FORM 10-K
                       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 July 1, 2000

                                       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 of other jurisdiction of                       (I.R.S. Employer
 incorporation or organization)                       Identification No.)

                   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:
                                                      Name of Exchange
          Title of Each Class                       on Which Registered
              Common Stock                         Nasdaq National Market

        Securities registered pursuant to Section 12(g) of the Act: None
                                (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 common stock held by  non-affiliates  of the
Registrant,  based on a per  share  price of  $24.50  as of July 28,  2000,  was
$148,000,972.  As of July 28, 2000, there were  outstanding  6,040,856 shares of
the Company's Common Stock (no par value).

Documents  Incorporated by Reference:  Portions of the Company's Proxy Statement
for the 2000 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  "Certain  Factors." All period  references  are to our fiscal  periods
ended July 1, 2000, July 3, 1999 or June 27, 1998, unless otherwise indicated.

ITEM 1(a):  General Development of Business

General

     We are a leading  solutions  provider of thin film  technology for the flat
panel display ("FPD") industry.  We use our proprietary  in-line coating systems
to produce thin film coated glass for use in a variety of displays  incorporated
in products ranging from calculators to wireless  communication devices. We also
design and  manufacture  thin film coating  equipment for display  manufacturers
across the entire  continuum of the FPD industry.  These  manufacturers  use our
equipment to apply thin films to glass for use in FPDs, including liquid crystal
displays  ("LCDs"),  touch panels,  active matrix computer displays and high end
plasma  displays for high  definition  televisions.  Our ability to produce both
thin film coated  glass and thin film coating  equipment  enables us to leverage
our expertise and provide effective solutions to the FPD market.

     FPDs are found in a wide  variety  of  consumer  and  industrial  products,
including   cellular   telephones,   personal   digital   assistants   ("PDAs"),
calculators,   laptop  computers,  flat  desktop  monitors,  pagers,  scientific
instruments,  televisions,  video games, gasoline pumps, automotive instruments,
point-of-sale  terminals  and a number of other  electronic  devices.  Most FPDs
require  optically  transparent,  electrically  conductive  thin films coated on
glass substrates. These thin films transmit electrical power to picture elements
of the  displays and allow light to pass to the viewer.  As FPDs become  larger,
thinner, and more information intensive,  the thin film coated glass used in the
displays must meet more demanding performance standards.

     We address two distinct  markets  within the FPD  industry:  the market for
thin film  coated  glass and the market  for thin film  coating  equipment.  The
market for our thin film coated glass is primarily comprised of manufacturers of
products  using  black  and  white  displays,  such as  those  used in  cellular
telephones,  calculators,  or electronic games.  These  manufacturers  typically
purchase thin film coated glass from specialized suppliers such as ourselves.

     The market for our thin film  coating  equipment  is  primarily  made up of
manufacturers of products using high information content,  color displays,  such
as high  resolution  LCDs and plasma  display  panels  ("PDPs") used in computer
monitors and high  definition  televisions.  The processes used to produce these
displays involve  intermediate process steps more suitably performed in-house by
the display  manufacturers.  Consequently,  these  manufacturers have a need for
thin film coating  equipment to internally apply thin film coatings in their own
display  fabrication  facilities.  To a lesser extent,  the market for thin film
coating  equipment  also includes  manufacturers  of lower  information  content
displays that choose to vertically  integrate and produce thin film coated glass
internally.

     We offer FPD  customers  a fully  integrated  solution  that  supports  the
customer  through all phases of development  and product life cycle.  We are the
only  company  that  supplies  both thin film  coated  glass for low  resolution
displays and also the coating  equipment for  manufacturers of both low and high
resolution displays. Our ability to supply both coated glass and coating process
systems enables us to supply and support a broad range of FPD technologies.  Our
increasing  emphasis  on coating  process  systems and the  introduction  of the
ATX-700 advanced coating platform  positions us to take advantage of anticipated
growth in the markets for high resolution LCD and plasma displays.

                                       2
<PAGE>
     Thin  Film  Coating  Equipment.  To  address  the  evolving  needs  of  FPD
manufacturers  and leverage our  expertise  in process  technology,  we recently
developed  and  introduced  the  ATX-700.  The ATX-700 is a modular and scalable
advanced  thin film coating  system that answers the needs of the PDP and active
matrix markets for small, flexible systems that minimize particulate  generation
and can easily be adapted to automation.  The advanced ATX-700 platform, coupled
with our process  technology  and  extensive  experience  in  operating  our own
coating  equipment,  provides  us with  significant  competitive  advantages  in
selling our coating equipment. In December 1999, we announced our first contract
for the sale of an  ATX-700  system.  We have sold a total of three (3)  ATX-700
systems. We are actively soliciting and negotiating additional system orders. As
of July 1, 2000, our backlog from such equipment  sales was  approximately  $8.8
million.

     We  believe  our  proprietary   technology  and  know-how   enables  us  to
effectively  address the advanced  technical  requirements of FPD manufacturers.
For example,  we developed and applied for patent protection for a process which
materially  increases the reactive  sputtering speed of magnesium oxide ("MgO").
We believe this process may represent a significant competitive advantage in the
emerging market for coating equipment for plasma displays.  In addition, we have
designed  our  advanced   platforms  to  provide  technical,   processing,   and
operational advantages to our customers.  We believe our technological expertise
will be of  increasing  importance  to our  equipment  business as the technical
requirements of FPDs continue to evolve.

     Thin Film Coated Glass. We are the leading worldwide  supplier of thin film
coated glass for low resolution black and white LCDs and we have a smaller,  but
growing share of the market for thin film coated glass for high resolution black
and white  LCDs.  Our  design,  construction  and  operation  of our own coating
equipment to supply these markets gives us a significant cost advantage over our
competitors,  most of which  must  purchase  equipment  from third  parties.  In
addition, our hands-on operating experience provides us competitive  advantages,
including:

    -    the  ability  to  make  continuous  process  and  system   improvements
         resulting in higher throughput, better yields, greater equipment uptime
         and more efficient target utilization;

    -    our  expertise in substrates,  coating  materials and glass preparation
         under cleanroom conditions; and

    -    the development of reliable, cost effective conveyance systems enabling
         movement of the glass at varied speeds in a controlled fashion.

     We meet our customers' needs by supplying glass from our plant in Longmont,
Colorado and increasingly  from our joint venture in Suzhou,  China.  This joint
venture is strategically  positioned in southeast Asia in close proximity to our
customer  base,  enabling  just-in-time  delivery,  minimizing  working  capital
requirements, and reducing raw glass, direct labor and transportation costs.

     We were  originally  incorporated in Colorado as Applied Films Lab, Inc. on
March 2, 1976.  On May 1, 1992, we merged with Donnelly  Coated  Corporation,  a
wholly owned  subsidiary of Donnelly  Corporation of Holland,  Michigan.  During
fiscal 1994, we ceased using capacity in Holland,  Michigan and began  operating
solely in Boulder, Colorado. In fiscal 1998 and 1999, we moved all of our office
and manufacturing facilities to Longmont, Colorado.

Strategy

     Our  objective is to enhance our position as a leading  global  supplier of
coating  process  technology and  equipment,  and coated glass to the entire FPD
industry. Essential elements of our strategy include the following:

     Leverage our  Leadership in Providing  Effective Thin Films  Solutions.  We
leverage  our thin film  technology  and  process  capabilities  to address  the
evolving requirements for more sophisticated, technologically advanced FPDs. The
FPD industry  includes a broad range of  technologies  used in a wide variety of
products.  We supply  coating  process  systems and coated  glass,  enabling our
customers  to  produce  a full  range  of FPDs.  We  believe  our  technological
capabilities,  our history of designing,  developing  and improving our own thin
film manufacturing  systems, and our extensive operational experience provide us
with  competitive  advantages in selling thin film coating  equipment and coated
glass to FPD manufacturers.

                                       3
<PAGE>
     Capture Opportunities Created by Growing Demand in High-End FPD Markets. As
consumers continue to demand more sophisticated  displays, FPD manufacturers are
focusing on and increasing  capacity to produce high  resolution  displays.  The
recovery of the Asian economy is creating  increasing demand for coating systems
as Asian manufacturers  establish new production facilities and build production
capacity to satisfy market  demand.  To address this need, we have developed the
ATX-700,  a modular and scalable advanced thin film coating system.  The ATX-700
provides a large area  sputtering  solution for ease of  automation,  increasing
display size and low-particulate requirements of FPD manufacturers. We provide a
complete  solution to our customers'  needs by offering all necessary  stages of
the coating  process,  from the first step of glass  cleaning  through the final
stage of  inspection,  packaging  and  shipment.  The  ATX-700  platform  can be
configured to address a variety of manufacturing requirements through the entire
FPD continuum,  including  advanced,  high  resolution  active matrix and plasma
displays.

     Reduce our Equipment  Manufacturing Time.  Competitive lead times are a key
to our  success.  As  demand  continues  to rise  and  customers  commit  to new
production facility  construction,  we will experience pressure on manufacturing
lead times.  We are currently  expanding our in-house  capacity and working with
our  suppliers  to ensure  that our  manufacturing  lead times will  satisfy our
customer needs.

     Capture  Opportunities  in the  Coated  Glass  Market  Driven  by Growth in
Wireless  Communications.  The proliferation of wireless  communication  devices
such as cellular  telephones and PDAs is creating increased demand for thin film
coated glass used in these devices.  As the leading supplier of thin film coated
glass,  we are well  positioned to take  advantage of this  opportunity.  We are
aggressively  pursuing the opportunity by seeking to be a low cost producer,  by
continuing to upgrade our own coating systems and by achieving  technology-based
manufacturing efficiencies.  In particular, our joint venture in China, which is
strategically  located near several major manufacturers of displays for wireless
communication devices, allows us to most effectively service these customers. We
also seek continued growth in other areas of our thin film coated glass business
by leveraging our long-standing  relationships  with many of the world's key FPD
manufacturers.

     Continue to Develop New Coating and Process  Technologies  for Existing and
Emerging Markets.  We are using our thin films expertise to address the evolving
needs of the FPD industry.  For example, we pioneered the  commercialization  of
several advanced process  technologies  including the application of MgO, indium
tin oxide ("ITO") and chrome copper chrome ("CrCuCr") on glass. In addition,  we
recently  developed  coatings  for the touch  screen  market and  announced  the
introduction  of our  commercial  thin films for use in  organic  light-emitting
diodes  ("OLEDs").  We are developing a low  temperature ITO process to meet the
growing needs of the active matrix LCD market.  We intend to continue to develop
new  coating  and  process  technologies  to  meet  the  evolving  needs  of our
customers.

     Deliver Superior  Service and Support.  We meet our customers' FPD needs by
providing in-house and on-site training,  ongoing customer service,  and support
through all phases of development and  production.  Our expertise and experience
as a supplier of thin film coated glass is a competitive  advantage that enables
us to better assist  customers in installing,  testing and operating the coating
equipment we provide.  Our fully operational  commercial coating lines enable us
to demonstrate equipment and train customers in an actual production environment
at our facilities. This hands-on training and support, combined with our modular
design,  benefits our customers by reducing start-up times, maximizing equipment
uptime and improving operational efficiencies.

ITEM 1(b):  Financial Information About Industry Segments

     We supply thin film coated glass and thin film coating equipment  primarily
to LCD  manufacturers,  which are currently  considered to be separate  industry
segments.   For  further  discussion  see  "ITEM  8:  Financial  Statements  and
Supplementary Data -- Note 11: Segment Information."

ITEM 1(c):  Narrative Description of Business

Products and Manufacturing

     Our thin film  coated  glass  and  processing  systems  are used in a broad
spectrum of FPD displays.  We design and manufacture thin film coating equipment
for FPD  manufacturers  and for our own in-house  production of coated glass. We
also  supply  thin  film  coated  glass  primarily  for  LCDs  used in  wireless
communication devices and other electronic

                                       4
<PAGE>
devices.

