  income  taxes  need not be  provided  on the
earnings from the Joint Venture.  During fiscal year 1999,  the Company  accrued
for income taxes to be paid on the earnings  from the Joint Venture at a rate of
34%. Based on the fiscal year 2000 determinations, the taxes originally provided
during fiscal year 1999, as well as those provided  through the first quarter of
fiscal year 2000 on the earnings  from the Joint  Venture,  were reversed in the
second  quarter of fiscal year 2000  resulting in an additional  tax benefit for
fiscal year 2000 of  approximately  $260,000.  No  provision  for taxes on Joint
Venture earnings has been accrued during fiscal year 2001.

                                       41
<PAGE>
Fiscal Year

The Company has adopted a fiscal year ending on the  Saturday  nearest  June 30,
which will result in fiscal years composed of 52 or 53 weeks. Fiscal years 2001,
2000, and 1999 include 52, 52, and 53 weeks, respectively.

Cash and Cash Equivalents

The Company generally  considers all highly liquid  investments with an original
maturity of less than 90 days to be cash equivalents.

Marketable Securities

The Company classifies all of its short-term  investments that do not qualify as
cash equivalents as trading securities.  Such short-term  investments consist of
municipal debt securities and corporate bonds. Trading securities are bought and
held principally for the purpose of selling them in the near term.  Realized and
unrealized  gains and losses on such securities are reflected as other income in
the  accompanying  statements of operations.  Trading  securities are carried at
current  market  value  which are based  upon  quoted  market  prices  using the
specific identification method.

As of July 1,  2000,  the  Company  had $3.5  million  in  corporate  bonds  and
approximately  $16.7 million in municipal  debt  securities.  The Company had no
significant  concentration  of credit risk arising from  investments  and had no
significant unrealized gains or losses at July 1, 2000. The Company did not have
any marketable securities at June 30, 2001.

Inventories

Inventories  consist of glass related materials used in the production of coated
glass, and materials used in the construction of systems. Inventories are stated
at the lower of cost  (first-in,  first-out) or market.  Inventories at June 30,
2001 and July 1, 2000 consist of the following (in thousands):
<TABLE>
                                                                                 June 30,   July 1,
                                                                                   2001      2000
                                                                                 --------   --------
                                       <S>                                       <C>        <C>
                                       Raw materials, net......................   $  5,116  $  4,003
                                       Work-in-process.........................      5,822        --
                                       Materials for manufacturing systems.....        733       195
                                       Finished goods, net.....................      4,928     5,808
                                                                                  --------  --------
                                                                                 $ 16,599   $ 10,006
</TABLE>

Property, Plant, and Equipment

Property,  plant and  equipment are stated at cost.  Replacements,  renewals and
improvements  are capitalized and costs for repairs and maintenance are expensed
as incurred.  Depreciation is computed using the  straight-line  method over the
following estimated useful lives.  Leasehold  improvements are depreciated using
the  straight-line  method  over the lesser of the  useful  life of the asset or
lease term.
<TABLE>
                                                                                    Estimated
                                                                                   Useful Lives
                                                                                   ------------
                                       <S>                                          <C>
                                       Building...............................        30 years
                                       Machinery and equipment................      3-10 years
                                       Office furniture and equipment.........       3-5 years
</TABLE>

Depreciation  expense was  approximately  $2.1  million,  $1.8  million and $1.8
million  for the years  ended  June 30,  2001,  July 1,  2000 and July 3,  1999,
respectively.

                                       42
<PAGE>
Income Taxes

The Company  accounts for income taxes in accordance with Statement of Financial
Accounting  Standards ("SFAS") No. 109,  "Accounting for Income Taxes." SFAS No.
109 requires  deferred tax assets and liabilities to be recognized for temporary
differences  between the tax basis and financial  reporting  basis of assets and
liabilities,  computed at current tax rates. Also, the Company's deferred income
tax assets include certain future tax benefits.  The Company records a valuation
allowance  against  any  portion of those  deferred  income tax assets  which it
believes it will more likely than not fail to realize.

Deferred Gain

During 1997, the Company entered into a lease transaction with a third party for
the Company's manufacturing and administrative  facility in Longmont,  Colorado,
which  included a purchase  option early in the lease  period.  The Company sold
this  purchase  option to another  third party,  who  exercised  this option and
purchased  the  building.  The  Company  then  entered  into a new  lease of the
facility  which  includes a purchase  option  (Note 11).  The  Company  received
$834,000  from the  original  purchase  option,  which is deferred  and is being
amortized on a straight-line basis over the term of the lease of 15 years.

Recoverability of Tangible and Intangible Assets

The Company  evaluates  the carrying  value of all  long-lived  assets  wherever
events or  circumstances  indicate the carrying value of assets may exceed their
recoverable  amounts. An impairment loss is recognized when the estimated future
cash flows  (undiscounted and without interest)  expected to result from the use
of an asset are less than the carrying  amount of the asset.  Measurement  of an
impairment  loss is based on fair value of the asset computed  using  discounted
cash  flows if the  asset is  expected  to be held and used.  Measurement  of an
impairment  loss for an asset held for sale would be based on fair market  value
less estimated costs to sell.

Coated Glass Revenue Recognition

Coated glass revenues are recognized  upon shipment to the customer  pursuant to
the terms  specified in the purchase  order.  A provision  for  estimated  sales
returns and allowances is recognized in the period of the sale.

Equipment Sales Revenue Recognition

Revenues on a substantial majority of contracts relating to the construction and
sale   of   thin   film    coating    equipment    are    recognized    on   the
percentage-of-completion  method in  accordance  with the American  Institute of
Certified Public Accountants  ("AICPA")  Statement of Position ("SOP") No. 81-1,
"Accounting for  Performance of  Construction-Type  and Certain  Production-Type
Contracts"  ("SOP  81-1").  Pursuant to SOP 81-1,  revenues  are measured by the
percentage  of the total costs  incurred  and applied to date in relation to the
estimated  total costs to be incurred for each  contract.  Management  considers
costs incurred and applied to be the best available measure of progress on these
contracts.  Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and administrative costs
are charged to expense as incurred. Changes in performance,  contract conditions
and estimated  profitability,  including  those  arising from  contract  penalty
provisions and final contract settlements,  may result in revisions to costs and
income and are  recognized in the period in which the revisions are  determined.
Billings in excess of costs and profit represent  amounts billed pursuant to the
contract terms which occur prior to the Company's recognition of revenues on the
contract  for  financial  reporting  purposes.  Costs and  profits  in excess of
billings represent revenues earned prior to billing.

Contracts  in  progress  at June 30,  2001 and July 1, 2000 are as  follows  (in
thousands):
<TABLE>
                                                                                 June 30,    July 1,
                                                                                   2001       2000
                                                                                ---------   --------
                              <S>                                               <C>         <C>
                              Costs incurred on contracts in progress and
                              estimated profit..............................    $ 100,013   $  6,211
                              Less: billings to date........................      (79,012)    (1,640)
                                                                                ---------   --------
                              Costs and profit in excess of billings, net...    $  21,001   $  4,571
                                                                                =========   ========
</TABLE>

The balances billed but not paid by customers  pursuant to retainage  provisions
in  equipment  contracts  will  be due  upon  completion  of the  contracts  and
acceptance  by the  customer.  Based on the  Company's  experience  with similar
contracts in recent years, the retention balance at each balance sheet date will
generally be collected within the subsequent  fiscal year.  Retainage  generally
ranges from 0% to 10% of amounts billed to customers  during the progress of the
contract.  Retainage amounts, that are actually billed, are included in accounts
receivable in the accompanying balance sheets.

                                       43
<PAGE>
The Company offers  warranty  coverage for equipment  sales for a period ranging
from 3 to 12 months after final installation is complete.  The Company estimates
the  anticipated  costs to be incurred  during the warranty period and accrues a
reserve as a percentage of revenue as revenue is recognized.  These reserves are
evaluated  periodically based on actual experience and anticipated  activity and
are adjusted if necessary.

Contracts that do not qualify for the percentage of completion  method under SOP
81-1 are  accounted  for using  the  completed  contract  method.  Revenues  are
recognized when all provisions of the contract are fulfilled.  Costs to complete
the contract are deferred until the related revenue is recognized.

Losses on contracts in process are  recognized  in their  entirety when the loss
becomes evident and the amount of loss can be reasonably  estimated.  As of June
30, 2001, the Company had accrued  approximately $10 million for loss contracts.
No such losses were identified for contracts in progress at July 1, 2000.

Spare Parts Revenue Recognition

Spare parts revenues are recognized upon shipment to the customer.

Deferred Revenue

During  fiscal  1999 and 2001,  the  Company  sold  certain  thin  film  coating
equipment  to the Joint  Venture  (Note 5).  Because the Company owns 50% of the
Joint Venture,  the Company  recorded 50% of the revenue and related cost of the
sales and has deferred  50% of the gross  margins,  approximately  $1.4 and $1.3
million,  respectively,  which will be recognized on a straight-line  basis over
ten years, the estimated depreciable life of the equipment.  The amortization of
the gross  margins are included  with equity in earnings of Joint Venture in the
accompanying consolidated statements of operations.

Research and Development Expenses

Research and development costs are expensed as incurred and consist primarily of
salaries,  supplies,  lab costs,  and depreciation of equipment used in research
and development  activities.  The Company incurred  approximately  $6.5 million,
$1.4  million and $1.0  million of research  and  development  expenses  for the
fiscal years ended June 30, 2001, July 1, 2000, and July 3, 1999,  respectively,
net of reimbursements received from a contracting research organization.

In  addition,  during  fiscal  2001,  the Company  recognized  $11.5  million of
acquired in-process research and development obtained in the acquisition of LAC,
which is included in amortization of goodwill and other intangible assets on the
accompanying consolidated statement of operations.

Foreign Currency Transactions

The Company generated 67% and 93% of its revenues in fiscal years 2001 and 2000,
respectively,  from  sales  to  foreign  corporations  located  outside  of  the
Company's  manufacturing  centers in the United States and Europe,  primarily in
Asia.  In  addition,  many of its  raw  materials  are  purchased  from  foreign
corporations.  The majority of the Company's sales and purchases are denominated
in U.S.  dollars,  with the  remainder  denominated  in Japanese  Yen. For those
transactions  denominated  in  Japanese  Yen,  the  Company  records the sale or
purchase at the spot  exchange  rate in effect on the date of sale.  Receivables
from such sales or payables for such  purchases are translated to the functional
currency using the end of the period spot exchange rate.  Transaction  gains and
losses are  charged or credited to income  during the year,  and any  unrealized
gains or losses are recorded as other income or loss at the end of the period.

Foreign Currency Translation

The results of the Company's foreign subsidiaries are translated to U.S. Dollars
using the current-rate method. Assets and liabilities are translated at the year
end spot  exchange  rate,  revenue and  expenses at average  exchange  rates and
equity transactions at historical exchange rates.  Exchange  differences arising
on  translation  are recorded as a component of other  cumulative  comprehensive
loss.

                                       44
<PAGE>
Other Cumulative Comprehensive Loss

SFAS No. 130,  "Reporting  Comprehensive  Income,"  establishes  a standard  for
reporting and  displaying  comprehensive  income and its  components  within the
financial  statements.  Comprehensive  income  includes  charges  and credits to
equity  that  are  not the  result  of  transactions  with  shareholders.  Other
cumulative  comprehensive  income for the Company  represents  foreign  currency
items associated with the translation of the Company's investment in its foreign
subsidiaries and the Joint Venture.

Net Income (Loss) Income Per Common Share

The Company follows SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes
standards  for  computing and  presenting  basic and diluted  earnings per share
("EPS").  Under this  statement,  basic earnings (loss) per share is computed by
dividing  the income or loss  available to common  stockholders  by the weighted
average number of shares of common stock  outstanding.  Diluted  earnings (loss)
per share is  determined  by  dividing  the income or loss  available  to common
stockholders  by the sum of (1) the  weighted  average  number of common  shares
outstanding  and (2) the dilutive  effect of  outstanding  potentially  dilutive
securities,  including  convertible  preferred stock, stock options and warrants
determined utilizing the treasury stock method.

A  reconciliation  between  the  number of shares  used to  calculate  basic and
diluted earnings per share is as follows (in thousands of shares):
<TABLE>
                                                                                      Fiscal Years Ended
                                                                                   -----------------------
                                                                                     2001     2000   1999
                                                                                   -------  ------- ------
                       <S>                                                         <C>      <C>     <C>
                       Weighted average number of common shares outstanding
                       (shares used in basic earnings per share computation)....    6,414    4,255   3,478
                       Effect of potentially dilutive securities................      N/A      184     N/A
                                                                                    -----    -----   -----
                       Shares used in diluted earnings per share Computation....    6,414    4,439   3,478
                                                                                    =====    =====   =====
</TABLE>

As all potentially  dilutive  securities were antidilutive for fiscal years 2001
and 1999, the effect of common stock issuable upon the conversion of convertible
preferred  stock and exercise of all options and warrants has been excluded from
the computation of diluted earnings per share for fiscal years 2001 and 1999.

Goodwill and Other Intangible Assets

Goodwill  resulting from acquisitions is being amortized using the straight-line
method over an  estimated  useful life of seven years.  Specifically  identified
intangible  assets are being amortized over estimated lives ranging from five to
seven years.

Shipping and Handling Costs

Shipping  and  handling  costs are  included  as a  reduction  of revenue in the
attached  consolidated  financial  statements.  Shipping and handling  costs for
fiscal years 2001, 2000 and 1999 were approximately  $613,000, $1.3 million, and
$1.2 million, respectively.

Recent Accounting Standards

In April  1998,  the  AICPA  issued  SOP No.  98-5,  "Reporting  on the Costs of
Start-up  Activities." SOP No. 98-5 provides guidance on the financial reporting
of start-up costs and organization  costs and requires such costs to be expensed
as incurred.  Generally,  initial application of SOP No. 98-5 should be reported
as the cumulative  effect of a change in accounting  principle.  SOP No. 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998.  Through the end of fiscal 1999,  the Company had been  deferring  certain
start-up  costs related to the Joint Venture in China (Note 5). A charge for the
application  of SOP No. 98-5 was  recorded as a change in  accounting  principle
during fiscal 2000.

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133,  "Accounting for Derivative  Instruments and Hedging  Activities." SFAS No.
133  establishes   accounting  and  reporting  standards  requiring  that  every
derivative  instrument  (including  certain derivative  instruments  embedded in
other  contracts)  be  recorded  in the  balance  sheet  as  either  an asset or
liability  measured at its fair value. SFAS No. 133 requires that changes in the
derivative's  fair value be  recognized  currently in earnings  unless  specific
hedge  accounting  criteria are met.  Special  accounting for qualifying  hedges
allows a derivative's  gains and losses to offset related  results on the hedged
item  in the  income  statement,  and  requires  that a  company  must  formally
document,  designate,  and assess the effectiveness of transactions that receive
hedge accounting.  SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is
effective for all fiscal  quarters of all fiscal years  beginning after June 15,
2000.  The  adoption  of the  standard  did not have a  material  impact  on the
Company.

                                       45
<PAGE>
Following the  acquisition  of LAC on December 31, 2000, the Company has entered
into  foreign  currency  forward  contracts  to mitigate  the risk of changes in
exchange rates on firm sale commitments denominated in foreign currencies. These
contracts  qualify as fair value hedges  pursuant to SFAS No. 133.  Accordingly,
the fair value of the derivative  instruments  are recorded on the balance sheet
and are offset by changes in the fair value of the related firm commitments. The
ineffective  portion of the  derivative  instruments  are recorded  currently in
income. Such amounts have not been significant.

In July 2001, the FASB issued SFAS No. 141,  "Business  Combinations,"  and SFAS
No. 142, "Goodwill and Other Intangible Assets." These statements  establish new
accounting  standards  for  goodwill  acquired  in a  business  combination.  It
continues  to require  recognition  of  goodwill as an asset but does not permit
amortization of goodwill as previously  required by Accounting  Principles Board
("APB") Opinion No. 17,  "Intangible  Assets."  Furthermore,  certain intangible
assets that are not separable from goodwill will also not be amortized under the
new standards.

SFAS Nos. 141 and 142 establish a new method of testing goodwill for impairment,
requiring   that  goodwill  be  separately   tested  for   impairment   using  a
fair-value-based  approach.  The provisions  apply not only to goodwill  arising
from  acquisitions  completed  after June 30,  2001 but also to the  unamortized
balance of  goodwill at the date of  adoption.  The Company is required to adopt
the proposed standard beginning with the first quarter of fiscal 2003;  however,
it expects to adopt the standard  early  effective July 1, 2001. The Company has
not fully evaluated the impact upon future  operating  results from the proposed
standard.  However,  based upon the  preliminary  allocation of the LAC purchase
price, and assuming the Company had adopted the proposed  standard,  the Company
would not have recorded the full  amortization  expense related to goodwill from
the LAC acquisition.

Related Parties

In addition to the Company's Joint Venture  investment  described in Note 5, the
Company has engaged in certain  related party  transactions.  During fiscal 2001
and 2000,  the Company  recognized  approximately  $1.5  million  and  $245,000,
respectively,  of sales  revenue to a company of which a member of the Company's
board of directors is an officer, and the Company had $1.3 million and $583,000,
respectively,  of  purchases  from a company of which a member of the  Company's
board of directors is an officer.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.

NOTE 3. ACQUISITION OF LAC

The Company  completed the acquisition of LAC on December 31, 2000.  Pursuant to
the purchase agreement, the purchase price is estimated to be $85,700,000, which
is  comprised  of  $65,500,000  of cash and  673,353  shares  of  Applied  Films
Corporation common stock valued at $25.76 per share (total value of $17,345,000,
based upon the  average of the closing  market  prices for the three days before
and after, and the day of, the public  announcement of the transaction,  October
18, 2000), plus  approximately  $2,855,000 of transaction costs. The acquisition
has been  accounted  for under the  purchase  method  of  accounting.  The final
purchase  price is subject to  adjustment  based upon the closing  balance sheet
prepared on a post closing basis. The final  determination of such balance sheet
has not been made.

                                       46
<PAGE>
The  accounts  of  this   acquisition   have  been  included  in  the  Company's
consolidated  financial statements from the acquisition date. The purchase price
has been  allocated  based upon the  estimated  fair  value of the  identifiable
assets acquired and liabilities  assumed.  The excess of the purchase price over
fair  value of net  identifiable  assets has been  allocated  to  goodwill.  The
estimated   $85,700,000  purchase  price  has  been  allocated  as  follows  (in
thousands):
<TABLE>
                                    <S>                                               <C>
                                    Net current assets...........................     $ 10,170
                                    Long-term liabilities........................       (9,029)
                                    Goodwill.....................................       49,892
                                    Other intangible assets......................       20,000
                                    Property, plant and equipment................        3,167
                                    In-process research and development..........       11,500
                                                                                      --------
                                              Total allocation of estimated
                                              purchase price.....................     $ 85,700
                                                                                      ========
</TABLE>

The  allocation is  preliminary  and subject to adjustment  based upon the final
determination  of the  purchase  consideration  and the fair value of the assets
acquired and liabilities assumed. Goodwill is being amortized on a straight-line
basis over a seven year period. Other intangible assets are being amortized on a
straight  line  basis  over  periods of 5 to 7 years.  In-process  research  and
development   represents  the  intangible  value  of  in-process   research  and
development projects that had not yet reached technical feasibility. The related
technology  had  no  alternative   use  and  required   substantial   additional
development by the Company.  In-process  research and development was charged to
operations during the quarter ended March 31, 2001.

The  following   unaudited  pro  forma   information   reflects  the  pro  forma
consolidated  results of  operations  for the Company  giving  effect to the LAC
acquisition  and related  issuance of Series A Convertible  Preferred  Stock and
warrants  as if the  transactions  occurred  on July 2,  2000 and July 4,  1999,
respectively.  The unaudited pro forma results include the unaudited  historical
operating  results of LAC for six months  ended  December 31, 2000 and 12 months
ended  July  1,  2000,  respectively.  The  unaudited  pro  forma  data  is  not
necessarily  indicative  of the  Company's  results  of  operations  that  would
actually have been reported if the  transaction  in fact had occurred on July 2,
2000 and July 4, 1999,  respectively,  and is not necessarily  representative of
the Company's consolidated results of operations for any future period.
<TABLE>
                                                                           Fiscal Year Ended
                                                           -------------------------------------------------
                                                                June 30, 2001             July 1, 2000
                                                           -----------------------   -----------------------
                                                                (in thousands, except per share data)
                                                           Historical    Pro Forma   Historical    Pro Forma
                                                           ----------    ---------   ----------    ---------
                                                                              (Unaudited)
                       <S>                                  <C>          <C>          <C>          <C>
                       Net revenues...................      $112,715     $174,740     $ 42,292     $119,460
                       Operating income (loss)........       (16,353)     (23,272)         (74)     (20,189)
                       Net loss.......................        (4,333)     (12,270)      (3,073)     (10,293)
                       Income (loss) per common share--
                         basic and diluted............      $  (0.73)    $  (1.94)    $ (0.72)     $  (2.26)
</TABLE>

NOTE 4. LONG-TERM DEBT
<TABLE>
                                                                                       June 30,       July 1,
                                                                                         2001          2000
                                                                                       ---------     -------
                                                                                           (in thousands)
                    <S>                                                                <C>            <C>
                    Revolving credit facility,  due September 17, 2002,  secured
                    by eligible accounts  receivable,  inventory,  equipment and
                    fixtures,  as defined  in the  agreement;  interest  payable
                    quarterly  and  accrued  based on the prime rate  and/or the
                    Eurodollar  rate,  at the  election  of the  Company  at the
                    beginning  of each  month,  plus a factor  varying  based on
                    earnings   before   interest,    taxes,   depreciation   and
                    amortization,  as defined by the agreement  (5.99% and 8% at
                    June 30, 2001 and July 1, 2000, respectively)....................   $6,483        $
                                                                                        ------        -----
                                                                                         6,483           --
                         Less-current portion........................................       --           --
                                                                                       -------        -----
                                   Total long-term debt..............................  $ 6,483        $
                                                                                       =======        =====
</TABLE>

On March 27,  1998,  the Company  entered  into an Amended and  Restated  Credit
Agreement (the  "Agreement"),  which  consolidated  all outstanding  debt into a
revolving credit facility with maximum availability of $11,500,000,  due on June
30, 2000.  Effective July 1999, the maturity Agreement was extended to September
17,  2002.  The Company  must  maintain  certain  financial  ratios to remain in
compliance  with the  Agreement,  including a ratio of debt to  earnings  before
interest,  taxes,  depreciation and amortization ("EBITDA") and a ratio of total
liabilities to tangible net worth, and maintain a certain amount of tangible net
worth,  all as defined in the  Agreement.  At June 30, 2001,  the Company was in
compliance  with all  covenants.  Approximately  $2.5 million of the facility is
used  to  guaranty  the  debt  of  the  Joint  Venture.   Interest  expense  was
approximately $489,000, $328,000 and $557,000 for the years ended June 30, 2001,
July 1, 2000, and July 3, 1999, respectively.

                                       47
<PAGE>
NOTE 5. INVESTMENT IN JOINT VENTURE

In June 1998,  the  Company  formed a 50/50 Joint  Venture  with NSG in China to
manufacture,  process,  sell and export certain types of thin film coated glass.
Each party contributed $3.2 million in cash to the Joint Venture.  During fiscal
1999 and the  first  quarter  of  fiscal  2001,  the  Company  sold  refurbished
equipment  to the Joint  Venture for use in the process of thin film  coating of
glass. The sales prices were approximately $5.1 and $4.7 million,  respectively.
During the fourth quarter of fiscal 2001, the Company manufactured an upgrade to
its existing equipment and sold it to the Joint Venture for $915,000.

The Joint Venture began operations during the fourth quarter of fiscal 1999. The
Company records 50% of income or loss from operations of the Joint Venture after
elimination of the impact of interentity  transactions.  The Company's  share of
profits  realized by the Joint  Venture on sale of  inventory to the Company are
eliminated as are  adjustments to inventory to the extent that such inventory is
held by the Company at the end of the period.  The  functional  currency for the
Joint  Venture is the local  currency.  The  Company's  investment  in the Joint
Venture is translated  into U.S.  dollars using the year-end  exchange rate. The
earnings  recorded  by the Company  from the Joint  Venture  are  translated  at
average rates prevailing during the period.  The cumulative  translation gain or
loss is  recorded  as  other  comprehensive  income  in  Company's  consolidated
financial statements.

During fiscal years 2001 and 2000, the Company  purchased  coated glass totaling
$5.8 million and $7.7 million,  respectively,  from the Joint Venture,  of which
$1.1 million and $1.2 million, respectively, remained in inventory. In addition,
the Company  received  royalties  totaling  $278,000 for the year ended June 30,
2001,  $284,000  for the year ended July 1, 2000 and  $44,000 for the year ended
July 3,1999. In March 2000, the Company agreed to guarantee  approximately  $2.5
million of the debt of the Joint Venture.

Summarized  statement of  operations  information  for the Joint Venture for the
fiscal  years ended June 30, 2001,  July 1, 2000 and July 3, 1999,  is presented
below (in thousands):
<TABLE>
                                                                                  Fiscal Year Ended
                                                                           ------------------------------
                                                                            June 30,    July 1,   July 3,
                                                                              2001       2000      1999
                                                                           ---------  ---------  -------
                         <S>                                                <C>        <C>       <C>
                         Joint Venture:
                           Operating revenues..........................     $32,360    $23,882   $ 4,139
                                                                            =======    =======   =======
                           Net income..................................     $ 8,202    $ 4,095   $   660
                                                                            =======    =======   =======
                         AFCO's equity in earnings:
                           Proportionate share of net income after
                              eliminations.............................     $ 4,087    $ 2,217   $   330
                           Amortization of deferred gain on sale of
                              equipment................................         334        164        52
                                                                            -------    -------   -------
                           Equity in earnings of Joint Venture.........     $ 4,421    $ 2,381   $   382
                                                                            =======    =======   =======
</TABLE>

Summarized  balance sheet information for the Joint Venture as of June 30, 2001,
July 1, 2000, and July 3, 1999, is presented below (in thousands):
<TABLE>
                                                                              June 30,  July 1,   July 3,
                                                                                2001     2000      1999
                                                                              -------- --------  --------
                                 <S>                                          <C>      <C>       <C>
                                 Assets:
                                   Current assets........................     $ 8,410  $  9,956  $  5,411
                                   Property, plant, and equipment, net...      27,860     9,921    10,414
                                                                              -------  --------  --------
                                                                              $36,270  $ 19,877  $ 15,825
                                 Capitalization and liabilities:
                                   Current liabilities...................     $ 9,239  $  5,397  $  7,125
                                   Long-term debt........................       7,321     2,800     1,596
                                   Common shareholders' equity...........      19,710    11,680     7,104
                                                                              -------  --------  --------
                                                                              $36,270  $ 19,877  $ 15,825
</TABLE>

As of June 30, 2001 and July 1, 2000,  the Company had  accounts  payable to the
Joint Venture of  approximately  $42,000 and $2.7 million,  and receivables from
the Joint Venture approximately $265,000 and $218,000, respectively.

                                       48
<PAGE>
NOTE 6. ASSETS HELD FOR SALE

During fiscal 2000,  the Company  entered into an agreement to sell  refurbished
equipment to the Joint Venture for approximately $4.7 million. The equipment had
been used in the Company's thin film coated glass segment.  The sale was subject
to customary terms, including installation and acceptance at the Joint Venture's
premises. The Company recorded the sale during the first quarter of fiscal 2001.
Accordingly,  the  equipment  was  classified as assets held for sale at July 1,
2000.

NOTE 7. STOCKHOLDERS' EQUITY

Secondary Offering

In March 2000, the Company  completed a secondary  public  offering of 3,066,500
shares,  including  2,500,000  newly  issued  shares.  In  connection  with this
offering,  certain  founders sold less than 50% of their interest  consisting of
566,500 shares.

Stock Options

In May 1993,  the board of directors  approved the  Company's  1993 Stock Option
Plan (the "1993 Plan")  covering  276,500  shares of common stock.  The exercise
price of these  options is  determined  by the board of  directors.  The options
granted in fiscal years 1994 and 1995 vested over a four year period and,  under
its original terms,  were not exercisable until after an initial public offering
of common stock was completed by the Company. Accordingly, the Company accounted
for the 1993 Plan as a  variable  plan until  June 30,  1995,  at which time the
board of directors  declared that the options then outstanding were exercisable,
subject to their vesting terms. The Company has recorded  approximately $597,000
of deferred compensation related to all options, which is equal to the excess of
the estimated  fair market value of the common stock as of July 1, 1995 over the
exercise price. As of July 3, 1999, all of the compensation has been expensed.

In April 1997, the Company  adopted the 1997 Stock Option Plan (the "1997 Plan")
covering  272,500  shares of common  stock,  as amended.  The exercise  price of
options  granted  under the 1997 Plan is  determined  by the board of  directors
based upon estimated fair market value.  The options granted are to vest ratably
over four years. In October 1999, the  shareholders  of the Company  approved an
increase of 100,000 shares to the 1997 Plan, increasing the shares available for
granting to 372,500  shares.  In October 2000, the  shareholders  of the Company
approved an increase of 650,000 shares to the 1997 Stock Option Plan, increasing
the shares available to 1,022,500 shares.

Outside Directors Options

In October  1999,  the Company  adopted the Outside  Director  Stock Option Plan
covering 24,000 shares of common stock.  The exercise price of the options under
this plan is determined based upon the estimated fair market value.

Statement of Financial Accounting Standards No. 123

SFAS No. 123,  "Accounting for Stock-Based  Compensation,"  defines a fair value
based  method of  accounting  for  employee  stock  options  or  similar  equity
instruments.   However,  SFAS  No.  123  allows  the  continued  measurement  of
compensation cost in the financial statements for such plans using the intrinsic
value based method  prescribed  by Accounting  Principles  Board Opinion No. 25,
"Accounting for Stock Issued to Employees"  ("APB 25"),  provided that pro forma
disclosures are made of net income or loss, assuming the fair value based method
of SFAS No. 123 had been  applied.  The  Company  has elected to account for its
stock-based compensation plans for employees and directors under APB 25.

Accordingly,  for purposes of the pro forma  disclosures  presented  below,  the
Company has computed the fair values of all options  granted during fiscal 2001,
2000, and 1999 using the Black-Scholes  pricing model and the following weighted
average assumptions:
<TABLE>
                                                                      2001      2000      1999
                                                                    --------  --------  -------
                                       <S>                          <C>       <C>       <C>
                                       Risk-free interest rate...     5.99%     6.24%     5.21%
                                       Expected lives............   7 years   7 years   7 years
                                       Expected volatility.......      161%      136%       77%
                                       Expected dividend yield...      0.0%      0.0%      0.0%
</TABLE>

                                       49
<PAGE>
To estimate expected lives of options for this valuation, it was assumed options
will be exercised at varying schedules after becoming fully vested.  All options
are initially assumed to vest. Because of the exercise trend related to both the
1993 and 1995 option grants,  the expected life of the options has been extended
to seven years in 1999. Cumulative compensation cost recognized in pro forma net
income or loss with  respect to options that are  forfeited  prior to vesting is
adjusted  as a  reduction  of pro forma  compensation  expense  in the period of
forfeiture.  Until the Company's common stock was publicly traded,  the expected
market volatility was estimated using the estimated average  volatility of three
publicly held companies which the Company believes to be similar with respect to
the markets in which they compete.  Actual volatility of the Company's stock may
vary.  Fair value  computations  are highly  sensitive to the volatility  factor
assumed;  the greater the volatility,  the higher the computed fair value of the
options granted.

The total fair value of options  granted was computed to be  approximately  $4.1
million,  $738,000, and $51,000 for the years ended June 30, 2001, July 1, 2000,
and July 3, 1999,  respectively.  The amounts  are  amortized  ratably  over the
vesting period of the options.  Pro forma stock-based  compensation,  net of the
effect of forfeitures,  was $894,000, $220,000, and $88,000 for the fiscal years
ended June 30, 2001, July 1, 2000, and July 3, 1999, respectively.