     The following table illustrates the FPD markets we serve:
<TABLE>
                                      -------------------------------------------------------------------------------
                                                                          Market
                                      -------------------------------------------------------------------------------
                                                 Black and         Touch        Color       Active
                                       TN        White STN         Panel         STN        Matrix       PDP
                                       --        ---------         -----         ---        ------       ---
<S>                                   <C>        <C>               <C>          <C>          <C>         <C>
Thin Film Coated Glass...........     SiO2       SiO2              ITO           (1)         (1)         (1)

                                      ITO        Thick ITO         Optical
                                                                   Coatings

Coating Process Systems..........     Venture    Venture 5000      ATX-700      ATX-700     ATX-700     ATX-700
                                      5000       or ATX-700
</TABLE>
----------
(1) For the color STN,  active  matrix and PDP markets where thin films are used
    as intermediate  layers, we supply process  qualification  samples of coated
    glass for the development  and  prototyping  needs of actual and prospective
    equipment customers.

     The following  table sets forth our gross sales by  (excluding  returns and
allowances)  our major  product  categories  and industry  segments for our last
three fiscal years:
<TABLE>
                                                   ---------------------------------------------------------------
                                                                           Fiscal Year Ended
                                                   ---------------------------------------------------------------
                                                       July 1, 2000          July 3, 1999          June 27, 1998
                                                       ------------          ------------          -------------
                                                                            (In thousands)
<S>                                                     <C>                   <C>                   <C>
TN Glass......................................          $   17,880            $   19,963            $    29,189
STN Glass.....................................              14,800                 4,703                  4,844
Other Coated Glass............................               3,739                 3,449                  7,211
                                                        ----------            ----------            -----------
Total Thin Film Coated Glass..................              36,212                28,115                 41,244
Thin Film Coating Equipment...................               7,133                 4,617                 13,908
                                                        ----------            ----------            -----------
Total Gross Sales                                       $   43,552            $   32,732            $    55,152
                                                        ==========            ==========            ===========
</TABLE>
Thin Film Coating Equipment

     Our coating equipment product line includes two platforms:

     The ATX-700  Series.  The recently  introduced  ATX-700 is an advanced thin
film  coating  system  that  provides  a  large  area  coating  solution  to the
increasing display size and low-particulate requirements of PDPs and other FPDs.
The ATX-700  features near  vertical  sputtering  of glass  substrates,  a large
coating window,  a minimized  footprint (half of a traditional  in-line system),
lower  particulate  levels,  and reduced  manual labor  requirements  because of
robotic  handling.  The selling  price of the ATX-700  typically  ranges from $4
million to $7 million,  depending on system configuration.  In December 1999, we
announced our first contract for the sale of an ATX-700  system.  This sale to a
Taiwanese  company is expected to be delivered  late in calendar  year 2000.  In
March 2000, we executed a contract with a manufacturer  of plasma display panels
to purchase an ATX-700,  and  following  the year end in July 2000, we announced
the sale of an ATX-700 to a major Japanese  manufacturer of PDPs for delivery in
early 2001. We also offer the ATX-700P, a pilot version of the ATX-700 for small
volume  production.  The selling price of the ATX-700P  typically ranges from $1
million to $2 million.

     The ATX-700 is modular and can be  configured  to meet  multiple  thin film
coating requirements for the high-end FPD market,  including plasma displays and
active matrix LCDs. The ATX-700 is particularly  well suited for the high growth
plasma  display  market where we can offer our unique  patent-pending  magnesium
oxide sputtering  process. We believe this process allows MgO to be applied with
greater uniformity over a large area than the current vacuum

                                       5
<PAGE>
evaporation  method.  We believe the process also  results in increased  yields,
increased  throughput  and reduced  costs.  The ATX-700  platform is designed to
apply  other  critical  coatings  in the plasma  display  fabrication  facility,
including ITO and CrCuCr. This capability allows the display manufacturer to use
a common  platform in multiple  locations in the  manufacturing  line,  creating
operational  efficiencies.  The  ATX-700  can  also  be  configured  for the low
temperature ITO and chrome black matrix  processes used to produce active matrix
LCDs.

     The Venture  Series.  The Venture  Series  platform is an in-line  vertical
system  used to apply  ITO,  silicon  dioxide  ("SiO2")  and other  thin  films,
primarily in producing coated glass for black and white LCDs. The Venture Series
platform  features high throughput,  reduced particle defects and the capability
for double sided coatings. The selling price of the Venture Series system ranges
from $4 million to $7  million.  We will  continue  to market this system to LCD
manufacturers in selected markets.

Thin Film Coated Glass

     TN Coated  Glass.  We are one of the world's  leading  producers of twisted
nematic ("TN") coated glass,  which is used for low  resolution  black and white
LCDs. Our customers  incorporate  these LCDs into consumer products that include
watches, calculators, and electronic instruments. To produce TN coated glass, we
use our  proprietary  in-line  coating systems to deposit SiO2 and ITO onto high
quality  glass  panels.  We then package and ship the coated glass panels to our
customers for incorporation into their products.

     STN Coated  Glass.  The most  rapidly  growing  portion of our coated glass
business is the market for STN coated  glass.  STN coated glass is used for high
resolution  black and white LCDs used in cellular  telephones,  personal digital
assistants,  office  copiers,  portable  video games and related  products.  The
growing market for STN coated glass is particularly impacted by increased demand
for wireless  communication devices. STN coated glass requires thicker thin film
coating  layers and greater  uniformity to improve  conductivity.  Because it is
more complex and  expensive to produce  than TN coated  glass,  STN coated glass
presently  provides us with higher  revenues and gross margins for each panel of
glass produced.  Our joint venture in Suzhou, China is especially focused on the
STN market where proximity to critical  customers allows us to meet just in time
delivery requirements.

     Touch Screens. In June of 1999, we entered into a joint marketing agreement
with Information  Products,  Inc., covering worldwide marketing and distribution
of coated glass for touch screen  applications.  We began commercial  production
and shipment of touch screen  products in the fourth  calendar  quarter of 1999.
Touch  screens  are used as the input  interface  on a variety of  consumer  and
industrial  products,  including  the high growth PDA and related  communication
markets.

     Organic LEDs. In July 2000, we announced the  development of our smooth ITO
for use in OLEDs.  OLEDs require ITO glass with a smooth  surface to ensure that
the thin organic film layer that is deposited by OLED  manufacturers is uniform.
To produce  this  smooth  ITO,  which has 1/10 the  surface  roughness  of other
commercially  available  ITO,  we use a  proprietary  deposition  process.  OLED
technology  is viewed as one of the  future  growth  segments  in the flat panel
display market.  These displays are expected to be less expensive to manufacture
than LCDs. The technology does not require a backlight, thus allowing the device
to be  lighter,  thinner and less  consumptive  of power.  Current  applications
include car audio and cell phones.

     Other Thin Film Coated Glass. Our other thin film coated glass includes ITO
coatings  for  automatically  dimming  electrochromic  mirrors,  and  chrome and
rhodium coatings for dental mirrors.  We also produce more limited quantities of
advanced  coated glass panels for the  development  and  prototype  needs of our
coating equipment  customers and prospective  customers.  These thin film coated
glass products  involve complex  coatings for a variety of high resolution color
FPDs including microdisplays, color STN displays, active matrix LCDs, and PDPs.

Sales, Marketing and Customers

     Sales of our  equipment  involve a  broad-based  effort at  various  levels
within  our  organization.  Much of the sales  effort in the  equipment  area is
undertaken by our technical and  marketing  groups,  including  sales offices in
Japan and China. Other personnel, including our Chief Executive Officer and Vice
President -- Sales and Marketing,  make regular trips to visit foreign customers
to finalize  contracts and ensure proper customer  service.  The sales cycle for
thin film

                                       6
<PAGE>
coating equipment is long, involving multiple visits to and by the customer, and
up to eighteen  months of technical  sales effort.  Equipment  sales efforts are
assisted by  independent  sales and service  representatives  in each region who
have been  selected  with an  emphasis  on their  ability to provide  post sales
service and  support.  We generally  sell our thin film  coating  equipment on a
progress  payment  basis.  The majority of our thin film coated glass is sold on
open  account,  backed by a letter of credit or insured.  Our  customer  payment
history has been excellent.

     Approximately 93% of our fiscal 2000 gross sales were derived from exports,
primarily to Asia.  In the same period,  we served 76 customers in 13 countries.
In fiscal 2000, our ten largest customers accounted for approximately 79% of our
gross sales.  The principal demand for thin film coated glass is in Asia and our
customers  for thin film coating  equipment  have  historically  been located in
Korea, China, Taiwan and the United States. We believe our potential  geographic
market for thin film coating equipment includes all the major geographic regions
in which FPD  manufacturing  takes place.  Sales to two customers,  Nippon Sheet
Glass Co., Ltd. ("NSG") and Gemtech,  represented  approximately  29% and 11% of
gross  sales  for  fiscal  2000,  respectively.  Sales  to NSG for  fiscal  2000
consisted  solely  of sales of thin film  coated  glass,  and  sales to  Gemtech
consisted solely of revenues of thin film coating equipment.

     Net sales of thin film coated  glass and  equipment  by  geographic  region
during each of the last three fiscal  years were as set forth  below.  Sales are
assigned to a region based upon where the contract for purchase is formed.
<TABLE>
                                                   ------------------------------------------------------------------
                                                                           Fiscal Year Ended
                                                   ------------------------------------------------------------------
                                                       July 1, 2000          July 3, 1999          June 27, 1998
                                                       ------------          ------------          -------------
                                                                            (In thousands)
<S>                                                     <C>                   <C>                   <C>
Asia (other than Japan).......................          $   25,901            $   18,900            $    32,800
Japan.........................................          $   13,929            $    7,645            $     7,824
United States.................................          $    2,934            $    4,924            $    12,224
Europe and Other..............................          $      788            $    1,263            $     2,304
                                                        ----------            ----------            -----------
     Total                                              $   43,552            $   32,732            $    55,152
                                                        ==========            ==========            ===========
</TABLE>
Technology

     Virtually all FPDs require optically transparent,  electrically  conductive
thin  films  coated on  substrates  such as glass.  These  thin  films  transmit
electrical  power to picture elements of the displays and allow light to pass to
the viewer, creating the actual picture on the screen. The FPD market is placing
increasing  performance  and other demands on the thin film coated glass used in
FPDs,  particularly  with  regard  to  imperfections,  which  must be fewer  and
smaller. As FPDs become larger and more resolution and information intensive, it
becomes more  crucial to maintain the lack of pinholes in the film,  the absence
of contamination on or under the film, and the physical, chemical and electrical
uniformity,  as well as the micro  flatness of the substrate.  In addition,  the
substrate  cleaning  process  becomes more  critical,  and handling of the glass
through the system must be more carefully controlled for quality.

     Process.  We  believe  that we are a world  leader  in  thin  film  process
technology.  One of our primary  process  elements and core  competencies in the
manufacture  of thin  film  coated  glass is the  preparation  of the  glass for
coating in high  volumes.  The  cleaning  process,  the lack of  pinholes in the
coating,  and the  absence  of any  contamination  on or under the  coating  are
critical in the manufacturing process. After cleaning and preparation, the glass
enters a HEPA filtered Class 1000 clean room where it is loaded into the coating
system. After removal of the substrate from the system, it must be inspected for
defects and optical, electrical and thickness properties. We continually work to
improve our glass cleaning and product inspection capabilities.

     The  coating  equipment  which we design and  produce  enables us and other
manufacturers of thin film coated glass to apply very thin,  transparent  layers
of thin film  coatings to glass.  The coatings  which we apply are  deposited in
microscopic  thicknesses  by physically  bombarding,  or  sputtering,  a cathode
source  coating  material  (a chemical  compound  or  element)  with argon ions.
Individual  atoms and molecules of the source  material are  separated  from the
source by  bombardment  to form a vapor that condenses as a film onto the glass.
Sputtering provides many advantages  including material  flexibility,  thickness
consistency, adaptability to large substrates and high volume production, defect
and  contamination  control,  adhesion and thin film density.  Our technology of
applying a thin film  coating to glass or other  substrate  enables  the display
into which the glass or  substrate  is  incorporated  to  function  as a complex
switch

                                       7
<PAGE>
which  controls  light  emission or  transmission  from each of the thousands of
segments or pixels  that  comprise an FPD.  Our primary  thin film coated  glass
product is made by applying a thin layer of SiO2 to prevent sodium in glass from
leeching into the thin film conductive coatings which are subsequently  applied.
After the SiO2 is deposited,  ITO is applied to provide  conductive  properties,
permitting the glass to be used for various FPD  applications.  Particularly  in
FPDs,  optically  transparent,  electrically  conductive films, such as those we
apply, find common  application in transferring  electrical power to the picture
elements of the displays and allowing light to pass to the viewer.

     The quality of the coatings, the cycle time of the process, the utilization
of materials,  and other factors are controlled by our  proprietary  information
and  technology.  For example,  we are improving the  utilization of the cathode
source material.  We also developed a method of reducing cathode voltage and are
developing the application of this method to ITO coatings.  We believe this will
improve the  conductivity  of the ITO  coating.  Our glass  coating  process has
declined from  approximately 11 hours  in-process-time  and nine separate manual
handling  steps in 1985, to  approximately  30 minutes and four manual  handling
steps currently. All of the coating and heat treating steps now occur within the
equipment.  The glass must be moved in a  carefully  controlled  fashion at high
temperatures  over a wide  range of  speeds  through  a vacuum  system.  We have
developed a simple,  cost effective and reliable means of moving glass with high
yields.  We are continually  enhancing our technology to improve the performance
of our equipment,  both in terms of the  characteristics of the coating obtained
and the  efficiency  of the  equipment.  We also are  working on  improving  the
conductivity  of our ITO coatings and the barrier  qualities of our SiO2, and on
improving our systems not only to obtain better  quality  coatings,  but also to
obtain better utilization of coating materials.

     We  continue  seeking  advances  to  thin  film  technologies   which  have
commercial promise. We developed the GEMs process,  which increases the speed of
reactive  sputtering of certain  materials such as MgO. A patent  application is
pending with respect to this process.

     Technological  Foundations.  John S. Chapin, Vice  President--Research  and
Development and one of our founders,  invented the planar  magnetron which first
enabled  manufacturers  of thin film coated  glass (as well as of  semiconductor
chips) to economically  deposit  sputtered thin film coatings.  Another founder,
Research  Engineer  Richard  Condon,  was a pioneer  in the  development  of the
in-line  coating  process which is currently  used by much of the  industry.  We
believe we maintain a competitive advantage because we design, build and operate
our own thin film coating equipment for thin film coated glass. Further, because
our primary  business has been producing thin film coated glass,  we are able to
effectively  incorporate  our production  know-how into new  generation  coating
equipment  and  improvements  in existing  coating  equipment.  We believe  this
provides us with a capital cost  advantage  over most of our  competitors.  This
also enables us to compete  effectively in the market for thin film coated glass
manufacturing equipment.

Research and Development

     Our success can be attributed to focused research and development  programs
in thin film technology,  processes and equipment. 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 for efficient
ITO and SiO2  deposition  for the FPD  industry.  These  solutions  include cost
effective  reactive  depositions,  simplified  process  control,  and innovative
coating  equipment  designs.  We  continue to build on these  traditions  in the
development  of  process  control  and  coater  design  which  lower the cost of
ownership.

     We are  innovators in developing  coating  equipment  systems.  Our ATX-700
platform meets  demanding  specifications  for the reduction of film defects and
the  elimination  of  particulates  and provides  major  advances  through glass
fixturing  in a near  vertical  configuration.  We continue to  reconfigure  and
incorporate  available hardware into the ATX-700 to further reduce film defects.
Additionally,  the heart of the film deposition system, the sputtering  cathode,
will continue to be improved.  Improvements  in cathode design will increase the
utilization of the source cathode  material which will lower operating costs and
extend the time between source cathode material changes.

     We are also  innovators  in  developing  new  thin  film  technologies  for
emerging markets:

    -    Plasma  displays.  We are capable of applying the three films (MgO, ITO
         and CrCuCr)  required in the  production  of PDPs. We work closely with
         all the major PDP  manufacturers  in Asia, the United States and

                                       8
<PAGE>
         Europe to develop the highest  quality films. We will continue  to work
         to align MgO material properties with panel quality requirements.

    -    Active matrix LCDs. The active matrix LCD and high  resolution  display
         markets require thick ITO coatings deposited at low temperatures. These
         markets are also demanding  additional  films with low  particulate and
         defect  levels.  We are  developing  new  coating  methods  to meet the
         requirements of these films.

    -    Touch  screens.  We are producing the basic film required for the touch
         panel market and are pursuing the  development of new alloys which will
         meet evolving touch panel market needs.

    -    OLEDs.  This is the term used for a new class of organic materials that
         emit light when a voltage  is applied to them.  We have  commercialized
         our smooth ITO film for use in OLEDs. This coating is a very smooth ITO
         layer which avoids electrical shorting through the organic layer.

Intellectual Property

     We believe that due to the rapid pace of  innovation  within our  industry,
factors such as  technological  and creative skilled  personnel,  the ability to
develop and enhance systems, knowledge and experience of management, reputation,
product  quality  and  customer  service  and  support  are more  important  for
establishing  and  maintaining a competitive  position  within the industry than
patent or other legal protections for our technology. We, nevertheless,  rely on
confidentiality agreements,  licensing agreements and other forms of contractual
provisions to protect our  intellectual  property.  We currently have one patent
application pending for the GEM's sputtering process. There can be no assurance,
however,  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.

Manufacturing and Facilities

     Our  Longmont,  Colorado  headquarters  consists of  approximately  127,000
square  feet  and  includes  our  general  offices,   research  and  development
facilities, and manufacturing and production facilities. This facility is leased
from an independent third party. We design and manufacture our thin film coating
equipment  and  produce  coated  glass  at these  facilities.  In  Longmont,  we
currently  operate  three coated glass  production  lines and three  development
lines for developing coating and equipment processes.  We can concurrently build
three  coating  systems at our Longmont  facility and have  sufficient  space to
build up to six coating systems with minor facility upgrades.

     In fiscal  1999,  we entered  into a joint  venture with Nippon Sheet Glass
Co.,  Ltd.,  a major  Japanese  glass  manufacturer  to supply  the low and high
resolution  coated  glass market from a production  base in Suzhou,  China.  The
joint venture  facilities were  incorporated  into existing NSG glass production
facilities  and contain  approximately  40,000 square feet.  This joint venture,
Suzhou NSG -- AFC Thin Film Electronics  LTD, known as "STEC",  has involved the
transfer of thin film coated glass  manufacturing  capacity to China.  The joint
venture presently operates two coating systems. We are currently  transferring a
Venture  5000  system  from our  Longmont  facility to STEC which will bring the
number of coating systems to three, as of the end of the first quarter of fiscal
2001. We believe we have built sufficient inventory to meet customer needs while
the Venture 5000 system is being  transferred  from  Longmont to STEC. We do not
consolidate  the revenues from the joint venture,  and although a portion of the
revenues from the Venture 5000 system production will not flow through us, we do
not expect the  transfer of the system to  materially  affect  revenues.  STEC's
location in Asia allows us to produce  coated  glass in  facilities  immediately
adjacent to our 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.  In its first twelve months
of operations, STEC was cash flow positive and profitable. We intend to continue
to leverage STEC's strategic position by expanding its manufacturing capacity in
the  future.  We will also  continue  to evaluate  business  opportunities  that
strengthen our position with our customers in other regions of Southeast Asia.

     In addition to our Longmont and STEC  facilities,  we have leased warehouse
space in Japan and Hong Kong from which we supply  coated  glass  customers on a
just-in-time basis.

                                       9
<PAGE>
Suppliers

     Thin Film Coating Equipment.  In our thin film coating equipment  business,
we use various suppliers of machined components, pump systems, logic controllers
and other  commercially  available  components  and  features.  We have multiple
sources for the principal components in this aspect of our business.  We own and
control the proprietary  parts of the process.  For the  proprietary  fabricated
parts  there  are  various   suppliers   who  can  produce   components  to  our
specifications.

     Thin Film  Coated  Glass.  The raw glass  that we use in our  manufacturing
process represents our most significant  material cost. The required quality, in
terms of  thickness,  flatness and visible  imperfections,  limits the number of
available  suppliers.  We  currently  purchase  raw glass  from four of the five
companies  worldwide that currently  manufacture to these quality standards.  We
are vulnerable to increased costs of raw glass. We regularly evaluate methods of
reducing our cost of glass. Our other primary raw materials for thin film coated
glass are SiO2 and ITO. We currently  purchase  SiO2 and ITO from two  suppliers
and believe alternative sources of supply could be developed if necessary.

Competition

     Thin Film Coating Equipment.  In manufacturing thin film coating equipment,
we compete against two established equipment manufacturers which are much larger
than the we are:  Ulvac  Japan,  Ltd.  in Japan and Balzers  Process  Systems in
Germany. Competition is based on performance and process technology, after-sales
support and service,  and price. We believe we compete favorably with respect to
each of these factors.  Key performance and technology  issues include technical
capability,  systems design, product uniformity,  yields, target utilization and
throughput.  We are the only major thin film coating equipment manufacturer that
also  manufactures  thin film coated  glass for the FPD  market.  We believe the
experience,  expertise  and  synergy  resulting  from  this  provide  us  with a
competitive advantage.

     Thin Film  Coated  Glass.  Competition  in the market for thin film  coated
glass  for  FPDs  is  intense.   Competition   is  based   primarily  on  price,
availability, and to a lesser extent on quality, delivery, and customer service.
In  addition,  we believe  the  ability to  anticipate  shifts in the market and
customer  needs for thin film coated glass  features are  important  competitive
factors.  We are aware of approximately  ten thin film coated glass  competitors
worldwide.  Certain of these  competitors are also  manufacturers  of thin glass
required  for thin film  components  and  several  are users of thin film coated
glass.  These are large  companies  with  significant  research and  development
funding and extensive thin film technology background. All of our principal thin
film coated glass  competitors are located in Asia. Our primary  competitors for
thin film coated glass are Samsung/Corning,  Merck Display Technology,  Wellite,
and Shenzhen Leybold.

STEC Joint Venture

     STEC was  formed  as a  limited  liability  company  under  the laws of the
People's Republic of China. NSG and we are each 50% joint venture partners,  and
the term of the joint venture is 50 years. Profits,  dividends, risks and losses
are also shared by the partners in proportion to their equity contributions. The
total  initial  investment  plan for STEC  involves $16  million,  of which $6.4
million is currently  in equity and up to $9.6  million in debt.  Each party has
made its $3.2 million equity contribution in cash.

     Governance.  The STEC board of directors  is comprised of three  appointees
for each partner with each director  serving a two year term.  For the first two
year term after  formation,  we have the right to appoint  the  chairman  of the
board,  and NSG has the right to  appoint  the  general  manager,  who may serve
concurrently as a director.

     All  board  actions  require a  unanimous  vote of the  directors  present.
Matters  subject to board  decision  include  approval of annual  operating  and
capital budgets;  distribution of profits and losses;  hiring,  compensation and
retention of senior management;  lease, sale, pledge or other encumbrance of all
or a substantial portion of STEC's assets; increase in required capital of STEC;
borrowing;  significant  purchase,  product sales and other important contracts;
amendments of the Articles of Association; and merger or dissolution of STEC.