If  the  Company  had  accounted  for  its  stock-based  compensation  plans  in
accordance  with SFAS No. 123, the  Company's  net income (loss) would have been
reported as follows (in thousands, except share data):
<TABLE>
                                                                     For The Fiscal Year Ended
                                                                 ----------------------------------
                                                                 June 2001    July 2000   July 1999
                                                                 ---------    ---------   ---------
                                <S>                              <C>          <C>         <C>
                                Net income (loss):
                                  As reported...............     $(4,333)     $ 3,073     $  (224)
                                                                 =======      =======     =======
                                  Pro forma.................     $(5,227)     $ 2,853     $  (313)
                                                                 =======      =======     =======
                                Basic earnings (loss) per
                                share:
                                  As reported...............     $   (.73)    $  0.72     $ (0.06)
                                                                 ========     =======     =======
                                  Pro forma.................     $   (.87)    $  0.67     $ (0.09)
                                                                 ========     =======     =======
</TABLE>

A summary of the 1993 and 1997 Plans is as follows:
<TABLE>
                                                                    For The Fiscal Years Ended
                                               --------------------------------------------------------------------
                                                    June 30, 2001          July 1, 2000           July 3, 1999
                                               ---------------------  ---------------------  ----------------------
                                                            Weighted               Weighted               Weighted
                                                             Average                Average                Average
                                                            Exercise               Exercise               Exercise
                                                 Options      Price    Options      Price     Options      Price
                                               -----------  ---------  --------  -----------  ---------  ----------
                <S>                             <C>          <C>       <C>        <C>         <C>         <C>
                Outstanding at beginning of
                  year.......................    455,076     $  4.22   384,296      $  3.42   379,645      $ 3.77
                  Granted....................    230,236       18.31   124,160         6.30    89,568        3.02
                  Forfeited..................     (8,900)      29.73    (5,063)       (3.16)  (81,111)       4.65
                  Exercised..................   (114,576)       2.94   (48,317)       (2.88)   (3,806)       2.87
                Outstanding at end of year...    561,836        9.88    455,076        4.22    384,296       3.42
                                                 =======     =======    =======     =======    =======     ======
                Exercisable at end of year...    228,778        4.16    268,076        3.45    260,288       3.25
                                                 =======     =======    =======     =======    =======     ======
                Weighted average fair value
                of options granted...........                $ 11.87                $  5.94                $ 2.05
                                                             =======                =======                ======
</TABLE>

The  following  table  summarizes   information  about  employee  stock  options
outstanding and exercisable at June 30, 2001:
<TABLE>
                                                    Options Outstanding                Options Exercisable
                                        -----------------------------------------  --------------------------
                                           Number of      Weighted
                                            Options        Average      Weighted       Number       Weighted
                                        Outstanding at    Remaining      Average   Exercisable at    Average
                         Range of          June 30,      Contractual    Exercise      June 30,      Exercise
                      Exercise Prices        2001       Life in Years     Price         2001          Price
                     ------------------ --------------  -------------------------- -------------  -----------
                     <S>                   <C>               <C>         <C>         <C>            <C>
                     $2.32-- $3.00.....    151,471           6.29        $  2.75       85,181        $  2.59
                     $3.01-- 5.26......    161,814           5.70           4.06      131,586           4.24
                     $5.27-- 13.99.....     11,515           6.18           7.20        8,636           7.20
                     $14.00-- 38.50....    237,036           9.47          18.59        3,375          32.75
                                           -------                                     ------
                                           561,836                                    228,778
                                           =======                                    =======
</TABLE>

                                       50
<PAGE>
Employee Stock Purchase Plan

On  September  5, 1997,  the Board of Directors  adopted,  and the  stockholders
subsequently  approved,  the Applied Films  Corporation  Employee Stock Purchase
Plan as amended in October 2000. The Purchase Plan permits eligible employees to
purchase shares of common stock through payroll deductions. Shares are purchased
at 85% of the fair market value of the common  stock on the Purchase  Date where
fair market value on either the first  business day of that option  period or as
of the last  business day of that Option  Period,  on whichever of those two (2)
days the closing sale price as reported on the Nasdaq  National Market System is
lower,  for the purchase of as many full shares,  but not less than one (1) full
share, as may be purchased with the funds in his or her Purchase Account.  Up to
100,000 shares of common stock may be sold under the Purchase Plan.  Shares sold
under the  Purchase  Plan may be newly issued  shares or shares  acquired by the
Company in the open market. Unless terminated earlier by the Board of Directors,
the Purchase Plan will terminate when all shares reserved for issuance have been
sold thereunder.  The Purchase Plan is intended to qualify as an "employee stock
purchase  plan"  under  Section 423 of the  Internal  Revenue  Code of 1986,  as
amended,  and will be  administered in accordance with the limitations set forth
in Section 423 and the rules and regulations thereunder.

During fiscal 2001 and 2000, the Company  issued shares to employees  under this
plan at a purchase  price  ranging  from  $3.15 to $32.96 per share.  A total of
19,961 shares have been issued under the plan since inception.

Series A Convertible Preferred Stock

Overview

On January 16,  2001,  the Company  sold $10.0  million in Series A  Convertible
Preferred  Stock  ("Series  A")  that is  convertible  into  common  stock  at a
conversion  price of $19.75 per common share. The conversion price of the Series
A is subject to adjustment under certain  circumstances.  The Series A carries a
dividend rate of 7% until October 16, 2001,  and then the rate increases to 8.5%
unless certain  conditions  are satisfied.  During fiscal year 2001, the Company
accrued $366,722, or $367 per share, of Series A in dividends.  The Series A may
be exchanged at the Company's option for a 5% subordinated convertible debenture
due  January  16,  2004.  The  Company  also  issued two grants of  warrants  in
connection  with this  offering:  warrants to purchase  75,949  shares of common
stock at $22.33 per share and warrants to purchase  17,468  shares at $20.09 per
share. The warrants are immediately  exercisable,  and may be exercised any time
over a five and three year period, respectively. The Company determined the fair
value of these warrants to be  approximately  $733,623  using the  Black-Scholes
option pricing model using the following weighted average assumptions:
<TABLE>
<S>                                                     <C>
Risk-free interest rate......................           4.99%
Expected life................................           1.5 years
Expected volatility..........................           100%
Expected dividend yield......................           0.0%
</TABLE>

The estimated fair value of these warrants was recorded in stockholders'  equity
with an offset to the amount  attributed to the Series A. These  securities also
contain  certain  registration  rights with respect to the underlying  shares of
common stock.

Repurchase Option

The Company has the right,  provided that certain  conditions are satisfied,  to
repurchase some or all of the outstanding Series A for cash equal to 114% of the
price paid for each preferred share plus accrued dividends.

Preferred Stockholder's Annual and Special Put Options

On January  16,  2002,  and January  16,  2003,  the holders of Series A have an
annual put right,  at their  discretion,  to convert all or any portion of their
Series A into common stock at an amended  conversion  price equal to the average
of  closing  price  for the  Company's  common  stock  on the ten  trading  days
immediately preceding the annual put date.

If at any time after July 16, 2001, the Company's  equity market  capitalization
is less than $50.0 million for 20 consecutive  trading days, then the holders of
Series A have a  special  put  right at their  discretion  to  convert  all or a
portion of the then outstanding Series A into common stock at a conversion price
equal to the average of the closing  price for the ten trading days  immediately
preceding the date that the notice of conversion is delivered.

However, in lieu of allowing the holders of Series A Convertible Preferred Stock
to exercise their annual put option or their special put option, the Company may
elect to repurchase all or a portion of the outstanding  Series A at 114% of the
stated  value of the Series A plus all accrued but unpaid  dividends in the case
of a special put option and at 100% of the stated value of the Series A plus all
accrued but unpaid dividends in the case of the annual put option.

                                       51
<PAGE>
Required Conversion

Subject to certain conditions,  on or after the date the registration  statement
related to the common stock underlying the Series A is declared  effective,  the
Company  has the right to require  conversion  of any or all of the  outstanding
Series A based on the then applicable  conversion price. Among the conditions to
the  Company's  ability to require  conversion  of the Series A is the condition
that the closing price of the Company's common stock must for thirty consecutive
trading days exceed 135% of the conversion price applicable on each such day.

Exchange for Debentures

The Company  has the option at any time to exchange  all (but not less than all)
of the  outstanding  shares of  Series A for 5%  Convertible  Debentures  of the
Company due January 16, 2004, having an aggregate  principal amount equal to the
stated  value  of the  Series A plus  all  accrued  but  unpaid  dividends.  The
Convertible  Debentures,  when and if issued,  will be  convertible  into common
stock at a conversion price of $19.75 per share, subject to certain adjustments.

Subordination

The  Convertible  Debentures,  when  and if  issued,  will  rank  junior  to the
Company's existing bank debt and to any extensions, refinancings or replacements
of that debt.

NOTE 8. INCOME TAXES

The Company accounts for income taxes through recognition of deferred tax assets
and liabilities for the expected future income tax  consequences of events which
have been  included  in the  financial  statements  or tax  returns.  Under this
method,  deferred  tax  assets  and  liabilities  are  determined  based  on the
difference  between  the  financial  statement  and  tax  bases  of  assets  and
liabilities  using  enacted  tax  rates in  effect  for the  year in  which  the
differences are expected to reverse.

The net  deferred  tax asset  (liability)  is  comprised  of the  following  (in
thousands):
<TABLE>
                                                                                     June 30,   July 1,
                                                                                       2001      2000
                                                                                     --------   -------
                                      <S>                                            <C>        <C>
                                      Inventories................................    $    276   $   160
                                      Accrued expenses...........................       2,839       335
                                      Deferred compensation......................         202       181
                                      Deferred gain..............................         240       261
                                      Deferred revenue...........................         373       513
                                      Goodwill and other intangible assets.......       4,601        --
                                      Net operating loss carry forwards..........       2,159        --
                                                                                     --------   -------
                                                Total deferred tax assets........      10,690     1,450
                                                                                     --------   -------
                                      Property, plant and equipment..............        (771)     (794)
                                      Uncompleted contracts......................      (4,255)       --
                                      Other......................................         (24)      (41)
                                                                                     --------   -------
                                                Total deferred tax liabilities...      (5,050)     (835)
                                                                                     --------   -------
                                                Total deferred tax asset, net....    $  5,640   $   615
                                                                                     ========   =======
</TABLE>

Income tax (benefit) provision for the fiscal years ended June 30, 2001, July 1,
2000, and July 3, 1999 consist of the following (in thousands):
<TABLE>
                                                                                         Years Ended
                                                                                ----------------------------
                                                                                June 30,   July 1,    July 3,
                                                                                  2001      2000       1999
                                                                                --------- ---------  -------
                               <S>                                                <C>        <C>        <C>
                               Current provision (benefit):
                                 Federal......................................    $   (95)   $ 484      $(718)
                                 State........................................         (9)      47        (70)
                                 Foreign......................................     (1,147)      --         --
                                                                                  -------    -----      -----
                                         Total current provision (benefit)....     (1,251)     531       (788)
                               Deferred provision (benefit):
                                 Federal......................................     (1,848)    (572)       483
                                 State........................................       (180)     (56)        47
                                 Foreign......................................     (2,481)      --         --
                                                                                  -------    -----      -----
                                         Total deferred provision (benefit)...     (4,509)    (628)       530
                                                                                  -------    -----      -----
                                         Total tax provision (benefit)........    $(5,760)   $ (97)     $(258)
                                                                                  =======    =====      =====
</TABLE>
                                       52
<PAGE>
Reconciliations  between the effective  statutory  federal  income tax provision
(benefit) rate and the Company's  effective income tax provision  (benefit) rate
as a percentage of net income (loss) before taxes were as follows:
<TABLE>
                                                                                         Fiscal Years Ended
                                                                                     ------------------------------
                                                                                     June 30,    July 1,    July 3,
                                                                                       2001       2000       1999
                                                                                     ---------  ---------  -------
                           <S>                                                       <C>        <C>        <C>
                           Statutory federal income tax (benefit)
                           provision rate.......................................      (34.0)%     34.0%     (34.0)%
                           State income taxes...................................       (3.3)       3.3       (3.3)
                           Foreign income taxes and other.......................       (1.8)       0.1        2.0
                           Equity earnings in Joint Venture.....................      (14.3)     (33.2)        --
                           Tax exempt interest income...........................       (3.7)      (6.4)        --
                           Effect of foreign sales corporation..................         --       (1.1)      (18.1)
                                                                                       ----       ----       -----
                                     Effective income tax provision (benefit)...      (57.1)%    (3.3)%     (53.4)%
                                                                                       =====      ====       =====
</TABLE>

As of June 30, 2001, the Company had Federal net operating  losses  available to
offset future taxable income of approximately  $5.7 million.  Such net operating
loss carry forwards  expire  through 2021.  Under the provisions of the Internal
Revenue Code, as amended,  the Company's  foreign sales corporation may exempt a
portion of its export  related  taxable  income from  federal  and state  income
taxes.

                                       53
<PAGE>
NOTE 9. EMPLOYEE BENEFIT PLANS

Profit Sharing Plan

In August  1992,  the Board of Directors  adopted a profit  sharing plan for all
non-executive  employees.  The amount to be  contributed  to the profit  sharing
pool, subject to the approval of the Company's board of directors,  is generally
10% of pre-tax income before interest income,  royalty income and profit sharing
expense.  Profit  sharing  is paid to  employees  in cash  quarterly  based on a
combination of their length of service with the Company and their pay level. The
Company expensed approximately $539,000,  $299,000, and $0 in fiscal years 2001,
2000, and 1999, respectively, related to this plan.

Pension Plan

LAC  maintains  a   noncontributory   defined   benefit  pension  plan  covering
substantially all employees of LAC. Benefits are based primarily on compensation
during a specified period before retirement of specified amount for each year of
service.  The  assumed  pension  liability  of  approximately  $6.9  million  is
reflected in the  accompanying  consolidated  balance sheet as of June 30, 2001,
and is subject to adjustment  based upon an assessment of the actuarial value of
the obligation. This plan has no assets as of June 30, 2001.

The following table sets forth the benefit obligation,  the funded status of the
pension  plan,  amounts  recognized  on  the  Company's  consolidated  financial
statements, and the principle weighted average assumptions used (in thousands):
<TABLE>
                                                                                      Year End
                                                                                      June 30,
                                                                                        2001
                                                                                     ---------
                                    <S>                                              <C>
                                    Change in Benefit Obligation:
                                      Benefit obligation at beginning of year....    $     --
                                      Service costs..............................         485
                                      Interest costs.............................         428
                                      Actuarial losses...........................         338
                                      Foreign exchange losses....................         153
                                      Acquisition................................       5,810
                                      Benefits paid
                                      Benefit obligation at end of year..........    $  7,214
                                                                                     --------
                                    Funded Status:
                                      Unrecognized net actuarial gain............    $ (7,214)
                                      Unrecognized prior service cost............         338
                                                                                     --------
                                      Net amount recognized......................    $ (6,876)
                                                                                     --------
                                    Amounts Recognized in the Balance Sheets:
                                      Accrued Benefit Liability..................    $ (6,876)
                                                                                     --------
                                      Net amount recognized......................    $ (6,876)
                                                                                     --------
                                    Weighted-average Assumptions as of June 30,
                                    2001:
                                      Discount rate..............................         6.0%
                                      Expected return on plan assets.............         N/A
                                      Rate of compensation increase:
                                         Employee................................        2.75%
                                         Retired.................................        2.25%
                                    Components of Net Periodic Benefit Cost:
                                      Service Cost...............................    $    485
                                      Interest Cost..............................         428
                                      Expected Return on plan assets.............          --
                                      Amortization of prior service costs........          --
                                      Recognition of actuarial loss..............         338
                                                                                     --------
                                              Net periodic benefit costs.........    $  1,251
                                                                                     --------
</TABLE>

NOTE 10. SIGNIFICANT CUSTOMERS

During  fiscal years 2001,  2000,  and 1999,  approximately  67%,  93%, and 85%,
respectively,  of the Company's net revenues were exported to customers  outside
of the Company's  manufacturing  region.  The  Company's  ten largest  customers
accounted  for,  in the  aggregate,  approximately  35%,  79%,  and 62%,  of the
Company's net revenues in fiscal 2001,  2000, and 1999,  respectively.  The loss
of, or a significant  reduction of purchases by, one or more of these  customers
would have a material adverse effect on the Company's operating results.

                                       54
<PAGE>
The breakdown of net revenues by geographic region is as follows (in thousands):
<TABLE>
                                                                           Fiscal Years Ended
                                                                       June 30,    July 1,  July 3,
                                                                         2001       2000     1999
                                                                      ---------  --------- -------
                                      <S>                            <C>         <C>       <C>
                                      Asia (other than Japan)....    $  48,206   $24,641   $17,691
                                      Japan......................       27,552    13,929     7,645
                                      United States..............       13,764     2,934     4,924
                                      Europe and other...........       23,193       788     1,263
                                                                     ---------   -------   -------
                                                   Net revenues..    $ 112,715   $42,292   $31,523
                                                                     =========   =======   =======
</TABLE>

The Company's sales are typically denominated in U.S. dollars.  However, certain
customers of the Company  currently pay in Japanese Yen and German  Marks.  As a
result, the Company recognized approximately $19,000, ($43,000), and $24,000, of
foreign  currency  exchange rate gain (loss) on foreign  currency  exchange rate
fluctuations for the fiscal years ended June 30, 2001, July 1, 2000, and July 3,
1999, respectively.  The Company has approximately $1.3 million and $2.0 million
of its accounts  receivable  and $0.9 and $2.4  million of its accounts  payable
denominated in Japanese Yen as of June 30, 2001 and July 1, 2000, respectively.

NOTE 11. COMMITMENTS

The  Company is  obligated  under  certain  noncancellble  operating  leases for
office,  manufacturing and warehouse facilities,  and various equipment.  During
June 1997, the Company entered into a lease for the Company's  manufacturing and
administrative  location in Longmont,  Colorado,  which is  accounted  for as an
operating lease. The lease commenced on January 30, 1998, and payments are fixed
until the first day of the second lease year,  at which time  payments  increase
annually one and one-half  percent plus one-half of the increase in the Consumer
Price Index per annum.  Lease payments have been normalized over the term of the
lease. The initial lease term is 15 years, with two additional 5 year options to
extend.

The  future  minimum  rental  payments  under  the  leases  are as  follows  (in
thousands):
<TABLE>
Fiscal Year
<S>                           <C>
2002....................      $   957
2003....................          952
2004....................          894
2005....................          890
2006....................          903
Thereafter..............        6,293
                              -------
                              $10,889
</TABLE>

NOTE 12. SEGMENT INFORMATION

The Company  manages its business and has  segregated  its  activities  into two
business segments,  the revenues of "Thin Film Coated Glass" and the revenues of
"Thin Film Coating Equipment." Certain financial information for each segment is
provided below (in thousands):
<TABLE>
                                                                               Fiscal Years Ended
                                                                        --------------------------------
                                                                         June 30,    July 1,     July 3,
                                                                           2001       2000        1999
                                                                        ---------- ----------  ---------
                           <S>                                          <C>         <C>         <C>
                           Net revenues:
                             Thin film coated glass.................    $  27,523   $ 35,159    $ 26,906
                             Thin film coating equipment............       85,192      7,133       4,617
                                                                        ---------   --------    --------
                                     Total net revenues.............    $ 112,715   $ 42,292    $ 31,523
                                                                        =========   ========    ========
                           Operating (loss) income:
                             Thin film coated glass.................    $  (1,798)  $  1,628    $   (148)
                             Thin film coating equipment............        1,981     (1,702)       (203)
                             Amortization of goodwill and other
                           intangible assets........................      (16,536)        --          --
                                                                        ---------   --------    --------
                                     Total operating (loss) income..    $ (16,353)  $    (74)   $   (351)
                                                                        =========   ========    ========
                           Identifiable assets:
                             Thin film coated glass.................    $   3,311   $  3,734    $  6,634
                             Thin film coating equipment............        3,936      1,403          38
                             Corporate and other....................          478        180       1,955
                                                                        ---------   --------    --------
                                     Total identifiable assets......    $   7,725   $  5,317    $  8,627
                                                                        =========   ========    ========
</TABLE>

                                       55
<PAGE>
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash and cash equivalents  approximates fair value due to
the nature of the investments  and the length of maturity of these  investments.
The fair  value of the  Company's  debt is based on  borrowing  rates that would
approximate existing rates; therefore,  there is no material difference in their
fair market value and the carrying value.

NOTE 14. QUARTERLY INFORMATION (unaudited)

The following table sets forth summary unaudited quarterly financial information
for the eight fiscal quarters ended June 30, 2001.
<TABLE>

                                             Fiscal 2001 Quarter Ended                        Fiscal 2000 Quarter Ended
                                 ------------------------------------------------ -------------------------------------------------
                                     June        March      December    September     July         April      January   September
                                     2001        2001         2000        2000        2000         2000        2000         1999
                                 ----------- -----------  ----------- ----------- -----------  ----------- -----------  ----------
<S>                                <C>        <C>           <C>         <C>         <C>          <C>         <C>          <C>
Net revenues................       $40,528    $  44,981     $10,309     $16,870     $14,837      $11,759     $ 8,308      $ 7,388
Cost of goods sold..........        30,518       35,293       9,861      14,322      12,815       10,301       7,042        6,475
                                   -------    ---------     -------     -------     -------      -------     -------      -------
Gross profit................        10,010        9,688         448       2,548       2,022        1,458       1,266          913
Operating expenses:
  Selling, general and
    administrative..........         6,446        6,354       1,536       1,689       1,529        1,084         902          809
  Research and development..         2,955        2,632         485         413         385          360         315          349
  Amortization of goodwill and
    other intangible assets.         2,568       13,969          --          --          --           --          --           --
                                   -------    ---------     -------     -------     -------      -------     -------      -------
Operating income (loss).....        (1,959)     (13,267)     (1,573)        446         108           14          49         (245)
Interest income (expense)...           (78)         (90)        666         536         655           32        (101)        (139)
Other income (expense)......           358          108         230         107         (47)         125          14          180
Equity earnings in affiliate           448        1,041       1,647       1,285         866          697         369          449
                                   -------    ---------     -------     -------     -------      -------     -------      -------
Income (loss) before income
  taxes.....................        (1,231)     (12,208)        970       2,374       1,582          868         331          245
Income tax benefit
  (provision)...............            (2)       5,399         483        (120)       (102)         (61)        343          (83)
                                   -------    ---------     -------     -------     -------      -------     -------      -------
Net income (loss) before
  cumulative effect of change
  in accounting principle...        (1,233)      (6,809)      1,453       2,254       1,480          807         674          162
Cumulative effect of change in
  accounting principle......            --           --          --          --          --           --          --          (50)
                                   -------    ---------     -------     -------     -------      -------     -------      -------
        Net income (loss)...       $(1,233)   $  (6,809)    $ 1,453     $ 2,254     $ 1,480      $   807     $   674      $   112
                                   =======    =========     =======     =======     =======      =======     =======      =======
</TABLE>

NOTE 15. SUBSEQUENT EVENTS

On July 1, 2001, the Company  increased the amount of the guarantee for the debt
of the Joint Venture to $5.0 million.

                                       56
<PAGE>
ITEM 9:  Changes in and Disagreements With Accountants and Financial Disclosure

     There  have  been  no  changes  in  or   significant   disagreements   with
Accountants.

                                    PART III

ITEM 10:  Directors and Executive Officers of the Registrant

     Information required to be furnished by Items 401 and 405 of Regulation S-K
is included in our  definitive  Proxy  Statement for our 2001 annual  meeting of
shareholders to be filed with the Securities and Exchange  Commission within 120
days after the end of the fiscal  year to which this report  relates  (the "2001
Proxy Statement") and is incorporated herein by reference.

ITEM 11:  Executive Compensation

     Information  required  to be  furnished  by Item 402 of  Regulation  S-K is
included in our 2001 Proxy Statement and is incorporated herein by reference.

ITEM 12:  Security Ownership of Certain Beneficial Owners and Management

     Information  required  to be  furnished  by Item 403 of  Regulation  S-K is
included in our 2001 Proxy Statement and is incorporated herein by reference.

ITEM 13:  Certain Relationships and Related Transactions

     Information  required  to be  furnished  by Item 404 of  Regulation  S-K is
included in our 2001 Proxy Statement and is incorporated herein by reference.

                                     PART IV

ITEM 14:  Exhibits, Financial Statements, Schedules, and Reports on Form 8-K

     (a) The following documents are filed as part of this report:

          1. Financial Statements.
               The Registrant's consolidated financial statements,  for the year
          ended July 1, 2000, together with the Report of Independent  Certified
          Public  Accountants  are filed as part of this Form 10-K  report.  See
          "ITEM  8:   Financial   Statements   and   Supplementary   Data."  The
          supplemental  financial  information  listed and  appearing  hereafter
          should be read in conjunction with the financial  statements  included
          in this report.

          2. Financial Statement Schedules.
               Financial  statement schedules are not submitted because they are
          not applicable or because the required  information is included in the
          consolidated financial statements or notes thereto.

          3. Exhibits.
               Reference  is made to the  Exhibit  Index that begins on the last
          page  of the  body of this  Form  10-K  Annual  Report  preceding  the
          exhibits.

     (b)  Reports on Form 8-K
          The  Registrant  did not file any  reports on Form 8-K during the last
     quarter of the fiscal year ended June 30, 2001.

     (c)  Exhibits
          The  response to this  portion of Item 14 is  submitted  as a separate
     section of this report.

     (d)  Financial Statement Schedules
          The  response to this  section of Item 14 is  submitted  as a separate
     section of this report.

                                       57
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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.

                                               APPLIED FILMS CORPORATION

                                               By: /s/ Thomas T. Edman
                                                   Thomas T. Edman, President
                                                   August 29, 2001

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the following  persons in the capacities  indicated on
August 29, 2001.

     Signature                         Title
     ---------                         -----

     /s/  Cecil Van Alsburg*           Director, Chairman of the Board
     Cecil Van Alsburg

     /s/  Thomas T. Edman              Director, President, and Chief Executive
     Thomas T. Edman                   Officer (principal executive officer)

     /s/  Lawrence D. Firestone        Treasurer and Chief Financial Officer and
     Lawrence D. Firestone             Secretary (principal financial officer)

     /s/  Richard P. Beck*             Director
     Richard P. Beck

     /s/  John S. Chapin*              Director
     John S. Chapin

     /s/  Vincent Sollitto *           Director
     Vincent Sollitto

     /s/  Chad D. Quist*               Director
     Chad D. Quist

     /s/  Aitor Galdos*                Director
     Aitor Galdos


*By:   /s/  Lawrence D. Firestone
       Lawrence D. Firestone
       Attorney-in-Fact
<PAGE>
                                  EXHIBIT INDEX

Exhibit No.    Description
-----------    -----------
      3.1      Amended and Restated  Articles of  Incorporation of Applied Films
               Corporation, as amended

      3.2      Amended and  Restated  Bylaws of Applied  Films  Corporation  are
               incorporated   by  reference  to  Exhibit  3.2  of   Registrant's
               Registration   Statement  on  Form  S-1,  as  amended  (Reg.  No.
               333-35331).

     10.1      1993 Stock Option Plan is  incorporated by reference to Exhibit 4
               of  Registrant's  Registration  Statement  on Form S-8 (Reg.  No.
               333-51175).

     10.2      1997 Stock Option Plan, as amended,  is incorporated by reference
               to Exhibit 10.2 of  Registrant's  Registration  Statement on Form
               S-1, as amended (Reg. No. 333-35331), by reference to Exhibit 4.2
               of  Registrant's  Registration  Statement  on Form S-8 (Reg.  No.
               333-47967)   by   reference   to  Exhibit  4.2  of   Registrant's
               Registration  Statement on Form S-8 (Reg.  No.  333-38426) any by
               reference  to Exhibits 4.2 and 4.3 of  Registrant's  Registration
               Statement on Form S-8 (Reg. No. 333-56376).

     10.3      Employee  Stock  Purchase Plan, as amended,  is  incorporated  by
               reference to Exhibit 10.3 of Registrant's  Registration Statement
               on Form S-1, as amended  (Reg.  No.  333-35331),  by reference to
               Exhibit 4 to the Registrant's  Registration Statement on Form S-8
               (Reg.  No.   333-47951)  and  by  reference  to  Exhibit  4.2  on
               Registrant's   Registration  Statement  on  Form  S-8  (Reg.  No.
               333-56378).

     10.4      Form of Indemnity  Agreement  between  Registrant and each of its
               Directors and Executive  Officers is incorporated by reference to
               Exhibit 10.4 of Registrant's  Registration Statement on Form S-1,
               as amended (Reg. No. 333-35331).

     10.5      Lease  Agreement  dated  January  30,  1998,  between  9586  East
               Frontage  Road,   Longmont,   CO  80504  LLC  and  Registrant  is
               incorporated   by  reference  to  Exhibit  10.9  of  Registrant's
               Quarterly  Report  on Form  10-Q  for the  fiscal  quarter  ended
               December 27, 1997.

     10.6      Agreement,  dated  November 18, 1997,  between Nippon Sheet Glass
               Co.,   Ltd.,   NSG  Fine  Glass  Co.,  Ltd.  and   Registrant  is
               incorporated by reference to Exhibit 10.8 of Registrant's  Annual
               Report on Form 10-K for the fiscal year ended June 27, 1998.

     10.7      Amended and Restated Credit Agreement,  dated September 17, 1999,
               between  Registrant and Bank One,  Michigan,  is  incorporated by
               reference to Exhibit 10.7 of  Registrant's  Annual Report on Form
               10-K for the fiscal year ended July 3, 1999.

     10.8      Security  Agreement dated June 30, 1994,  between  Registrant and
               Bank  One,  Michigan,  formerly  NBD  Bank,  is  incorporated  by
               reference to Exhibit 10.5 of Registrant's  Registration Statement
               on Form S-1, as amended (Reg. 333-35331).

     10.9      Outside  Director Stock Option Plan is  incorporated by reference
               to Exhibit 4.1 of Registrant's Registration Statement on Form S-8
               (Reg. No. 333-95367).

     10.10     Share  Purchase and Exchange  Agreement  dated  October 18, 2000,
               between  Registrant,  AFCO GmbH & Co. KG, Balzers Process Systems
               GmbH and  Unaxis  Holding  AG is  incorporated  by  reference  to
               Exhibit 2.1 of  Registrant's  Current  Report on Form 8-K/A dated
               December 31, 2000.

     10.11     Amendment  Agreement dated December 29, 2000, between Registrant,
               AFCO GmbH & Co.  KG,  Balzers  Process  Systems  GmbH and  Unaxis
               Holding  AG is  incorporated  by  reference  to  Exhibit  2.2  of
               Registrant's  Current  Report on Form 8-K/A  dated  December  31,
               2000.

     10.12     Contribution  Agreement dated December 29, 2000,  between Balzers
               Process  Systems  GmbH  and  Leybold  Coating  GmbH  & Co.  KG is
               incorporated by reference to Exhibit 2.3 of Registrant's  Current
               Report on Form 8-K/A dated December 31, 2000.
<PAGE>
     10.13     Bravo Intellectual  Property License Agreement dated December 31,
               2000,  between  Balzers  Process Systems GmbH and Leybold Coating
               GmbH & Co. KG is  incorporated  by  reference  to Exhibit  2.4 of
               Registrant's  Current  Report on Form 8-K/A  dated  December  31,
               2000.

     10.14     Newco Intellectual  Property License Agreement dated December 31,
               2000,  between  Balzers  Process Systems GmbH and Leybold Coating
               GmbH & Co. KG is  incorporated  by  reference  to Exhibit  2.5 of
               Registrant's  Current  Report on Form 8-K/A  dated  December  31,
               2000.

     10.15     Registration  Rights  Agreement dated December 31, 2000,  between
               Registrant and Balzers  Process  Systems GmbH is  incorporated by
               reference to Exhibit 2.6 of  Registrant's  Current Report on Form
               8-K/A dated December 31, 2000.

     10.16     Securities  Purchase  Agreement  dated January 16, 2001,  between
               Registrant and the purchasers  identified on the signature  pages
               thereto  is   incorporated   by  reference  to  Exhibit  10.1  of
               Registrant's Current Report on Form 8-K dated January 16, 2001.

     10.17     Registration  Rights  Agreement  dated January 16, 2001,  between
               Registrant  and the investors  identified on the signature  pages
               thereto  is   incorporated   by  reference  to  Exhibit  10.2  of
               Registrant's Current Report on Form 8-K dated January 16, 2001.

     10.18     Common Stock Warrant No. 1 dated January 16, 2001 is incorporated
               by reference to Exhibit 10.3 of  Registrant's  Current  Report on
               Form 8-K dated January 16, 2001.

     10.19     Common Stock Warrant No. 2 dated January 16, 2001 is incorporated
               by reference to Exhibit 10.4 of  Registrant's  Current  Report on
               Form 8-K dated January 16, 2001.

     10.20     Common Stock Warrant No. 3 dated January 16, 2001 is incorporated
               by reference to Exhibit 10.5 of  Registrant's  Current  Report on
               Form 8-K dated January 16, 2001.

     10.21     Common Stock Warrant No. 4 dated January 16, 2001 is incorporated
               by reference to Exhibit 10.6 of  Registrant's  Current  Report on
               Form 8-K dated January 16, 2001.

     10.22     Lease  Agreement  between  RWE  Systems  Immobilren  GmbH  &  Co.
               KG/Lahmeyer  Grandbesitz  GmbH & Co. KG and Applied  Films GmbH &
               Co. KG dated January 31, 2001 for the Alzenau,  Germany facility.

     10.23     Commercialization Agreement between The Coca-Cola Company, KRONES
               AG and  Applied  Films  GmbH & Co.  KG (as  assignee  of  Balzers
               Process Systems GmbH) effective September 1, 2000.

     11.1      Statement re: computation of per share earnings.

     21.1      Subsidiary  of  Applied  Films  Corporation  is  incorporated  by
               reference to Exhibit 21 of Registrant's Registration Statement on
               Form S-1 (Reg. No. 333-59984).

     23.1      Consent of Arthur Andersen LLP.

     24.1      Power of Attorney (previously filed).
<PAGE>
Exhibit 3.1

                              AMENDED and RESTATED
                            ARTICLES OF INCORPORATION
                                       OF
                            APPLIED FILMS CORPORATION

     The following  Amended and Restated  Articles of Incorporation are executed
by the  undersigned  corporation  pursuant  to the  provisions  of the  Colorado
Business Corporation Act.

     1. The name of the corporation is Applied Films Corporation.

     2. The original  Articles of  Incorporation  were filed  effective  July 1,
1994,  and were amended and restated  effective  July 3, 1995,  and were further
amended on November 18, 1996.

     3. The following Amended and Restated  Articles of Incorporation  supersede
the original Articles of Incorporation,  as amended and restated  effective July
3, 1995, and as further  amended on November 18, 1996, and shall be the Articles
of Incorporation of the corporation.

     4. These Amended and Restated  Articles of Incorporation  were adopted by a
vote of the directors and  shareholders in accordance with the provisions of the
Colorado Business Corporation Act.

     5. The  number of votes cast for the  amendment  by each  voting  group was
sufficient for approval by such voting group.

                                    ARTICLE I

     The name of the corporation is Applied Films Corporation.

                                   ARTICLE II.

     The purpose for which the  corporation is formed is to engage in any lawful
business or businesses.  The corporation  shall have and may exercise all powers
and rights granted or otherwise  provided by the Colorado  Business  Corporation
Act as in effect from time to time and any successor law.
<PAGE>
                                  ARTICLE III.

     The total  number of shares of all classes of stock  which the  corporation
shall have authority to issue is eleven million  (11,000,000)  shares,  of which
ten million  (10,000,000) shares shall be common stock without par value and one
million  (1,000,000)  shares shall be preferred  stock,  without par value.  The
shares of preferred stock may be divided into one or more series.

     The  authorized  shares of common stock are all of one class with unlimited
voting rights, and each such share shall be equal to every other such share.