                                       10
<PAGE>
     In the event of deadlock, the conflict is referred to our President and the
corporate  officer in charge of the Fine Glass  Division  of NSG. If the parties
fail to reach agreement  within six months and the deadlock  materially  impairs
the continued  operation of STEC in a manner consistent with past practice or an
agreed  business  plan,  either  partner  may notify the other that it wishes to
withdraw  from the  joint  venture.  In the event of such  withdrawal,  the fair
market  value of STEC will be agreed by the parties or by an  appraiser  if they
cannot  agree.  The party  receiving  the notice has the option to purchase  the
interest of the other party at 85% of the fair market value  attributable to the
withdrawing  party's  ownership  interest,  or to  require  the  other  party to
purchase its interest at 115% of the fair market value of its interest.

     Relationship Between Partners and Joint Venture. Each joint venture partner
provides  marketing,  promotion and sales  assistance to STEC. NSG has agreed to
cause its subsidiary SNSG to sell glass substrate to STEC, and the joint venture
will purchase all of its glass  substrate from SNSG unless a customer  specifies
substrate from another manufacturer.

     Financing.  If the Board  approves third party debt financing with a lender
who  requires the  guarantee  of the parties,  each party must provide a several
guaranty of such borrowings in accordance with its then current equity interest.
Guarantors  will receive a guarantee  fee to be agreed by the parties,  and STEC
will indemnify the  guarantors.  STEC has entered into a $3.5 million  revolving
credit  agreement with Sumitomo Bank,  which we and NSG have  guaranteed.  NSG's
guarantee is secured by all of the assets of the joint venture.

     Restrictions  on  Transfer.  Neither  party may sell,  pledge or  otherwise
dispose of all or any portion of its equity  interest in STEC to any third party
without the prior written consent of the other party and approval by the Chinese
regulatory  authorities.  Each  party  has a right  of first  refusal  regarding
transfers by the other party.

     If NSG sells its subsidiary SNSG to an entity not controlled by it, we have
the option to purchase  NSG's  equity  interest  in STEC,  or to sell our equity
interest to NSG.  Following  determination  of the fair market  value of STEC by
agreement  of the parties or by an  appraisal,  we may elect to  purchase  NSG's
interest in STEC at its fair market  value,  or to sell our  interest in STEC at
120% of its fair market value.

Employees

     As of July 1, 2000, we employed 200 people, versus 161 people at the end of
fiscal 1999. None of the employees are unionized.  We consider our  relationship
with our employees to be good.

     We focus on enhancing sound manufacturing systems and applying key concepts
of high performance  work systems to improve our ability to grow rapidly,  excel
at product cost, quality, and delivery, and encourage continuous improvement and
innovation.  Our  fundamental  work  units are  teams,  including  multi-skilled
production teams  responsible for  start-to-completion  manufacturing  and teams
focused on technology  development,  and innovation.  Coordination and direction
are established through extensive work force education, participative leadership
and  management,  and  shared  goal  setting,  communication,   and  performance
feedback.

     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 maintain
a  discretionary   monthly  profit  sharing  plan  for  full-time   nonexecutive
employees.  We believe this emphasis  assists with enhanced  productivity,  cost
control,  and  product  quality  and has  helped us attract  and retain  capable
employees.

Seasonality

     Our business is not  especially  seasonal,  however,  production  output is
affected by holidays,  vacations  and  available  workdays.  Our business may be
subject to significant quarterly and annual fluctuations.

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,  local,  and  international
governments and agencies and has been subject to

                                       11
<PAGE>
increasing regulation.

One Time Charges

     No  one-time  charges  were  reported  during  fiscal  2000,   however,  we
restructured our workforce during the 1999 fiscal year. This restructuring along
with the cost to complete  the move of the company to its current  manufacturing
and  headquarters  site  generated  one time  charges to earnings in fiscal 1999
totaling $433,000.

Executive Officers, Directors and Key Employees

     The executive  officers,  directors and key employees of the Company are as
follows:
<TABLE>
                     Name                        Age                          Position
                     ----                        ---                          --------
<S>                                              <C>      <C>
Cecil Van Alsburg...........................     63       Director, Chairman of the Board
Thomas T. Edman.............................     38       Director, President, Chief Executive Officer
John S. Chapin..............................     59       Director, Vice President - Research, Secretary
Graeme Hennessey............................     62       Vice President - Sales and Marketing
Lawrence D. Firestone.......................     42       Chief Financial Officer and Treasurer
Chad D. Quist...............................     38       Director
Richard P. Beck.............................     67       Director
Vincent Sollitto, Jr........................     52       Director
Roger Smith.................................     59       Director of Materials
Jim Scholhamer..............................     34       Director of Operations - Thin Film Coatings
Russell W. Black............................     40       Director of Operations - Thin Films Systems
John J. Kester..............................     50       Director of Advanced Development
</TABLE>

     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  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  Corporation for which he had worked
since 1957. Mr. Van Alsburg majored in civil engineering and architecture at the
University of Michigan.

     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 also 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 in East Asian  studies  (Japan)  from Yale and,  in June  1993,  received a
masters  degree  in  business  administration  from The  Wharton  School  at the
University of Pennsylvania.

     John S. Chapin co-founded Applied Films Lab, Inc. in 1976 and has served as
Vice President - Research,  Corporate  Secretary,  and 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.

     Graeme  Hennessey  has served as our Vice  President - Sales and  Marketing
since April  1993.  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
obtained 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  and
Treasurer  since July 1999.  From March 1996 until  March  1999,  Mr.  Firestone
served as Vice President and Chief Operating

                                       12
<PAGE>
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.

     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,  and  has  recently  assumed  responsibility  for the
electrochromic  mirror  business  unit  for  Donnelly  Corporation  as its  Vice
President.  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
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 the 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  positions,
including Director of Technology and Process at International  Business Machines
Corporation,  before joining Supercomputer Systems,  Incorporated.  Mr. Sollitto
serves as a director of Irvine Sensors Corp. Mr. Sollitto is a graduate of Tufts
College where he received a B.S.E.E. in 1970.

     Roger  Smith has served our  company  since  July 1998 as our  Director  of
Materials.  From May 1993 until  July  1998,  Mr.  Smith  served  our  company's
Treasurer.  Prior to joining our company, Mr. Smith was employed for 33 years by
Donnelly  Corporation in various  capacities,  including  controller and project
manager.

     Jim Scholhamer  has been employed by us since August 1997.  Mr.  Scholhamer
currently  is the  Director  of  Operations  for  Thin  Film  Coatings  and  was
previously the Engineering  Manager.  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  obtained his bachelors of science degree in engineering from the
University of Michigan.

     Russell  W.  Black  has  been  employed  by us since  December  1996 as its
Director of  Operations -- Thin Film  Systems.  From 1994 until March 1996,  Mr.
Black served as  Engineering  Manger at Applied  Komatsu  Technology,  a capital
equipment supplier to the FPD industry, and from 1990 to 1993, as an Engineering
Manager  at  Varian  Associates,  Inc.,  a  capital  equipment  supplier  to the
semiconductor  industry.  Mr. Black  obtained a bachelors  of science  degree in
engineering  technology from California State Polytechnic  University.  In 1995,
Mr. Black pleaded  guilty to one count of wire fraud in United  States  District
Court.  Mr. Black was sentenced to 18 months probation and 50 hours of community
service and was ordered to pay  approximately  $7,500 in fines and  restitution.
Mr. Black's probation was terminated by the court after 10 months.

     John J.  Kester has been  employed  by us since  June 1997 as our  Advanced
Development  Director.  From  1995  until he joined  us,  Dr.  Kester  served as
Research and Development Manager for the photovoltaic

                                       13
<PAGE>
     module manufacturer, Golden Photon Inc., a subsidiary of ACX Inc. From 1989
to 1995, he was the Physics Division Chief at the Seiler Research  Laboratory at
the United States Air Force Academy.  From 1982 to 1989 he worked in the Central
Research  Laboratory of Dow Chemical  Company.  Dr. Kester hs a bachelors degree
from The Colorado College and a masters and doctorate in physics from Washington
University in St. Louis, Missouri.

     Our Board of Directors is currently composed of six directors, divided into
three classes.  Messrs. Edman and Sollitto serve in the class whose term expires
in 2000; Messrs. Van Alsburg and Chapin serve in the class whose term expires in
2001;  and Messrs Beck and Quist serve in the class whose term  expires in 2002.
Upon the expiration of the term of each class of directors, directors comprising
that class will be elected for a three-year term at the next  succeeding  annual
meeting of  shareholders.  Each  director  holds  office  until that  director's
successor has been duly elected and qualified. Selection of the nominees for the
Board of Directors is made by the entire Board of Directors.

     The Board of  Directors  elects  executive  officers  on an  annual  basis.
Executive  officers  serve  until  their  successors  have been duly elected and
qualified.


ITEM 1 (d):  Information About Foreign Operations

     See "ITEM 1(c): Narrative Description of Business -- Sales, Marketing,  and
Customers" and "--STEC Joint Venture." See also "ITEM 7: Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview - China
Joint Venture."

ITEM 2:  Properties

     Our  headquarters  and the  majority of our  manufacturing  facilities  are
located in Longmont,  Colorado in  approximately  127,000  square feet of leased
space. We have sales offices in China and Japan and utilize inventory warehouses
in Japan and Hong Kong.

     Our facilities are modern,  well-maintained  and adequately insured and are
well-utilized.

ITEM 3:  Legal Proceedings

     We are  presently  not  involved  in any legal  proceedings  which,  if not
settled in our favor would individually or collectively, have a material adverse
impact on its financial condition.

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

     No matters  were  submitted  during the fourth  quarter of fiscal 2000 to a
vote of the Company Shareholders.

                                       14
<PAGE>
                                 CERTAIN FACTORS

     Described  below are certain risks that we face. The risks  described below
are not the only  ones that we face.  Additional  risks  and  uncertainties  not
presently  known to us or that are currently  deemed  immaterial may also impair
our business operations. Our business,  operating results or financial condition
could be materially  adversely  affected by, and the trading price of our common
stock could decline due to, any of these risks.

     This Report  contains  forward-looking  statements  that involve  risks and
uncertainties,  such as statements of our plans,  objectives,  expectations  and
intentions. Our actual results could differ materially from those anticipated in
the forward-looking statements for many reasons, including the factors described
below and elsewhere in this Report. You should not place undue reliance on these
forward-looking statements.

Our operating results may fluctuate.

     We have experienced and may continue to experience  significant  annual and
quarter-to-quarter  fluctuations  in  our  operating  results.  Our  annual  and
quarterly operating results have fluctuated and may fluctuate in the future as a
result of a variety of factors including:

    -    customer demand, which is influenced by a number of factors,  including
         general economic  conditions in the FPD industry,  market acceptance of
         our products and the products of our customers,  changes in the product
         mix  demanded  and offered,  and the timing,  cancellation  or delay of
         customer orders and shipments;

    -    competition,  including competitive pressures on prices of our products
         and those of our  customers  (for  example,  although  thin film coated
         glass prices were stable in fiscal 2000, prices declined  approximately
         29% during  fiscal  1999,  adversely  affecting  our net income in that
         fiscal  year),  the  introduction  or  announcement  of new products by
         competitors and the addition of new production capacity by competitors;

    -    the cyclical nature of the capital equipment market;

    -    manufacturing  and  operational  issues that arise due to,  among other
         things,  fluctuations  in  availability  and cost of raw  materials and
         production  capacity,  the  transfer  of  equipment  and  personnel  to
         manufacturing  facilities at our joint venture in China, and the hiring
         and training of additional staff;

    -    issues related to new product development, including most significantly
         our ability to  introduce  new products  and  technologies  on a timely
         basis and the increased research, development and engineering costs and
         marketing expenses associated with new product introductions;

    -    the timing of the recognition of revenues from capital equipment orders
         can materially impact our operating results on a quarterly basis due to
         the magnitude of each capital equipment order;

    -    sales and marketing issues,  including our concentration,  particularly
         in the  equipment  area,  on a small number of customers  and discounts
         that may be granted to certain customers; and

    -    fluctuations in foreign currency exchange rates.

The coated glass market is highly competitive and subject to pricing pressures.

     The market to supply thin film coated glass to LCD  manufacturers is highly
competitive.  Many of our  competitors  have  substantially  greater  financial,
technical,  marketing and sales  resources than we have.  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.  Recent
pricing stabilization in fiscal 2000 may not continue,  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

                                       15
<PAGE>
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 will decline.

     Additional  competitors  may enter our markets,  certain of which may offer
lower  prices.  For  example,  our  suppliers  and  customers  could  vertically
integrate to  manufacture  the products we produce.  Our suppliers of thin glass
are large, well-capitalized companies that could enter the LCD market by coating
the glass they produce and supplying LCD manufacturers  directly.  Because glass
is by far our largest  material cost, a manufacturer  of glass desiring to enter
this market could have a significant  cost advantage if they chose to vertically
integrate.  We are aware of one manufacturer of thin glass, Asahi Glass Company,
that also coats glass for the LCD market.  Further,  companies that  manufacture
thin film glass coating  equipment could begin producing thin film coated glass.
In addition,  certain LCD manufacturers have vertically integrated to coat glass
for LCDs, and we expect further  vertical  integration into certain areas of LCD
manufacturing.  Any such vertical integration or other competition could lead to
reduced sales and gross margins and could have a material  adverse effect on our
business, operating results, financial condition and prospects.

Our entry  into the thin film  coating  equipment  business  exposes us to risks
associated with new business ventures in emerging markets.

     Until fiscal 1997, our business was focused almost  exclusively on the sale
of thin film coated glass. Since then, we have devoted substantial  resources to
the development and sale of the equipment for thin film coating,  and we believe
our future  growth  depends  significantly  upon our  success  in the  equipment
market.

     We are subject to the risks inherent in the operation or the development of
a new business,  including  risks  associated  with  attracting  and servicing a
customer base, manufacturing products in a cost-effective and profitable manner,
managing the  expansion of a business  operation  and  attracting  and retaining
qualified  engineering,  manufacturing,  service  and  marketing  personnel.  We
entered the equipment business because of our expectations  regarding continuing
rapid growth of the FPD market,  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 systems less  attractive.  If the market
for our thin film coating  equipment fails to grow, or grows more slowly or in a
different  direction than anticipated,  we may be unable to realize the expected
return on our investment in developing the equipment  market,  and our business,
operating  results,  financial  condition  and  prospects  could  be  materially
adversely   affected.   In  particular,   we  are  anticipating  growth  in  PDP
applications  over the next two years. If  commercialization  of that technology
develops  more  slowly than we expect,  our future  results  will be  negatively
affected.

     Sales of our thin  film  coating  equipment  depend  in large  part  upon a
prospective  customer's  decision to  increase  manufacturing  capabilities  and
capacities or to respond to consumer  demands for greater cost  efficiencies  by
upgrading or expanding  existing  manufacturing  facilities or constructing  new
manufacturing  facilities,  all of which typically involve  significant  capital
expenditures.   Customers  may  postpone   decisions   regarding  major  capital
expenditures,  such as our  coating  equipment,  due to the rapid  technological
change in the thin film coated glass industry. Customers that purchase thin film
coated  glass from us could decide to purchase  thin film  coating  equipment to
bring some or all of their thin film coated glass  requirements  in-house,  thus
adversely affecting our sales of thin film coated glass to such customers.

     The sales cycle of our thin film  coating  equipment  is lengthy due to the
customized  nature of the  process,  the  customer's  evaluation  of its ordered
system  and  completion  of  any  necessary  upgrades,   and  the  expansion  or
construction  of  facilities.  We may expend  substantial  funds and  management
effort during the sales cycle,  particularly in initial  installations  of newly
developed,  complex  products,  which  could  have a  negative  impact  on gross
margins.


We must continue to invest in research and  development to compete  successfully
in a rapidly changing marketplace.

     The  market  for  thin  film  coated   glass  and  coating   equipment   is
characterized  by rapid change.  Our future success  depends upon our ability to
introduce new  products,  improve  existing  products and processes to keep pace
with

                                       16
<PAGE>
technological  and  market   developments,   and  to  address  the  increasingly
sophisticated  and  demanding  needs of our  customers.  Technological  changes,
process improvements,  or operating  improvements that could adversely affect us
include:

    -    development  of  new technologies that improve manufacturing efficiency
         of our competitors;

    -    changes in product requirements of our customers, as illustrated by the
         shift in the FPD market from lower information content  applications to
         higher  information  content FPDs such as supertwisted  nematic ("STN")
         high resolution, active matrix LCDs and plasma displays;

    -    changes in the way coatings are applied to glass for LCDs;

    -    development of  new materials that improve the performance of thin film
         coated glass; and

    -    improvements  in the alternative to the sputtering technology we use in
         plasma displays.

     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.

A significant part of our business is done in Asia and any downturn in the Asian
economy could adversely affect us.

     Sales to international customers represented approximately 78%, 85% and 93%
of our gross  sales in fiscal  1998,  1999 and fiscal  2000,  respectively.  The
principal  international  markets in which we and our STEC joint venture operate
are China  (including  Hong Kong),  Korea,  Japan,  Taiwan and Malaysia.  Recent
banking  and  currency  problems  in Asia have had and may  continue  to have an
adverse impact on our revenue and  operations.  We believe  international  sales
will continue to represent a significant  portion of our sales, and that we will
be subject to the normal  risks of  conducting  business  internationally.  Such
risks include:

    -    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;

    -    foreign exchange risks;

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

    -    difficulties in staffing and managing foreign sales operations; and

    -    potentially adverse tax consequences.

     In  addition,  the laws of certain  foreign  countries  may not protect our
proprietary rights to the same extent as do the laws of the United States. Other
risks inherent in our  international  business  include greater  difficulties in
accounts receivable collection,  which we have attempted to mitigate by insuring
our foreign accounts receivable.

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

     Our future  results will depend  significantly  on the results of our fifty
percent owned STEC joint  venture with Nippon Sheet Glass Co.,  Ltd.  ("NSG") in
China. The results of the joint venture depend on the continuing  cooperation of

                                       17
<PAGE>
NSG. The success of the STEC joint venture is subject to a number of risks, over
many of which we have limited  control.  We rely on our joint  venture  partner,
NSG, to house the STEC joint venture within its glass  fabrication  facility and
to supply glass to the joint venture. We also rely on NSG's management personnel
to manage the day-to-day  operations of the joint venture,  and the president of
STEC is  employed  by the  joint  venture  as well  as by  NSG.  We do not  have
employment  agreements with any of the management at STEC. STEC's future success
will be dependent in part on our ability to continue to effectively  participate
in the joint  venture  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 joint  venture,  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,
inability  to  repatriate  funds or a  deterioration  of the general  political,
economic or social environment in China.

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.  Factors affecting our market price
include:

    -    quarterly variations in our results of operations;

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

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

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

    -    the operating and stock price performance of comparable companies;

    -    technological innovations by us or our competitors; and

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

     Recently,  stock prices for many  technology  companies have  fluctuated in
ways  unrelated  or  disproportionate  to  the  operating   performance  of  the
companies. Such fluctuations may adversely affect the market price of our common
stock.  The market  price of our common stock has risen  dramatically  in recent
months, from $3.00 per share at October 26, 1999 to $39.13 per share at June 30,
2000. We cannot assure that the market price at any particular  date will remain
the market price in the future.

Our  operating  results  depend on market  conditions  in the flat panel display
industry.

     Our business  depends on the purchasing  requirements of  manufacturers  of
FPDs, which, in turn, depends upon the current and anticipated market demand for
FPDs.  We cannot  assure you that the FPD market will  continue to grow, or that
any growth  will have a positive  impact on our  future  business  or results of
operations.   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 the FPD market.  Our business,  operating  results,  financial
condition and prospects  would be  materially  adversely  affected by any future
downturns in the FPD market.

We are dependent on a small number of suppliers of certain raw materials and are
vulnerable to increased prices for raw materials.

                                       18
<PAGE>
     We currently  rely on four glass  suppliers,  Pilkington  Micronics,  Ltd.,
Glaverbel  Societe Anonyme,  Central Glass Co., Ltd. and Nippon Sheet Glass Co.,
Ltd. for most of our thin glass. All of these  manufacturers are located outside
the United States.  We do not have long-term  supply contracts with any of these
suppliers,  and thus have no  contractual  assurance  of a firm  price,  over an
extended  term, of a long-term  commitment to supply our principal raw material.
In periods of short  supply,  we could have  difficulty  obtaining the necessary
quantities of glass at a competitive  cost. Such  interruptions  could occur for
numerous  reasons,  including  labor  difficulties at some point in the chain of
manufacturing  or distribution.  If the price of glass increases,  we may not be
able to pass the price increases  along to our customers,  especially in periods
of soft  demand for our  products  or excess  capacity.  Current  and  potential
competitors  that both manufacture and coat glass could be better able to absorb
raw material cost  increases due to their vertical  integration.  We also have a
limited  number of  qualified  suppliers  of target  materials  for our  coating
process.  If  we  were  to  experience  significant  delays,  interruptions,  or
shortages  in the supply of raw  material or material  price  increases  for raw
materials,  our business,  operating results,  financial condition and prospects
could be materially adversely affected.

We depend on a small number of significant customers.

     Our ten largest customers  accounted for approximately  78%, 62% and 79% of
our gross sales in fiscal 1998,  1999 and fiscal 2000,  respectively.  In fiscal
2000,  sales  to NSG  and  Gemtech  represented  29%  and  11% of  gross  sales,
respectively.  The loss of, or a  significant  reduction of purchases by, one or
more  of  these  customers  would  materially  adversely  affect  our  business,
operating results, financial condition and prospects. There are a limited number
of  potential  customers  in the  LCD  market  and we  expect  that  sales  to a
relatively  small  number of  customers  will  continue  to  account  for a high
percentage of our revenues in the LCD market in the foreseeable  future. We have
not entered into long-term  agreements with our thin film coated glass customers
and they are not  obligated to continue to buy their thin film coated glass from
us. Moreover,  in the event that customers  purchase thin film coating equipment
from us or from one of our competitors  and begin coating glass in-house,  sales
to those customers may decrease sharply.  If such lost sales are not replaced on
a timely basis by new orders of thin film coated  glass or equipment  from other
customers,  our business,  operating results,  financial condition and prospects
could be materially adversely affected.

We conduct  business in foreign  currencies,  and  fluctuation  in the values of
those currencies could result in foreign exchange losses.

     In fiscal  2000,  approximately  29% and 71% of our total  gross sales were
denominated in yen and dollars, respectively. Any strengthening of the dollar in
relation to the currencies of our competitors or customers,  or strengthening or
weakening of the yen in relation to other  currencies  in which our customers or
competitors do business, could adversely affect our competitiveness.  Although a
strengthening  dollar may result in some  offsetting  cost reductions on the raw
materials we import,  such cost reductions may not be sufficient to enable us to
remain competitive. Moreover, 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 joint  venture in China  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.  We cannot
assure you that  fluctuations  in exchange  rates will not 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 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 rapid growth may make it more difficult to manage our business effectively.