     The  corporation's  Board of  Directors  shall have the  authority  without
shareholder  action,  to determine  the  preferences,  limitations  and relative
rights of any  preferred  stock  (whether in a series or as a class),  including
without limitation the following: (i) the designation of any series of preferred
stock;  (ii) unlimited,  special,  conditional,  or limited voting rights, or no
right to vote;  except that no condition,  limitation,  or prohibition on voting
shall eliminate any right to vote provided by the Colorado Business  Corporation
Act; (iii)  redemption  rights;  (iv)  conversion  rights;  (v)  distribution or
dividend  rights,  including  the  determination  of  whether  such  rights  are
cumulative,  noncumulative or partially  cumulative;  and (vi) preference rights
over any  other  class or  series  of  shares  with  respect  to  distributions,
including dividends and distributions upon the dissolution of the corporation.


                                   ARTICLE IV.

     The  address of the  registered  office,  which is the same as the  mailing
address,  is 6797 Winchester  Circle,  Boulder,  Colorado 80301. The name of the
registered agent is Cecil Van Alsburg.

                                   ARTICLE V.

     The  address  of the  corporation's  principal  office  is 6797  Winchester
Circle, Boulder, Colorado 80301.

                                   ARTICLE VI.

     Cumulative voting shall not be permitted in the election of directors.

                                        2
<PAGE>
                                  ARTICLE VII.

     A  director  of the  corporation  shall  not be  personally  liable  to the
corporation or its  shareholders  for monetary damages for a breach of fiduciary
duty as a director,  except for liability:  (a) for any breach of the director's
duty  of  loyalty  to the  corporation  or its  shareholders;  (b)  for  acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law;  (c)  resulting  from a violation of section  7-108-403 of the
Colorado  Business  Corporation  Act;  (d) for any  transaction  from  which the
director derived an improper  personal  benefit;  or (e) for any act or omission
occurring  prior to the date of the approval of this  Article.  In the event the
Colorado Business  Corporation Act is amended after the approval of this Article
to  authorize  corporate  action  further  eliminating  or limiting the personal
liability of  directors,  then the  liability  of a director of the  corporation
shall be eliminated or limited to the fullest  extent  permitted by the Colorado
Business Corporation Act. Any repeal,  modification or adoption of any provision
in these  Articles of  Incorporation  inconsistent  with this Article  shall not
adversely  affect  any right or  protection  of a  director  of the  corporation
existing at the time of such repeal,  modification or adoption.  Any limitations
on liability in effect prior to the date of these Amended and Restated  Articles
shall remain in full force and effect.

                                  ARTICLE VIII.

     The  corporation   shall  indemnify  all  officers  and  directors  of  the
corporation to the fullest extent permitted by the Colorado Business Corporation
Act, as amended from time to time, subject to any expansion (but not limitation)
of such  indemnification as may be set forth in the Bylaws of the corporation or
any shareholders' or directors'  resolution or by any indemnification or similar
agreement between the Company and any officer or director, to the fullest extent
permitted by the Colorado Business Corporation Act.

                                   ARTICLE IX.

     The  corporation  shall not merge or consolidate  with another  corporation
(except a corporation of which all outstanding  stock is  beneficially  owned by
this corporation  "Subsidiary"),  or sell, lease, exchange,  pledge or otherwise
dispose of all or  substantially  all of the  assets of the  entire  corporation
other  than in the usual and  regular  course of its  business,  or  voluntarily
dissolve and liquidate its assets without the affirmative  vote of not less than
two-thirds  (2/3) of the voting power of the then issued and outstanding  shares
entitled to vote  thereon,  voting  together as a single voting group (unless as
otherwise

                                        3
<PAGE>
provided  by the  Colorado  Business  Corporation  Act;  or unless as  otherwise
provided in any articles of amendment filed with the Colorado Secretary of State
providing for the issuance of preferred shares).

     Notwithstanding  any other provision of these Articles of  Incorporation or
the  Bylaws  of this  corporation  (and  notwithstanding  the fact that a lesser
percentage  may be  specified by law,  these  Articles of  Incorporation  or the
Bylaws of the  corporation),  the affirmative  vote of the holders of two-thirds
(2/3) or more of shares the voting power of the shares entitled to vote thereon,
voting together as a single voting group,  (unless as otherwise  required by the
Colorado  Business  Corporation  Act;  or unless as  otherwise  provided  in any
articles of amendment  filed with the Colorado  Secretary of State providing for
the  issuance of  preferred  shares),  shall be required to amend or repeal,  or
adopt any  provisions  inconsistent  with,  this Article IX of these Articles of
Incorporation.

                                   ARTICLE X.

     The Board of Directors  of this  corporation  shall not  approve,  adopt or
recommend any offer of any person or entity, other than the corporation, to make
a tender or exchange offer for any capital stock of the corporation, to merge or
consolidate  the  corporation  with any other entity or to purchase or otherwise
acquire all or  substantially  all of the assets or business of the  corporation
(i) known by the Board of Directors to be a possible violation of any applicable
laws;  and (ii)  unless  and until  the  Board of  Directors  shall  have  first
evaluated the offer and  determined  that the offer is in the best  interests of
the corporation and its  shareholders.  The Board of Directors may seek and rely
upon an opinion of legal counsel independent from the offeror as to the legality
of an offer and it may test the  legality  of an offer in any  state or  federal
court or  before  any  state or  federal  administrative  agency  which may have
appropriate  jurisdiction.  In  connection  with its  evaluation  as to the best
interests of the  corporation and its  shareholders,  the Board of Directors may
consider all factors which it deems relevant,  including without limitation: (i)
the adequacy and fairness of the consideration to be received by the corporation
and/or its shareholders under the offer considering historical trading prices of
the  corporation's  stock, the price that might be achieved in a negotiated sale
of the  corporation  as a whole,  premiums  over trading  prices which have been
proposed or offered with  respect to the  securities  of other  companies in the
past in  connection  with  similar  offers  and  the  future  prospects  for the
corporation and its business;  (ii) the potential  social and economic impact of
the offer and its consummation on this  corporation,  its employees and vendors;
and  (iii)  the  potential,  social  and  economic  impact  of the offer and its
consummation on the  communities in which the  corporation and any  subsidiaries
operate or are located.

                                        4
<PAGE>
     Notwithstanding  any other provision of these Articles of  Incorporation or
the Bylaws of the corporation to the contrary (and notwithstanding the fact that
a lesser  percentage may be specified by law, these Articles of Incorporation or
the  Bylaws  of  the  corporation),  the  affirmative  vote  of the  holders  of
two-thirds  (2/3) or more of the voting power of the then issued and outstanding
shares  entitled to vote for the  election of  directors,  voting  together as a
single  voting group (unless or as otherwise  required by the Colorado  Business
Corporation  Act; or unless as  otherwise  provided in any articles of amendment
filed  with the  Colorado  Secretary  of State  providing  for the  issuance  of
preferred  shares),  shall be required to amend,  repeal, or adopt any provision
inconsistent with this Article X.

                                   ARTICLE XI.

     The  business and affairs of the  corporation  shall be managed by or under
the  direction of the Board of  Directors.  The Board shall  consist of not less
than five (5) members nor more than nine (9) members. Directors shall be elected
annually at each annual shareholders meeting and shall hold office for a term of
three (3) years and until their  successors are elected and qualified,  or until
their earlier resignation or removal.

     The Board of Directors  shall be divided into three (3) classes,  as nearly
equal in number as  practicable,  the term of office of those of the first class
to expire at the first annual meeting of shareholders after their election,  the
term of office of those of the  second  class to  expire  at the  second  annual
meeting of shareholders after their election, and the term of office of those of
the third  class to expire at the third  annual  meeting of  shareholders  after
their  election.  Upon  expiration  of the terms of office of the  directors  as
classified  above,  their  successors shall be elected for the term of three (3)
years each,  so that  one-third of the number of  directors  of the  corporation
shall be elected annually.

                                  ARTICLE XII.

     The shareholder vote required to approve Business Combinations (hereinafter
defined) shall be as set forth in this Article XII.

     Section 1.  Higher  Vote for  Business  Combinations.  In  addition  to any
affirmative vote required by law or these Articles of Incorporation,  and except
as otherwise expressly provided in Section 3 of this Article XII:

          A. any merger or  consolidation  of the  corporation or any Subsidiary
     (as   hereinafter   defined)  with  (i)  any  Interested   Shareholder  (as
     hereinafter  defined) or (ii) any other corporation  (whether or not itself
     an Interested

                                        5
<PAGE>
     Shareholder)  which is, or after such merger or consolidation  would be, an
     Affiliate (as hereinafter defined) of an Interested Shareholder; or

          B. any sale,  lease,  exchange,  mortgage,  pledge,  transfer or other
     disposition (in one transaction or a series of transactions) to or with any
     Interested  Shareholder or any Affiliate of any  Interested  Shareholder of
     any assets of the  corporation or any  Subsidiary  having an aggregate Fair
     Market Value of $5,000,000 or more; or

          C. the issuance or transfer by the  corporation  or any Subsidiary (in
     one  transaction  or a series of  transactions)  of any  securities  of the
     corporation  or  any  Subsidiary  to  any  Interested  Shareholder  or  any
     Affiliate of any Interested Shareholder in exchange for cash, securities or
     other property (or a combination  thereof)  having an aggregate Fair Market
     Value of $5,000,000 or more; or

          D.  the  adoption  of any  plan or  proposal  for the  liquidation  or
     dissolution of the  corporation  proposed by or on behalf of any Interested
     Shareholder or any Affiliate of any Interested Shareholder; or

          E. any  reclassification  of securities  (including  any reverse stock
     split),  or  recapitalization   of  the  corporation,   or  any  merger  or
     consolidation  of the corporation with any of its Subsidiaries or any other
     transaction  (whether  or not  with  or  into  or  otherwise  involving  an
     Interested  Shareholder) which has the effect,  directly or indirectly,  of
     increasing the proportionate  share of the outstanding  shares of any class
     of equity or  convertible  securities of the  corporation or any Subsidiary
     which is directly or indirectly owned by any Interested  Shareholder or any
     Affiliate of any Interested Shareholder;

shall  require the  affirmative  vote of the holders of at least eighty  percent
(80%) of the voting power of the then outstanding shares of capital stock of the
corporation entitled to vote generally in the election of directors (the "Voting
Stock"),  voting together as a single voting group (unless as otherwise required
by the Colorado Business Corporation Act; or unless as otherwise provided in any
articles of amendment  filed with the Colorado  Secretary of State providing for
the issuance of preferred shares), including the affirmative vote of the holders
of not less than fifty percent (50%) of the  outstanding  Voting Stock not owned
directly or indirectly by any  Interested  Shareholder.  Such  affirmative  vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be

                                        6
<PAGE>
specified, by law, in any other Article of these Articles of Incorporation or in
any agreement with any national securities exchange or otherwise.

     Section  2.  Definition  of  "Business  Combination".  The  term  "Business
Combination"  as used in this  Article XII shall mean any  transaction  which is
referred to in any one or more of paragraphs A through E of Section 1.

     Section 3. When Higher Vote Is Not Required. The provisions of Section 1 of
this Article XII shall not be applicable to any particular Business Combination,
and such Business  Combination  shall require only such  affirmative  vote as is
required by law and any other provision of these Articles of Incorporation if in
the case of a  Business  Combination  that  does not  involve  any cash or other
consideration  being received by the shareholders of the corporation,  solely in
their  capacities  as  shareholders,  the  condition  specified in the following
paragraph A is met,  or if in the case of any other  Business  Combination,  the
conditions specified in either of the following paragraphs A or B are met:

          A. Approval by Continuing  Directors.  The Business  Combination shall
     have  been  approved  by  a  majority  of  the  Continuing   Directors  (as
     hereinafter defined).

          B. Price and Procedure  Requirements.  All of the following conditions
     shall have been met:

               (i) The  aggregate  amount of the cash and the Fair Market  Value
          (as  hereinafter  defined) as of the date of the  consummation  of the
          Business  Combination (the  "Consummation  Date") of the consideration
          other than cash to be received per share by holders of Common Stock in
          such  Business  Combination  shall be an amount at least  equal to the
          higher of the following (it being  intended that the  requirements  of
          this  paragraph  B(i) shall be required to be met with  respect to all
          shares of Common  Stock  outstanding,  whether  or not the  Interested
          Shareholder has previously acquired any shares of the Common Stock):

                    (a) the  highest per share price  (including  any  brokerage
               commissions, transfer taxes and soliciting dealers' fees) paid by
               the  Interested  Shareholder  for  any  shares  of  Common  Stock
               acquired by it (1) within the two-year period  immediately  prior
               to the first public  announcement of the proposal of the Business
               Combination (the  "Announcement  Date") or (2) in the transaction
               in which it became an

                                        7
<PAGE>
               Interested  Shareholder,   whichever  is  higher,  plus  interest
               compounded  annually  from  the  date  on  which  the  Interested
               Shareholder   became  an  Interested   Shareholder   through  the
               Consummation Date at the prime rate of interest of Citibank, N.A.
               (or other major bank headquartered in New York City selected by a
               majority of the Continuing Directors) from time to time in effect
               in New York City, less the aggregate amount of any cash dividends
               paid,  and the Fair Market Value of any  dividends  paid in other
               than cash,  per share of Common  Stock from the date on which the
               Interested  Shareholder became an Interested  Shareholder through
               the  Consummation  Date in an amount up to but not  exceeding the
               amount of such interest payable per share of Common Stock; or

                    (b) the Fair Market  Value per share of Common  Stock on the
               Announcement Date.

               (ii) The  aggregate  amount of the cash and the Fair Market Value
          as of the Consummation Date of the consideration other than cash to be
          received  per share by holders  of shares of any class of  outstanding
          Voting  Stock,   other  than  the  Common  Stock,   in  such  Business
          Combination  shall be an amount at least  equal to the  highest of the
          following (it being intended that the  requirements  of this paragraph
          B(ii) shall be required to be met with  respect to all shares of every
          such  other  class of  outstanding  Voting  Stock,  whether or not the
          Interested  Shareholder  has  previously  acquired  any  shares  of  a
          particular class of Voting Stock):

                    (a) the  highest per share price  (including  any  brokerage
               commissions, transfer taxes and soliciting dealers' fees) paid by
               the Interested Shareholder for any shares of such class of Voting
               Stock acquired by it (1) within the two-year  period  immediately
               prior to the Announcement Date or (2) in the transaction in which
               it became an Interested  Shareholder,  whichever is higher,  plus
               interest   compounded   annually  from  the  date  on  which  the
               Interested  Shareholder became an Interested  Shareholder through
               the Consummation  Date at the prime rate of interest of Citibank,
               N.A. (or other major bank headquartered in New York City selected
               by a majority of the Continuing  Directors)  from time to time in
               effect in New York City,  less the  aggregate  amount of any cash
               dividends  paid,  and the Fair Market Value of any dividends paid
               in other than cash, per share of such class of Voting

                                        8
<PAGE>
               Stock from the date on which the Interested Shareholder became an
               Interested Shareholder through the Consummation Date in an amount
               up to but not exceeding  the amount of such interest  payable per
               share of such class of Voting Stock;

                    (b) the Fair Market  Value per share of such class of Voting
               Stock on the Announcement Date; or

                    (c) the highest  preferential  amount per share,  if any, to
               which the  holders  of shares of such  class of Voting  Stock are
               entitled   in  the  event  of  any   voluntary   or   involuntary
               liquidation, dissolution or winding up of the corporation.

               (iii) The consideration to be received by holders of a particular
          class of outstanding Voting Stock (including Common Stock) shall be in
          cash or in the same form as the Interested  Shareholder has previously
          paid for  shares of such  class of  Voting  Stock.  If the  Interested
          Shareholder  has paid for  shares of any class of  Voting  Stock  with
          varying forms of  consideration,  the form of  consideration  for such
          class of Voting Stock shall be either cash or the form used to acquire
          the largest number of shares of such class of Voting Stock  previously
          acquired by it.

               (iv) After such  Interested  Shareholder has become an Interested
          Shareholder   and  prior  to  the   consummation   of  such   Business
          Combination:  (a) except as approved  by a majority of the  Continuing
          Directors,  there shall have been no failure to declare and pay at the
          regular date  therefor any full  quarterly  dividends  (whether or not
          cumulative) on any outstanding  Preferred  Stock; (b) there shall have
          been (1) no  reduction  in the annual  rate of  dividends  paid on the
          Common Stock  (except as necessary to reflect any  subdivision  of the
          Common  Stock),  except as approved  by a majority  of the  Continuing
          Directors,  and (2) an increase in such  annual rate of  dividends  as
          necessary to reflect any reclassification (including any reverse stock
          split),  recapitalization,  reorganization or any similar  transaction
          which has the effect of reducing the number of  outstanding  shares of
          the Common  Stock,  unless the failure so to increase such annual rate
          is approved by a majority of the  Continuing  Directors;  and (c) such
          Interested  Shareholder  shall have not become the beneficial owner of
          any  additional   shares  of  Voting  Stock  except  as  part  of  the
          transaction which results in such Interested  Shareholder  becoming an
          Interested Shareholder.

                                        9
<PAGE>
               (v) After such  Interested  Shareholder  has become an Interested
          Shareholder,  such Interested  Shareholder shall not have received the
          benefit,   directly  or  indirectly   (except   proportionately  as  a
          shareholder),  of any loans,  advances,  guarantees,  pledges or other
          financial  assistance  or any tax  credits  or  other  tax  advantages
          provided by the corporation.

               (vi) A proxy or  information  statement  describing  the proposed
          Business  Combination  and  complying  with  the  requirements  of the
          Securities  Exchange  Act  of  1934  and  the  rules  and  regulations
          thereunder (or any subsequent  provision  replacing such Act, rules or
          regulations) shall be mailed to all stockholders of the corporation at
          least 30 days prior to the  consummation of such Business  Combination
          (whether or not such proxy or information  statement is required to be
          mailed pursuant to such Act or subsequent provisions).

     Section 4. Certain Definitions. For the purposes of this Article XII:

          A. A "person" shall mean any  individual,  firm,  corporation or other
     entity.

          B.  "Interested  Shareholder"  shall mean any person  (other  than the
     corporation,  any Subsidiary or any existing  shareholder at the time these
     Amended and Restated  Articles of Incorporation  become effective who would
     otherwise meet the definition  herein of Interested  Shareholder as of such
     date) who or which:

               (i) is the beneficial owner, directly or indirectly, of more than
          10% of the voting power of the outstanding Voting Stock; or

               (ii) is an  Affiliate of the  corporation  and at any time within
          the two-year period  immediately prior to the date in question was the
          beneficial owner, directly or indirectly, of 10% or more of the voting
          power of the then outstanding Voting Stock;

               (iii) is an assignee of or has otherwise  succeeded to any shares
          of Voting  Stock  which were at any time  within the  two-year  period
          immediately  prior to the date in question  beneficially  owned by any
          Interested  Shareholder,  if such assignment or succession  shall have
          occurred in the course of a transaction or series of transactions  not
          involving a public  offering  within the meaning of the Securities Act
          of 1933.

                                       10
<PAGE>
          C. A person shall be a "beneficial owner" of any Voting Stock:

               (i) which such person or any of its  Affiliates or Associates (as
          hereinafter defined) beneficially owns, directly or indirectly; or

               (ii) which such person of any of its Affiliates or Associates has
          (a)  the  right  to  acquire   (whether  such  right  is   exercisable
          immediately  or only  after  the  passage  of time),  pursuant  to any
          agreement,  arrangement  or  understanding  or upon  the  exercise  of
          conversion rights, exchange rights, warrants or options, or otherwise,
          or (b) the right to vote  pursuant to any  agreement,  arrangement  or
          understanding; or

               (iii) which are beneficially  owned,  directly or indirectly,  by
          any other  person with which such person or any of its  Affiliates  or
          Associates has any agreement,  arrangement  or  understanding  for the
          purpose of  acquiring,  holding,  voting or disposing of any shares of
          Voting Stock.

          D. For the purposes of  determining  whether a person is an Interested
     Shareholder pursuant to paragraph B of this Section 4, the number of shares
     of Voting Stock deemed to be outstanding  shall include shares deemed owned
     through  application of paragraph C of this Section 4 but shall not include
     any other  shares of Voting  Stock  which may be  issuable  pursuant to any
     agreement,  arrangement  or  understanding,  or upon exercise of conversion
     rights, warrants or options, or otherwise.

          E.  "Affiliate"  or  "Associate"  shall have the  respective  meanings
     ascribed to such terms in Rule 12b-2 of the General  Rules and  Regulations
     under the Securities Exchange Act of 1934.

          F. "Subsidiary" means any corporation of which a majority of any class
     of equity security is owned,  directly or indirectly,  by the  corporation;
     provided,  however,  that for the purposes of the  definition of Interested
     Shareholder  set  forth  in  paragraph  B  of  this  Section  4,  the  term
     "Subsidiary"  shall mean only a  corporation  of which a  majority  of each
     class  of  equity  security  is  owned,  directly  or  indirectly,  by  the
     corporation.

          G. "Continuing Director" means any member of the Board of Directors of
     the  corporation  (the  "Board") who is  unaffiliated  with the  Interested
     Shareholder  and was a member  of the  Board  prior  to the  time  that the
     Interested Shareholder became

                                       11
<PAGE>
     an Interested  Shareholder,  and any successor of a Continuing Director who
     is  unaffiliated  with the  Interested  Shareholder  and is  recommended to
     succeed a Continuing Director by a majority of Continuing Directors then on
     the Board.

          H. "Fair Market  Value" means:  (i) in the case of stock,  the highest
     closing sale price during the 30-day period immediately  preceding the date
     in  question  of a share of such stock on the  Composite  Tape for New York
     Stock  Exchange-Listed  Stocks,  or,  if such  stock is not  quoted  on the
     Composite  Tape, on the New York Stock  Exchange,  or, if such stock is not
     listed on such Exchange, on the principal United States securities exchange
     registered under the Securities Exchange Act of 1934 on which such stock is
     listed,  or, if such stock is not listed on any such exchange,  the highest
     closing  bid  quotation  with  respect to a share of such stock  during the
     30-day period preceding the date in question on the National Association of
     Securities Dealers, Inc., Automated Quotations System or any system then in
     use, or if no such  quotations are available,  the fair market value on the
     date in  question of a share of such stock as  determined  by a majority of
     the  Continuing  Directors in good faith;  and (ii) in the case of property
     other than cash or stock,  the fair  market  value of such  property on the
     date in question as determined by a majority of the Continuing Directors in
     good faith.

          I. In the event of any Business  Combination in which the  corporation
     survives, the phrase "consideration other than cash to be received" as used
     in paragraphs  B(i) and (ii) of Section 3 of this Article XII shall include
     the  shares of  Common  Stock  and/or  the  shares  of any  other  class of
     outstanding Voting Stock retained by the holders of such shares.

     Section 5. Powers of  Continuing  Directors.  A majority of the  Continuing
Directors of the corporation shall have the power and duty to determine,  on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article XII, including without limitations (A)
whether  a person  is an  Interested  Shareholder,  (B) the  number of shares of
Voting  Stock  beneficially  owned by any  person,  (C)  whether  a person is an
Affiliate or Associate of another,  (D) whether the  requirements of paragraph B
of Section 3 have been met with  respect to any  Business  Combination,  and (E)
whether the assets which are the subject of any Business  Combination  have,  or
the  consideration  to be received for the issuance or transfer of securities by
the corporation or any Subsidiary in any Business  Combination has, an aggregate
Fair Market Value of $5,000,000 or more; and the good faith  determination  of a
majority of the  Continuing  Directors on such matters shall be  conclusive  and
binding for all the purposes of this Article XII.

                                       12
<PAGE>
     Section 6. No Effect on Fiduciary  Obligations of Interested  Stockholders.
Nothing contained in this Article XII shall be construed to relieve the Board of
Directors or any Interested Shareholder from any fiduciary obligation imposed by
law.

     Section 7. Amendment,  Repeal, etc. Notwithstanding any other provisions of
these  Articles  of   Incorporation  or  the  Bylaws  of  the  corporation  (and
notwithstanding the fact that a lesser percentage may be specified by law, these
Articles of  Incorporation  or the Bylaws of the  corporation),  the affirmative
vote of the holders of eighty  percent  (80%) or more of the voting power of the
shares of the then outstanding Voting Stock,  voting together as a single voting
group (unless as otherwise required by the Colorado Business Corporation Act; or
unless as  otherwise  provided  in any  articles  of  amendment  filed  with the
Colorado  Secretary of State  providing  for the issuance of preferred  shares),
including  the  affirmative  vote of the holders of not less than fifty  percent
(50%) of the Voting Stock not owned  directly or  indirectly  by any  Interested
Shareholder,  shall be  required  to amend or  repeal,  or adopt any  provisions
inconsistent  with,  this  Article  XII  of  these  Articles  of  Incorporation;
provided,  however, that the preceding provisions of this Section 7 shall not be
applicable  to  any  amendment  to  this  Article  XII  of  these   Articles  of
Incorporation, and such amendment shall require only such affirmative vote as is
required by law and any other provisions of these Articles of Incorporation,  if
such  amendment  shall  have  been  approved  by a  majority  of the  Continuing
Directors.

     Dated: September 19, 1997.


                                         APPLIED FILMS CORPORATION


                                         By /s/ Cecil Van Alsburg
                                           Cecil Van Alsburg
                                              Its:  President & Registered Agent



                                       13
<PAGE>
                          Mail to: Secretary of State        For office use only
                              Corporation Section
                            1560 Broadway, Sutie 200
                                Denver, CO 80202
                                 (303) 894-2251
                               Fax (303 894-2242
MUST BE TYPED
FILING FEE: $25.00
MUST SUBMIT TWO COPIES

                             ARTICLES OF AMENDMENT
                                     TO THE
Please include a typed     ARTICLES OF INCORPORATION
self-addressed envelope

Pursuant  to the  provisions  of the  Colorado  Business  Corporation  Act,  the
undersigned  corporation  adopts the  following  Articles  of  Amendment  to its
Articles of Incorporation:

FIRST: The name of the corporation is Applied Films Corporation

SECOND: The following  amendment to the Articles of Incorporation was adopted on
February 14, 2001, as prescribed by the Colorado  Business  Corporation  Act, in
the manner marked with an X below:

___ No shares have been issued or Directors Elected - Action by Incorporators

___ No shares have been issued but Directors Elected - Action by Directors

___ Such amendment was adopted by the board of directors where shares have  been
    issued and shareholder action was not required.

_X_ Such  amendment  was  adopted  by a vote of the shareholders.  The number of
    shares voted for the amendment was sufficient for approval.

This Amendment is Attached.

THIRD: If changing corporate name, the new name of the corporation is __________

FOURTH:  The manner, if not set forth in such amendment,  in which any exchange,
reclassification, or cancellation of issued shares provided for in the amendment
shall be effected, is as follows:



If these amendments are to have a delayed effective date, please list that date:
__________________ ((Not to exceed ninety (90) days from the date of filing)



                                 Signature /s/ Lawrence D. Firestone
                                           Lawrence D. Firestone
                                 Title     Chief Financial Officer and Secretary


                                                                    Revised 7/95
<PAGE>
                      AMENDMENT TO THE AMENDED AND RESTATED
                          ARTICLES OF INCORPORATION OF
                            APPLIED FILMS CORPORATION


Paragraph 1 of Article III of Applied Films Corporation's Amended and Restated
Articles of Incorporation is hereby deleted in its entirety and replaced with
the following:

     The total  number of shares of all classes of stock  which the  Corporation
     shall have the authority to issue is forty-one million (41,000,000) shares,
     of which forty  million  (40,000,000)  shares shall be common stock without
     par value and one million  shares  (1,000,000)  shares  shall be  preferred
     stock,  without part value.  The shares of  preferred  stock may be divided
     into one or more series.









::ODMA\PCDOCS\GRR\536443\1
<PAGE>

                                   CERTIFICATE
                     OF DESIGNATIONS, PREFERENCES AND RIGHTS
                    OF SERIES A CONVERTIBLE PREFERRED STOCK,
                                WITHOUT PAR VALUE

                                       OF

                            APPLIED FILMS CORPORATION

                            ------------------------

                      Pursuant to Section 7-108-101 of the
                        Colorado Business Corporation Act
                            ------------------------


     Applied Films Corporation,  a corporation  organized and existing under the
Colorado  Business  Corporation  Act  (the  "Company"),  hereby  certifies  that
pursuant to the authority granted to and vested in the Board of Directors by the
Amended and Restated Articles of Incorporation,  as amended, of the Company (the
"Articles of  Incorporation"),  and in accordance with the provisions of Section
7-108-101  of the  Business  Corporation  Act  of the  State  of  Colorado,  the
Directors on January 11, 2001, adopted the following  resolution creating out of
the one million  (1,000,000) shares of Preferred Stock authorized in Article III
of the Amended and Restated  Articles of  Incorporation a series of one thousand
(1,000) shares of Preferred Stock  designated as Series A Convertible  Preferred
Stock:

     Resolved,  that pursuant to the authority  vested in the Board of Directors
of this Company in  accordance  with the  provisions of its Amended and Restated
Articles  of  Incorporation,  as  amended,  a series of  Preferred  Stock of the
Company be and it hereby is created, and that the designation and amount thereof
and the optional and other special rights of the shares of such series,  and the
qualifications, limitations or restrictions thereof are as follows:

               Designation of Series A Convertible Preferred Stock

     1.  Designation,  Amount and Par Value. The series of preferred stock shall
be  designated  as the  Company's  Series A  Convertible  Preferred  Stock  (the
"Preferred Stock"),  and the number of shares so designated shall be 1,000. Each
share of  Preferred  Stock  shall have no par value and a stated  value equal to
$10,000.00  plus (i) the  amount  of any  dividends  added to the  Stated  Value
pursuant to Section 3(b) below, and (ii) any Unpaid Liquidated Damages due under
the Transaction Documents (the "Stated Value").

     2.  Definitions.  In  addition  to the  terms  defined  elsewhere  in  this
Certificate  of  Designations,  (a)  capitalized  terms  that are not  otherwise
defined herein have the meanings given to such terms in the Securities  Purchase
Agreement,  dated as of January 16, 2001,  among the Company and the  Purchasers
identified therein (the "Purchase Agreement"),  and (b) the following terms have
the meanings indicated:

          "Amended Conversion Price" means the average of the ten Closing Prices
     immediately  preceding  an  Annual  Put  Date or a  Special  Put  Date,  as
     applicable under Section 9(d) below.

          "Conversion  Price" means $19.75 per share,  subject to  adjustment as
     set forth herein.

          "Equity  Conditions"  means,  with respect to a specified  issuance of
     Common Stock, that each of the following  conditions is satisfied:  (i) the
     number of authorized but unissued and otherwise unreserved shares of Common
     Stock is sufficient for such issuance; (ii) such shares of Common Stock are
     registered  for resale by the Holder  pursuant to an  effective  Underlying
     Shares Registration Statement or all such shares may be sold without volume
     restrictions  pursuant to Rule 144(k) under the  Securities  Act; (iii) the
     Common Stock is listed or quoted (and is not suspended  from trading) on an
     Eligible  Market;  (iv) such  issuance  would be  permitted in full without
     violating  Section  17 hereof or the rules or  regulations  of any  Trading
     Market;  and (v) the Company is not in default with respect to any material
     obligation hereunder or under any other Transaction Document.
<PAGE>
          "Event Equity Value" means,  in connection  with any required  payment
     following an Event Notice hereunder,  the average of the Closing Prices for
     the five Trading  Days  preceding  either:  (a) the date of delivery of the
     Event Notice or (b) the date on which such required payment  (together with
     any other  payments,  expenses and liquidated  damages then due and payable
     under the Transaction Documents) is paid in full, whichever is greater.

          "Holder" means any holder of Preferred Stock.

          "Junior  Securities"  means the Common  Stock and all other  equity or
     equity  equivalent  securities of the Company  other than those  securities
     that are  outstanding on the Original Issue Date and are explicitly  senior
     in dividend rights or liquidation preference to the Preferred Stock.

          "Original  Issue  Date"  means the date of the first  issuance  of any
     shares of the Preferred Stock  regardless of the number of transfers of any
     particular  shares of  Preferred  Stock  and  regardless  of the  number of
     certificates that may be issued to evidence such Preferred Stock.

          "Unpaid  Liquidated  Damages" means, for each share of Preferred Stock
     owned  by a Holder  at any  time,  an  amount  equal to (a) any  Liquidated
     Damages  due and  payable to such  Holder  that are not paid in cash on the
     date due,  divided by (b) the number of shares of Preferred  Stock owned by
     such Holder on such due date,  provided,  that, for the avoidance of doubt,
     each dollar of Liquidated  Damages  shall be payable  once,  either (at the
     Company's  Option) in cash or by adding  the  amount  thereof to the Stated
     Value of the Shares pursuant to Section 1 hereof.

     3. Dividends.

          (a)  Holders  shall be  entitled  to  receive,  out of  funds  legally
     available therefor,  and the Company shall pay, cumulative dividends on the
     Preferred  Stock at the rate per share (as a percentage of the Stated Value
     per share) of 7% (the  "Dividend  Rate") per annum,  payable  quarterly  in
     arrears on each March 31, June 30,  September 30 and December 31, except if
     such date is not a  Trading  Day,  in which  case  such  dividend  shall be
     payable on the next  succeeding  Trading  Day (each,  a  "Dividend  Payment
     Date").  Dividends on the Preferred  Stock shall be calculated on the basis
     of a 360-day  year,  shall accrue daily  commencing  on the Original  Issue
     Date, and shall be deemed to accrue from such date whether or not earned or
     declared  and whether or not there are  profits,  surplus or other funds of
     the Company legally available for the payment of dividends.

          (b) Subject to the conditions  and  limitations  set forth below,  the
     Company may, at its option,  pay required dividends either: (i) in cash, or
     (ii) by adding the  per-share  amount of such dividend to the Stated Value.
     The Company  must  deliver  written  notice to the Holders  indicating  the
     manner in which it intends to pay dividends at least ten Trading Days prior
     to each  Dividend  Payment  Date,  but the Company may indicate in any such
     notice that the election  contained  therein shall  continue for subsequent
     Dividend  Payment  Dates  until  revised.  Failure to timely  provide  such
     written  notice  shall be  deemed an  election  by the  Company  to add the
     per-share amount of each dividend to the Stated Value.