                                       19
<PAGE>
     In order to support  potential  future growth,  we will need to improve our
productivity,  invest  in  additional  research  and  development,  enhance  our
management  information systems and add management  personnel.  We cannot assure
you that we will continue to grow or be effective in managing our future growth,
expanding our facilities  and  operations or attracting and retaining  qualified
personnel.  Failure to do these things could have a material  adverse  effect on
our business, operating results, financial condition, and prospects.

We may not be able to adequately  protect or enforce our  intellectual  property
rights.

     We rely  primarily  upon trade  secret laws and  employee  and  third-party
nondisclosure  agreements to protect our  proprietary  technology.  The steps we
have taken to protect our  proprietary  rights  might not be adequate to prevent
misappropriation  of such  rights.  We are not aware that our  products or other
proprietary  rights infringe the proprietary  rights of third parties.  However,
third parties may assert  infringement  claims against us in the future and such
claims may require us to enter into license  agreements  or result in protracted
and costly litigation,  regardless of their merits. We may not be able to obtain
licenses to use third-party technology and such licenses, if available,  may not
be available to us on commercially reasonable terms. These factors may adversely
affect our business, operating results, financial condition or growth.

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 the our common stock. 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.

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
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. The failure to comply with current
or future  regulations  could result in the  imposition  of  substantial  fines,
suspension of production, alteration of its manufacturing processes or cessation
of operations.

                                       20
<PAGE>
                                     PART II

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

     Prior to  November  21,  1997,  there was no public  market  for our Common
Stock. The Common Stock was approved for quotation on the Nasdaq National Market
under the symbol AFCO, beginning November 21, 1997. At July 28, 2000, the number
of common Shareholders of record was 30.

     The range of high and low bid  quotations  for our  Common  Stock as quoted
(without  retail  markup or  markdown  and  without  commissions)  on the Nasdaq
National Market since its initial public offering is provided below. They do not
necessarily represent actual transactions.
<TABLE>
                                                                       High Bid                Low Bid
<S>                                                                    <C>                     <C>
Fiscal 2000
     Fourth Quarter.....................................               39 7/8                  13 1/8
     Third Quarter......................................               35 3/4                  12 7/8
     Second Quarter.....................................               14 3/4                  3
     First Quarter......................................               4                       3 1/8

Fiscal 1999
     Fourth Quarter.....................................               4 1/4                   2 1/2
     Third Quarter......................................               4 1/4                   1 13/16
     Second Quarter.....................................               3 7/8                   2 5/8
     First Quarter......................................               5 5/8                   2 7/8

Fiscal 1998
     Fourth Quarter.....................................               9 5/8                   4 9/16
     Third Quarter......................................               11 5/16                 7 1/8
     Second Quarter (since November 21, 1997)...........               9 1/8                   8 1/4
</TABLE>
     We have not declared or paid any cash  dividends on our capital  stock.  We
currently  intend to  retain  all  future  earnings  to  finance  our  business.
Accordingly,  we do not anticipate  paying cash or other dividends on our Common
Stock in the  foreseeable  future.  Furthermore,  our revolving  credit facility
prohibits the  declaration or payment of any cash dividends on the Common Stock.
See "ITEM 7:  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations -- Liquidity and Capital Resources."

                                       21
<PAGE>
ITEM 6: Selected Financial Data

     The  following  selected  consolidated   financial  data  is  qualified  by
reference  to,  and  should  be  read  in  conjunction  with,  our  fiscal  2000
Consolidated  Financial  Statements and notes thereto and the discussion thereof
included  elsewhere in this Form 10-K. The selected  consolidated  statements of
operations for the fiscal years ended June 1998, July 1999 and July 2000 and the
related  balance sheet data as of the fiscal years ended July 1999 and July 2000
derived  from  consolidated  financial  statements  have been  audited by Arthur
Andersen LLP, independent public accountants,  whose report with respect thereto
is included elsewhere in this Form 10-K. The selected consolidated statements of
operations  data for the fiscal  year  ended June 1996 and 1997 and the  related
consolidated balance sheet data as of June 1996, 1997 and 1998 have been derived
from audited  consolidated  financial  statements of the Company not included in
this Form 10-K.
<TABLE>
                                         Summary Consolidated Financial Data
                                        (In thousands, except per share data)
                                                      -------------------------------------------------------------
                                                                             Fiscal Year Ended
                                                      -------------------------------------------------------------
                                                          July 1,      July 3,     June 27,    June 28,    June 29,
                                                           2000         1999         1998        1997       1996
                                                           ----         ----         ----        ----       ----
<S>                                                       <C>          <C>          <C>         <C>        <C>
Statement of Operations Data
   Net sales.....................................         $42,292      $31,523      $53,041     $34,050    $21,738
   Gross profit..................................           5,659        4,453       10,891       6,698      2,720
   Operating income (loss).......................             (74)        (351)       4,581       2,953       (478)
   Net income (loss).............................           3,073         (224)       2,857       1,621     (1,078)
   Diluted net income (loss) per common share....          $ 0.69      $ (0.06)      $ 0.85      $ 0.58    $ (0.39)
   Weighted average common shares outstanding,
          diluted................................           4,439        3,478        3,375       2,814
                                                                                                             2,798
Balance Sheet Data
   Working capital...............................         $63,785      $11,812     $ 10,747     $ 5,534    $ 6,232
   Total assets..................................          87,478       30,195       28,697      21,541     18,198
   Long term debt, net of current portion........               0        7,180        4,175       6,448      8,501
   Total shareholders' equity....................          73,197       14,658       14,826       6,740      5,058
</TABLE>

                                       22
<PAGE>
ITEM 7:  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

     The  following  discussion  and  analysis of our  financial  condition  and
results  of  operations  should  be read in  conjunction  with our  consolidated
financial statements and notes thereto included in this Report.

     This  Report,   including   the   disclosures   below,   contains   certain
forward-looking  statements that involve  substantial  risks and  uncertainties.
When used herein, the terms "believe,"  "anticipate," "intend," "goal," "expect"
and similar  expressions  may identify  forward-looking  statements.  Our actual
results,  performance or achievements may differ materially from those expressed
or implied  by such  forward-looking  statements.  Factors  that could  cause or
contribute to such material  differences include those disclosed in the "Certain
Factors" section of this Report.

Overview

     We were  incorporated  in Colorado as Applied Films Labs,  Inc. on March 2,
1976, with our main offices located in Boulder,  Colorado.  Since inception, our
business has evolved from applied  thin films  research and  development  to the
production  and sale of thin film  coated  glass and coating  equipment.  During
fiscal  years  1998 and 1999,  we  relocated  our  Boulder  operations  to a new
headquarters and manufacturing facility in Longmont, Colorado.

     In March 1999, we completed the development of our latest coating platform,
the  ATX-700.  In the second  half of fiscal  2000,  we  experienced  a shift in
revenue with increasing  revenues from the equipment side of the business due to
the order volume of ATX-700's.  Net revenues of coating equipment are recognized
primarily on the percentage-of-completion  method, 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.  The lead time for the sale of coating
equipment is generally  six to nine months.  To date, we have priced our coating
equipment in U.S.  dollars.  Net sales of thin film coating  equipment in fiscal
years  1998,  1999 and fiscal  2000 were $13.9  million,  $4.6  million and $7.1
million,  respectively.  Coating  equipment  backlog as of July 1, 2000 was $8.8
million, compared to $423,000 as of July 3, 1999.

     The  majority of our net sales to date have been from the sale of thin film
coated glass to  manufacturers of LCDs. Thin film coated glass sales and related
costs are  recognized  when products are shipped.  Historically,  net sales have
varied  substantially from quarter to quarter,  and we expect such variations to
continue.  We are  typically  able to ship our thin film coated  glass within 30
days of receipt of the order and, therefore, do not have a significant long-term
backlog of thin film coated glass  orders.  Our ten largest  customers  for thin
film coated glass  accounted for, in the aggregate,  approximately  78%, 62% and
79% of gross sales in fiscal 1998, 1999 and fiscal 2000, respectively.

     The   principal   demand  for  our  thin  film  coated   glass  is  by  LCD
manufacturers,  most of  which  are  located  in  Asia.  Total  gross  sales  to
international customers represented  approximately 78%, 85% and 93% of our gross
sales  in  fiscal  1998,   1999  and  fiscal  2000,   respectively.   We  expect
international  sales will continue to represent a significant portion of our net
sales.  We sell most of our thin film coated glass to foreign  customers in U.S.
dollars  except for sales to certain  Japanese  customers that are in yen. Gross
sales denominated in yen were approximately $6.0 million, $6.7 million and $12.7
million in fiscal 1998, 1999 and fiscal 2000, respectively.  Beginning in fiscal
2001,  certain  customers  and  suppliers  will be  converted  to U.S.  Dollars,
reducing our exposure to foreign currency translation charges.

     In  fiscal  2000,  the  FPD  industry  experienced  very  favorable  market
conditions  in both thin film coating  equipment  and the coated glass  markets.
Capital equipment  spending grew compared to the prior year as FPD manufacturers
began  investing  in FPD  production  facilities.  PDP  and  active  matrix  LCD
manufacturing  facility growth is increasing at an unprecedented rate.. The thin
film coated glass market is also very  strong,  led by wireless  devices such as
PDA's and cell phones, evidenced by our growth in STN revenues.

     In fiscal 1999, the FPD industry  experienced  adverse market conditions in
both the thin film  coated  glass  market  and the thin film  coating  equipment
market.  During fiscal 1999,  there was a downturn in the Asian economy and many
FPD  manufacturers  located in Asia  delayed  capital  spending  on new  coating
equipment.  In  addition,  market  prices for thin film  coated  glass  declined
approximately  29% during  fiscal  1999.  During the course of this  downturn we
reduced costs in our U.S.  operations and expanded our lower cost  operations at
our joint  venture  in China.  Recently,  the Asian  economy  has  improved  and
worldwide demand for FPDs has risen,  resulting in increasing  demand for coated

                                       23
<PAGE>
glass and thin film coating equipment.

     China Joint Venture.  In April 1999, we entered into our STEC joint venture
with NSG to produce coated glass in Suzhou China for resale through our company,
NSG, and others.  The joint venture  represents a strategic  effort to establish
manufacturing capacity in the Far East and reduce our total manufacturing costs.
Upon  formation of the joint venture,  each partner sold a production  coater to
the joint venture and moved a portion of its manufacturing  capacity to STEC. We
have sold one additional  production coater to the joint venture to be delivered
in the fall of 2000.  The  equipment  sold is a Venture  5000 system that was in
operation in our  Longmont,  Colorado  facility.  We believe  sales to the joint
venture are on arms-length  terms.  One-half of the anticipated gain on the sale
of the Venture 5000 to the Joint  Venture will be deferred  and  amortized  into
income over the remaining estimated useful life of the system.

     We recognize 50% of STEC's net income as "Equity  earnings in affiliate" on
our consolidated  statement of operations.  We buy coated glass  manufactured by
the joint venture and resell it to our customers in Asia.  The income from these
sales will continue to flow through our consolidated statement of operations. We
expect  that  the  lower  cost  structure  from  reduced  labor,  materials  and
transportation  costs  will  result  in  higher  margins  on our  sales of glass
manufactured by STEC.

     The joint venture has determined that it will utilize  available cash flows
for  operating  purposes  and to repay  debt.  Accordingly,  we do not expect to
receive dividends from the joint venture in the foreseeable future. See "Results
of  Operations  -- Income Tax Benefit  (Provision)."  The only cash flow we will
receive  from the  joint  venture  will be 50% of the 2%  royalty  on all  joint
venture  sales,  payable  quarterly.  We expect that the joint  venture will not
materially  affect our revenues,  operating  income or cash flows from operating
activities, but will increase our net income.