          (c) Except as otherwise  provided  herein,  if at any time the Company
     pays less  than the total  amount of  required  dividends  on any  Dividend
     Payment  Date,  then such payment  shall be  distributed  ratably among the
     Holders  based  upon the number of shares of  Preferred  Stock held by each
     Holder.

          (d) So long as any  Preferred  Stock is  outstanding:  (i) neither the
     Company nor any Subsidiary shall, directly or indirectly,  redeem, purchase
     or otherwise acquire any Junior Securities or set aside any monies for such
     a redemption, purchase or other acquisition, and (ii) the Company shall not
     pay or  declare  any  dividend  or  make  any  distribution  on any  Junior
     Securities,   except  stock  dividends  on  the  Common  Stock  payable  in
     additional shares of
<PAGE>
     Common Stock and dividends due and paid in the ordinary course on preferred
     stock of the Company at such times as the Company is in compliance with its
     payment and other obligations hereunder.

     4.  Registration of Preferred  Stock.  The Company shall register shares of
the  Preferred  Stock,  upon  records to be  maintained  by the Company for that
purpose (the  "Preferred  Stock  Register"),  in the name of the record  Holders
thereof from time to time. The Company may deem and treat the registered  Holder
of shares of Preferred  Stock as the absolute  owner  thereof for the purpose of
any  conversion  hereof or any  distribution  to such Holder,  and for all other
purposes, absent actual notice to the contrary.

     5.  Registration  of Transfers.  The Company shall register the transfer of
any shares of Preferred Stock in the Preferred Stock Register, upon surrender of
certificates  evidencing  such Shares to the  Company at its  address  specified
herein. Upon any such registration or transfer, a new certificate evidencing the
shares of Preferred Stock so transferred shall be issued to the transferee and a
new  certificate   evidencing  the  remaining  portion  of  the  shares  not  so
transferred, if any, shall be issued to the transferring Holder.

     6.  Liquidation.  Upon any  liquidation,  dissolution  or winding-up of the
Company,  whether voluntary or involuntary (a "Liquidation"),  the Holders shall
be  entitled  to receive an amount  equal to the Stated  Value for each share of
Preferred Stock, plus all accrued but unpaid dividends  thereon,  payable out of
the assets of the  Company,  whether  such assets are  capital or  surplus,  and
before  any  distribution  or payment  may be made to the  holders of any Junior
Securities. If the assets of the Company are insufficient to pay such amounts in
full,  then the entire amount of assets to be  distributed  shall be distributed
among the Holders  ratably in accordance  with the amount each Holder would have
received if such assets were  sufficient  to pay all such  amounts in full.  The
Company  shall mail written  notice of any  Liquidation  or Change of Control to
each record  Holder not less than 45 days prior to the payment date or effective
date thereof. At the request of any Holder, which must be delivered prior to the
effective  date of a Change of Control  (or, if later,  within five Trading Days
after such Holder  receives  notice of such Change of Control from the Company),
such Change of Control  will be treated as a  Liquidation  with  respect to such
Holder,  provided,  however,  that a Change of Control  will not be treated as a
Liquidation  event if the  Change of  Control  is caused by one or more  Holders
acquiring  control of the  Company or as a result of the  Special  Put Option or
other rights of the Holders under the Preferred Stock.

     7. Conversion.

          (a) Conversion at Option of Holder.  At the option of any Holder,  any
     Preferred  Stock held by such Holder may be  converted  into  Common  Stock
     based  on the  then-applicable  Conversion  Price.  A  Holder  may  convert
     Preferred  Stock into Common Stock  pursuant to this  paragraph at any time
     and from time to time after the Original  Issue Date,  by delivering to the
     Company a  Conversion  Notice,  in the form  attached  hereto as Exhibit A,
     appropriately  completed and duly signed,  and the date any such Conversion
     Notice is delivered to the Company (as  determined in  accordance  with the
     notice provisions  hereof) is a "Holder  Conversion Date."  Notwithstanding
     anything herein to the contrary,  the Holders right to receive Common Stock
     upon conversions hereunder shall be subject to the limitations set forth in
     Sections 4.5(f) and (g) of the Purchase Agreement.

          (b)  Conversion  at  Option  of  Company.  If,  at any time  after the
     Effective  Date, the Closing Price for 30 consecutive  Trading Days exceeds
     135% of the Conversion  Price  applicable on each such day, the Company may
     require the Holders to convert all or a portion of the Preferred Stock into
     Common Stock based on the then-applicable Conversion Price. The Company may
     require a conversion  pursuant to this paragraph by delivering  irrevocable
     written  notice of such election to the Holders,  and the tenth Trading Day
     after the date any such notice is delivered  to the Holders (as  determined
     in  accordance  with the notice  provisions  hereof)  will be the  "Company
     Conversion  Date"  for  such  required   conversion.   Notwithstanding  the
     foregoing,  the Company may not require any conversion under this paragraph
     (and any notice  thereof  will be void),  unless (i) the  Company  requires
     conversion  on a pro rata basis under the  corresponding  provisions of all
     outstanding  shares of Preferred  Stock and (ii) from the beginning of such
     period of ten consecutive Trading Days through the Company Conversion Date,
     the Equity  Conditions  are satisfied with respect to all of the Underlying
     Shares then issuable upon conversion in full of all  outstanding  shares of
     Preferred  Stock.   "Conversion  Date"  shall  refer  to  either  a  Holder
     Conversion Date or a Company Conversion Date, as applicable.
<PAGE>
     8. Mechanics of Conversion.

          (a) The number of Underlying  Shares  issuable upon any  conversion of
     Preferred Stock hereunder shall equal (i) the Stated Value of the Preferred
     Stock to be converted,  divided by the  Conversion  Price on the Conversion
     Date,  plus (ii) the  amount of any  accrued  but unpaid  dividends  on the
     Preferred  Stock through the  Conversion  Date,  divided by the  Conversion
     Price on the Conversion  Date,  provided,  that, if the Company has a valid
     election in force on the  Conversion  Date to pay  dividends in cash,  then
     clause (ii) of this  paragraph  shall not be included  in  calculating  the
     number of Underlying Shares issuable upon such conversion.

          (b) Upon conversion of any Preferred Stock, the Company shall promptly
     (but in no event later than three Trading Days after the  Conversion  Date)
     issue or cause  to be  issued  and  cause  to be  delivered  to or upon the
     written  order of the  Holder  and in such name or names as the  Holder may
     designate:  (i) a certificate for the Underlying  Shares issuable upon such
     conversion,  free of restrictive  legends  unless a registration  statement
     covering  the  resale of the  Underlying  Shares and naming the Holder as a
     selling  stockholder  thereunder is not then effective and such  Underlying
     Shares  are  not  then  freely  transferable  without  volume  restrictions
     pursuant to Rule 144 under the Securities Act, and (ii) a bank check in the
     amount of all  accrued  and  unpaid  dividends  on the  Preferred  Stock so
     converted  (if the Company  has elected or is required to pay such  accrued
     dividends in cash).  Within three Trading Days after receipt  thereof,  the
     Holder will deliver the original  certificate(s)  evidencing  the Preferred
     Stock so converted to the Company, unless the Holder is awaiting receipt of
     a new  certificate  evidencing  such shares  from the  Company  pursuant to
     another  provision  hereof.  The Holder, or any Person so designated by the
     Holder to receive Underlying Shares,  shall be deemed to have become holder
     of record of such Underlying  Shares as of the Conversion Date. The Company
     shall,  upon  request  of the  Holder,  use its  best  efforts  to  deliver
     Underlying  Shares  hereunder  electronically  through the Depository Trust
     Corporation or another established clearing corporation  performing similar
     functions.

          (c) If a Holder is converting  less than all shares of Preferred Stock
     represented by the certificate or certificates  delivered by such Holder to
     the  Company in  connection  with such  conversion,  or if such  conversion
     cannot be  effected  in full for any reason,  the  Company  shall  promptly
     deliver to such Holder a new certificate  representing the number of shares
     of Preferred Stock not converted.

          (d) The Company's  obligations to issue and deliver  Underlying Shares
     upon  conversion of Preferred Stock in accordance with the terms hereof are
     absolute and  unconditional,  irrespective of any action or inaction by any
     Holder to  enforce  the same,  any waiver or  consent  with  respect to any
     provision  hereof,  the recovery of any judgment  against any Person or any
     action  to  enforce  the same,  or any  setoff,  counterclaim,  recoupment,
     limitation or termination, or any breach or alleged breach by any Holder or
     any other  Person of any  obligation  to the  Company or any  violation  or
     alleged  violation  of  law  by  any  Holder  or  any  other  Person,   and
     irrespective  of any other  circumstance  which might  otherwise limit such
     obligation of the Company to any Holder in connection  with the issuance of
     such Underlying Shares.

     9. Repurchase Options.

          (a) Company's Option.  Subject to the provisions of this Section, from
     and after the Original Issue Date,  the Company shall have the right,  upon
     30 Trading Days' irrevocable notice (a "Company  Repurchase Notice") to the
     Holder,  to  repurchase  all or any  portion of the  outstanding  shares of
     Preferred Stock (as to which no Conversion Notice has been delivered), at a
     price equal to 114% of the Stated Value of the shares of Preferred Stock to
     be repurchased plus all accrued but unpaid dividends thereon to the date of
     payment (the "Company  Repurchase  Price").  The Company  Repurchase Notice
     will specify the effective  date of the  repurchase  under this  paragraph,
     which must be a Trading  Day at least 30  Trading  Days after the date such
     notice is delivered (the "Company Repurchase Date"), and the entire Company
     Repurchase  Price  shall be paid in cash by the next  Trading Day after the
     Company  Repurchase  Date.  Upon receipt of such  payment,  the Holder will
     deliver the  original  certificate(s)  evidencing  the shares of  Preferred
     Stock so repurchased to the Company, unless such Holder is awaiting receipt
     of a new certificate evidencing shares from the Company pursuant to another
     provision hereof.  At any time on or prior to the Company  Repurchase Date,
     the Holder may convert all or any portion of the shares of Preferred  Stock
     into  Common  Stock  subject to such  Company  Repurchase  Notice,  and the
     Company  shall  honor  any such  conversion  in  accordance  with the terms
     hereof.  Notwithstanding  the  foregoing,  the Company  may only  deliver a
     Company Repurchase Notice and complete such optional  repurchase if, on the
     date of the  Company  Repurchase  Notice  and from  such date  through  the
     Company
<PAGE>
     Repurchase Date, the Equity Conditions are satisfied with respect to all of
     the  Underlying  Shares  then  issuable  upon  conversion  in  full  of all
     outstanding shares of Preferred Stock.

     If the  Company  fails to pay the Company  Repurchase  Price in full by the
     next Trading Day after the Company  Repurchase  Date,  then, in addition to
     any other remedies available to the Holder under the Transaction Documents,
     (1) the Company shall  thereafter  have no further right under this Section
     to repurchase any shares of Preferred  Stock, and (2) the Holder shall have
     the right (by notice to the  Company)  to declare  the  Company  Repurchase
     Notice to be void ab initio.

          (b)  Holder's  Annual  Put  Option.  Each  of  the  first  and  second
     anniversaries  of the Original  Issue Date shall  constitute an "Annual Put
     Date" hereunder.  On each Annual Put Date, the Holder shall have the right,
     in  its  sole  discretion,  to  convert  all  or any  portion  of the  then
     outstanding  shares of  Preferred  Stock into Common  Stock at a Conversion
     Price equal to the Amended Conversion Price by delivering to the Company on
     or prior to such Annual Put Date a written notice  specifying the number of
     shares of Preferred Stock to be so converted (an "Annual Put Notice").

          (c) Holder's Special Put Option. If, at any time after the sixth month
     anniversary of the Closing Date, the Company's equity market capitalization
     (defined  as the  aggregate  number of shares of Common  Stock  outstanding
     times  the  Closing  Price)  is less than $50  million  for 20  consecutive
     Trading Days, then the Holder shall have the right, in its sole discretion,
     to convert all or any portion of the then  outstanding  shares of Preferred
     Stock  into  Common  Stock  at a  Conversion  Price  equal  to the  Amended
     Conversion  Price by delivering to the Company a written notice  specifying
     the number of shares of Preferred  Stock to be so converted (a "Special Put
     Notice"),  and the date on which such notice is delivered is referred to as
     the Special Put Date.

          (d)  Cash  Alternative.  Notwithstanding  the  foregoing,  in  lieu of
     allowing a Holder to convert  Preferred Stock into Common Stock pursuant to
     an Annual Put Notice or a Special  Put  Notice,  the  Company  may elect to
     repurchase all or any portion of such  Preferred  Stock at a price equal to
     (i) in the case of an Annual Put Notice,  100% of the Stated  Value of each
     share of Preferred Stock covered by such Annual Put Notice plus all accrued
     but unpaid dividends thereon,  or (ii) in the case of a Special Put Notice,
     114% of the Stated Value of each share of Preferred  Stock  covered by such
     Special  Put Notice  plus all accrued  but unpaid  dividends  thereon.  The
     Company may elect this cash alternative by delivering to the Holder written
     notice of such election  specifying the number of shares of Preferred Stock
     to be repurchased (a "Cash Payment Notice") within three Trading Days after
     delivery of the Annual Put Notice or the  Special  Put  Notice.  Any shares
     that the Company does not elect to  repurchase  in the Cash Payment  Notice
     will be  converted  into Common  Stock in  accordance  with Section 9(b) or
     Section 9(c), as applicable. If the Company delivers a Cash Payment Notice,
     the  Company  shall pay the  applicable  repurchase  price to the Holder in
     immediately  available funds (free of any claim of  subordination) no later
     than the tenth  Trading  Day  following  the Annual Put Date or Special Put
     Date (as applicable),  and upon receipt thereof the Holder will deliver the
     original  certificate(s)  evidencing  the  shares  of  Preferred  Stock  so
     repurchased to the Company,  unless the Holder is awaiting receipt of a new
     certificate   evidencing  shares  from  the  Company  pursuant  to  another
     provision hereof. If the Company fails to pay such repurchase price in full
     when due hereunder,  then, in addition to any other  remedies  available to
     the Holder under the Transaction Documents, the Holder shall have the right
     (by notice to the Company) to rescind the  applicable  Annual Put Notice or
     Special Put Notice.

     10.  Exchange of  Preferred  Stock to  Debentures.  At any time the Company
shall have the option to  exchange  all (but not less than all) of the shares of
Preferred  Stock  then  held  by  the  Holders  for  the  Company's  Convertible
Debentures  due three years from the Original  Issue Date,  in the form attached
hereto as Exhibit B (the  "Debentures"),  having an aggregate  principal  amount
equal to the  Stated  Value of the shares of  Preferred  Stock  being  exchanged
pursuant  to the terms  hereof plus all  accrued  but unpaid  dividends  thereon
through the date of the exchange. Upon an exchange pursuant to the terms hereof,
the Company may require the Holders to enter into a  subordination  agreement in
the form  attached to the Purchase  Agreement  as Exhibit E (the  "Subordination
Agreement").  Upon receipt of the Debentures in the aggregate  principal  amount
calculated  pursuant to the terms  hereof,  the Holder will deliver the original
certificate(s)  evidencing  the shares of  Preferred  Stock so  exchanged to the
Company,  unless the Holder is awaiting receipt of a new certificate  evidencing
shares from the Company pursuant to another  provision  hereof.  Notwithstanding
anything  herein to the  contrary,  (i) if the Company shall not have issued the
Debentures  to  the  Holders  pursuant  to  this  Section  by  the  ninth  month
anniversary of the Original Issue Date, then the Dividend Rate shall be
<PAGE>
increased to 8.50% and (ii) if the Company shall not have issued the  Debentures
to the Holders pursuant to this Section by October 31, 2002 (the "Target Date"),
then the Company shall issue to each Holder a common stock  purchase  warrant in
the form of Exhibit B to the  Purchase  Agreement  pursuant to which such Holder
shall be entitled to purchase a number of shares of Common Stock equal to 10% of
the  aggregate  Stated Value of the shares of Preferred  Stock then held by such
Holder  divided by the average of the Closing  Price for the five  Trading  Days
immediately  preceding the Target Date (the "Measuring  Price"),  at an exercise
price equal to $22.33 per share (the "Preferred Stock Warrants").

     11. Events of Defaults.

          a. "Event of Default" means any one of the following  events (whatever
     the reason and whether it shall be voluntary or  involuntary or effected by
     operation of law or pursuant to any judgment, decree or order of any court,
     or any order,  rule or regulation  of any  administrative  or  governmental
     body):

               i.  any   default   in  the   payment   (free  of  any  claim  of
          subordination)  of  principal,  dividends  or  liquidated  damages  in
          respect of any shares of Preferred Stock, as and when the same becomes
          due and payable  (whether on a Conversion  Date or by  acceleration or
          otherwise);

               ii.  the  Company  or  any  Subsidiary  defaults  in  any  of its
          obligations  under  any  other  debenture  or  any  mortgage,   credit
          agreement or other facility, indenture agreement,  factoring agreement
          or other instrument under which there may be issued, or by which there
          may be secured or evidenced,  any  indebtedness  for borrowed money or
          money due under any long term leasing or factoring  arrangement of the
          Company or any  Subsidiary in an amount  exceeding  $750,000,  whether
          such indebtedness now exists or is hereafter created, and such default
          results  in such  indebtedness  becoming  or  being  declared  due and
          payable prior to the date on which it would  otherwise  become due and
          payable;

               iii.  the Company  shall fail to issue  Debentures  to the Holder
          pursuant to Section 10 hereof.

               iv. any Triggering Event.

          b. At any time following the  occurrence of an Event of Default,  each
     Holder shall have the option to elect,  by notice to the Company (an "Event
     Notice"), to convert all or any portion of the Preferred Stock then held by
     such Holder into Common Stock at a conversion price equal to (i) the lowest
     of (A)  the  average  of  the  Closing  Prices  on the  five  Trading  Days
     immediately  preceding the date of the Event Notice and (B) the  Conversion
     Price under the Certificate of Designation on the date of the Event Notice,
     divided by (ii) 1.14;  provided that the Company shall have the option,  by
     notice to the Holder  delivered within three Trading Days after the date of
     the Event  Notice,  to  repurchase  all of the  Preferred  Stock that would
     otherwise  be covered  pursuant  to such Event  Notice at a price per share
     equal to the  greater  of (1) 114% of the  Stated  Value of such  Preferred
     Stock plus all accrued  but unpaid  dividends  thereon  through the date of
     payment,  or (2) the Event Equity Value of the Underlying  Shares  issuable
     upon conversion of such Preferred Stock  (including such accrued but unpaid
     dividends  thereon)  (the  greater of (1) and (2) being  referred to as the
     "Event  Price").  If the  Company  elects  to  repurchase  Preferred  Stock
     pursuant to the  preceding  sentence,  the Company  shall pay the aggregate
     repurchase  price to each  Holder  no later  than the  eighth  Trading  Day
     following  the date of  delivery  of the  Event  Notice,  and upon  receipt
     thereof such Holder shall  deliver  original  certificates  evidencing  the
     shares of  Preferred  Stock and  Underlying  Shares so  repurchased  to the
     Company  (to the  extent  such  certificates  have  been  delivered  to the
     Holder).

          c. Upon the  occurrence  of any  Bankruptcy  Event,  the Company shall
     immediately  be  obligated,  without any further  action by any Holder,  to
     repurchase  all  outstanding   shares  of  Preferred  Stock  and  all  such
     Underlying Shares at the Event Price pursuant to the preceding paragraph as
     if each  Holder had  delivered  an Event  Notice  immediately  prior to the
     occurrence of such Bankruptcy Event.

          d. In  connection  with any  Event of  Default,  the  Holder  need not
     provide and the Company hereby waives any presentment,  demand,  protest or
     other  notice of any kind,  and the  Holder  may  immediately  and  without
     expiration  of any  grace  period  enforce  any and all of its  rights  and
     remedies  hereunder and all other remedies
<PAGE>
     available to it under applicable law. Any such declaration may be rescinded
     and annulled by the Holder at any time prior to payment hereunder.  No such
     rescission  or annulment  shall affect any  subsequent  Event of Default or
     impair any right consequent thereto.

     12. Voting  Rights.  Except as otherwise  provided  herein and as otherwise
required by law, the Preferred  Stock shall have no voting rights.  However,  so
long as any shares of Preferred  Stock are  outstanding,  the Company shall not,
without  the  affirmative  vote of the  Holders of a  majority  of the shares of
Preferred  Stock then  outstanding:  (a) alter or change  adversely  the powers,
preferences  or  rights  given to the  Preferred  Stock  or alter or amend  this
Certificate of  Designation,  (b) authorize or create any class of stock ranking
as to  dividends  or  distribution  of assets  upon a  Liquidation  senior to or
otherwise  pari passu with the Preferred  Stock,  (c) amend its  certificate  or
articles of incorporation  or other charter  documents so as to affect adversely
any rights of the  Holders,  (d)  increase  the  authorized  number of shares of
Preferred Stock,  (e) incur,  create,  assume,  guarantee or suffer to exist any
indebtedness in addition to the Permitted Senior  Indebtedness or (f) enter into
any agreement with respect to the foregoing.

     13. Charges,  Taxes and Expenses.  Issuance of  certificates  for shares of
Preferred Stock and for Underlying  Shares issued on conversion of (or otherwise
in respect of) the Preferred  Stock shall be made without  charge to the Holders
for any issue or transfer  tax,  withholding  tax,  transfer  agent fee or other
incidental tax or expense in respect of the issuance of such  certificates,  all
of which taxes and  expenses  shall be paid by the Company;  provided,  however,
that the  Company  shall not be  required  to pay any tax that may be payable in
respect of any transfer  involved in the  registration of any  certificates  for
Common  Stock or  Preferred  Stock in a name other than that of the Holder.  The
Holder  shall be  responsible  for all other tax  liability  that may arise as a
result of holding or transferring  the Preferred  Stock or receiving  Underlying
Shares in respect of the Preferred Stock.

     14. Replacement Certificates. If any certificate evidencing Preferred Stock
or Underlying Shares is mutilated,  lost, stolen or destroyed, the Company shall
issue  or  cause  to be  issued  in  exchange  and  substitution  for  and  upon
cancellation hereof, or in lieu of and substitution for such certificate,  a new
Company  of such  loss,  theft  or  destruction  and  customary  and  reasonable
indemnity,   if  requested.   Applicants  for  a  new  certificate   under  such
circumstances  shall also  comply  with such other  reasonable  regulations  and
procedures and pay such other  reasonable  third-party  costs as the Company may
prescribe.

     15. Reservation of Underlying Shares. The Company covenants that it will at
all times reserve and keep  available out of the aggregate of its authorized but
unissued  and  otherwise  unreserved  Common  Stock,  solely for the  purpose of
enabling  it to issue  Underlying  Shares as required  hereunder,  the number of
Underlying Shares which are then issuable and deliverable upon the conversion of
(and  otherwise  in respect of) all  outstanding  Preferred  Stock  (taking into
account the adjustments of Section 16), free from preemptive rights or any other
contingent  purchase  rights of  persons  other  than the  Holder.  The  Company
covenants that all Underlying  Shares so issuable and  deliverable  shall,  upon
issuance in accordance  with the terms hereof,  be duly and validly  authorized,
issued and fully paid and nonassessable.

     16. Certain Adjustments. The Conversion Price is subject to adjustment from
time to time as set forth in this Section 16.

          (a) Stock  Dividends  and Splits.  If the  Company,  at any time while
     Preferred  Stock is  outstanding,  (i) pays a stock  dividend on its Common
     Stock or otherwise  makes a distribution on any class of capital stock that
     is payable in shares of Common Stock  (other than regular  dividends on the
     Preferred Stock), (ii) subdivides outstanding shares of Common Stock into a
     larger number of shares,  or (iii)  combines  outstanding  shares of Common
     Stock  into a  smaller  number  of  shares,  then in  each  such  case  the
     Conversion  Price shall be  multiplied by a fraction of which the numerator
     shall be the  number  of shares of  Common  Stock  outstanding  immediately
     before  such  event and of which  the  denominator  shall be the  number of
     shares of Common  Stock  outstanding  immediately  after  such  event.  Any
     adjustment  made  pursuant  to clause (i) of this  paragraph  shall  become
     effective  immediately  after  the  record  date for the  determination  of
     stockholders  entitled to receive such  dividend or  distribution,  and any
     adjustment  pursuant to clause (ii) or (iii) of this paragraph shall become
     effective  immediately  after the  effective  date of such  subdivision  or
     combination.  If any event  requiring an  adjustment  under this  paragraph
     occurs during the period that a Conversion  Price is calculated  hereunder,
     then  the   calculation  of  such   Conversion   Price  shall  be  adjusted
     appropriately to reflect such event.
<PAGE>
          (b)  Pro  Rata  Distributions.  If  the  Company,  at any  time  while
     Preferred Stock is outstanding,  distributes to all holders of Common Stock
     (i)  evidences  of  its  indebtedness,  (ii)  any  security  (other  than a
     distribution  of Common Stock  covered by the preceding  paragraph),  (iii)
     rights or warrants to subscribe for or purchase any  security,  or (iv) any
     other asset (in each case, "Distributed Property"), then, at the request of
     any Holder  delivered  before the 90th day after the record  date fixed for
     determination of stockholders  entitled to receive such  distribution,  the
     Company will  deliver to such  Holder,  within five Trading Days after such
     request (or, if later,  on the effective  date of such  distribution),  the
     Distributed  Property  that such Holder would have been entitled to receive
     in respect of the Underlying Shares for which such Holder's Preferred Stock
     could have been  converted  immediately  prior to such record date. If such
     Distributed Property is not delivered to a Holder pursuant to the preceding
     sentence,  then upon any  conversion  of Preferred  Stock that occurs after
     such record date, such Holder shall be entitled to receive,  in addition to
     the  Underlying  Shares  otherwise  issuable  upon  such  conversion,   the
     Distributed  Property  that such Holder would have been entitled to receive
     in  respect of such  number of  Underlying  Shares had the Holder  been the
     record holder of such Underlying  Shares  immediately  prior to such record
     date. In the event that the  Distributed  Property is not the same for each
     share of Common  Stock,  the Holder  will be entitled to choose any type of
     Distributed Property that any holder of Common Stock is entitled to receive
     in such distribution.

          (c) Fundamental Transactions. If, at any time while Preferred Stock is
     outstanding,  (i) the Company  effects any merger or  consolidation  of the
     Company with or into another  Person,  (ii) the Company effects any sale of
     all or  substantially  all of its  assets  in one or a  series  of  related
     transactions,  (iii) any tender  offer or  exchange  offer  (whether by the
     Company or another Person) is completed pursuant to which holders of Common
     Stock  are  permitted  to  tender  or  exchange   their  shares  for  other
     securities,   cash  or   property,   or  (iv)  the   Company   effects  any
     reclassification  of the  Common  Stock or any  compulsory  share  exchange
     pursuant  to which  the  Common  Stock  is  effectively  converted  into or
     exchanged  for other  securities,  cash or  property  (in any such case,  a
     "Fundamental   Transaction"),   then  upon  any  subsequent  conversion  of
     Preferred  Stock,  each Holder  shall have the right to  receive,  for each
     Underlying Share that would have been issuable upon such conversion  absent
     such Fundamental Transaction,  the same kind and amount of securities, cash
     or property as it would have been  entitled to receive upon the  occurrence
     of such Fundamental  Transaction if it had been,  immediately prior to such
     Fundamental  Transaction,  the  holder of one share of  Common  Stock  (the
     "Alternate  Consideration").  In the  event  that  more  than  one  type of
     Alternate  Consideration  is to be received by holders of Common Stock in a
     Fundamental Transaction, the Holders will be entitled to choose any type of
     Alternate  Consideration  that any holder of Common  Stock is  entitled  to
     receive  in  such  Fundamental  Transaction.   For  purposes  of  any  such
     conversion,   the   determination   of  the   Conversion   Price  shall  be
     appropriately  adjusted to apply to such Alternate  Consideration  based on
     the amount of Alternate  Consideration  issuable in respect of one share of
     Common  Stock  in  such  Fundamental  Transaction,  and the  Company  shall
     apportion  the  Conversion  Price among the  Alternate  Consideration  in a
     reasonable manner reflecting the relative value of any different components
     of the  Alternate  Consideration.  If holders of Common Stock are given any
     choice  as  to  the  securities,  cash  or  property  to be  received  in a
     Fundamental Transaction, then each Holder shall be given the same choice as
     to the Alternate Consideration it receives upon any conversion of Preferred
     Stock following such  Fundamental  Transaction.  To the extent necessary to
     effectuate  the  foregoing  provisions,  any  successor  to the  Company or
     surviving entity in such Fundamental  Transaction shall issue to the Holder
     a new series of preferred stock  consistent  with the foregoing  provisions
     and  evidencing  the Holders'  right to convert such  preferred  stock into
     Alternate  Consideration.  The terms of any  agreement  pursuant to which a
     Fundamental  Transaction is effected shall include terms requiring any such
     successor  or  surviving  entity  to  comply  with the  provisions  of this
     paragraph  (c)  and  insuring  that  the  Preferred   Stock  (or  any  such
     replacement  security)  will be  similarly  adjusted  upon  any  subsequent
     transaction analogous to a Fundamental Transaction.
<PAGE>
          (d) Subsequent Equity Sales.

               i.  If,  at  any  time  while  shares  of  Preferred   Stock  are
          outstanding, the Company or any Subsidiary issues additional shares of
          Common Stock or rights, warrants,  options or other securities or debt
          convertible, exercisable or exchangeable for shares of Common Stock or
          otherwise  entitling  any  Person to  acquire  shares of Common  Stock
          (collectively,  "Common Stock  Equivalents") at an effective price per
          share of Common Stock (the "Effective Price") less than the Conversion
          Price (as adjusted  hereunder to such date), then the Conversion Price
          shall be reduced to equal the product of (A) the  Conversion  Price in
          effect  immediately  prior to such  issuance of Common Stock or Common
          Stock Equivalents times (B) a fraction,  the numerator of which is the
          sum  of  (1)  the  number  of  shares  of  Common  Stock   outstanding
          immediately  prior to such issuance,  plus (2) the number of shares of
          Common Stock which the aggregate  Effective  Price of the Common Stock
          issued (or  deemed to be  issued)  would  purchase  at the  Conversion
          Price,  and the denominator of which is the aggregate number of shares
          of Common Stock  outstanding or deemed to be  outstanding  immediately
          after such  issuance.  For purposes of the  foregoing  adjustment,  in
          connection with any issuance of any Common Stock Equivalents,  (x) the
          maximum number of shares of Common Stock  potentially  issuable at any
          time upon  conversion,  exercise  or  exchange  of such  Common  Stock
          Equivalents  (the "Deemed  Number")  shall be deemed to be outstanding
          upon  issuance of such Common  Stock  Equivalents,  (y) the  Effective
          Price  applicable to such Common Stock shall equal the minimum  dollar
          value of consideration  payable to the Company to purchase such Common
          Stock  Equivalents  and to convert,  exercise  or  exchange  them into
          Common  Stock,  divided  by the  Deemed  Number,  and  (z) no  further
          adjustment  shall be made to the  Conversion  Price  upon  the  actual
          issuance of Common Stock upon conversion, exercise or exchange of such
          Common Stock Equivalents.  However,  upon termination or expiration of
          any Common  Stock  Equivalents  the  issuance of which  resulted in an
          adjustment to the  Conversion  Price pursuant to this  paragraph,  the
          Conversion  Price shall be recomputed to equal the price it would have
          been had the  adjustments  in this paragraph been made, at the time of
          issuance of such Common Stock  Equivalents,  only with respect to that
          number of shares of the Common Stock actually issued upon  conversion,
          exercise  or  exchange of such  Common  Stock  Equivalents  and at the
          Effective Prices actually paid in connection therewith.

               ii.  If,  at  any  time  while  shares  of  Preferred  Stock  are
          outstanding,  the  Company  or  any  Subsidiary  issues  Common  Stock
          Equivalents with an Effective Price that floats or resets or otherwise
          varies or is  subject  to  adjustment  based on  market  prices of the
          Common  Stock (a  "Floating  Price  Security"),  then for  purposes of
          applying the  preceding  paragraph in connection  with any  subsequent
          conversion,  the Effective Price will be determined separately on each
          Conversion Date and will be deemed to equal the lowest Effective Price
          at which any holder of such  Floating  Price  Security  is entitled to
          acquire shares of Common Stock on such Conversion Date  (regardless of
          whether any such holder actually acquires any shares on such date).

               iii.  Notwithstanding  the foregoing,  no adjustment will be made
          under this  paragraph  (d) in respect  of: (A) the  issuance of Common
          Stock upon  exercise or  conversion  of any Common  Stock  Equivalents
          described in Schedule 3.1(g) to the Purchase Agreement  (provided that
          such  exercise  or  conversion  occurs  in  accordance  with the terms
          thereof,  without  amendment or modification,  and that the applicable
          exercise or conversion  price or ratio is described in such schedule),
          (B) any grant of options to  employees,  officers or  directors of the
          Company  pursuant  to  any  stock  option  plan  duly  adopted  by the
          Company's  board of  directors or in respect of the issuance of Common
          Stock  upon  exercise  of any  such  options,  (C)  securities  issued
          pursuant to an underwritten  public offering by the Company  resulting
          in gross proceeds to the Company of not less than $20,000,000 ("equity
          lines  of  credit"  or  their   equivalents  shall  not  satisfy  this
          exception), and (D) shares of Common Stock issued in connection with a
          Strategic  Transaction.  For  purposes of this  Section,  a "Strategic
          Transaction"  shall mean a transaction  or  relationship  in which the
          Company issues shares of Common Stock to an entity which is, itself or
          through its  subsidiaries,  an operating company in a business related
          to the  business  of the  Company  and in which the  Company  receives
          benefits in addition to the investment of funds, but shall not include
          a transaction in which the Company is issuing securities primarily for
          the purpose of raising capital.

          (e) Calculations. All calculations under this Section 16 shall be made
     to the nearest cent or the nearest 1/100th of a share,  as applicable.  The
     number of shares of Common Stock outstanding at any given time
<PAGE>
     shall  not  include  shares  owned  or held by or for  the  account  of the
     Company,  and the  disposition  of any such shares shall be  considered  an
     issue or sale of Common Stock.