                                       24
<PAGE>
Results of Operations

     The following table sets forth  information  derived from our  consolidated
statements of operations  expressed as a percentage of net sales for the periods
indicated.
<TABLE>
                                                      --------------------------------------------------------------
                                                                            Fiscal Year Ended
                                                      --------------------------------------------------------------
                                                         July 1, 2000         July 3, 1999         June 27, 1998
                                                         ------------         ------------         -------------
<S>                                                      <C>                     <C>                   <C>
Statement of Operations Data:
   Net sales....................................             100.0%               100.0%               100.0%
   Cost of goods sold...........................              86.6                 85.9                 79.5
                                                            ------               ------               ------
Gross profit....................................              13.4                 14.1                 20.5
Operating expenses:
   Selling, general & administrative............              10.2                 11.9                  9.6
   Research and development.....................               3.3                  3.3                  2.3
                                                             -----               ------               ------
Operating income (loss).........................              (0.1)                (1.1)                 8.6
Interest income (expense).......................               1.1                 (1.8)                (0.9)
Other income (expense)..........................               0.6                  0.0                  0.5
Income from joint venture.......................               5.6                  1.4                   --
                                                            ------               ------               ------
Income (loss) before income taxes and
   cumulative effect of change in
   accounting principle.........................               7.2                 (1.5)                 8.2
Income tax benefit (provision)..................               0.2                  0.8                 (2.8)
                                                             -----               ------                -----
Net income (loss) before cumulative
   effect of change in accounting principle.....               7.4%                (0.7)%                5.4%
Cumulative effect of change in
   accounting principle.........................              (0.1)                  --                   --
                                                              -----                ----                 ----
Net income (loss)...............................               7.3%                (0.7)%                5.4%
                                                              =====                =====                =====
</TABLE>

Sales

     Net sales were $42.3  million,  $31.5  million and $53.0  million in fiscal
years 2000, 1999 and 1998,  respectively.  This  represented a 34% increase from
fiscal  1999 to fiscal  2000,  and a decrease  of 41% from fiscal 1998 to fiscal
1999.  Thin film coated glass sales  increased  31% to $35.2 million from fiscal
1999 to fiscal 2000 and dropped from $39.1  million to $26.9 million from fiscal
1998 to fiscal 1999.  The  increase in fiscal 2000 was due to strong  demand for
coated  glass for both TN and STN coated  glass.  Because it is more complex and
expensive to produce  than TN coated  glass,  STN coated glass  provides us with
higher  revenues and gross margins for each panel of glass  produced.  Also, the
growth in  demand  for  wireless  communication  devices  fueled  our  increased
production  and sale of STN coated glass in fiscal 2000. In fiscal 1999,  coated
glass prices  dropped  approximately  29%, which had an adverse impact on coated
glass sales. Sales of thin film coating equipment  increased 54% to $7.1 million
in fiscal 2000 from $4.6 million in fiscal  1999.  This growth was driven by the
sales of the  ATX-700.  During  fiscal  2000 and  shortly  after,  we sold three
ATX-700  systems  and  recognized  partial  revenue  and  margin on two of those
systems in the second half of fiscal 2000.  The FPD  industry  has  appropriated
capital for growth in production  facilities  for both the PDP and active matrix
LCD markets for which the ATX-700 is particularly well suited.

Gross Profits

     Gross profits were $5.7  million,  $4.5 million and $10.9 million in fiscal
years 2000, 1999, and 1998,  respectively.  As a percentage of net sales,  gross
profit margins were 13.4%,  14.1% and 20.5% in fiscal years 2000, 1999 and 1998,
respectively.  Gross  profits  increased  in fiscal  2000 from  fiscal  1999 due
primarily to the high concentration in sales levels of thin film coated glass as
well as gross profit  contribution from thin film coating equipment revenue that
began in the second half of fiscal 2000. Gross profits for fiscal 2000 were also
positively impacted by the sale of the refurbished coater to the Joint Venture.

                                       25
<PAGE>
Selling, General and Administrative

     Selling,  general and  administrative  expenses totaled $4.3 million,  $3.8
million and $5.1  million for fiscal  years 2000,  1999 and 1998,  respectively.
SG&A  increased  15% from $3.8  million in fiscal 1999 to $4.3 million in fiscal
2000 due to the sales commissions from systems sales. We use commissioned  sales
representative  firms in  partnership  with  our  sales  team for the thin  film
equipment portion of our business.  As a percentage of sales,  selling,  general
and administrative  costs were 10.2%, 11.9% and 9.6% for fiscal years 2000, 1999
and 1998, respectively.

Research and Development

     Research and development  expenses  totaled $1.4 million,  $1.0 million and
$1.2 million for fiscal years 2000,  1999 and 1998,  respectively.  Research and
development  expenditures  consisted  primarily of salaries,  outside contractor
expenses and other expenses related to our ongoing product development  efforts.
The  increase  from  fiscal 1999 to fiscal 2000 was  primarily  attributable  to
changes in  staffing  and  material  and  supplies  expense  related to advanced
development projects in fiscal 1999. The advanced development team completed the
design,  fabrication,  process  proving  and  debugging  of our  latest  ATX-700
technology  in  March  of  1999.  This  team is  currently  engaged  in  several
development  projects  that will allow us to maintain  our  industry  leadership
position.  As a percentage of net sales,  research and development expenses were
3.3%, 3.3% and 2.3% in fiscal years 2000, 1999 and 1998, respectively.

Interest Income (Expense)

     Interest  income  (expense) was $447,000,  ($533,000)  and  ($441,000)  for
fiscal  years  2000,  1999 and  1998,  respectively.  The  shift  from  interest
(expense) in fiscal 1999 and prior years to interest  income in fiscal 2000, was
related to the investment of the proceeds of $55 million secondary offering that
was completed in March 2000. The increase in long-term borrowings in fiscal 1999
funded the $3.2 million up front  capital  infusion of the STEC joint venture in
China. As of fiscal year end 2000, we had no bank debt. Total bank debt was $7.4
million and $4.3 million as of fiscal year end 1999 and 1998, respectively.

Other Income (Expense)

     Other income  (expense) was $272,000,  $40,000 and $197,000 in fiscal years
2000,  1999 and 1998,  respectively.  In fiscal  2000,  other  income  consisted
primarily of royalties  from the joint venture of $284,000  that were  partially
offset by a small foreign  currency loss. The decrease in other income from 1998
to 1999 was the absence of foreign  currency gains in fiscal 1999 that drove the
gain in fiscal 1998. It is uncertain  whether  foreign  exchange gains or losses
will be incurred in the future.

Income Tax Benefit (Provision)

     The income tax provision was $1,480,000 for fiscal year 1998. The effective
tax rate for fiscal  1998 was 34%. We  recorded a $258,000  tax  benefit  during
fiscal year 1999.  We received a refund of $522,000 in fiscal 1999 for estimated
payments and because 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 a  negative  3.3%.  This  benefit  was  primarily  derived  from the
reversal of the income tax accrual on the equity  income from the joint  venture
that was accrued in fiscal 1999.  Other factors  contributing  to the relatively
low  effective  tax rate in fiscal 2000 were interest and current year equity in
earnings in the Joint Venture income that are not subject to tax.

                                       26
<PAGE>
Quarterly Results of Operations

     The  following  table  sets forth  summary  unaudited  quarterly  financial
information  for the last eight fiscal  quarters.  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)  for a fair
presentation of such 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
there  can be no  assurance  that any  trends  reflected  in such  results  will
continue in the future.  Our results of operations may be subject to significant
quarterly  variations.  See also " Certain Factors -- Our Operating  Results May
Fluctuate."
<TABLE>
                                --------------------------------------    --------------------------------------------
                                             Fiscal 2000                                  Fiscal 1999
                                            Quarter Ended                                Quarter Ended
                                --------------------------------------    --------------------------------------------
                                  July       April     January     October       July      March      December   September
                                  2000       2000       2000        1999         1999      1999         1998       1998
<S>                             <C>        <C>         <C>         <C>           <C>       <C>        <C>        <C>
Net Sales.....................  $ 14,837   $ 11,759    $ 8,308     $ 7,388       $ 7,779   $ 8,216    $ 6,176    $ 9,351

Cost of goods sold............    12,815     10,301      7,042       6,475         6,798     6,622      5,493      8,158
                                  ------     ------                                -----     -----      -----      -----

Gross profit..................     2,022      1,458      1,266         913           981     1,594        683      1,193
Operating expenses:
  Selling, general and
  Administrative..............     1,529      1,084        902         809           750       911        794      1,304
Research and development......       385        360        315         349           297       274        212        260
                                   -----      -----      -----       -----         -----     -----      -----      -----

Operating income (loss).......       108         14         49        (245)          (66)      409       (323)      (371)
Interest income (expense).....       655         32       (101)       (139)         (147)     (167)      (140)      (112)
Other income (expense)........       (47)       125         14         180            78       (27)      (135)       136

Equity earnings in affiliate..       866        697        369         449           382        --         --        --
                                    ----       ----       ----        ----          ----      ----       ----      ----
Income (loss) before income
  taxes.......................     1,582        868        331         245           247       215       (598)      (347)
Income tax benefit (provision)      (102)       (61)       343         (83)          (86)      (72)       286        130
                                    ----       ----       ----        ----          ----      ----       ----       ----
Net income (loss) before
cumulative effect of change
in accounting principle.......     1,480        807        674         162           161       143       (312)      (217)
Cumulative  effect  of  change
in accounting principle.......        --         --         --         (50)           --        --         --         --

Net income (loss).............   $ 1,480      $ 807      $ 674       $ 112         $ 161     $ 143     $ (312)    $ (217)
                                 =======      =====      =====       =====         =====     =====     ======     ======
</TABLE>

                                       27
<PAGE>
The following table sets forth the above  unaudited  information as a percentage
of total net sales.
<TABLE>
                                --------------------------------------    --------------------------------------------
                                             Fiscal 2000                                  Fiscal 1999
                                            Quarter Ended                                Quarter Ended
                                --------------------------------------    --------------------------------------------
                                  July      April    January   October     July       March      December   September
                                  2000      2000       2000     1999       1999        1999       1999        1998
<S>                              <C>       <C>       <C>       <C>         <C>        <C>        <C>        <C>
Net Sales...................     100.0%    100.0%    100.0%    100.0%      100.0%     100.0%     100.0%     100.0%

Cost of goods sold..........      86.4      87.6      84.8      87.6        87.4       80.6       88.9       87.2
                                 -----     -----     -----     -----       -----      -----      -----      -----
Gross profit................      13.6      12.4      15.2      12.4        12.6       19.4       11.1       12.8
Operating expenses:
  Selling, general and
  Administrative............      10.3       9.2      10.9      11.0         9.6       11.1       12.9       13.9
Research and development....       2.6       3.1       3.8       4.7         3.8        3.3        3.4        2.8
                                                      ----      ----        ----       ----       ----       ----
Operating income (loss).....       0.7       0.1       0.5      (3.3)       (0.8)       5.0       (5.2)      (3.8)
Interest income (expense)...       4.4       0.3      (1.2)     (1.9)       (1.9)      (2.0)      (2.3)      (1.2)
Other income (expense)......      (0.3)      1.1       0.2       2.4         1.0       (0.3)      (2.2)       1.5

Equity earnings in affiliate       5.8       5.9       4.4       6.0         4.9         --         --         --
                                  ----      ----      ----      ----        ----       ----       ----       ----
Income (loss) before income
  taxes.....................      10.7       7.4       3.9       3.2         3.2        2.6       (9.7)      (3.7)
Income tax benefit (provision)    (0.7)     (0.5)      4.1      (1.1)       (1.1)      (0.9)       4.6        1.4
                                  ----      ----      ----      ----        ----       ----       ----       ----
Net income (loss) before
cumulative effect of change
in accounting principle.....      10.0       6.9       8.0       2.1         2.1        1.7       (5.1)      (2.2)
Cumulative effect of change
in accounting principle.....        --        --        --      (0.7)         --         --         --         --
Net income (loss)...........      10.0%      6.9%      8.0%      1.4%        2.1%       1.7%      (5.1%)     (2.2)%
                                  =====     ====      ====      ====         ====       ====      =====      ====
</TABLE>
     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.  Net sales  during  fiscal 1999
were  relatively  flat due to reduced demand from customers for thin film coated
glass  as well as a  reduction  in  capital  spending  and thin  film  equipment
purchases in the  industry.  Net sales of thin film coated glass for fiscal 2000
totaled  $35.2  million  versus $26.9  million  during fiscal year 1999 with STN
coated glass representing over 41% of fiscal 2000 glass sales. Sales and related
costs of thin film coated  glass  products  are  recognized  when  products  are
shipped.  Sales of thin film  coating  equipment  totaled $7.1 million in fiscal
2000 versus $4.6  million in fiscal  1999 with  revenue  recorded on two ATX-700
systems in the second half of fiscal 2000.  Approximately 94% of the revenue for
coating  equipment  was recorded in the second half of the year.  We utilize the
percentage of completion  accounting  method for recognizing sales of equipment.
See "ITEM 8: Financial  Statements and Supplementary Data -- Note 2: Significant
Accounting Policies -- Equipment Sales Revenue Recognition." During the year, we
sold two ATX-700  systems and on July 10, 2000, we announced the sale of a third
ATX-700 system to a major  Japanese PDP  manufacturer.  This  represents a major
market penetration for our latest equipment platform.  We have successfully sold
the ATX-700 system into three different countries in the Far East.