          (f) Notice of  Adjustments.  Upon the  occurrence  of each  adjustment
     pursuant  to this  Section 16, the  Company at its  expense  will  promptly
     compute such  adjustment in accordance  with the terms hereof and prepare a
     certificate  describing  in  reasonable  detail  such  adjustment  and  the
     transactions  giving  rise  thereto,  including  all facts  upon which such
     adjustment  is based.  Upon  written  request,  the Company  will  promptly
     deliver a copy of each such certificate to each Holder and to the Company's
     Transfer Agent.

          (h) Notice of Corporate Events. If the Company (i) declares a dividend
     or any other distribution of cash,  securities or other property in respect
     of its Common Stock, including without limitation any granting of rights or
     warrants to subscribe  for or purchase any capital  stock of the Company or
     any  Subsidiary,  (ii)  authorizes  or approves,  enters into any agreement
     contemplating  or  solicits   stockholder   approval  for  any  Fundamental
     Transaction or (iii) authorizes the voluntary  dissolution,  liquidation or
     winding up of the affairs of the Company, then the Company shall deliver to
     each Holder a notice  describing  the material terms and conditions of such
     transaction,  at least 20 calendar days prior to the  applicable  record or
     effective  date on which a Person  would need to hold Common Stock in order
     to participate in or vote with respect to such transaction, and the Company
     will  take all steps  reasonably  necessary  in order to  insure  that each
     Holder is given the practical  opportunity  to convert its Preferred  Stock
     prior to such time so as to  participate  in or vote with  respect  to such
     transaction;  provided, however, that the failure to deliver such notice or
     any defect  therein shall not affect the validity of the  corporate  action
     required to be described in such notice.

     17  Limitation  on  Conversion.  Notwithstanding  anything to the  contrary
contained  herein,  the number of shares of Common Stock that may be acquired by
any Holder upon any  conversion  of Preferred  Stock (or otherwise in respect of
the  Preferred  Stock) shall be limited to the extent  necessary to insure that,
following  such  conversion (or other  issuance),  the total number of shares of
Common Stock then  beneficially  owned by such Holder and its Affiliates and any
other  Persons  whose  beneficial  ownership of Common Stock would be aggregated
with the Holder's for purposes of Section  13(d) of the Exchange  Act,  does not
exceed  9.999%  (the  "Maximum  Percentage")  of the total  number of issued and
outstanding  shares of Common  Stock  (including  for such purpose the shares of
Common Stock  issuable  upon such  conversion).  For such  purposes,  beneficial
ownership  shall be determined in accordance  with Section 13(d) of the Exchange
Act and the rules and  regulations  promulgated  thereunder.  Each delivery of a
Conversion  Notice by a Holder will constitute a  representation  by such Holder
that it has evaluated the  limitation set forth in this paragraph and determined
that  issuance  of the  full  number  of  Underlying  Shares  requested  in such
Conversion  Notice is permitted under this  paragraph.  By written notice to the
Company,  any Holder may waive the  provisions  of this  Section or  increase or
decrease  the  Maximum  Percentage  to any other  percentage  specified  in such
notice, but (i) any such waiver or increase will not be effective until the 61st
day after such notice is delivered  to the Company,  and (ii) any such waiver or
increase or decrease will apply only to such Holder and not to any other Holder.

     18 Fractional  Shares.  The Company shall not be required to issue or cause
to be issued  fractional  Underlying Shares on conversion of Preferred Stock. If
any fraction of an  Underlying  Share would,  except for the  provisions of this
Section,  be issuable upon conversion of Preferred  Stock, the Company shall pay
an amount in cash equal to the average of the Closing Prices of the Common Stock
for the  five  Trading  Days  immediately  prior  to  (but  not  including)  the
Conversion  Date  multiplied by such fraction;  provided  that,  unless a Holder
requests  otherwise,  no payment shall be required to a Holder  pursuant to this
sentence until the aggregate  amount  payable to such Holder in connection  with
such conversion  (together with unpaid amounts from prior  conversions)  exceeds
$1,000, at which time all previously deferred payments shall be made.

     19  Notices.  Any and all  notices or other  communications  or  deliveries
hereunder  (including  without  limitation  any  Conversion  Notice) shall be in
writing and shall be deemed given and  effective on the earliest of (i) the date
of  transmission,  if such notice or communication is delivered via facsimile at
the facsimile number specified in this Section prior to 6:30 p.m. (New York City
time)  on  a  Trading  Day,  (ii)  the  next  Trading  Day  after  the  date  of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading Day or
later than 6:30 p.m. (New York City time) on any Trading Day,  (iii) the Trading
Day following the date of mailing,  if sent by nationally  recognized  overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required  to be  given.  The  addresses  for  such  communications  shall  be as
specified
<PAGE>
in the  Purchase  Agreement  or such other  address or  facsimile  number as the
Holder may provide to the Company in accordance with this Section.

     20 Miscellaneous.

          (a) The headings herein are for convenience  only, do not constitute a
     part of this  Certificate of Designations  and shall not be deemed to limit
     or affect any of the provisions hereof.

          (b) No waiver of any default with respect to any provision,  condition
     or requirement of this Certificate of Designations  shall be deemed to be a
     continuing waiver in the future or a waiver of any subsequent  default or a
     waiver of any other provision,  condition or requirement  hereof, nor shall
     any delay or omission of either  party to exercise  any right  hereunder in
     any manner impair the exercise of any such right.


      [Remainder of page intentionally left blank. Signature page follows.]
<PAGE>

     In Witness Whereof,  Applied Films  Corporation has caused this Certificate
of  Designation to be signed by its President and Chief  Executive  Officer this
16th day of January,  2001, who affirms that the statements made herein are true
and correct.



                                           /s/ Thomas T. Edman
                                           Thomas T. Edman
                                           President and Chief Executive Officer






::ODMA\PCDOCS\GRR\523641\3
<PAGE>

                                                                       EXHIBIT A

                            FORM OF CONVERSION NOTICE

(To be executed by the registered Holder
in order to convert shares of Preferred Stock)

The  undersigned  hereby elects to convert the number of shares of Applied Films
Corporation Series A Convertible  Preferred Stock indicated below into shares of
common  stock,  no par value per share (the "Common  Stock"),  of Applied  Films
Corporation, a Colorado corporation (the "Company"), according to the conditions
hereof, as of the date written below.


                             ---------------------------------------------------
                             Date to Effect Conversion

                             ---------------------------------------------------
                             Number of shares  of Preferred Stock owned prior to
                             Conversion

                             ---------------------------------------------------
                             Number of shares of Preferred Stock to be Converted

                             ---------------------------------------------------
                             Stated  Value  of  shares  of Preferred Stock to be
                             Converted

                             ---------------------------------------------------
                             Number of shares of Common Stock to be Issued

                             ---------------------------------------------------
                             Applicable Conversion Price

                             ---------------------------------------------------
                             Number of  shares  of Preferred Stock subsequent to
                             Conversion

                             ---------------------------------------------------
                             Name of Holder

                             By:________________________________________________
                             Name:______________________________________________
                             Title:_____________________________________________

<PAGE>


                                                                       EXHIBIT B

THIS  DEBENTURE  HAS NOT  BEEN  REGISTERED  WITH  THE  SECURITIES  AND  EXCHANGE
COMMISSION  OR THE  SECURITIES  COMMISSION  OF ANY  STATE  IN  RELIANCE  UPON AN
EXEMPTION  FROM  REGISTRATION  UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY,  MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE  REGISTRATION  STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION  REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.


No. [ ]                                                                    $[  ]

                            APPLIED FILMS CORPORATION
                         CONVERTIBLE DEBENTURE DUE 2004

     THIS DEBENTURE is one of a series of duly authorized and issued  debentures
of Applied Films Corporation, a Colorado corporation (the "Company"), designated
as its  Convertible  Debentures due 2004, in the aggregate  principal  amount of
$10,000,000 (the "Debentures").

     FOR VALUE  RECEIVED,  the Company  promises to pay to [ ] or its registered
assigns (the  "Holder"),  the  principal  sum of [ ] ($ ), on [January [], 2004]
(the  "Maturity  Date"),  or such earlier date as the Debentures are required or
permitted to be repaid as provided hereunder,  and to pay interest to the Holder
on the  aggregate  unconverted  and then  outstanding  principal  amount of this
Debenture in accordance with the provisions hereof. This Debenture is subject to
the following additional provisions.

     1.  Definitions.  In  addition  to the  terms  defined  elsewhere  in  this
Debenture,  (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the certificate of  designations,  dated January
16,  2001,  governing  the  rights  and  privileges  of the  Company's  Series A
Convertible  Preferred  Stock (the  "Certificate of  Designation"),  and (b) the
following terms have the meanings indicated:

          "Amended Conversion Price" means the average of the ten Closing Prices
     immediately  preceding  an  Annual  Put  Date or a  Special  Put  Date,  as
     applicable under Section 7(d) below.

          "Conversion  Price" means  $19.75,  subject to adjustment as set forth
     herein.

          "Equity  Conditions"  means,  with respect to a specified  issuance of
     Common Stock, that each of the following  conditions is satisfied:  (i) the
     number of authorized but unissued and otherwise unreserved shares of Common
     Stock is sufficient for such issuance; (ii) such shares of Common Stock are
     registered  for resale by the Holder  pursuant to an  effective  Underlying
     Shares Registration Statement or all such shares may be sold without volume
     restrictions  pursuant to Rule 144(k) under the  Securities  Act; (iii) the
     Common Stock is listed or quoted (and is not suspended  from trading) on an
     Eligible  Market;  (iv) such  issuance  would be  permitted in full without
     violating  Section  14 hereof or the rules or  regulations  of any  Trading
     Market;  and (v) the Company is not in default with respect to any material
     obligation hereunder or under any other Transaction Document.

          "Event Equity Value" means,  in connection  with any required  payment
     following an Event Notice hereunder,  the average of the Closing Prices for
     the five  Trading  Days  preceding  either (a) the date of  delivery of the
     Event Notice or (b) the date on which such required payment  (together with
     any other  payments,  expenses and liquidated  damages then due and payable
     under the Transaction Documents) is paid in full, whichever is greater.

          "Original  Issue  Date"  means the date of the first  issuance  of any
     Debentures,  regardless  of the  number  of  transfers  of  any  particular
     Debenture.

     2. Interest.
<PAGE>
          (a) The  Company  shall pay  interest  to the Holder on the  aggregate
     unconverted and then outstanding  principal amount of this Debenture at the
     rate of 5% per annum,  payable  quarterly in arrears on each March 31, June
     30, September 30 and December 31, except if such date is not a Trading Day,
     in which case such interest shall be payable on the next succeeding Trading
     Day (each, an "Interest Payment Date"). Interest shall be calculated on the
     basis of a 360-day year and shall accrue daily  commencing  on the Original
     Issue Date.

          (b) Subject to the conditions  and  limitations  set forth below,  the
     Company may pay  interest on this  Debenture  (i) in cash or (ii) by adding
     the amount of the interest to the principal amount  outstanding  under this
     Debenture. The Company must deliver written notice to the Holder indicating
     the manner in which it intends to pay  interest at least ten  Trading  Days
     prior to each Interest  Payment  Date,  but the Company may indicate in any
     such  notice  that  the  election  contained  therein  shall  continue  for
     subsequent Interest Payment Dates until revised.  Failure to timely provide
     such  written  notice  shall be deemed an  election  by the  Company to pay
     interest  by adding  the amount of the  interest  to the  principal  amount
     outstanding under this Debenture. All interest payable on the Debentures on
     any Interest Payment Date must be paid in the same manner.

          (c) Except as otherwise  provided  herein,  if at any time the Company
     pays less  than the  total  amount of  required  interest  on any  Interest
     Payment  Date,  then such payment  shall be  distributed  ratably among the
     holders of the  Debentures  based upon the  principal  amount of Debentures
     held by each such holder.

          (d)  Notwithstanding  anything to the contrary  contained herein,  the
     Company may not pay  interest  by adding the amount of the  interest to the
     principal amount outstanding under this Debenture unless, at such time, the
     Equity  Conditions  are  satisfied  with  respect to all of the  Underlying
     Shares then issuable upon conversion in full of the  outstanding  Preferred
     Stock  (after  giving  effect  to such  addition  to the  principal  amount
     outstanding under this Debenture).

          (e) So long as any Debentures are outstanding, (i) neither the Company
     nor any  Subsidiary  shall,  directly or  indirectly,  redeem,  purchase or
     otherwise  acquire  any  capital  stock or set aside any  monies for such a
     redemption,  purchase or other acquisition,  and (ii) the Company shall not
     pay or declare any dividend or make any  distribution on any capital stock,
     except stock dividends on the Common Stock payable in additional  shares of
     Common Stock and dividends due and paid in the ordinary course on preferred
     stock of the Company at such times as the Company is in compliance with its
     payment and other obligations hereunder.

     3.  Registration  of Debentures.  The Company shall register the Debentures
upon records to be  maintained  by the Company for that purpose (the  "Debenture
Register")  in the name of each record  holder  thereof  from time to time.  The
Company  may deem and  treat the  registered  Holder  of this  Debenture  as the
absolute owner hereof for the purpose of any conversion hereof or any payment of
interest  hereon,  and for all  other  purposes,  absent  actual  notice  to the
contrary.

     4. Registration of Transfers and Exchanges.  The Company shall register the
transfer  of any  portion  of this  Debenture  in the  Debenture  Register  upon
surrender  of this  Debenture to the Company at its address for notice set forth
herein.   Upon  any  such  registration  or  transfer,   a  new  debenture,   in
substantially  the  form of this  Debenture  (any  such  new  debenture,  a "New
Debenture"),  evidencing the portion of this  Debenture so transferred  shall be
issued to the transferee and a New Debenture evidencing the remaining portion of
this Debenture not so transferred,  if any, shall be issued to the  transferring
Holder.  The acceptance of the New Debenture by the transferee  thereof shall be
deemed the acceptance by such transferee of all of the rights and obligations of
a holder of a Debenture.  This Debenture is exchangeable  for an equal aggregate
principal  amount  of  Debentures  of  different  authorized  denominations,  as
requested by the Holder  surrendering  the same. No service  charge or other fee
will be  imposed  in  connection  with  any such  registration  of  transfer  or
exchange.
<PAGE>
     5. Conversion.

          (a) Conversion at Option of Holder.  At the option of the Holder,  all
     or any portion of this  Debenture may be converted  into Common Stock based
     on  the  then-applicable  Conversion  Price.  A  Holder  may  convert  this
     Debenture into Common Stock pursuant to this paragraph at any time and from
     time to time after the Original  Issue Date, by delivering to the Company a
     conversion  notice (a "Conversion  Notice"),  in the form attached  hereto,
     appropriately  completed and duly signed,  and the date any such Conversion
     Notice is delivered to the Company (as  determined in  accordance  with the
     notice provisions hereof) is a "Holder Conversion Date."

          (b)  Conversion  at  Option  of  Company.  If,  at any time  after the
     Effective  Date, the Closing Price for 30 consecutive  Trading Days exceeds
     135% of the Conversion  Price  applicable on each such day, the Company may
     require  the Holder to  convert  all or a portion  of this  Debenture  into
     Common Stock based on the then-applicable Conversion Price. The Company may
     require a conversion  pursuant to this paragraph by delivering  irrevocable
     written  notice of such  election to the Holder,  and the tenth Trading Day
     after the date any such notice is delivered to the Holder (as determined in
     accordance  with  the  notice  provisions  hereof)  will  be  the  "Company
     Conversion  Date"  for  such  required   conversion.   Notwithstanding  the
     foregoing,  the Company may not require any conversion under this paragraph
     (and any notice  thereof  will be void),  unless (i) the  Company  requires
     conversion under the corresponding provisions of all outstanding Debentures
     and (ii) from the beginning of such period of 30  consecutive  Trading Days
     through the Company  Conversion  Date, the Equity  Conditions are satisfied
     with respect to all of the Underlying  Shares then issuable upon conversion
     in full of all  outstanding  Debentures.  "Conversion  Date" shall refer to
     either  a  Holder  Conversion  Date  or  a  Company   Conversion  Date,  as
     applicable.

     6. Mechanics of Conversion.

          (a) The  number of  Underlying  Shares  issuable  upon any  conversion
     hereunder  shall  equal  (i)  the  outstanding  principal  amount  of  this
     Debenture  to  be  converted,  divided  by  the  Conversion  Price  on  the
     Conversion Date, plus (ii) the amount of any accrued but unpaid interest on
     this Debenture through the Conversion Date, divided by the Conversion Price
     on the Conversion Date;  provided that, if the Company has a valid election
     in force on the Conversion  Date to pay interest in cash,  then clause (ii)
     of this  paragraph  shall not be  included  in  calculating  the  number of
     Underlying Shares issuable upon such conversion.

          (b) Upon conversion of this Debenture, the Company shall promptly (but
     in no event later than three Trading Days after the Conversion  Date) issue
     or cause to be issued  and  cause to be  delivered  to or upon the  written
     order of the Holder  and in such name or names as the Holder may  designate
     (i) a certificate for the Underlying  Shares issuable upon such conversion,
     free of restrictive  legends unless a registration  statement  covering the
     resale  of the  Underlying  Shares  and  naming  the  Holder  as a  selling
     stockholder thereunder is not then effective and such Underlying Shares are
     not then freely transferable  without volume restrictions  pursuant to Rule
     144 under the  Securities  Act,  and (ii) a bank check in the amount of all
     accrued  and  unpaid  interest  on  principal  amount of the  Debenture  so
     converted  (if the Company  has elected or is required to pay such  accrued
     interest in cash).  Within three  Trading Days after receipt  thereof,  the
     Holder will  deliver the  original  Debenture  so converted to the Company,
     unless the Holder is awaiting  receipt of a New Debenture  from the Company
     pursuant  to  another  provision  hereof.  The  Holder,  or any  Person  so
     designated by the Holder to receive Underlying  Shares,  shall be deemed to
     have become holder of record of such Underlying Shares as of the Conversion
     Date. The Company shall,  upon request of the Holder,  use its best efforts
     to  deliver   Underlying  Shares  hereunder   electronically   through  the
     Depository Trust Corporation or another  established  clearing  corporation
     performing similar functions.

          (c) If the Holder is converting less than all of the principal  amount
     of this Debenture in connection with such conversion, or if such conversion
     cannot be  effected  in full for any reason,  the  Company  shall  promptly
     deliver  to  the  Holder  a  New  Debenture  representing  the  outstanding
     principal amount not converted.

          (d) The Company's  obligations to issue and deliver  Underlying Shares
     upon  conversion of this Debenture in accordance  with the terms hereof are
     absolute and  unconditional,  irrespective of any action or inaction by the
     Holder to  enforce  the same,  any waiver or  consent  with  respect to any
     provision  hereof,  the recovery of any judgment  against any Person or any
     action  to  enforce  the same,  or any  setoff,  counterclaim,  recoupment,
     limitation or termination, or any breach or alleged breach by the Holder or
     any other Person of any obligation to the Company or any violation or
<PAGE>
     alleged  violation  of  law  by  the  Holder  or  any  other  Person,   and
     irrespective  of any other  circumstance  which might  otherwise limit such
     obligation of the Company to the Holder in connection  with the issuance of
     such Underlying Shares.

     7. Repurchase Options.

          (a) Company's Option.  Subject to the provisions of this Section, from
     and after the Original Issue Date,  the Company shall have the right,  upon
     30 Trading Days' irrevocable notice (a "Company  Repurchase Notice") to the
     Holder,  to repurchase  all or any portion of the principal  amount of this
     Debenture (as to which no Conversion Notice has been delivered), at a price
     equal to 114% of the outstanding  principal  amount hereof plus all accrued
     but unpaid interest thereon to the date of payment (the "Company Repurchase
     Price").  The Company  Repurchase Notice will specify the effective date of
     the repurchase  under this paragraph,  which must be a Trading Day at least
     30  Trading  Days after the date such  notice is  delivered  (the  "Company
     Repurchase Date"), and the entire Company Repurchase Price shall be paid in
     cash by the next  Trading  Day  after the  Company  Repurchase  Date.  Upon
     receipt of such payment,  the Holder will deliver the original Debenture so
     repurchased to the Company, unless such Holder is awaiting receipt of a New
     Debenture from the Company  pursuant to another  provision  hereof.  At any
     time on or prior to the Company Repurchase Date, the Holder may convert all
     or any portion of this Debenture  into Common Stock,  and the Company shall
     honor  any  such   conversion   in   accordance   with  the  terms  hereof.
     Notwithstanding  the  foregoing,  the  Company  may only  deliver a Company
     Repurchase Notice and complete such optional  repurchase if, on the date of
     the  Company  Repurchase  Notice  and from such date  through  the  Company
     Repurchase Date, the Equity Conditions are satisfied with respect to all of
     the  Underlying  Shares  then  issuable  upon  conversion  in  full  of all
     outstanding Debentures.

          If the Company  fails to pay the Company  Repurchase  Price in full by
     the next Trading Day after the Company  Repurchase  Date, then, in addition
     to any  other  remedies  available  to the  Holder  under  the  Transaction
     Documents,  (1) the Company  shall  thereafter  have no further right under
     this  Section to  repurchase  any  portion of this  Debenture,  and (2) the
     Holder  shall have the right (by  notice to the  Company)  to  declare  the
     Company Repurchase Notice to be void ab initio.

          (b)  Holder's  Annual  Put  Option.  Each  of  the  first  and  second
     anniversaries  of the Original  Issue Date shall  constitute an "Annual Put
     Date" hereunder.  On each Annual Put Date, the Holder shall have the right,
     in its sole  discretion,  to require the Company to  repurchase  all or any
     portion  of the then  outstanding  principal  amount of this  Debenture  by
     delivering  to the  Company  on or prior to such  Annual Put Date a written
     notice  specifying the principal  amount to be repurchased  (an "Annual Put
     Notice").  The price applicable to any repurchase under this paragraph (the
     "Annual Put Price") shall equal 114% of the outstanding principal amount to
     be repurchased, plus all accrued but unpaid interest thereon to the date of
     payment. Subject to Section 7(d) below, the Company shall pay the aggregate
     Annual Put Price to the Holder in immediately  available funds (free of any
     claim of subordination  except pursuant to the Subordination  Agreement) no
     later than the tenth Trading Day following the applicable  Annual Put Date,
     and upon receipt thereof the Holder will deliver the original  Debenture so
     repurchased to the Company,  unless the Holder is awaiting receipt of a New
     Debenture from the Company pursuant to another provision hereof.

          (c) Holder's  Special Put Option.  If, at any time after the six month
     anniversary of the Closing Date, the Company's equity market capitalization
     (defined  as the  aggregate  number of shares of Common  Stock  outstanding
     times  the  Closing  Price)  is less than $50  million  for 20  consecutive
     Trading Days, then the Holder shall have the right, in its sole discretion,
     to  require  the  Company  to  repurchase  all or any  portion  of the then
     outstanding principal amount of this Debenture by delivering to the Company
     a written  notice  specifying  the principal  amount to be  repurchased  (a
     "Special  Put  Notice"),  and the date on which such notice is delivered is
     referred to as the Special Put Date. The price applicable to any repurchase
     under this  paragraph  (the  "Special  Put Price")  shall equal 114% of the
     outstanding principal amount to be repurchased, plus all accrued but unpaid
     interest thereon to the date of payment. Subject to Section 7(d) below, the
     Company  shall  pay the  aggregate  Special  Put  Price  to the  Holder  in
     immediately  available  funds  (free of any claim of  subordination  except
     pursuant to the  Subordination  Agreement)  no later than the tenth Trading
     Day  following  the Special Put Date,  and upon receipt  thereof the Holder
     will deliver the original  Debenture so repurchased to the Company,  unless
     the Holder is awaiting receipt of a New Debenture from the Company pursuant
     to another provision hereof.
<PAGE>
          (d) Maximum Cash Amount.  Notwithstanding  the foregoing,  the Company
     may,  from time to time,  deliver a  written  notice to the  Holder (a "Put
     Payment Notice"),  indicating therein its intention not to pay in excess of
     a maximum dollar amount in cash as part of any subsequent  Annual Put Price
     or Special Put Price (the "Maximum Cash Amount"). A Put Payment Notice will
     be effective as to any Annual Put Date or Special Put Date  occurring  more
     than 20 Trading  Days after  delivery of such Put  Payment  Notice and will
     remain in effect thereafter until revised,  and the same Put Payment Notice
     must be in effect at all times  for all  outstanding  Debentures.  If a Put
     Payment  Notice is in effect with respect to any Annual Put Date or Special
     Put Date for which an Annual Put Notice or Special Put Notice is  delivered
     for all or a portion of the Debenture (the "Subject Portion"), then (A) the
     Company  shall pay the  Annual Put Price or  Special  Put Price  applicable
     thereto up to the Maximum  Cash Amount  and,  in  exchange  therefor,  will
     repurchase a corresponding  percentage of the Subject Portion,  and (B) the
     Company  will not be  required  to  repurchase  the  remaining  part of the
     Subject Portion (the "Remaining  Portion"),  but instead (i) the Conversion
     Price  applicable to such Remaining  Portion will be reduced,  effective on
     such Annual Put Date or Special Put Date,  to equal the Amended  Conversion
     Price and (ii) the Annual Put Notice or Special  Put Notice  will be deemed
     to  constitute a Conversion  Notice under  Section 5(a) with respect to the
     Remaining  Portion.  If the  Company  fails to pay the cash  portion of the
     Annual Put Price or the Special Put Price in full when due hereunder, then,
     in  addition  to any  other  remedies  available  to the  Holder  under the
     Transaction  Documents,  the Holder  shall have the right (by notice to the
     Company) to rescind the applicable Annual Put Notice or Special Put Notice.

     8. Events of Default.

          (a) "Event of Default" means any one of the following events (whatever
     the reason and whether it shall be voluntary or  involuntary or effected by
     operation of law or pursuant to any judgment, decree or order of any court,
     or any order,  rule or regulation  of any  administrative  or  governmental
     body):

               (i)  any   default  in  the   payment   (free  of  any  claim  of
          subordination) of principal, interest or liquidated damages in respect
          of any  Debentures,  as and  when  the same  becomes  due and  payable
          (whether on a Conversion  Date or the Maturity Date or by acceleration
          or otherwise);

               (ii)  the  Company  or  any  Subsidiary  defaults  in  any of its
          obligations  under  any  other  debenture  or  any  mortgage,   credit
          agreement or other facility, indenture agreement,  factoring agreement
          or other instrument under which there may be issued, or by which there
          may be secured or evidenced,  any  indebtedness  for borrowed money or
          money due under any long term leasing or factoring  arrangement of the
          Company or any  Subsidiary in an amount  exceeding  $750,000,  whether
          such indebtedness now exists or is hereafter created, and such default
          results  in such  indebtedness  becoming  or  being  declared  due and
          payable prior to the date on which it would  otherwise  become due and
          payable; or

               (iii) any Triggering Event.

          (b) At any time following the  occurrence of an Event of Default,  the
     Holder shall have the option to elect,  by notice to the Company (an "Event
     Notice"),  to require the Company to  repurchase  all or any portion of (i)
     the outstanding  principal amount of this Debenture,  at a repurchase price
     equal to the greater of (A) 114% of such outstanding principal amount, plus
     all accrued but unpaid interest thereon through the date of payment, or (B)
     the Event Equity Value of the Underlying Shares issuable upon conversion of
     such principal amount and all such accrued but unpaid interest thereon, and
     (ii) any  Underlying  Shares  issued  to such  Holder  upon  conversion  of
     Debentures during the 30 calendar days preceding such Event of Default,  at
     a price  per  share  equal to the  Event  Equity  Value of such  Underlying
     Shares.  The aggregate amount payable pursuant to the preceding sentence is
     referred to as the "Event Price." The Company shall pay the aggregate Event
     Price to the Holder no later than the eighth Trading Day following the date
     of delivery of the Event Notice,  and upon receipt thereof the Holder shall
     deliver the original  Debenture and original  certificates  evidencing  any
     Underlying  Shares  so  repurchased  to the  Company  (to the  extent  such
     documents have been delivered to the Holder).

          (c) Upon the  occurrence  of any  Bankruptcy  Event,  all  outstanding
     principal  and  accrued  but  unpaid   interest  on  this  Debenture  shall
     immediately  become due and  payable in full in cash,  without  any further
     action by the Holder,  and the Company  shall  immediately  be obligated to
     repurchase this Debenture and all such Underlying
<PAGE>
     Shares at the Event Price  pursuant to the  preceding  paragraph  as if the
     Holder had delivered an Event Notice immediately prior to the occurrence of
     such Bankruptcy Event.

          (d) In  connection  with any Event of  Default,  the  Holder  need not
     provide and the Company hereby waives any presentment,  demand,  protest or
     other  notice of any kind,  and the  Holder  may  immediately  and  without
     expiration  of any  grace  period  enforce  any and all of its  rights  and
     remedies  hereunder and all other remedies available to it under applicable
     law. Any such  declaration  may be rescinded  and annulled by the Holder at
     any time prior to payment hereunder.  No such rescission or annulment shall
     affect any  subsequent  Event of  Default  or impair  any right  consequent
     thereto.

     9. Ranking.  This Debenture ranks pari passu with all other  Debentures now
or  hereafter  issued  pursuant  to the  Transaction  Documents.  Except for the
Permitted  Senior  Indebtedness  described  in Schedule  3.1(z) of the  Purchase
Agreement,  no  indebtedness of the Company is senior to this Debenture in right
of payment,  whether with respect of interest,  damages or upon  liquidation  or
dissolution  or  otherwise.  The  Company  will  not,  and will not  permit  any
Subsidiary to,  directly or indirectly,  enter into,  create,  incur,  assume or
suffer to exist any  indebtedness  of any kind, on or with respect to any of its
property or assets now owned or hereafter  acquired or any  interest  therein or
any income or profits therefrom,  that is senior in any respect to the Company's
obligations under the Debentures,  other than the Permitted Senior  Indebtedness
or any  extension,  renewal  or  refinancing  thereof,  indebtedness  secured by
purchase  money  security  interests  (which  will  be  senior  only  as to  the
underlying  assets  covered  thereby)  and  indebtedness   under  capital  lease
obligations (which will be senior only as to the assets covered thereby).

     10. Charges,  Taxes and Expenses.  Issuance of certificates  for Underlying
Shares upon  conversion of (or otherwise in respect of) this Debenture  shall be
made  without  charge to the Holder for any issue or transfer  tax,  withholding
tax,  transfer  agent fee or other  incidental  tax or expense in respect of the
issuance of such  certificate,  all of which taxes and expenses shall be paid by
the Company;  provided,  however,  that the Company shall not be required to pay
any tax  which  may be  payable  in  respect  of any  transfer  involved  in the
registration of any certificates  for Underlying  Shares or Debentures in a name
other than that of the Holder. The Holder shall be responsible for all other tax
liability that may arise as a result of holding or  transferring  this Debenture
or receiving Underlying Shares in respect hereof.

     11.  Replacement  of  Debentures.  If  this  Debenture  or any  certificate
evidencing  Underlying  Shares is  mutilated,  lost,  stolen or  destroyed,  the
Company shall issue or cause to be issued in exchange and  substitution  for and
upon  cancellation  hereof,  or in  lieu  of and  substitution  therefor,  a new
certificate  or a New  Debenture,  but only upon receipt of evidence  reasonably
satisfactory to the Company of such loss, theft or destruction and customary and
reasonable  indemnity,  if requested.  Applicants for a new certificate or a New
Debenture under such circumstances  shall also comply with such other reasonable
regulations and procedures and pay such other  reasonable  third-party  costs as
the Company may prescribe.

     12. Reservation of Underlying Shares. The Company covenants that it will at
all times reserve and keep  available out of the aggregate of its authorized but
unissued  and  otherwise  unreserved  Common  Stock,  solely for the  purpose of
enabling  it to issue  Underlying  Shares as required  hereunder,  the number of
Underlying Shares which are then issuable and deliverable upon the conversion of
(and  otherwise  in respect of) this entire  Debenture  (taking into account the
adjustments of Section 13), free from preemptive  rights or any other contingent
purchase rights of persons other than the Holder. The Company covenants that all
Underlying Shares so issuable and deliverable shall, upon issuance in accordance
with the terms hereof, be duly and validly authorized, issued and fully paid and
nonassessable.

     13. Certain Adjustments. The Conversion Price is subject to adjustment from
time to time as set forth in this Section 13.

          (a) Stock Dividends and Splits. If the Company, at any time while this
     Debenture is outstanding,  (i) pays a stock dividend on its Common Stock or
     otherwise  makes a  distribution  on any  class of  capital  stock  that is
     payable in shares of Common Stock,  (ii) subdivides  outstanding  shares of
     Common Stock into a larger number of shares, or (iii) combines  outstanding
     shares of Common Stock into a smaller  number of shares,  then in each such
     case the  Conversion  Price shall be  multiplied by a fraction of which the
     numerator  shall be the  number  of  shares  of  Common  Stock  outstanding
     immediately  before  such event and of which the  denominator  shall be the
     number of shares of Common Stock outstanding  immediately after such event.
     Any adjustment  made pursuant to clause (i) of this paragraph
<PAGE>
     shall  become  effective   immediately   after  the  record  date  for  the
     determination  of  stockholders   entitled  to  receive  such  dividend  or
     distribution,  and any adjustment  pursuant to clause (ii) or (iii) of this
     paragraph shall become  effective  immediately  after the effective date of
     such subdivision or combination. If any event requiring an adjustment under
     this paragraph  occurs during the period that a Conversion  Price (or other
     price) is calculated  hereunder,  then the  calculation of such  Conversion
     Price (or other  price)  shall be adjusted  appropriately  to reflect  such
     event.

          (b) Pro Rata  Distributions.  If the  Company,  at any time while this
     Debenture is  outstanding,  distributes  to all holders of Common Stock (i)
     evidences of its indebtedness, (ii) any security (other than a distribution
     of Common  Stock  covered  by the  preceding  paragraph),  (iii)  rights or
     warrants to subscribe for or purchase any security, or (iv) any other asset
     (in each case, "Distributed Property"),  then, at the request of the Holder
     delivered before the 90th day after the record date fixed for determination
     of  stockholders  entitled to receive such  distribution,  the Company will
     deliver to the Holder,  within five Trading Days after such request (or, if
     later,  on the  effective  date  of  such  distribution),  the  Distributed
     Property  that the Holder would have been entitled to receive in respect of
     the Underlying  Shares for which this  Debenture  could have been converted
     immediately prior to such record date. If such Distributed  Property is not
     delivered to the Holder pursuant to the preceding  sentence,  then upon any
     conversion of this Debenture that occurs after such record date, the Holder
     shall  be  entitled  to  receive,  in  addition  to the  Underlying  Shares
     otherwise issuable upon such conversion,  the Distributed Property that the
     Holder  would have been  entitled  to receive in respect of such  number of
     Underlying  Shares had the Holder been the record holder of such Underlying
     Shares  immediately  prior  to such  record  date.  In the  event  that the
     Distributed  Property is not the same for each share of Common  Stock,  the
     Holder will be entitled to choose any type of Distributed Property that any
     holder of Common Stock is entitled to receive in such distribution

          (c) Fundamental Transactions.  If, at any time while this Debenture is
     outstanding,  (i) the Company  effects any merger or  consolidation  of the
     Company with or into another  Person,  (ii) the Company effects any sale of
     all or  substantially  all of its  assets  in one or a  series  of  related
     transactions,  (iii) any tender  offer or  exchange  offer  (whether by the
     Company or another Person) is completed pursuant to which holders of Common
     Stock  are  permitted  to  tender  or  exchange   their  shares  for  other
     securities,   cash  or   property,   or  (iv)  the   Company   effects  any
     reclassification  of the  Common  Stock or any  compulsory  share  exchange
     pursuant  to which  the  Common  Stock  is  effectively  converted  into or
     exchanged  for other  securities,  cash or  property  (in any such case,  a
     "Fundamental  Transaction"),  then upon any  subsequent  conversion of this
     Debenture,  the Holder shall have the right to receive, for each Underlying
     Share  that would  have been  issuable  upon such  conversion  absent  such
     Fundamental  Transaction,  the same kind and amount of securities,  cash or
     property as it would have been  entitled to receive upon the  occurrence of
     such  Fundamental  Transaction  if it had been,  immediately  prior to such
     Fundamental  Transaction,  the  holder of one share of  Common  Stock  (the
     "Alternate  Consideration").  In the  event  that  more  than  one  type of
     Alternate  Consideration  is to be received by holders of Common Stock in a
     Fundamental Transaction,  the Holder will be entitled to choose any type of
     Alternate  Consideration  that any holder of Common  Stock is  entitled  to
     receive  in  such  Fundamental  Transaction.   For  purposes  of  any  such
     conversion,   the   determination   of  the   Conversion   Price  shall  be
     appropriately  adjusted to apply to such Alternate  Consideration  based on
     the amount of Alternate  Consideration  issuable in respect of one share of
     Common  Stock  in  such  Fundamental  Transaction,  and the  Company  shall
     apportion  the  Conversion  Price among the  Alternate  Consideration  in a
     reasonable manner reflecting the relative value of any different components
     of the  Alternate  Consideration.  If holders of Common Stock are given any
     choice  as  to  the  securities,  cash  or  property  to be  received  in a
     Fundamental Transaction,  then the Holder shall be given the same choice as
     to the  Alternate  Consideration  it receives  upon any  conversion of this
     Debenture following such Fundamental  Transaction.  To the extent necessary
     to  effectuate  the foregoing  provisions,  any successor to the Company or
     surviving entity in such Fundamental  Transaction shall issue to the Holder
     a new debenture consistent with the foregoing provisions and evidencing the
     Holder's right to convert such debenture into Alternate Consideration.  The
     terms of any  agreement  pursuant  to which a  Fundamental  Transaction  is
     effected  shall  include terms  requiring  any such  successor or surviving
     entity to comply with the  provisions  of this  paragraph  (c) and insuring
     that this  Debenture (or any such  replacement  security) will be similarly
     adjusted  upon  any  subsequent  transaction  analogous  to  a  Fundamental
     Transaction.

          (d) Subsequent Equity Sales.

               (i) If, at any time  while this  Debenture  is  outstanding,  the
          Company or any Subsidiary  issues additional shares of Common Stock or
          rights,  warrants,  options or other  securities or debt  convertible,
          exercisable  or  exchangeable  for shares of Common Stock or otherwise
          entitling any Person to acquire shares
<PAGE>
          of Common  Stock  (collectively,  "Common  Stock  Equivalents")  at an
          effective price per share of Common Stock (the "Effective Price") less
          than the Conversion Price (as adjusted  hereunder to such date),  then
          the Conversion  Price shall be reduced to equal the product of (A) the
          Conversion  Price in  effect  immediately  prior to such  issuance  of
          Common Stock or Common  Stock  Equivalents  times (B) a fraction,  the
          numerator  of which is the sum of (1) the  number  of shares of Common
          Stock  outstanding  immediately  prior to such issuance,  plus (2) the
          number of shares of Common Stock which the aggregate  Effective  Price
          of the Common Stock issued (or deemed to be issued) would  purchase at
          the Conversion  Price,  and the  denominator of which is the aggregate
          number  of  shares  of  Common  Stock  outstanding  or  deemed  to  be
          outstanding  immediately  after such  issuance.  For  purposes  of the
          foregoing  adjustment,  in connection  with any issuance of any Common
          Stock  Equivalents,  (x) the maximum  number of shares of Common Stock
          potentially issuable at any time upon conversion, exercise or exchange
          of such Common Stock Equivalents (the "Deemed Number") shall be deemed
          to be outstanding upon issuance of such Common Stock Equivalents,  (y)
          the  Effective  Price  applicable to such Common Stock shall equal the
          minimum  dollar  value of  consideration  payable  to the  Company  to
          purchase  such Common Stock  Equivalents  and to convert,  exercise or
          exchange them into Common Stock, divided by the Deemed Number, and (z)
          no further  adjustment  shall be made to the Conversion Price upon the
          actual issuance of Common Stock upon conversion,  exercise or exchange
          of  such  Common  Stock  Equivalents.  However,  upon  termination  or
          expiration  of any Common  Stock  Equivalents  the  issuance  of which
          resulted in an adjustment  to the  Conversion  Price  pursuant to this
          paragraph, the Conversion Price shall be recomputed to equal the price
          it would have been had the adjustments in this paragraph been made, at
          the time of  issuance  of such  Common  Stock  Equivalents,  only with
          respect to that number of shares of the Common Stock  actually  issued
          upon conversion, exercise or exchange of such Common Stock Equivalents
          and at the Effective Prices actually paid in connection therewith.

               (ii) If, at any time while this  Debenture  is  outstanding,  the
          Company or any  Subsidiary  issues  Common Stock  Equivalents  with an
          Effective  Price  that  floats  or resets  or  otherwise  varies or is
          subject to  adjustment  based on market  prices of the Common Stock (a
          "Floating  Price  Security"),   then  for  purposes  of  applying  the
          preceding paragraph in connection with any subsequent conversion,  the
          Effective Price will be determined  separately on each Conversion Date
          and will be deemed to equal the  lowest  Effective  Price at which any
          holder of such Floating  Price  Security is entitled to acquire shares
          of Common Stock on such  Conversion  Date  (regardless  of whether any
          such holder actually acquires any shares on such date).

               (iii)  Notwithstanding the foregoing,  no adjustment will be made
          under this  paragraph  (d) in respect  of (A) the  issuance  of Common
          Stock upon  exercise or  conversion  of any Common  Stock  Equivalents
          described in Schedule 3.1(g) to the Purchase Agreement  (provided that
          such  exercise  or  conversion  occurs  in  accordance  with the terms
          thereof,  without  amendment or modification,  and that the applicable
          exercise or conversion  price or ratio is described in such schedule),
          (B) any grant of options to  employees,  officers or  directors of the
          Company  pursuant  to  any  stock  option  plan  duly  adopted  by the
          Company's  board of  directors or in respect of the issuance of Common
          Stock  upon  exercise  of any  such  options,  (C)  securities  issued
          pursuant to an underwritten  public offering by the Company  resulting
          in gross proceeds to the Company of not less than $20,000,000 ("equity
          lines  of  credit"  or  their   equivalents  shall  not  satisfy  this
          exception), and (D) shares of Common Stock issued in connection with a
          Strategic  Transaction.  For  purposes of this  Section,  a "Strategic
          Transaction"  shall mean a transaction  or  relationship  in which the
          Company issues shares of Common Stock to an entity which is, itself or
          through its  subsidiaries,  an operating company in a business related
          to the  business  of the  Company  and in which the  Company  receives
          benefits in addition to the investment of funds, but shall not include
          a transaction in which the Company is issuing securities primarily for
          the purpose of raising capital.

          (e) Calculations. All calculations under this Section 13 shall be made
     to the nearest cent or the nearest 1/100th of a share,  as applicable.  The
     number of shares of Common  Stock  outstanding  at any given time shall not
     include shares owned or held by or for the account of the Company,  and the
     disposition  of any such  shares  shall be  considered  an issue or sale of
     Common Stock.

          (f) Notice of  Adjustments.  Upon the  occurrence  of each  adjustment
     pursuant  to this  Section 13, the  Company at its  expense  will  promptly
     compute such  adjustment in accordance  with the terms hereof and prepare a
     certificate  describing  in  reasonable  detail  such  adjustment  and  the
     transactions  giving  rise  thereto,  including  all facts  upon which such
     adjustment  is based.  Upon  written  request,  the Company  will  promptly
     deliver a copy of each such certificate to the Holder.
<PAGE>
          (g) Notice of Corporate Events. If the Company (i) declares a dividend
     or any other distribution of cash,  securities or other property in respect
     of its Common Stock, including without limitation any granting of rights or
     warrants to subscribe  for or purchase any capital  stock of the Company or
     any  Subsidiary,  (ii)  authorizes  or approves,  enters into any agreement
     contemplating  or  solicits   stockholder   approval  for  any  Fundamental
     Transaction or (iii) authorizes the voluntary  dissolution,  liquidation or
     winding up of the affairs of the Company, then the Company shall deliver to
     the Holder a notice  describing  the material  terms and conditions of such
     transaction,  at least 20 calendar days prior to the  applicable  record or
     effective  date on which a Person  would need to hold Common Stock in order
     to participate in or vote with respect to such transaction, and the Company
     will take all steps reasonably necessary in order to insure that the Holder
     is given the practical  opportunity to convert this Debenture prior to such
     time so as to  participate  in or vote with  respect  to such  transaction;
     provided,  however,  that the failure to deliver  such notice or any defect
     therein shall not affect the validity of the corporate  action  required to
     be described in such notice.

     14.  Limitation  on  Conversion.  Notwithstanding  anything to the contrary
contained  herein,  the number of shares of Common Stock that may be acquired by
the Holder  upon any  conversion  of this  Debenture  (or  otherwise  in respect
hereof) shall be limited to the extent necessary to insure that,  following such
conversion (or other issuance),  the total number of shares of Common Stock then
beneficially owned by such Holder and its Affiliates and any other Persons whose
beneficial  ownership of Common Stock would be aggregated  with the Holder's for
purposes  of Section  13(d) of the  Exchange  Act,  does not exceed  9.999% (the
"Maximum  Percentage") of the total number of issued and  outstanding  shares of
Common Stock  (including  for such  purpose the shares of Common Stock  issuable
upon  such  conversion).  For  such  purposes,  beneficial  ownership  shall  be
determined  in  accordance  with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder.  Each delivery of a Conversion Notice by
the Holder will constitute a representation  by the Holder that it has evaluated
the limitation  set forth in this paragraph and determined  that issuance of the
full  number  of  Underlying  Shares  requested  in such  Conversion  Notice  is
permitted under this paragraph. By written notice to the Company, the Holder may
waive the  provisions  of this  Section or  increase  or  decrease  the  Maximum
Percentage to any other  percentage  specified in such notice,  but (i) any such
waiver or increase will not be effective until the 61st day after such notice is
delivered to the Company,  and (ii) any such waiver or increase or decrease will
apply only to the Holder and not to any other holder of Debentures.

     15. Fractional  Shares. The Company shall not be required to issue or cause
to be issued fractional  Underlying  Shares on conversion of this Debenture.  If
any fraction of an  Underlying  Share would,  except for the  provisions of this
Section, be issuable upon conversion of this Debenture, the Company shall pay an
amount in cash equal to the  average of the Closing  Prices of the Common  Stock
for the  five  Trading  Days  immediately  prior  to  (but  not  including)  the
Conversion  Date multiplied by such fraction;  provided that,  unless the Holder
requests otherwise,  no payment shall be required to the Holder pursuant to this
sentence  until the aggregate  amount  payable to the Holder in connection  with
such conversion  (together with unpaid amounts from prior  conversions)  exceeds
$1,000, at which time all previously deferred payments shall be made.

     16.  Notices.  Any and all notices or other  communications  or  deliveries
hereunder  (including  without  limitation  any  Conversion  Notice) shall be in
writing and shall be deemed given and effective on the earliest of: (i) the date
of  transmission,  if such notice or communication is delivered via facsimile at
the facsimile number specified in this Section prior to 6:30 p.m. (New York City
time)  on  a  Trading  Day,  (ii)  the  next  Trading  Day  after  the  date  of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading Day or
later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading
Day following the date of mailing,  if sent by nationally  recognized  overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required  to be  given.  The  addresses  for  such  communications  shall  be as
specified in the Purchase Agreement or such other address or facsimile number as
the Holder may provide to the Company in accordance with this Section.

     17 Miscellaneous.

          (a)  So  long  as  any  principal  amount  is  outstanding  under  the
     Debentures,  the Company  shall not,  without the  affirmative  vote of the
     Holders of a majority  in interest of the  principal  amount of  Debentures
     then outstanding,  incur, create, assume,  guarantee or suffer to exist any
     indebtedness in addition to the Permitted Senior Indebtedness.
<PAGE>
          (b) This Debenture shall be binding on and inure to the benefit of the
     parties hereto and their respective  successors and assigns. This Debenture
     may be amended  only in writing  signed by the  Company  and the Holder and
     their successors and assigns.

          (c) Subject to Section 17(a),  above,  nothing in this Debenture shall
     be  construed to give to any person or  corporation  other than the Company
     and the Holder any legal or  equitable  right,  remedy or cause  under this
     Debenture.  This Debenture shall inure to the sole and exclusive benefit of
     the Company and the Holder.

          (d) The  corporate  laws of the State of  Colorado  shall  govern  all
     issues  concerning the relative rights of the Company and its stockholders.
     All other questions concerning the construction,  validity, enforcement and
     interpretation  of this  Debenture  shall be governed by and  construed and
     enforced  in  accordance  with the  internal  laws of the  State of  Texas,
     without regard to the  principles of conflicts of law thereof.  The Company
     and the Holder hereby irrevocably  submit to the exclusive  jurisdiction of
     the state and  federal  courts  sitting in Dallas  County,  Texas,  for the
     adjudication of any dispute hereunder or in connection herewith or with any
     transaction contemplated hereby or discussed herein, and hereby irrevocably
     waives,  and agrees not to assert in any suit,  action or  proceeding,  any
     claim that it is not  personally  subject to the  jurisdiction  of any such
     court,  or that such suit,  action or proceeding  is improper.  Each of the
     Company  and the  Holder  hereby  irrevocably  waives  personal  service of
     process and consents to process  being  served in any such suit,  action or
     proceeding  by  receiving a copy thereof sent to the Company at the address
     in effect  for  notices to it under this  instrument  and agrees  that such
     service shall constitute good and sufficient  service of process and notice
     thereof.  Nothing  contained herein shall be deemed to limit in any way any
     right to serve process in any manner permitted by law.

          (e) The headings herein are for convenience  only, do not constitute a
     part of this  Debenture  and shall not be deemed to limit or affect  any of
     the provisions hereof.

          (f) In case any one or more of the provisions of this Debenture  shall
     be invalid or unenforceable in any respect, the validity and enforceability
     of the remaining  terms and provisions of this  Debenture  shall not in any
     way be affected or impaired  thereby and the parties  will  attempt in good
     faith to agree  upon a valid and  enforceable  provision  which  shall be a
     commercially  reasonable substitute therefor,  and upon so agreeing,  shall
     incorporate such substitute provision in this Debenture.

          (g) No provision of this  Debenture may be waived or amended except in
     a written  instrument  signed, in the case of an amendment,  by the Company
     and the Holder or, or, in the case of a waiver, by the Holder. No waiver of
     any default with respect to any provision, condition or requirement of this
     Debenture  shall be deemed  to be a  continuing  waiver in the  future or a
     waiver  of any  subsequent  default  or a waiver  of any  other  provision,
     condition or requirement  hereof, nor shall any delay or omission of either
     party to exercise any right  hereunder in any manner impair the exercise of
     any such right.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                             SIGNATURE PAGE FOLLOWS]
<PAGE>

     IN WITNESS  WHEREOF,  the  Company  has caused  this  Debenture  to be duly
executed by a duly authorized officer as of the date first above indicated.


                                            APPLIED FILMS CORPORATION


                                            By:     ____________________________
                                            Name:   ____________________________
                                            Title:  ____________________________
<PAGE>
                            FORM OF CONVERSION NOTICE

(To be executed by the registered Holder
in order to convert Debenture)

The  undersigned  hereby  elects to convert the  specified  principal  amount of
Convertible  Debentures (the  "Debentures")  into shares of common stock, no par
value (the "Common Stock"), of Applied Films Corporation, a Colorado corporation
(the  "Company"),  according to the  conditions  hereof,  as of the date written
below.


                                 ----------------------------------------------
                                 Date to Effect Conversion

                                 ----------------------------------------------
                                 Principal amount  of Debentures owned prior to
                                 conversion

                                 ----------------------------------------------
                                 Principal amount of Debentures to be Converted

                                 ----------------------------------------------
                                 Number of shares of Common Stock to be Issued

                                 ----------------------------------------------
                                 Applicable Conversion Price

                                 -----------------------------------------------
                                 Principal amount of Debentures owned subsequent
                                 to Conversion

                                 -----------------------------------------------
                                 Name of Holder

                                 By: ___________________________________________
                                 Name: _________________________________________
                                 Title: ________________________________________

<PAGE>
                           AMENDMENMENT TO CERTIFICATE
                     OF DESIGNATIONS, PREFERENCES AND RIGHTS
                    OF SERIES A CONVERTIBLE PREFERRED STOCK,
                                WITHOUT PAR VALUE

                                       OF

                            APPLIED FILMS CORPORATION

                            ------------------------

                      Pursuant to Section 7-108-101 of the
                        Colorado Business Corporation Act
                            ------------------------


     Applied Films Corporation,  a corporation  organized and existing under the
Colorado  Business  Corporation  Act  (the  "Company"),  hereby  certifies  that
pursuant to the authority granted to and vested in the Board of Directors by the
Amended and Restated Articles of Incorporation,  as amended, of the Company (the
"Articles of  Incorporation"),  and in accordance with the provisions of Section
7-108-101  of the  Business  Corporation  Act  of the  State  of  Colorado,  the
Directors on , 2001,  adopted the  following  resolution  amending the Company's
Certificate  of  Designations,  Preferences  and Rights of Series A  Convertible
Preferred Stock, Without Par Value (the "Certificate"):

     Resolved,  that pursuant to the authority  vested in the Company's Board of
Directors in accordance with the provisions of its Articles of Incorporation, as
amended, the Certificate is hereby amended as follows:

          1.  Section 9(c) is hereby  deleted in its entirety and replaced  with
     the following:

               (c) Holder's Special Put Option.  If, at any time after the sixth
          month  anniversary  of the Closing Date,  the Company's  equity market
          capitalization  (defined as the  aggregate  number of shares of Common
          Stock  outstanding  times the Closing  Price) is less than $50 million
          for 20 consecutive Trading Days, then the Holder shall have the right,
          in its sole  discretion,  to  convert  all or any  portion of the then
          outstanding   shares  of  Preferred  Stock  into  Common  Stock  at  a
          Conversion Price equal to the Amended Conversion Price divided by 1.14
          by delivering to the Company a written notice specifying the number of
          shares of Preferred Stock to be so converted (a "Special Put Notice"),
          and the date on which such notice is  delivered  is referred to as the
          Special Put Date.




                                           /s/ Lawrence D. Firestone
                                           Lawrence D. Firestone
                                           Chief Financial Officer and Secretary



::ODMA\PCDOCS\GRR\536596\1


<PAGE>

EXHIBIT 10.22

[logo] RWE Systems

Lease agreement

between

RWE Systems Immobilien GmbH & Co. KG, Altenessener Strasse 35, 45141 Essen,

Lahmeyer Grundbesitz GmbH & Co. KG, Augustaanlage 32, 68186 Mannheim,

- hereinafter referred to as "Lessor" -

and

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

- hereinafter referred to as "Lessee" -

- collectively referred to as "Parties" -
<PAGE>
                                      - 2 -

Preamble

Between  Balzers  Process  Systems  GmbH (now  Applied  Films GmbH & Co. KG) and
Victoria Mathias  Verwaltungsgesellschaft mbH (now RWE Systems Immobilien GmbH &
Co. KG)/Lahmeyer  Grundbesitz GmbH & Co. KG, a lease agreement was signed on May
25/June 5, 2000,  for office,  service,  production,  storage  and other  spaces
including parking on the property at Siemensstrasse 100, 63755 Alzenau. The term
of the lease ends on June 30,  2002.  Lessee and Lessor have agreed to renew the
agreement with regard to the majority of the spaces.  During  preliminary talks,
it was further  agreed that the Lessor erect and place at Lessee's  disposal new
hall  structures.  Moreover,  Lessor  has  agreed to create  additional  parking
spaces.

Both Parties agree that the written  provisions of 5/25/00 and/or 6/5/00 as well
as any amendments  thereto shall expire upon transfer of the new hall structures
and be replaced by the following provisions:

                                      ss.1
                              Subject of agreement

1.1       The Lessor is the proprietor of various lots located at Siemensstrasse
          100 in  Alzenau.  The entire  property  is marked by a red line on the
          attached map (Attachment 1).

1.2       On the  approximately  15,500 m2 lot marked blue on the attached  map,
          the  Lessor  shall  erect  the new hall  structures  mentioned  in the
          preamble.

1.3.1     In the existing structure, Lessee leases:

          office space as well as traffic and reception  areas totaling 6,882 m2
          in size, hall and lab spaces including traffic areas totaling 6,612 m2
          in size, 354 m2 of storage space and basement,
<PAGE>
                                      - 3 -

          500 m2 of storage space in the basement.

          Traffic  and  reception  areas are  leased  proportionately,  with the
          proportions  determined  by space  leased  excluding  storage.  To the
          extent  necessary,   other  lessees  of  the  building,   contractors,
          visitors, etc. are entitled to use the traffic areas.

          The  Lessee is  entitled  to use all  mobile  fittings  and  equipment
          present in the lease  object.  The fittings and equipment are detailed
          in a separate listing (Attachment 2 of the lease agreement).

          The  leased  spaces  are  color-marked  in the  attached  floor  plans
          (Attachments  3.1 through 3.5), with offices space  including  traffic
          areas marked red, hall and lab spaces  including  traffic areas marked
          blue. The traffic areas  attributable  to the Lessee are marked by red
          lines,  the  storage  areas in the  basement  by green  lines  and the
          reception area by blue lines.

          In addition,  open space and 220 parking spaces are placed at Lessee's
          disposal. Leased parking spaces have already been assigned.

1.3.2     In the new structures, Lessee leases:

          office space including additional and traffic areas totaling 969 m2 in
          size, production halls totaling 7,326 m2 in size.

          Moreover, Le ssee shall lease 130 additional parking spaces, the exact
          location of which has not yet been determined.  Lessee agrees that the
          location of additional  parking  spaces shall be determined by Lessor,
          provided  that such  parking  spaces are  located  outside of the area
          marked blue and at a reasonable distance from the new structures.

          In addition,  more than 3,100 m2 of made-up open space shall be placed
          at Lessee's disposal.
<PAGE>
                                      - 4 -

1.4       Lessee shall use the lease object to manufacture  vacuum equipment and
          for office purposes. The parking spaces are to accommodate cars.

          On the open space  bordering on the body of the  building,  Lessee has
          erected  two halls,  which are marked  yellow on the map.  Lessee uses
          these premises to receive  shipments as well as to package and process
          its products to be shipped.  Both halls are  connected to the property
          only  temporarily  (ss.95 BGB) and shall be demolished and disposed of
          at Lessee's expense, including foundations,  if any. Details are found
          in  the  building   specifications.   Lessee   acknowledges  that  the
          observation  of the date mentioned  under Item 2.2.1  requires  timely
          demolition.

          Moreover,  the exterior spaces must not be used for storage  purposes.
          Likewise,   Lessee  shall  not  store  hazardous  materials  (such  as
          explosives  and  harmful  substances)  or  perform  actions  likely to
          increase  the  insured  risk or  violate  safety  regulations  in such
          spaces.

          A change of the intended use requires Lessor's written consent,  which
          must not be refused unreasonably.

          Even in the absence of express notice to this effect, Lessor's consent
          is granted subject to the approval of the competent authorities, which
          Lessee shall obtain and uphold at its own expense,  receiving Lessor's
          support as needed.

          Prior to such change of intended use becoming effective,  Lessee shall
          furnish proof to Lessor that all  necessary  permits have been granted
          or no permits are required, whichever applies.
<PAGE>
                                      - 5 -

          Between  the first and second  halls,  there is a gas  control  center
          (composed of an open  building  where gas tanks are stored,  and of an
          permanently  installed gas tanks) as required by Lessee to operate its
          display-technology  division  (marked  orange  on the  map).  Upon the
          expiration of the tenancy,  Lessee shall dismantle and remove this gas
          control  center at its own expense if Lessor no longer has use for it.
          Moreover,   the  entire  building  complex  houses  various  technical
          facilities and machines likewise (located at the time in the technical
          storage  rooms  and in the  basement)  exclusively  used  by  Lessee's
          display-technology  division.  Lessee is the sole  proprietor of these
          technical  facilities,  which are also  detailed  as part of the lease
          agreement in a separate listing (Attachment 4). Upon the expiration of
          the tenancy, Lessee shall remove all technical equipment and machines.
          To the extent that Lessor  requires its removal,  this also applies to
          wiring.

1.5       The specifications in terms of m2 refer to net areas determined on the
          basis  of Item  2.3,  of DIN  277,  Part 1,  and are not  adjusted  by
          non-supporting  interior  walls and beams.  The spaces  encompass  all
          building parts  including the entrance  hall, the reception  area, the
          elevator  foyers and  corridors  as well as the area  occupied by door
          openings  and  niches  (excluding  elevator  shafts),  staircases  and
          landings. For purposes of this paragraph,  the lease object is defined
          by the plans attached as Attachments 5.1 through 5.5.

          The total area shall be determined at Lessor's expense upon completion
          using the floor plans M 1:50.  Departures from the stated net areas up
          to 2% shall not affect the rent.

1.6       The  buildings  specifications  (Attachment  6) as well  as the  plans
          (Attachments  5.1 through  5.5) are subject to change in the course of
          construction.  Lessee  shall agree to such  changes to the extent that
          neither  the  intended  purpose nor the  fittings  and  equipment  are
          compromised  and the lease object  remains  within 2% of its projected
          size.
<PAGE>
                                     - 6 -

1.7.1     Until the new  structures  are handed  over,  any  departure  from the
          building  specifications of the lease object to be erected,  which the
          Parties agree upon with regard to design or fittings and equipment may
          be implemented. Such modifications shall be recorded in a protocol, as
          are regulations  regarding additional costs and Lessee's obligation to
          reverse upon the  expiration of its tenancy,  if  applicable.  If such
          modifications  or  additions  result  in  delays  in  completion,  the
          protocol  must  state the  number of days,  by which the  transfer  is
          delayed.  All changes or additions to be implemented shall be recorded
          in an Attachment 7 of this agreement.

          The effects of requests for changes or additions on the effective date
          of Lessee's obligations to pay rent are addressed under ss.3.

1.7.2     Prior to determining extension materials,  an inspection is performed,
          which  must be  scheduled  well  in  advance  and  take  place  on the
          construction  site or in a  sample  room  built  for that  purpose  in
          Alzenau.  The materials to be inspected,  along with specifications as
          to product and model, shall be presented by Lessor. Materials found by
          Lessee,  on the occasion of  inspection,  to fall short of the quality
          standards  agreed upon shall be replaced  immediately  by materials in
          compliance  with such  standards if such  assessment is accurate.  The
          choice of suitable materials shall be made by Lessee, which also bears
          the costs of the  inspection.  Purpose and  results of the  inspection
          shall be recorded in an inspection  protocol.  Another  protocol shall
          detail the agreement  reached between Lessor and Lessee with regard to
          the distribution of space.

1.7.3     Any inspections or permits  required by the competent  authorities for
          Lessee's facilities are deemed the responsibility of Lessor insofar as
          the building specifications call for Lessor to provide such facilities
          or equipment.  All other inspections or permits are the responsibility
          of Lessee.  Whichever Party is responsible shall arrange for or obtain
          such inspections or permits in a timely manner.
<PAGE>
                                     - 7 -

1.8       Lessor  guarantees  that the  construction  project is  implemented in
          accordance  with the building  specifications  (Attachment  6) and the
          plans (Attachments 5.1 through 5.5) as well as the protocols signed by
          the Parties  following the execution of this agreement,  which pertain
          to the  agreed-upon  changes and  additions  to design or fittings and
          equipment  and the  inspection  pursuant  to Items  1.7.1  and  1.7.2.
          However, building specifications and plans must not be construed to be
          guaranteed  characteristics  of the lease  object as they merely serve
          the purpose of  detailing  Lessee's  obligation  in terms of the lease
          object's completion.

          In case of  conflicts,  the  protocol  pertaining  to the  agreed-upon
          changes  pursuant to Item 1.7.1  takes  precedence  over the  building
          specifications,  which take  precedence  over the plans.  Detailing of
          objects and furnishings in the  construction  plans is considered part
          neither  of this  agreement  nor of the  lease  object,  which  is the
          exclusive domain of the building specifications.

                                      ss.2
                         Commencement and term of lease

2.1       For both the existing and the new  structures,  the lease commences on
          the date of  transfer  of the new  production  halls or, if the Lessee
          fails to take  possession  of the new  production  halls,  on the date
          intended for such transfer.

2.2.1     The  transfer of the new  production  halls as well as the new parking
          spaces takes place 14 months after both Parties signed this agreement.
          If the Parties  were to do so in January  2001,  such  transfer  would
          occur on March 31, 2002.

          If the agreement is not signed by both Parties in January, the date of
          transfer is postponed accordingly.

2.2.2     Lessor  hereby  acknowledges  that  Lessee  essentially  needs to take
          possession of the new production  halls in December 2001, which is why
          Lessor  shall  endeavor to  negotiate  with the general  contractor  a
          reduction in construction  time. The added costs associated  therewith
          would be borne by Lessee in a manner yet to be determined.

          Moreover,   the  Parties  shall  work  closely  together  to  identify
          solutions that would make it possible for Lessee to take possession of
          the new  production  halls  prior to March  31,  2002.  To  facilitate
          transfer at an earlier date, the Parties intend to reduce the approval
          period, which amounts to approximately five months.
<PAGE>
                                      - 8 -

          However, Lessor issues no guarantee to the effect that such halls will
          be transferred in December 2001.

2.2.3     Lessor  shall  notify  Lessee in writing of the dates of  transfer  as
          suggested by progress,  such dates being  furnished two months and one
          month in advance, specifying week and day of transfer, respectively.

2.2.4     The dates  rendered  by Item 2.2.1 in  connection  with Item 1.7.1 are
          subject  to change  due to bad  weather,  strike,  force  majeure  and
          lockout.  Delays may also occur as a result of review  proceedings  on
          the part of the competent authorities. However, Lessor shall press for
          quick  processing.  In case of delays,  Lessee  shall be  entitled  to
          damages only to the extent that such delays occurred through the fault
          of Lessor.

2.2.5     Lessee is not entitled to withdraw  from the  agreement as a result of
          delays  caused by Lessor.  If the  transfer of the new  structures  is
          delayed by more than six months, Lessee may terminate this agreement.

2.3       Upon  transfer  of the new  structures,  the Parties  shall  prepare a
          protocol  detailing the  condition of the lease object.  Such transfer
          protocol  shall  include  any flaws and tasks  remaining  of the lease
          object.  All flaws and remaining tasks listed in the transfer protocol
          shall  be  eliminated  or  performed  immediately.   Minor  flaws  and
          remaining tasks found upon transfer,  which do not inhibit  operations
          and may be remedied without major  disruptions  suffered by Lessee, do
          not cause a delay of transfer  regardless of their pending elimination
          or performance.

          If the Parties hold conflicting views as to

          a)       whether and which flaws are present and/or
          b)       the accuracy of the transfer protocol,
<PAGE>
                                      - 9 -

          the conflict shall be settled  finally and  conclusively  by an expert
          appointed  by the Chamber of  Commerce  responsible  for Alzenau  upon
          request by one of the Parties.  Arbitration  may be requested only if,
          in the  opinion  of one of the  Parties,  an attempt to reach a mutual
          agreement  failed,  but no  earlier  than two  weeks  after one of the
          Parties  declares  that all transfer  requirements  have been met. The
          costs of  arbitration  are borne by the Parties to the extent of their
          defeat.

2.4       The lease term expires on March 31, 2010.  Lessee is granted an option
          to renew the lease  agreement by five years.  The option is considered
          exercised if Lessee fails to object to renewing the lease agreement at
          least twelve months before it is scheduled to expire.

2.5       ss.565 BGB [German  civil code] does not apply upon the  expiration of
          the lease term.

2.6       Deadline  compliance  is  assessed on the basis of the date on which a
          declaration is received by the intended recipient.

                                      ss.3
                       Rent, payments, stable value clause

3.1       The monthly rent equals
<TABLE>
          <S>                                         <C>               <C>      <C>
          7,851 m2 of office space                    x Euro 9.00       =        Euro  70,659.00
          13,938 m2 of production halls               x Euro 6.50       =        Euro  90,597.00
          Facilities surcharge                                                   Euro  56,406.00
          354 m2 of storage space/archive             x Euro 2.55       =        Euro     902.70
          [illegible]00 m2 of storage space/archive                     =        Euro     787.00
          350 parking spaces (outside)                x Euro 12.80      =        Euro   4,480,00
                                                                       ---------------
          Total                                                         =        Euro 223,811.70
                                                                        =        DM   437,737.63
</TABLE>
plus turnover tax in the amount permitted by law.
<PAGE>
                                     - 10 -

          The aforementioned rent is due upon the transfer of the new production
          facilities.  To the extent that requests for changes and/or  additions
          result in delays  according  to Item 1.7.1,  Lessee shall be liable to
          make rent  payments from the date, on which the transfer of the leased
          portion of the building in question could have occurred in the absence
          of requests for changes and/or additions,  even if such leased portion
          was not yet transferred.

          If, under the foregoing provision,  the commencement date of the lease
          or the date of possible  transfer  does not coincide with the first of
          the month, a proportionate  amount of the rent is due for the month in
          question.

3.2       By the third  business day of each month,  the rent shall be deposited
          into an account yet to be specified  by Lessor.  Payment is not deemed
          received until Lessor 's account is credited accordingly.

3.3       Other  payments  under this  agreement  shall be made within one month
          following the receipt of an invoice or request.  Late charges apply in
          accordance with ss.14.

3.4       Lessor is entitled to apply, at its sole discretion,  any payment made
          by Lessee to monies owed under the agreement unless Lessee  stipulates
          otherwise.

3.5       Based on claims  pursuant to  ss.ss.537,  538 and 539 BGB,  Lessee may
          justify  adjustments  or exercise a right of retention  with regard to
          the rent (excluding utilities) if notice is given thereof one month in
          advance and no actions to improve matters were taken in the meantime.

3.6       If the  monthly  cost-of-living  index for all private  households  in
          Germany  (starting  point 1995 = 100), as  determined by  Statistische
          Bundesamt  [federal office of statistics],  rises or falls by at least
          ten points versus the level in effect on the commencement  date of the
          lease, the rent payable is adjusted accordingly pursuant to Item 3.1.

          Such change in the amount of the rent  becomes  effective on the first
          of  the  month  following  the  month,  during  which  the  conditions
          justifying a change in the amount of the rent were present.
<PAGE>
                                     - 11 -

          However,  Lessee is not  considered  to be in default until Lessor has
          issued a written reminder stipulating a reasonable deadline.

          If the rent was adjusted based on the foregoing  stable-value  clause,
          the clause becomes  applicable again in accordance with the provisions
          of the preceding paragraphs. Accordingly, the amount of the rent shall
          be  adjusted  again once the index has risen or fallen by at least ten
          points versus the level that prompted the last adjustment.

          The agreed-upon price clause meets the conditions of Preisangaben- und
          Preisklauselgesetz  [law on  pricing  and price  clauses]  and thus is
          deemed approved by law (approval  assumed).  However, as a precaution,
          Lessor  shall submit a request to Bundesamt  fur  Wirtschaft  [federal
          office of economy] to approve the stable-value clause.

          In case the  aforementioned  clause is not approved by  Bundesamt  fur
          Wirtschaft,  the  Parties  agree to sign into  effect a solution  that
          matches the rejected clause in economic terms.

3.7       Under the lease agreement of 5/25/00 and/or 6/5/00,  Lessor  undertook
          to refund to Lessee  the  amount  of Euro  0.77/m2/month  for  various
          spaces if the  agreement is extended by at least five years after June
          30,  2002.  The Parties  agree that such claim for  reimbursement  was
          taken into account when determining the amount of the rent for the new
          structures. Therefore, no refund will be granted.

                                      ss.4
                                    Utilities

4.1       In  addition  to the rent,  Lessee  shall  bear the costs  continually
          incurred by Lessor as a result of its  ownership  of the  property and
          the  intended use of  buildings,  facilities,  fittings and  equipment
          (operating    costs).    Attachment    3   of    ss.27    of    Zweite
          Berechnungsverordnung   [second  computation  ordinance]  details  the
          operating costs to be apportioned, a copy of which is enclosed in this
          agreement as  Attachment  8. In addition,  based on laws  currently in
          effect, Lessee shall bear additional expenses as follows: snow and ice
          removal,  window and facade  cleaning  including  shading  facilities,
          calibration fees, power,  building and site security,  operating costs
          and   maintenance   of  all   technical,   electrical  and  electronic
          equipment/facilities   on   the   leased   premises,   as   mentioned,
          installations and hydraulic equipment.
<PAGE>
                                     - 12 -

          The various  operating  costs to be distributed in the future shall be
          apportioned on the basis of previous settlements of accounts.

          Lessor has hired a  third-party  contractor  to manage  all  technical
          aspects of the lease object.  The  expenditures  associated  therewith
          shall be borne by Lessee as part of the settlement of operating costs.

          Operating and maintenance  costs related to the technical,  electrical
          and  electronical  equipment/facilities,  installations  and hydraulic
          equipment  listed in the  attached  building  specifications  likewise
          shall be charged to Lessee.

          In case of doubt,  the extent of  cleaning,  maintenance  and  similar
          services  as well as  building  and site  security  and the  degree of
          insurance coverage are determined by Lessor.

4.2       The  apportionment key and settlement period are determined and may be
          changed by Lessor in an equitable  fashion.  In case of doubt,  Lessor
          may  distribute  expenses  based on the  proportion of leased space to
          total space or the degree of  utilization or use a combination of both
          approaches, whichever appears to be fair.

          To the extent that individual operating-cost items refer to the entire
          site, they are apportioned  based on the proportion of leased space to
          utilized space.

          If  any  costs  or  expenses   related  to  Lessee's   consumption  of
          electricity  are  charged  directly by the  utility  company,  advance
          payments shall be made upon request.

4.3       Utilities are settled once annually.  Lessor is entitled to adjust the
          frequency of settlement for practical reasons.
<PAGE>
                                     - 13 -

4.4       In addition, all utilities are subject to a monthly advance payment in
          the amount of Euro 120,000 plus turnover tax,  which becomes due along
          with the monthly rent.

          Open claims revealed by the annual settlement of accounts shall become
          due one month  following  the receipt of the  settlement  of accounts.
          Upon request,  Lessee may view the settlement  records,  objections to
          which must be  submitted  in writing  within one month  following  the
          receipt of the settlement of accounts.  If no objections are submitted
          in time, the settlement of accounts is deemed valid.

4.5       Lessor  adjusts  the  monthly  advance  payments  to  reflect  current
          conditions  in  accordance  with ss.315 BGB.  Upon  Lessee's  request,
          Lessor shall state reason and amount of such adjustment.

4.6       Upon the  introduction  of new taxes or the  occurrence or increase of
          costs directly or indirectly related to the management of the building
          or property, such costs may also be apportioned from the date of their
          first  occurrence  by Lessor,  which  determines  appropriate  advance
          payments.

4.7       To the extent practicable and economically feasible, Lessor undertakes
          to  accurately  assess  consumption  and  prepare  the  settlement  of
          accounts  accordingly.  The meters  needed for this  purpose  shall be
          installed by Lessor. This does not apply where consumption  assessment
          involves  gauging  production  and/or  utilization.  The  costs of the
          installation and maintenance of such meters are borne by Lessee.

          Without  prejudice to the foregoing,  Lessor is entitled to demand, to
          the  extent  technically  feasible,   that  Lessee  settle  individual
          operating-cost  items  (e.g.,  water  consumption)  directly  with the
          utility  provider in question.  To this extent,  Lessee shall  install
          meters  (e.g.,  water  meters) at its own expense if so  requested  by
          Lessor.
<PAGE>
                                     - 14 -


                                      ss.5
                                   Termination

5.1       Unless otherwise  provided by this agreement,  the termination of this
          lease agreement for important reasons is subject to legal provisions.

5.2       Lessor may terminate the lease agreement without notice if Lessee

          a) defaults on two installments of the agreed-upon rent;
          b) defaults on utility advance  payments and/or the payment of utility
          arrears in the amount of at least one monthly rent;
          c)  has   suspended   payments  or  operations  or  if  bankruptcy  or
          composition proceedings have been initiated or if the authorities have
          shut down its operations.
          d)  The  same   applies  if  Lessee   becomes   subject  to  execution
          proceedings,  especially  when  execution  is imposed  on  contributed
          assets or those subject to Lessor's lien, or if execution  proceedings
          were unsuccessful.

          In case of termination  through the responsibility of Lessee,  same is
          liable  for  damages  suffered  by Lessor as a result of Lessee or any
          subtenant not vacating or returning the lease object in time. The same
          applies  if the lease  object is damaged  following  its  vacation  or
          return,  cannot be leased for the  remainder of the lease term or only
          on unfavorable terms.  Compensation for lost income shall amount to at
          least the agreed-upon rent plus utilities.

          If, in case of premature  termination of the lease  agreement  through
          the responsibility of Lessee,  same suggests a tenant to take over the
          lease,  which appears to be a suitable party to a new lease  agreement
          and would  assume  the  lease  object on  identical  terms,  Lessee is
          released from its liability for damages.
<PAGE>
                                     - 15 -

5.3       Notice of termination must be given in writing.

                                      ss.6
           Structural changes implemented by Lessee following transfer

6.1       Structural changes within the lease object as well as the installation
          of additional  facilities needed,  for example,  for Lessee's business
          operations require Lessor's written consent. The costs related thereto
          are  borne by  Lessee.  Item 1.4  applies  accordingly.  Fittings  and
          equipment may be introduced by Lessee without Lessor's consent.

6.2       Upon the  conclusion  of the lease  term,  Lessee  shall  restore  the
          original  condition  of the lease  object to the  extent  that  Lessor
          refuses to accept  Lessee's offer to retain changes and/or  facilities
          introduced to the Lease object.  If, however,  Lessor agrees to retain
          such changes and/or facilities,  no compensation is due to Lessee as a
          result  thereof,   nor  is  Lessee   entitled  to   compensation   for
          appreciation of value.

6.3       In  accordance   with  the   directions   contained  in  the  building
          specifications,  Lessor  shall  ensure  that  wiring  is in place  for
          electricity  and water.  If Lessee intends to consume  electricity and
          water above and beyond normal  consumption  levels, to the effect that
          existing  capacities may be exhausted,  Lessee shall obtain  technical
          specifications  from Lessor.  If applicable,  additional  needs may be
          satisfied by  expanding  the supply  network at Lessee's  expense once
          Lessor's written consent has been obtained.

          In case of service  disruptions or damaged supply lines,  Lessee shall
          immediately perform a shutdown. If Lessee is incapable of doing so, it
          shall immediately notify Lessor or its authorized representatives.

          Lessee is not  entitled  to seek  damaged  from  Lessor as a result of
          changes in the supply of electricity, especially a shift in voltage.
<PAGE>
                                     - 16 -

          If the  supply  of  electricity,  heating  or  water  or  drainage  is
          disrupted  for reasons  beyond the  control of Lessor,  and in case of
          flood or force majeure,  Lessee is not entitled to  compensation  from
          Lessor.

                                      ss.7
              Maintenance, liability for condition of lease object

7.1       Lessor's obligations and liability

7.1.1     To the extent that Lessor is responsible  for maintenance and repairs,
          Lessor shall keep the lease object in good working order.

          Lessor  assumes  maintenance  and repairs of "Dach und Fach" [roof and
          shell], which in the case of the lease object include:

          - the  "roof," as in the roof  construction  including  roof tiles and
          plumbing (e.g., gutter) as well as canopies;
          - the "shell," as in the shell  construction  encompassing  components
          bordering on and encasing the building,  such as chimneys and facades,
          any exterior  windows and window frames as well as exterior  doors and
          door frames, excluding window and door locks and window panes.

          Maintenance  and repairs of the lease  object's  remaining  components
          shall be the  responsibility of Lessee,  which also bears the costs of
          upkeeping  and  replacing   installations  as  well  as  fittings  and
          equipment  included  in the lease.  Any such  expenditure  incurred by
          Lessor shall be passed on to Lessee.

7.1.2     No  guarantee  is issued  for  lighting  equipment  found in the lease
          object.

7.1.3     Lessee  shall not be entitled to a reduction in rent or damages due to
          disruptions or obstruction of the building's entrances beyond Lessor's
          control or third-party  construction  outside of the building.  Lessor
          shall endeavor to limit possible unavoidable  hindrances to a minimum.
<PAGE>
                                     - 17 -

          Moreover,  Lessor  agrees to have the access  road  cleaned in regular
          intervals co-determined by Lessee.

7.1.4     In the presence of defects found in the lease object or disruptions to
          the operation of the building and its fittings and  equipment,  Lessee
          shall be entitled to damages only if such defects or disruptions arose
          through Lessor's intentional or gross negligence or if Lessor fails to
          remedy such defects or disruptions within a reasonable period of time.
          Such  limitation does not apply to the extent that Item 7.1.5 Sentence
          1 applies.  However, Lessee's claims for a reduction in rent shall not
          be affected.

7.1.5     For damages subject to the risk covered by Lessor's premises liability
          insurance,  Lessor's  liability  in each  instance  is  limited to the
          amount of the insured  sum (which  amounts to Euro 67 million per case
          for the structures  erected on the site,  whereas such amount would be
          distributed  in  proportion  to damages  occurred and  evidenced if an
          event insured against affected several tenants). As for the structures
          yet to be erected under this agreement,  Lessor shall obtain insurance
          coverage  and  communicate  the  amount  of  such  premises  liability
          insurance to Lessee. Lessor shall be liable for damages not covered by
          the insured sum only if such damages  occurred through its intentional
          or gross negligence.

7.1.6     Limitations  under  Items  7.1.4  and 7.1.5 do not  apply  during  the
          warranty  period  of  the  general   contractor  hired  to  erect  the
          structures,  to the extent that the  defects,  disruptions  or damages
          present are the general contractor's liability. Insofar as maintenance
          agreements have been executed pursuant to Lessor's  obligations toward
          third  parties,  the  warranty  period  agreed  upon with the  general
          contractor is eight months for all  electrical  and  mechanical  parts
          subject  to wear and tear,  one year for  elevators  and two years for
          machines and facilities following inspection. Work performed on roofs,
          including  insulation,  as  well as  construction  and  extensions  is
          guaranteed  for five  years  from the date of  inspection.  All  other
          guarantees  correspond  with VOB/B;  i.e.,  work  performed on wood is
          guaranteed for two years,  work performed on the property for one year
          and all other work for two years following inspection.
<PAGE>
                                     - 18 -

7.1.7     Lessee  hereby  acknowledges  that the complex as well as  surrounding
          properties  are  subject  to   development.   With  the  exception  of
          unauthorized  actions,  disruptions  caused by  construction  or other
          tenants moving in do not entitle Lessee to damages payable by Lessor.

7.2       Lessee's obligations and liability

7.2.1     Pursuant  to ss.9 UStG [law on  turnover  tax],  Lessor has waived its
          right to be exempted  from  turnover tax under ss.4 No. 12 a UStG with
          regard to letting the lease object (turnover-tax option).

7.2.1.1   Lessee agrees to  exclusively  apply the lease object to earnings that
          do not preclude Lessor from claiming prior turnover tax deductions.

7.2.1.2   Lessee further agrees,  to the extent needed for disclosure  purposes,
          to provide such documents to Lessor as allow the latter to fulfill its
          obligations  to present  evidence to the financial  authorities  under
          ss.9  Paragraph 2 UStG. To this extent,  Lessor may demand that Lessee
          submit  such  documents  and/or  declarations  as are  required by the
          competent financial authorities.

7.2.1.3   If, in the case of Lessee or any  subtenant,  conditions  arise or are
          assumed by the financial  authorities  while conducting an independent
          audit,  which affect Lessor's  turnover tax option,  Lessee shall give
          immediate notice thereof to Lessor.

7.2.1.4   When subletting,  Lessee shall ensure that the turnover-tax  option is
          retained by the subtenant and,  furthermore,  include in its agreement
          with the subtenant the obligations under Items 7.2.1.1 through 7.2.1.3
          so as to enable  Lessor to assert its  rights  against  the  subtenant
          under the agreement  executed between Lessee and subtenant by means of
          an agreement for the benefit of third parties.  Lessee shall be liable
          toward Lessor for the  fulfillment  of this  obligation on the part of
          the subtenant.
<PAGE>
                                     - 19 -

7.2.1.5   Insofar as the  financial  authorities,  with regard to the concept of
          exclusive  application for earnings not precluding  prior turnover tax
          deductions,  apply a neutral  exemption  recognized  by the  financial
          courts,  the  concept  of  exclusivity,   as  used  in  the  foregoing
          provisions,  is  subject  to such  exemption  (see BMF  letter  BStBl.
          [federal tax gazette] 1994 page 943ff.).

7.2.1.6   If Lessee or, should the lease object be sublet,  any subtenant  fails
          to observe the obligation under Items 7.2.1.1 through 7.2.1.4,  Lessee
          shall be liable to Lessor for any resulting damages.

7.2.2     Lessee  shall  treat the lease  object  with care,  clean it,  keep it
          vermin-free and use it for the duration of the lease.

7.2.3     Lessee  shall  perform  at  its  own  expense  all  cosmetic  repairs,
          maintenance  and  upkeep  of  the  lease  object  as  well  as of  the
          facilities,   fittings,  equipment  and  installations  found  therein
          (including  feed and drainage  lines  to/from the supply and discharge
          facilities  all the way to the main  lines,  venetian  blinds  and all
          windows, window frames, doors and door frames located inside the lease
          object).

7.2.4     The  obligation  to perform  repairs  pursuant  to Item 7.2.3 does not
          apply during the warranty period of the general  contractor (see 7.1.6
          Sentence  2) insofar as the need for repairs is due to a defect of the
          lease object insured against by the general contractor.

7.2.5     Lessee shall repair blocked drainage pipes. Any  consequential  damage
          shall be Lessee's  responsibility  unless such damage occurred through
          Lessor 's fault.

7.2.6     Upon the  conclusion  of the lease,  Lessee  shall  transfer the lease
          object  professionally  renovated and repaired.  In  particular,  such
          renovations and repairs include,  to the extent  necessary,  replacing
          floor  covering  and  wallpaper,  painting  the  walls  and  ceilings,
          installing  air  conditioning,  heaters and  cables,  windows and door
          frames  as  well as  doors,  replacing  damaged  tiles,  sanitary  and
          technical  installations,  matching the state of repair,  in which the
          lease object was transferred to Lessee.
<PAGE>
                                     - 20 -

          Instead of performing renovation and repair work, Lessee may opt for a
          compensation payment to Lessor, giving due consideration to the period
          of time needed to complete  renovations and repairs.  Lessee must give
          notice  thereof  to  Lessor  at  least  three  months  prior  to lease
          expiration.  Following  such  notice,  the Parties  shall  inspect the
          building  together  and  reach an  agreement  as to the  amount of the
          compensation payment.

          If the  Parties  fail to reach an  agreement,  the  conflict  shall be
          settled finally and conclusively by an expert appointed by the Chamber
          of  Commerce  responsible  for  Alzenau  upon  request  by  one of the
          Parties.  Arbitration  may be requested only if, in the opinion of one
          of the Parties,  an attempt to reach a mutual agreement failed, but no
          earlier than four weeks after the Parties started  negotiations on the
          issue of the compensation  payment. The costs of arbitration are borne
          by the Parties in equal parts.

7.2.7     If Lessee returns the lease object having neither  completed the tasks
          detailed  under  7.2.6  nor  given  timely  notice  to  Lessor  of its
          intention to make a compensation  payment, and if Lessee further fails
          to perform  the  necessary  work  within the period  granted by Lessor
          thereafter,  Lessor may perform all  necessary  work at the expense of
          Lessee,  which  shall bear the costs of such  renovations  and repairs
          even if same are  performed by the next tenant.  In this case,  Lessor
          shall be entitled to compensation for possible damages, including loss
          of income during  renovations  and repairs for up to three months plus
          any additional period of time extended to Lessee.

7.2.8     Prior to the  installation  of  facilities  and  equipment  (machines,
          safes,  etc.), Lessee shall consult Lessor to obtain the maximum loads
          permitted  for each floor.  S uch maximum  loads must not be exceeded.
          However,  if they are  exceeded,  Lessee shall be liable to Lessor for
          any resulting damages and consequential damages, releasing Lessor from
          liability for any third-party claim based thereon.
<PAGE>
                                     - 21 -

7.2.9     Lessee is responsible for any damage occurring within the lease object
          as well as for any contamination or removal of materials,  liquids and
          gases,  as may be required  by law,  even if such damage was caused by
          its employees,  subtenants,  visitors, suppliers or contractors.  This
          applies   especially  if  such  conditions   affect   Lessee-installed
          equipment  and special  technical  installations.  Lessee shall not be
          responsible if such damage occurred  through  Lessor's  fault.  Lessor
          shall remedy damages caused by Lessor, persons acting on its behalf or
          third parties contracted by it.

          Lessee  shall  promptly  address  damages or  contamination  affecting
          property and buildings outside of the lease object,  which were caused
          by  Lessee,  its  employees,   subtenants,   visitors,   suppliers  or
          contractors.

          To the extent that damages affect only the lease object,  Lessee shall
          furnish  evidence to the effect that such damages were caused  neither
          by  Lessee  nor its  employees,  subtenants,  visitors,  suppliers  or
          contractors.

7.2.10    Lessee shall promptly notify Lessor of any damages to the lease object
          upon discovery.

7.3       Obligations and liability of both parties

          Maintenance  and repair  work  pursuant  to Items 7.1 and 7.2 shall be
          performed  within a  reasonable  period  of  time.  If,  after  having
          received a written  reminder and  additional  time, one of the Parties
          fails to perform  the  maintenance  and repair  work,  for which it is
          responsible,  the other  party  may have any  urgently  required  work
          performed at the expense of the defaulting party.

          If delays would entail risks, both Parties shall endeavor to eliminate
          such risks by taking appropriate action.
<PAGE>
                                     - 22 -

7.4       Insurance

          Lessor shall insure the building  against fire,  storm,  water,  glass
          breakage,  hail and flood.  In addition,  the  fittings and  equipment
          included in the lease shall be insured against fire,  burglary,  theft
          as well as water.

          Lessee agrees to obtain insurance coverage for the items it introduced
          as well as all  other  items,  including  stocks.  Lessor  assumes  no
          liability for such items. In particular, Lessee shall obtain insurance
          coverage for the lease term as follows:

          a)  insurance   against  damages  caused  by  fire,   water  and  fire
          extinguishers  for the items  Lessee  introduced  as well as all other
          items, including stocks;

          b) liability  insurance against personal injury and property damage to
          whatever extent is customary in Lessee's branch;

          c) insurance  against the risks, for which it is responsible  pursuant
          to Item 7.2.9;

          d) installations liability insurance pursuant to Wasserhaushaltsgesetz
          [water  resources  act]  (WHG),  Umwelthaftungsgesetz   [environmental
          liability act] (UmweltHG) and other applicable legal provisions to the
          extent that Lessee operates installations subject to such laws.

          It is  recommended  that  Lessee  also  obtain  for the  lease  object
          insurance  against loss of profit,  glass breakage as well as burglary
          and theft,  including damage to the building,  as these damages do not
          represent Lessor's responsibility.
<PAGE>
                                     - 23 -

                                      ss.8
                Reconstruction clause, disruptions of operations

8.1       If any part of the lease object should be fully or partly destroyed or
          sustain  damages  as a  result  of  design  faults,  fire,  explosion,
          lightening,  storm, force majeure,  the impact of war or other events,
          this lease agreement does not expire until Lessor issues a declaration
          to the effect that no reconstruction  effort will be undertaken.  Such
          declaration shall be issued promptly and in writing.

          However, insofar as full utilization of the damaged or destroyed rooms
          is no longer  possible,  Lessee's  obligation to pay rent is suspended
          from the day following the damaging  event unless such damaging  event
          occurred through Lessee's fault or must be remedied by same.

          Upon the completion of the  reconstruction  effort,  the provisions of
          this agreement apply accordingly.

8.2       Temporary  disruptions of operations  beyond  Lessor's  control do not
          diminish  Lessee's  obligation  to pay rent  unless  such  disruptions
          cannot be remedied within a reasonable  period of time. In the case of
          enduring  disruptions  beyond  Lessor's  control,   Item  8.1  applies
          accordingly.

                                      ss.9
                            Entering the lease object

          Upon   proper   notice,   Lessor  and  its   agents   and   authorized
          representatives  are free to inspect the lease object during  Lessee's
          regular  business hours. For purposes of accident  prevention,  Lessee
          shall grant Lessor access at any time.
<PAGE>
                                     - 24 -

                                      ss.10
                    Structural changes implemented by Lessor

10.1      Lessor does not require Lessee's consent to take measures necessary or
          fit to mainta in,  upkeep or improve the  building or the lease object
          or prevent  impending  accidents or repair  damages.  However,  Lessee
          shall be given proper notice thereof. If possible,  the measures to be
          taken and the date of their performance  should be determined  jointly
          with Lessee,  which shall keep the spaces in question  accessible  and
          abstain from hindering or delaying the performance of scheduled work.

10.2      Lessor is entitled to modernize  the building  both inside and outside
          both any time.

10.3      With  regard to  measures  as defined  by Items 10.1 and 10.2,  Lessee
          shall be  entitled  to claims  only to the extent  that such  measures
          represent a major disruption to Lessee's operations.

                                      ss.11
             Design of advertising as well as (company) name plates

11.1      Lessor's consent must be obtained before posting (company) name plates
          and signage on the property. Lessor shall consent to Lessee's requests
          to the extent that such requests do not conflict with uniform design.

          Lessee bears the costs of producing and posting  (company) name plates
          and signage.

11.2      Insofar  as  advertising  space is being  leased,  the design of same,
          which  shall also be of uniform  nature,  require  Lessor's  approval,
          which must not be  refused  unreasonably.  Advertising  media must not
          hinder or disturb other tenants.
<PAGE>
                                     - 25 -

11.3      Item 1.4 applies to advertising media accordingly.

                                ss.12 Subletting

12.1      Subletting requires Lessor's prior written approval, which must not be
          refused  unreasonably.  With regard to the nature of utilization,  the
          provisions of Item 1.4 apply.

12.2      ss.549 Paragraph 1 Sentence 2 BGB does not apply.

12.3      In case of an unauthorized sublease, Lessor is entitled to demand that
          Lessee  terminate  the  sublease as soon as possible but no later than
          one month  following  notice.  If Lessee  fails to comply,  Lessor may
          terminate the lease without notice.

12.4      When  subletting,  Lessee is liable for all  actions or  omissions  of
          subtenant irrespective of its own involvement.

12.5      If the lease object is sublet and Lessee defaults on rent payments, it
          agrees,  without  prejudice to its own obligations to pay rent, to pay
          to  Lessor,  as a  security,  an amount  equal to the rent owed by the
          subtenant  under the sublease  agreement plus lien,  thus matching the
          total amount owed to Lessor.

12.6      A sublease  is deemed to be in effect if any part of the lease  object
          has been ceded for independent  use,  creating a genuine lease between
          Lessee and subtenant. For purposes of this paragraph,  ceding space to
          consultants  contracted  by Lessee  or to  companies  affiliated  with
          Lessee as defined by ss.15 AktG  [companies  act] and their  employees
          does not qualify as subletting.
<PAGE>
                                     - 26 -

12.7      Lessor agrees to consent to an assignment of this lease agreement to a
          company  affiliated  with  Lessee as defined by ss.15 AktG unless such
          transfer would  compromise  Lessor's own significant  interests.  Upon
          receipt of a written  notice,  in which  Lessee  specifies  to whom it
          intends to assign the  agreement,  Lessor has three weeks to object to
          Lessee's choice of assignee. In the absence of Lessor's objection, the
          assignment is deemed  approved.  In  particular,  the new tenant shall
          observe the provisions of Item 1.4.

                                      ss.13
                              Special arrangements

13.1      The  Parties  agree that  Lessee  cannot  demand to be  shielded  from
          competition during the term of the lease.

13.2      Lessee agrees to allow Lessor to view Lessee's  audited  annual report
          and financial  statements  for the year 2000 as well as, upon request,
          all balance sheets to be prepared in the course of the lease term.

                                      ss.14
                                     Default

          In case Lessee defaults on rent payments,  utilities or other payments
          under the lease agreement, Lessee shall pay late fees in the amount of
          European  Central Bank deposit facility plus 3%. Lessor is entitled to
          assert additional  claims for damages,  if any, for which it bears the
          burden of proof.

                                      ss.15
                                  Written form

15.1      Changes and amendments to this agreement must be made in writing. This
          requirement  can be waived  only in writing.  The same  applies to all
          declarations,  for which this agreement stipulates the written form.
<PAGE>
                                     - 27 -

15.2      The  stipulation   requiring   written  form  applies   especially  to
          arrangements  yet  to be  made  by  the  Parties  with  regard  to the
          improvement of the lease object.

15.3      The  Parties  are aware of the special  legal  requirements  regarding
          written form found in ss.ss.  586 Sentence 1, 126 BGB. They enter into
          the mutual obligation, upon request of one of the Parties, to take any
          action and issue any  statement  necessary  to comply  with  statutory
          written form,  especially in connection with the execution of amending
          agreements,   and  to  abstain,  until  such  time,  from  prematurely
          terminating the agreement citing non-compliance with statutory written
          form.

                                      ss.16
                               Partial invalidity

          If any  part of this  agreement  should  be void or  contestable,  the
          validity  of the  remainder  of the  agreement  shall not be  affected
          thereby.  The invalid  portion shall be deemed  replaced by that which
          approximates,  to the extent  permitted  by law,  what the Parties had
          intended or would have  intended if they had been aware of the invalid
          portion.  The same applies to cases,  where the  agreement is found to
          have loopholes.

                                      ss.17
                                  Miscellaneous

17.1      Duty to ensure safety/cleanliness

          Lessee  assumes full  responsibility  for ensuring  safety  within the
          lease object and the  facilities  therein,  excluding  inspections  of
          "roof and shell" as defined by Item 7.1.1,  which  Lessor is obligated
          to maintain and repair.  Lessor offers to provide  winter  services as
          well as security and cleaning for all enclosed  areas if Lessee agrees
          to assume the costs related thereto.
<PAGE>
                                     - 28 -

17.2      After having  consulted  with Lessor,  Lessee may  introduce  building
          rules, which it shall determine and change in an equitable fashion.

17.3      To the extent that suppliers and manufacturers of technical  equipment
          publish  manuals for use and  maintenance,  Lessee  shall  receive the
          manuals of such  equipment as is used and  maintained  by it,  observe
          such manuals and return them upon the conclusion of the lease term.

17.4      The agreement includes:


          Attachment 1:                 Map
          Attachment 2:                Listing of assets, fittings and equipment
          Attachment 3.1 through 3.6:  Floor plans of existing building
          Attachment 4:                Listing of property of Applied Films GmbH
          Attachment 5.1 through 5.5:  Plans (with leased spaces marked) of new
                                       structures
          Attachment 6:                Building specifications
          Attachment 7:                Requests for changes/additions made until
                                       agreement was executed
          Attachment 8:                Statement of operating costs according to
                                       Attachment 3 adss.27 II. BV

Alzenau, January 31, 2001                     Essen, January 31, 2001

Applied Films                                 RWE Systems
GmbH & Co. KG                                 Immobilien GmbH & Co. KG
[signatures]                                  [signatures]
Applied Films
- Lessee -                                    - Lessor -
Applied Films GmbH & Co. KG
Postfach 11 45
D-63764 Alzenau
Siemensstra(beta)e 100
D-63755 Alzenau                               Mannheim, January 31, 2001
                                              Lahmeyer Grundbesitz GmbH & Co. KG
                                  [signatures]
                                   - Lessor -
<PAGE>
EXHIBIT 10.23

                           COMMERCIALIZATION AGREEMENT



              FOR EQUIPMENT RELATED TO THE APPLICATION OF A PLASMA
                         ENHANCED COATING TO CONTAINERS



                                    EFFECTIVE



                                SEPTEMBER 1, 2000



                                     BETWEEN



                              THE COCA-COLA COMPANY



                                       AND



                                    KRONES AG



                                       AND



                          BALZERS PROCESS SYSTEMS GmbH
<PAGE>
                                Table of Contents

Commercialization Agreement for Equipment related to the Application of a Plasma
enhanced coating to Containers

1.     Products covered by this Agreement
2.     Balzers
3.     Licensing and Sales of Plasma Equipment
4.     Parties` Responsibilities
       4.1.          TCCC Responsibilities
       4.2.          KRONES Responsibilities
       4.3.          Balzers Responsibilities
       4.4.          Meetings between the Parties
5.     Warranties/Indemnification
       5.1.          Warranty of Right to Grant Licenses
       5.2.          Warranty of Notification of Claim
       5.3.          Product Warranty
       5.4.          Warranty of Non-Infringement
5.5    Limitations
       5.6.          Indemnification
6.     Territory
7.     Sales, Support, Training and Service
8.     Notification
9.     Improvements and New Technology
       9.1           Improvements
       9.2           Disclosure of New Technology
10.    Term and Termination
       10.1.         Term
       10.2.         Termination
11.    Performance Criteria
12.    Confidentiality
       12.1.         Non-Disclosure Obligation
       12.2.         Exceptions
       12.3.         Confidential Agreement
       12.4.         Term of Obligations
       12.5.         Disclosure to Participating Affiliates
13.    Independent Contractor
14.    Applicable Law, Mediation and Arbitration
       14.1.         Applicable Law
       14.2.         Mediation
       14.3.         Arbitration
15.    Entire Agreement
16.    Amendment
17.    Waiver
18.    Severability
19.    Force Majeure
20.    Hardship
21.    Assignment
22.    Sale of Business by KRONES or Balzers
23.    Survival
24.    Exhibits
<PAGE>
                           COMMERCIALIZATION AGREEMENT
          FOR EQUIPMENT RELATED TO THE APPLICATION OF A PLASMA ENHANCED
                              COATING TO CONTAINERS



THIS AGREEMENT is effective as of September1, 2000, between


                                        The Coca-Cola Company,
                                        a Delaware corporation,
                                        having a place of business at
                                        One Coca-Cola Plaza, N.W.,
                                        Atlanta, Georgia 30313
                                        (referred to as "TCCC")

and

                                        KRONES AG,
                                        a German Corporation,
                                        having a place of business at
                                        Bohmerwaldstr. 5
                                        D-93068 Neutraubling
                                        Germany
                                        (referred to as "KRONES")

and

                                        BALZERS PROCESS SYSTEMS GmbH,
                                        a German corporation,
                                        having a place of business at
                                        Wilhelm-Rohn-Strabe
                                        D-63450 Hanau
                                        Germany
                                        (referred to as "Balzers").
<PAGE>
WITNESSETH THAT:


A. TCCC is engaged in, among other  things,  the business of  manufacturing  and
marketing   beverages,   beverage  bases  and  concentrates  through  TCCC,  its
subsidiaries and participating bottlers, canners, and other companies authorized
by TCCC to package,  distribute  and/or sell beverages  under the trademarks and
patents of TCCC ("Participating  Affiliates").  In connection with its beverage,
beverage base and concentrate  business,  TCCC is engaged in providing technical
services in respect of the  development  and supply of equipment  related to the
application  of a  plasma  enhanced  coating  to  plastic  containers.  TCCC  is
providing  a process  for use in  applying  plasma  coating to the  exterior  of
plastic  containers (as described in Exhibit B1) based on the patents and patent
applications of TCCC, listed in Exhibit B2, and further on various patents owned
by Plasco,  listed in Exhibit B2 and licensed  worldwide to TCCC for application
in the beverage industry.

B. KRONES is a manufacturer  of various  components of equipment  related to the
application  of  a  plasma  enhanced  coating  to  plastic  containers  ("Plasma
Equipment") and a distributor of Plasma Equipment. KRONES desires to participate
in selling and servicing Plasma Equipment,  in conjunction with TCCC and Balzers
pursuant to the terms of this Agreement.

C. Balzers is a  manufacturer  of various  components  of Plasma  Equipment  and
desires to, in conjunction with KRONES and TCCC, sell Plasma Equipment  pursuant
to the terms of this Agreement.

D. With respect to the  manufacture,  sale and  distribution of Plasma Equipment
pursuant to the terms of this  Agreement,  it is the intent of TCCC,  KRONES and
Balzers  (collectively,  the  "Parties")  that  Balzers  and  KRONES  will  each
manufacture  various components of Plasma Equipment,  as set forth in Exhibit A,
and Balzers will  integrate the various  components  into a single unit with the
assistance  of KRONES  for sale by KRONES  according  to  Section  4.2.  of this
Agreement.

E. This Agreement supersedes the following Agreements (hereinafter  "Development
Agreements"):

     1.  Development  Agreement  for Bottle  Handling  Equipment  Related to the
     Application of Plasma to Plastic Containers  effective July 1, 1997 between
     The  Coca-Cola  Company and KRONES AG and any  addendums  or  modifications
     thereto; and

     2.  Development  Agreement for the Application of Plasma Coating to Plastic
     Containers effective July 1, 1997 between The Coca-Cola Company and Leybold
     Systems GmbH and any addendums or modifications thereto,

to the extent that they address issues of  commercialization,  sales and service
of Plasma Equipment and such technical issues as set forth in this Agreement and
its Exhibits,  especially  the  performance  criteria.  Moreover this  Agreement
supersedes the Development  Agreements between The Coca-Cola Company and Leybold
Systems  GmbH and The  Coca-Cola  Company  and  KRONES AG and any  addendums  or
modifications  thereto as far as licenses to inventions or technology made under
the Development Agreement are granted pursuant to this Agreement.

F. The Parties have reached agreement on Terms and Conditions  applicable to the
supply and service of Plasma Equipment as between the Parties.
<PAGE>
                                 Now Therefore:

In  consideration  of the promises and  obligations of the parties  contained in
this Agreement, the Parties agree as follows:

1. Products Covered by this Agreement

In this  Agreement,  "Plasma  Equipment"  means the equipment,  its  components,
parts,  and other  services  identified in Exhibit A, using,  in part, the basic
process  for  use  in  applying  plasma  coating  to  the  exterior  of  plastic
containers,  provided by TCCC and described in Exhibit B1,  attached  hereto and
based on the  patents and  licenses  listed in Exhibit  B2.  Because  KRONES and
Balzers will be  individually  and/or  jointly  commercializing,  manufacturing,
selling and servicing Plasma Equipment with TCCC as set forth herein, references
to  Plasma  Equipment  in this  Agreement  may  also  be  used  to mean  various
components  of Plasma  Equipment  and the  services  identified  in  Exhibit  A.
"Improvements", as defined in Paragraph 9 of this Agreement, are included in the
definition of Products covered by this Agreement.

2. Balzers

Balzers is the successor company to LEYBOLD SYSTEMS GmbH ("Leybold");  as far as
Plasma Equipment is concerned and has assumed all rights and responsibilities of
Leybold under the Development Agreement for the Application of Plasma Coating to
Plastic  Containers  effective  July 1, 1997  between  TCCC and  Leybold and any
addendums or modifications thereto.

3. Licensing and Sales of Plasma Equipment

The Parties  agree that for a period of two years after this  Agreement  becomes
valid  Balzers  and  KRONES  have  the  obligation  to sell and  license  Plasma
Equipment only to TCCC,  its  subsidiaries,  Participating  Affiliates and other
Companies which are authorized by TCCC (collectively and hereinafter referred to
as  "dedicated  Customers").  For each  order  of  Plasma  Equipment,  dedicated
Customers  will be  notified  by TCCC to KRONES  and  Balzers.In  all cases when
KRONES and Balzers are in doubt  whether a third party is a dedicated  Customer,
they will contact TCCC as set forth in Section 8 of this Agreement. If TCCC does
not  confirm the third  party as a  dedicated  Customer,  KRONES and Balzers are
prohibited  from any sales.  Dedicated  Customers  will generally be entitled to
place  orders for  Plasma  Equipment  pursuant  to the Terms and  Conditions  of
Exhibit C or D, attached hereto,  per TCCC's  decision,  and will be notified by
TCCC of the existence of the  Agreement,  and the related  Terms and  Conditions
governing orders for Plasma Equipment.

After a period of two years  after  this  Agreement  becomes  valid  KRONES  and
Balzers  are free to sell and  license  Plasma  Equipment  to any third  parties
(collectively and hereinafter referred to as "non-dedicated  Customers") without
being  restricted  in the  determination  of  prices,  components  of  prices or
discounts or any other terms of conditions.  Sales and licensing  issues related
to  Plasma  Equipment  to be sold to  non-dedicated  Customers  will be  handled
pursuant to the terms set forth in Exhibit C, attached hereto.

4. Parties` Responsibilities

While the rights and  responsibilities  of the  Parties  are set forth in detail
throughout this entire Agreement,  this Section is generally intended to outline
the interaction of the three Parties in commercializing,  manufacturing, selling
and servicing  Plasma  Equipment.  Prior to September 30, 2001, the Parties will
meet with the  intention  of  re-defining  the  responsibilities  of KRONES  and
Balzers  under  this  Agreement  with  respect  to sales and  service  of Plasma
Equipment.
<PAGE>
4.1 TCCC' Responsibilities

TCCC will generally assist in the interaction of dedicated Customers with KRONES
and  Balzers  in the  purchase  of Plasma  Equipment.  The  interaction  by TCCC
referred to in this  Section will be for  dedicated  Customers  only.  TCCC will
coordinate  dedicated  Customers  in this regard and will have the  authority to
dictate the order in which dedicated  Customers  demand for Plasma  Equipment is
met by KRONES and Balzers.

TCCC is responsible for the Process, as briefly described in Exhibit B1, for use
in applying plasma coating to the exterior of plastic containers, which includes
the right to use patent  rights and  know-how  by  Balzers  and KRONES  owned or
licensed by TCCC.  Concerning the patents and licenses  listed in Exhibit B2 and
the  aforementioned  know-how,  TCCC grants Balzers and KRONES an exclusive (for
the purposes stated herein),  worldwide right of use, transferable to associated
companies, for manufacture, sale and service of Plasma Equipment during the term
of this Agreement.  Royalties for this license will be as set forth in Exhibit C
and D of this Agreement. For purposes of this Agreement,  "associated companies"
will mean the Parties and any other business  entities owned (by more than 50%),
either directly or indirectly, by the Parties.

In order to enable  Balzers to perform its  obligations  and exercise its rights
under this Agreement,  TCCC grants Balzers an exclusive (for the purposes stated
herein),  worldwide  license,  transferable  to associated  companies,  in Prior
Inventions, Supplier Inventions, Joint Inventions and KO Inventions (referred to
as Licensed  Inventions in the Development  Agreement between TCCC and Leybold),
as defined in  Exhibit E of the  Development  Agreement  between  The  Coca-Cola
Company  and  BALZERS  AG,  addressed  in  Witnesseth  That,  Section  E of this
Agreement, for manufacture, sale and service of Plasma Equipment pursuant to the
terms of this  Agreement.  Royalties  for this  license  will be as set forth in
Exhibit C and D of this  Agreement.  TCCC and  Balzers  agree  that  Exhibit  C,
subparagraph  2.4 and Exhibit E of the  Development  Agreement will not apply to
the license in Licensed  Inventions as far as the manufacture,  sale and service
of Plasma Equipment pursuant to the terms of this Agreement is concerned.


In order to enable  KRONES to perform its  obligations  and  exercise its rights
under this Agreement  TCCC grants KRONES an exclusive  (for the purposes  stated
herein),  worldwide  license,  transferable  to associated  companies,  in Prior
Inventions, Supplier Inventions, Joint Inventions and KO Inventions (referred to
as Licensed Inventions in the Development Agreement between TCCC and Krones), as
defined in Exhibit E of the Development  Agreement between The Coca-Cola Company
and KRONES AG,  addressed in Witnesseth That,  Section E of this Agreement,  for
manufacture,  sale and service of Plasma Equipment pursuant to the terms of this
Agreement. Royalties for this license will be as set forth in Exhibit C and D of
this  Agreement.  TCCC and KRONES agree that Exhibit E ,  subparagraph 2. of the
Development  Agreement  will not apply to the license in Licensed  Inventions as
far as the  manufacture,  sale and service of Plasma  Equipment  pursuant to the
terms of this Agreement is concerned.


4.2 KRONES' Responsibilities

According to Section 10.1. it is the Party's  intention that after September 30,
2001 KRONES will generally have the primary responsibility for manufacturing the
bottle handling  components of the Plasma Equipment,  assisting Balzers with the
integration of the bottle  handling  component of the Plasma  Equipment with the
plasma  generation/application  component of the Plasma Equipment to be supplied
by Balzers, selling the completed Plasma Equipment,  worldwide service of Plasma
Equipment and initially collecting royalties received for distribution among the
Parties.  KRONES  will  perform  its  duties  under this  Agreement  in the most
reasonable manner with respect to efficiencies and costs.
<PAGE>
4.3 Balzers' Responsibilities

Balzers will generally have the primary  responsibility  for  manufacturing  the
plasma  generation/application  components of the Plasma Equipment,  integrating
these  components  of the Plasma  Equipment  with those  supplied by Krones into
Plasma Equipment ready for sale, and supporting KRONES, to the extent necessary,
in  the  worldwide  service  of  Plasma   Equipment,   particularly  the  plasma
generation/application  components of Plasma Equipment. Balzers will perform its
duties  under this  Agreement  in the most  reasonable  manner  with  respect to
efficiencies and costs.

4.4 Meetings between the Parties

During  the  first  two  years  of this  Agreement,  the  Parties  agree to meet
regularly,  either in person or otherwise  as desired by the Parties,  but in no
event  less  than  once  a   quarter,   to   discuss   issues   related  to  the
commercialization,  sale and service of Plasma Equipment. During these meetings,
the Parties will  discuss,  at a minimum,  the  priorities  of TCCC,  KRONES and
Balzers in selling and implementing Plasma Equipment.  Each Party has a right to
call a meeting of the Parties as contemplated by this Section. The meetings will
take place within a reasonable time after the meeting is called,  but not longer
than four weeks unless agreed upon otherwise. The Parties agree to work together
in good faith in order to accomadate the other Parties scheduling conflicts.

5. Warranties/Indemnification

5.1 Warranty of Right to Grant Licenses

TCCC  warrants  to Balzers  and  KRONES  that it has the full right and power to
grant the rights of use and the  licenses  pursuant  to Section  4.1 and Section
10.1 of this Agreement and that concerning the Process,  as briefly described in
Exhibit B1, no patents and licenses  apart from the patents and licenses  listed
in Exhibit B2 are required and no other  know-how than  mentioned in Section 4.1
is  necessary  for the  manufacture,  sale and  service of Plasma  Equipment  by
Balzers and KRONES to the best of TCCC's knowledge.

5.2 Warranty of Notification of Claim

KRONES,  Balzers and TCCC  warrant  each other that each of them will notify the
other  party  immediately  of any  claim  alleging  that  the  Plasma  Equipment
(including the Process) infringes the rights of a third party.

5.3 Product/Process Warranty

Balzers,  KRONES  and/or  TCCC  warrant  each other that the  respective  Plasma
Equipment components and/or Process that they each manufacture or for which they
are  responsible  will  meet  all  legal   requirements,   statutes  and  safety
regulations  governing the manufacture,  sale and use of Plasma Equipment.  TCCC
warrants  that the  Process  as set forth in  Exhibit  B1 will not cause  health
defects, when used properly as set forth in Exhibit B1, and shall exempt Balzers
and KRONES from all asserted  claims from third parties based on the  allegation
of health  defects  caused by the Process.  This  warranty is made by TCCC based
upon the health laws and  regulations  existing as of the effective date of this
Agreement.  If the health laws or regulations  change materially so as to impact
the  Process  after the  effective  date of this  Agreement  in any  country  or
territory,  TCCC may, at its option, declare a "Hardship" pursuant to Section 20
of this  Agreement.  This  warranty  does not apply if the  Process  is  changed
outside of the  definition set forth in Exhibit B1 or is used  improperly.  If a
health claim is asserted  relating to the Process.If courts in the United States
or the European  Community  have  rendered res judicata one or more  judgements,
TCCC may,  at its  option,  order the shut down of any or all  Plasma  Equipment
necessary to address the respective  claim,  provided this serves reasonably the
purpose of preventing or mitigating substantial damages.
<PAGE>
5.4 Warranty of Non-infringement

To the best of their  respective  knowledge,  KRONES and/or  Balzers and/or TCCC
warrant their respective Plasma Equipment  components and Process to be supplied
pursuant  to this  Agreement  do not  infringe  any patent,  copyright  or other
industrial or proprietary right of any third party. KRONES,  Balzers and/or TCCC
agree to conduct and maintain  regular patent  searches for monitoring  existing
technology in the general  field of Coating  Equipment,  and related  processes.
Each Party is responsible for the patent search as far as its responsibility for
the Plasma  Equipment  Components  and  Process  pursuant to this  Agreement  is
concerned.

5.5 Limitations

Unless stated otherwise in this Agreement, the Parties will not be liable to the
other Parties for damages relating to activities pursuant to this Agreement.

5.6. Indemnification

Balzers and/or TCCC are still  responsible with regard to KRONES as far as their
respective  components,  process or licenses are  concerned.  Therefore,  if any
claims  based on default or  infringement  by Balzers  and/or TCCC are  asserted
against KRONES by a third Party, Balzers and/or TCCC shall be obliged to defend,
indemnify and hold KRONES harmless, provided however, Balzers and/or TCCC are at
fault,  that  means  if  and  in as  far  as the  cause  for  the  liability  of
actions/suits/claims  against  KRONES  is  attributable  wholly or partly to the
sphere or area of  responsibility/organisational  area of Balzers  and/or  TCCC,
including without  limitation  actions/suits/claims  based on the use or sale of
Plasma  Equipment  supplied,  and all  product  liability  for Plasma  Equipment
supplied.  Further  rights and  responsibilities  of the Parties with respect to
intellectual  property  indemnifications  are set  forth  in  Exhibit  D of this
Agreement.

6. Territory

This  Agreement  will cover the  commercialization,  sale and  service of Plasma
Equipment in all territories worldwide.

7. Sales Support, Training and Service

KRONES and Balzers will be responsible  for providing  adequate sales  structure
and sales support in order to supply Plasma Equipment and for providing adequate
Training and Service. The details are described in Exhibit A.
<PAGE>
8. Notification

Notification  to the  parties  hereunder  shall be  directed  to the  respective
parties as follows:

For TCCC, addressed to:

The Coca-Cola Company
One Coca-Cola Plaza N.W.
Atlanta, Georgia 30313

Attention: Chris Jacobi
Phone: 404-676-6401
Facsimile:

With a copy to:

Senior Patent and Technology Counsel via facsimile at 404-676-8414.


If to KRONES, addressed to:

KRONES AG
Bohmerwaldstr. 5
D-93068 Neutraubling
Germany

Attention: Dr. Herbert Pickel
Phone: 49-9401-702900
Fax: 49-9401-702762


If to Balzers, addressed to:

Balzers Process Systems GmbH
Wilhelm-Rohn-Stra(beta)e 25
D-63450 Hanau
Germany

Attention: Dr. Klaus Michael
Phone: 49-6181-234-1728
Fax: 49-6182-34-1070


or to such address as may be later specified. If notice is sent via facsimile or
e-mail  transmission a confirmation copy shall be sent by courier.  Notices sent
as set forth  above shall be  effective  as of the date  received,  or three (3)
business days from the mailing date if sent by courier air mail.

9. Improvements and New Technology

The  Parties  agree that  Improvements  and New  Technology  relating  to Plasma
Equipment  and the  Process,  as briefly  described in Exhibit B, shall be dealt
with  pursuant to Section 9.1 and  Section  9.2 of this  Agreement.  The Parties
agree/understand  that  New  Technology  is  defined  to  be  breakthrough  type
technology  and  not  simply  a  modification  or  advancement  to the  existing
technology which is defined to be Improvements hereunder.

9.1 Improvements

The  Parties  intend,  to the  extent  that it is  commercially  reasonable,  to
continue to develop and improve  Plasma  Equipment  and the Process,  as briefly
described in Exhibit B1, necessary for the use of the Plasma  Equipment.  To the
extent that  Improvements  are made to Plasma  Equipment  and the Process in the
future,   the  terms  and  conditions  of  this  Agreement  will  apply  to  the
commercialization,  sales and  servicing of the improved  Plasma  Equipment  and
Process.  KRONES,  Balzers  and TCCC will  regularly  inform  each  other of the
respective  development activities relating to Plasma Equipment and the Process.
Improvements  will be treated as Products Covered by this Agreement  pursuant to
Section 1 above. The Parties agree that an exclusive license to any Improvements
will  be  provided,   during  the  Agreement,   by  the  respective  Party(ies),
responsible  for creating the  Improvements  such that Plasma  Equipment and the
Process can incorporate such Improvements.
<PAGE>
9.2 Disclosure of New Technology

KRONES, Balzers and TCCC acknowledge that each of them will benefit from a close
working  relationship  during the term of this Agreement.  Accordingly,  KRONES,
Balzers and TCCC agree to disclose to each other any new  technology  internally
developed  during the term of this  Agreement  relating  to barrier  coatings of
plastic bottles and any relevant  process for the use of applying plasma coating
to the exterior of plastic  containers  before disclosing such technology to any
other party.  Once a disclosure  of New  Technology  is made by one party to the
other two  parties,  there will be a 90 day period  where the  Parties  agree to
discuss in good faith  working with each other to develop  and/or  commercialize
the identified New  Technology.  If the Parties are unable to agree to terms for
working  together  in the given 90 day  period,  the party  originating  the New
Technology  will be free to develop  the New  Technology  without  the other two
parties.

10. Term and Termination

10.1 Term

This Agreement  shall continue in effect until August 31,  2005.and shall not be
subject to tacit renewal.. In case the Parties do not agree to a prolongation of
this  Agreement  afterAugust  31,  2005,  TCCC  grants  KRONES and  Balzers  the
worldwide,  non-exclusive  license,  transferable to associated  companies,  for
manufacture,  sale and service of Plasma  Equipment,  including  the patents and
licenses,  listed in Exhibit B, and the know-how,  mentioned in Section 4.1. The
license  granted  by TCCC is royalty  bearing  with such  royalty  rates to TCCC
(royalty per Exhibit C) and Plasco  ($27,500US) as set forth in this  Agreement.
as far  and as  long as TCCC is  obligated  to pay  royalties  for the  licenses
granted by Plasco GmbH.

10.2 Termination

This  Agreement may be terminated on behalf of any party for material  breach if
60 days after receiving such written notice of such breach,  it remains uncured.
If such a termination  occurs,  the other two parties will agree upon a plan for
continuing  the  manufacture,  distribution  and service of Plasma  Equipment as
outlined  in  this  Agreement.  In the  event  of a  termination  pursuant  to a
non-cured  breach by one  party,  the other two  non-breaching  parties  will be
permitted to continue  manufacturing,  selling and  servicing  Plasma  Equipment
pursuant  to this  Agreement,  either as two parties or with the  assistance  of
other  parties as  necessary to continue  the  manufacture,  sale and service of
Plasma  Equipment.  In the event of a termination  of this Agreement for breach,
the  breaching  Party will lose its future  rights,  including  license  rights,
granted under this Agreement.

11. Performance Criteria

The Performance Criteria applicable to Plasma Equipment shall be as set forth in
Exhibit E. KRONES and Balzers  represent that Plasma  Equipment sold to TCCC and
dedicated  Customers will meet the Performance  Criteria set forth in Exhibit E.
TCCC represents that the Process will meet the Performance Criteria set forth in
Exhibit E.
<PAGE>
12. Confidentiality

12.1 Non-Disclosure Obligation

None  of  the  Parties  will  disclose  or  use  for  its  benefit  confidential
information  furnished  to it  ("Receiving  Party") by any of the other  Parties
("Disclosing Party"). Each Party recognizes that certain engineering, technical,
marketing  and  other  information  which may be  disclosed  by one of the other
Parties  represents  confidential  and valuable  proprietary  information of the
Disclosing Party. For purposes of this Section "Confidential  Information" shall
include without limitation all written  information marked  confidential and any
information which is orally disclosed and confirmed in writing within 30 days as
being  confidential and any information which is not available to the public and
later confirmed in writing as being confidential.

12.2 Exceptions

The Receiving Party shall not be obligated to maintain in confidence information
which:

         12.2.1     Is, or  subsequently  may  become,  available  to the public
                    through no fault of the Receiving Party;

         12.2.2     The Receiving  Party can show was previously  known to it at
                    the time of disclosure;

         12.2.3     May subsequently be obtained lawfully from a third party who
                    has obtained the  information  through no fault of Receiving
                    Party;

         12.2.4     Is  indepentently   developed  by  the  Receiving  Party  as
                    evidenced by the written records of the Receiving Party;

         12.2.5     Is disclosed to a third party by the Disclosing Party and/or
                    its affiliated companies without a corresponding  obligation
                    of confidence; or

         12.2.6     Is required  to be  disclosed  pursuant to the  requirement,
                    order or directive or a government agency or by operation of
                    law subject to prior  consultation  with Disclosing  Party's
                    legal counsel.

12.3 Confidential Agreement

This Agreement is confidential and no party will,  without prior written consent
of both of the other parties,  disclose any  information  relative to or derived
under this Agreement, except as may be required to ensure its performance or may
be required by authorities.

12.4 Term of Obligations

The foregoing  obligations shall remain in effect for a period of five (5) years
from disclosure of the Confidential Information.

12.5 Disclosure to Participating Affiliates

TCCC will be free to disclose  the contents of this  Agreement to  Participating
Affiliates.  KRONES and Balzers  will be free to disclose  the  contents of this
Agreement  to their  subsidiaries  and  affiliates.  All  Parties  agree to only
disclose those parts of the Agreement to these other companies needed to conduct
business pursuant to this Agreement.
<PAGE>
13. Independent Contractor

TCCC,  KRONES and Balzers are deemed to be Independent  Contractors  and neither
TCCC, KRONES,  Balzers nor their agents or employees shall have the authority to
contract for the other Party.

14. Applicable Law, Mediation and Arbitration

14.1 Applicable Law

The validity, interpretation and performance of this Agreement shall be governed
by the laws  applicable  to  contracts to be performed in the State of New York,
USA,  without  giving  effect  to the  conflict  of law or  choice  of law rules
thereof.

14.2 Mediation

In the event of any  controversy  or dispute  arising out of or relating to this
Agreement or a party's performance hereunder, the Parties will undertake to make
all  reasonable  effort to reach an amicable  settlement  of their  differences.
Failing such  settlement,  the Parties  agree to enter  mediation  (non-binding)
regarding such controversy or dispute with a third party mediator agreed upon by
all Parties to the  mediation.  The mediation will be held in New York, New York
(USA)  unless  the  Parties  agree  otherwise  and will be  administered  by the
American Arbitration Association under its Commercial Mediation Rules.

14.3 Arbitration

         14.3.1     Arbitration after Attempts at Amicable Settlement

                    If the  Parties  are unable to settle  within six (6) months
                    the controversy or dispute pursuant to Section 14.2. of this
                    Agreement, then within a reasonable period of time following
                    the  mediation  proceedings,  the  controversy  or  dispute,
                    unless otherwise  specifically  provided for to the contrary
                    in the Agreement, shall be settled by arbitration to be held
                    in New York, New York (USA) under the Rules of  Conciliation
                    and Arbitration of the International  Chamber of Commerce by
                    three arbitrators appointed in accordance with the Rules.

         14.3.2     Arbitration Rules

                    Unless otherwise  specifically  provided for to the contrary
                    in this Agreement:

                    (A)   The arbitration shall be held in English language;

                    (B)   The arbitrators  shall  be  specifically  empowered to
                          render a  decree  requiring  specific  performance  or
                          injunctive  relief.  In  the  event  the   arbitrators
                          should  decide that a decree of  specific  performance
                          would not be enforceable,  they are empowered to award
                          damages on a continuing basis for each day a party may
                          delay  fulfilling its obligations  under the  arbitral
                          award.

         14.3.3     Expeditious Resolution

                    The  Chairman  of  the  arbitration   panel  is  instructed,
                    directed and commanded to assume case management  initiative
                    and  control  of  the  dispute  resolution  process  and  to
                    initiate early  scheduling of all events whereby  reasonably
                    to assure  disposal of this dispute as  expeditiously  as is
                    practical  but in all events in not over one hundred  eighty
                    (180) calendar days from the Chairman's appointment.
<PAGE>
         14.3.4     Arbitration Binding

                    The decision of a majority of the arbitrators shall be final
                    and binding upon the Parties and non-appealable judgment may
                    be   entered   on  an  award  in  any  court  of   competent
                    jurisdiction,  in accordance with any applicable convention,
                    such as the Convention on the Recognition and Enforcement of
                    Foreign  Arbitral  Awards,  adopted  by the  United  Nations
                    Conference on International Arbitration, held in 1958 in New
                    York City. The  arbitrators  shall not award any punitive or
                    exemplary  damages.  Pretrail  discovery,  other than as set
                    forth below, shall be excluded.

         14.3.5     Proceeding Confidential

                    The Parties and the arbitrators shall treat the proceedings,
                    any related  discovery and decisions of the  arbitrators  as
                    confidential, except where not possible in connection with a
                    judicial  challenge  to,  or  enforcement  of,  an award and
                    unless otherwise required by law.

         14.3.6     Temporary Court Orders

                    The above  arbitration  Agreement  (Section 14.3.1 - 14.3.5)
                    shall not  preclude any rights of the Parties to the present
                    Agreement to apply for Court Order(s)  provided they are for
                    temporary  (preservative  or  preventative)  measures,  e.g.
                    temporary writs of attachment  and/or  temporary  (preaward)
                    injunction(s) and/or temporary restraining orders etc.

         14.3.7   Discovery

                    The Parties will agree upon the issues to be arbitrated.  At
                    least  30 days  prior  to the  arbitration  proceeding,  the
                    Parties will also exchange an "Arbitration Brief" which will
                    outline the points  that each Party  intends to prove at the
                    arbitration proceeding as well as a brief description of how
                    each point will be proven.  The  parties  agree to  exchange
                    relevant  documents in their  possession which relate to the
                    legal  issues  to be  arbitrated  prior to 30 days  from the
                    commencement of the arbitration proceedings.

15. Entire Agreement

This  Agreement  and  the  Exhibits  constitute  the  entire   Commercialization
Agreement between TCCC,  KRONES and Balzers relating to Plasma  Equipment.  This
Agreement  supersedes all prior oral or written agreements between TCCC, Balzers
and/or Leybold and TCCC and KRONES relating to the commercialization,  sales and
service of Plasma Equipment,  including the Development Agreements to the extent
that they  address  issues of  commercialization,  sales and  service  of Plasma
Equipment or the performance criteria set forth in Exhibit E and with respect to
the Development Agreement between The Coca-Cola Company and Leybold Systems GmbH
and the Coca Cola Company and KRONES AG, addressed in Witnesseth That, Section E
of  this  Agreement,  as far as TCCC  grants  Balzers  and  KRONES  licenses  to
inventions or technology made under the Development  Agreement  pursuant to this
Agreement.
<PAGE>
16. Amendment

No  amendment  to this  Agreement  shall be binding  unless it is in writing and
signed by all the Parties.

17. Waiver

No waiver by any Party of any breach of any  provision of this  Agreement  shall
constitute a waiver of any other  breach of that or any other  provision of this
Agreement.

18. Severability

In the  event  that  any of the  provisions  of this  Agreement  are  held to be
unenforceable,  the remaining  provisions of this Agreement shall remain in full
force and effect.

19. Force Majeure

The Force Majeure  (exemption)  clause of the International  Chamber of Commerce
(ICC Publication No. 421) is hereby incorporated in this Agreement.

20. Hardship

Should the occurrence of events not  contemplated  by the Parties  fundamentally
alter the  equilibrium of the present  Agreement,  thereby  placing an excessive
burden on one of the Parties in the performance of its contractual  obligations,
that Party may proceed as follows:

The Party shall make a request for revision  within a  reasonable  time from the
moment it  becomes  aware of the event and of its  effect on the  economy of the
present Agreement.  The request shall indicate the grounds on which it is based.
The Parties  then shall  consult  each other with a view to revising the present
Agreement on an equitable  basis in order to ensure that neither  Party  suffers
from an excessive prejudice.

The request for revision does not of itself  suspend  performance of the present
Agreement.

Failing an  agreement  of the Parties on the  revision of the present  Agreement
within a time limit of 45 days of the request either Party may refer the case to
the ICC Standing Committee for the Regulation of Contractual  Relations in order
to obtain the appointment of a third person in accordance with the provisions of
the rules for the  regulation  of  contractual  relations  of the ICC. The third
person shall decide on the Parties'  behalf  whether the conditions for revision
provided above are satisfied. If so, he shall revise the present Agreement on an
equitable  basis in order to ensure that neither Party suffers from an excessive
prejudice.

The  decision of the third  person  shall be binding on the Parties and shall be
deemed to be incorporated in the present Agreement.

21. Assignment

The Parties agree not to assign any rights or  obligations  under this Agreement
without the prior written approval of the other Parties.

22. Sale of Business by KRONES and Balzers

This Section is subject to the decision of the  principal  company of Balzers in
Switzerland.
<PAGE>
KRONES or Balzers  will not sell,  through  asset,  stock or other sale whole or
part of their  business  (the  "Business")  or company unit that  handles  their
individual  responsibilities  or duties pursuant to this Agreement without prior
written  approval  from  TCCC,  such  approval  not  be  unreasonably  withheld.
Withholding the approval shall be deemed to be unreasonable, if the purchaser of
the Business can give satisfactory  guarantees,  including,  but not limited to,
its   financial   abilities   to  perform   under  the   Agreement,   that  this
Commercialization  Agreement will be honoured and fulfilled by the purchase.  No
approval from TCCC shall be required if KRONES or BALZERS decide to transfer the
Business into a different  legal entity  within its own Group of  Companies.  It
will not be considered  unreasonable for TCCC to deny approval,  if the proposed
sale is to a competitor of TCCC.

If either  Balzers or KRONES  breaches this section,  the parties agree that the
breach will be material and that this  contract may be  terminated by TCCC as to
the breaching party. Other than terminating the Agreement, any further claims of
TCCC on whatsoever reasons shall be excluded.

23. Survival

The terms  relating to Sales  Support,  Training and  Service,  confidentiality,
arbitration and Exhibit C will survive any termination or expiration hereof.

24. Exhibits

The Exhibits to this  Agreement are hereby  incorporated  into the Agreement and
will have the same effect as all other provisions to this Agreement.



IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the
date set forth above.




KRONES AG                                     The Coca-Cola Company

By: /s/ Illegible                             By: /s/ Illegible
Title: ...........................            Title: VP and Director Engineering




Balzers Process Systems GmbH

By: /s/ K. Michael
Title: President
<PAGE>

                                  Exhibit 11.1
<TABLE>
                    COMPUTATION OF EARNINGS PER COMMON SHARE
                    (in thousands, except per share amounts)


                                                                        June 30, 2001
                                                                        -------------
<S>                                                                     <C>
BASIC EARNINGS PER SHARE
Net income applicable to common stockholder (loss)                      $     (4,700)
Weighted average number of common shares outstanding                       6,413,802
Basic earnings per share                                                $       (.73)

DILUTED EARNINGS PER SHARE
Net income (loss)                                                       $     (4,333)
Weighted average number of common shares outstanding                       6,666,966
Assuming exercise of stock options                                           655,253
Assuming repurchase of treasury stock                                       (352,449)
                                                                    ----------------------
        Net incremental shares                                               302,804
Weighted average number of common shares
        Outstanding, as adjusted                                           6,969,770
Diluted earnings per share                                              $       (.62)
</TABLE>
<PAGE>
                                  Exhibit 23.1



                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the incorporation of our
report  dated  July 19,  2001  included  in this Form 10-K,  into the  Company's
previously  filed  Registration  Statement  file numbers  333-68476,  333-47951,
333-47967, 333-38426, 333-51175, 333-95367, 333-56376 and 333-56378.

                                                      /s/ARTHUR ANDERSEN LLP

Denver, Colorado,
September 5, 2001