     In absolute  dollars, total gross  profits  grew for each quarter in fiscal
2000. As a percentage of sales, gross profits were positively impacted beginning
in the third  quarter of fiscal 2000 from margins on the ATX-700  system  sales.
Margins  in fourth  quarter  fiscal  2000 were  negatively  impacted  due to the
refurbishment  program,  whereby we took a  production  coater  off-line  at the
beginning of June 2000 to be refurbished and sold it to the STEC for delivery in
first quarter of fiscal 2001.  This drop in  production  in Longmont  negatively
affected our margins for the fourth  quarter.  Once this system is in production
at STEC, it is  anticipated to have a positive  impact on equity  earnings going
forward.

     Selling,  general and  administrative  expenses  increased  16% per quarter
during fiscal 2000 due to the re-introduction of sales commissions for thin film
equipment  sales,  which escalated with equipment  revenue in the second half of
the year.  Included  in the  fiscal  1999  SG&A  expenses  are one time  charges
totaling  $433,000 for the  completion of the  relocation  of our  facilities to
Longmont and severance charges.

                                       28
<PAGE>
     Interest expense decreased  sequentially  since the third quarter of fiscal
year 1999 and  converted  to interest  income  from the third  quarter of fiscal
2000.  Interest  income was  $447,000 in fiscal  2000  compared to an expense of
($553,000)  in the prior year. At the end of third quarter 2000, we raised $55.5
million in a  secondary  offering  and we have a large  portion  of these  funds
invested in low-risk securities and instruments.

     Equity  earnings  in  affiliate  have grown  substantially  since the joint
venture   commenced   production  in  April  1999,   and  is  now   contributing
significantly  to our  profits.  The  joint  venture  has  also  benefited  from
increased  demand for STN coated glass which allowed STEC to shift production to
the higher margin STN product.

Liquidity and Capital Resources

     We have funded our operations with cash generated from operations, proceeds
from an initial and secondary  public  offerings of our common  stock,  and with
borrowings.  Cash  provided  by  operating  activities  for fiscal 2000 was $3.9
million compared to $3.9 million for the corresponding period in fiscal 1999 due
primarily to net income  earned during the year. In fiscal 2000, we paid off our
bank debt under our line of credit from the proceeds of our secondary  offering.
As of July 1, 2000, cash and cash equivalents were  approximately  $52.2 million
and working capital was $63.8 million.  As of July 1, 2000,  accounts receivable
were approximately $11.1 million.

     Our $11.5 million  credit  facility  with a commercial  bank will expire on
September 17, 2002. As of July 1, 2000,  we had no  outstanding  balances on our
credit  facility.  The interest rate under the credit facility was 9.25% at July
1, 2000.  The credit  facility  generally  restricts our ability to make capital
expenditures,  incur  additional  indebtedness,  enter  into  capital  leases or
guarantee such  obligations.  To remain in compliance with the credit agreement,
we must  also  maintain  certain  financial  ratios.  At July 1, 2000 we were in
compliance with all of the financial covenants in our credit facility.

     Capital  expenditures  were  $484,000,  $2.9  million and $5.4  million for
fiscal years 1999 and 1998, respectively.  We anticipate capital expenditures of
approximately $6.5 million in fiscal 2001, consisting primarily of costs related
to the  completion  of  additional  coating  capacity,  additional  research and
development  hardware,  thin film coating test equipment and development support
equipment. The majority of capital spending in fiscal 2000 was for machinery and
equipment to enhance our process  capabilities in thin film coated glass and for
modifications to our ATX-700 demonstration.

     We believe that our working capital and capital resource needs for the next
12 months  will  continue to be met by our  current  cash and cash  equivalents,
operations,  and borrowings under the existing credit facility.  We believe that
success  in our  industry  requires  substantial  capital  in order to  maintain
flexibility to take advantage of  opportunities  as they may arise. We may, from
time to  time,  invest  in or  acquire  complementary  businesses,  products  or
technologies  and may seek  additional  equity  or debt  financing  to fund such
activities.

Year 2000 Compliance

     The Year 2000 issue did not have a material adverse effect on our financial
condition,  results of operations or  liquidity.  However,  the systems of other
companies  that  interact  with us may not be Year  2000  compliant,  which  may
adversely affect us.

Recent Financial Accounting Standards Board Statements

     Several new accounting  pronouncements  have been issued in fiscal 1997 and
1998,  some of which are listed in the notes to the  financial  statements  that
have  impacted us in fiscal year 1999 and 2000.  These  standards  may impact us
going forward. Management believes that these accounting standards will not have
a material impact on the operating results when implemented. See Item 8.

ITEM 7A:  Quantitative and Qualitative Disclosures About Market Risk

Market Risk Exposure
                                       29
<PAGE>
     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.

Foreign Exchange Exposure

     We are  exposed to  foreign  exchange  risk  associated  with our  accounts
receivable and payable denominated in foreign currencies,  primarily in Japanese
yen. At July 1, 2000, we had approximately  $2.0 million of accounts  receivable
and $2.4 million of accounts  payable  denominated  in yen compared with July 3,
1999, when we had approximately $605,000 of accounts receivable and $1.0 million
of accounts  payable  denominated in yen. A one percent change in exchange rates
would result in an approximate  $4,000 net impact on pre-tax income based on the
July 1, 2000 quarter end foreign currency  denominated  accounts  receivable and
accounts  payable  balances.   Our  customers  typically  pay  us  for  our  yen
denominated  sales within  approximately  15 to 45 days of the date of sale.  We
occasionally offer cash discounts for early payment and pre-payment.

     Notwithstanding  the above,  actual  changes in interest  rates and foreign
exchange  rates  could  adversely  affect our  operating  results  or  financial
condition.  The potential  impact is likely greater the greater the magnitude of
the rate change. See also "Note 12 to Consolidated  Financial Statements -- Fair
Value of Financial Instruments."

            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.

                                       30
<PAGE>
ITEM 8:  Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                            Page
Report of Independent Public Accountants....................................  32
Consolidated Balance Sheets as of July 1, 2000 and July 3, 1999.............  33
Consolidated Statements of Operations for the fiscal years ended
   July 1, 2000, July 3, 1999 and June 27, 1998.............................  34
Consolidated Statements of Stockholders' Equity for the fiscal
   years ended July 1, 2000, July 3, 1999 and June 27, 1998.................  35
Consolidated Statements of Cash Flows for the fiscal years
   ended July 1, 2000, July 3, 1999 and June 27, 1998.......................  36
Notes to Consolidated Financial Statements..................................  37



                                       31
<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 subsidiary as of July 1, 2000 and July
3, 1999 and the related  consolidated  statements of  operations,  stockholders'
equity and cash flows for each of the fiscal  years ended July 1, 2000,  July 3,
1999 and June 27, 1998. 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 subsidiary,  as of July 1, 2000 and July 3, 1999, and the
consolidated  results  of their  operations  and their cash flows for the fiscal
years ended July 1, 2000,  July 3, 1999 and June 27, 1998,  in  conformity  with
accounting principles generally accepted in the United States.


                                        /s/ Arthur Andersen LLP
                                        Arthur Andersen LLP



Denver, Colorado,
    July 18, 2000.

                                       32
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY
<TABLE>
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
                                                                                            July 1,        July 3,
ASSETS                                                                                       2000           1999
------                                                                                     --------       --------
<S>                                                                                         <C>           <C>
Current assets:
    Cash and cash equivalents.....................................................          $32,058       $ 1,163
    Marketable securities.........................................................           20,167            --
    Accounts and trade notes receivable, net of allowance of $188 and $73
       Coated glass and other.....................................................            6,273         5,501
       Costs and profit in excess of billings.....................................            4,571            --
       Due from Joint Venture.....................................................              219         1,560
    Inventories, net..............................................................           10,006         8,152
    Assets held for sale..........................................................            2,251            --
    Prepaid expenses and other....................................................              187           675
    Income tax receivable.........................................................               --           711
    Deferred tax asset, net.......................................................              480           169
                                                                                            -------       -------
                Total current assets..............................................           76,212        17,931
Property, plant and equipment:
    Land..........................................................................              270           270
    Building......................................................................              226           226
    Machinery and equipment.......................................................           11,443        15,491
    Office furniture and equipment................................................              356           444
    Leasehold improvements........................................................            1,504         1,340
                                                                                            -------       -------
                                                                                             13,799        17,771
    Accumulated depreciation......................................................           (8,479)       (9,144)
                                                                                            -------       -------
       Total property, plant and equipment........................................            5,320         8,627
                                                                                            -------       -------
Investment in Joint Venture.......................................................            5,746         3,637
Deferred tax asset, net...........................................................              136            --
Other assets......................................................................               64            --
                                                                                            -------       -------
                                                                                            $87,478       $30,195
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
    Trade accounts payable........................................................          $ 9,971       $ 3,950
    Accrued expenses..............................................................            2,138         1,656
    Income tax payable............................................................               98            --
    Current portion of -
       Deferred revenue...........................................................              164           236
       Deferred gain..............................................................               56            56
       Long-term debt.............................................................               --           221
                                                                                            -------       -------
                Total current liabilities.........................................           12,427         6,119

Long-term debt, net of current portion............................................               --         7,180
Deferred revenue, net of current portion..........................................            1,210         1,356
Deferred gain, net of current portion.............................................              644           700
Deferred tax liability, net.......................................................               --           182
                                                                                            -------       -------
                Total liabilities.................................................           14,281        15,537
                                                                                            -------       -------

Commitments (Note 10) Stockholders' equity:
    Preferred stock, no par value, 1,000,000 shares authorized;
       no shares outstanding......................................................              --            --
    Common stock; no par value, 10,000,000
       shares authorized, 6,040,856 and 3,487,058
       shares issued and outstanding at July 1, 2000 and
       July 3, 1999, respectively.................................................           64,959         9,473
    Other cumulative comprehensive gain (loss)....................................              (20)           --
    Retained earnings.............................................................            8,258         5,185
                                                                                            -------       -------
                Total stockholders' equity........................................           73,197        14,658
                                                                                            -------       -------
                                                                                            $87,478       $30,195
                                                                                            =======       =======
</TABLE>
     The accompanying notes are an integral part of these  consolidated  balance
sheets.

                                       33
<PAGE>
<TABLE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

                                                                                    For The Fiscal Years Ended
                                                                              ---------------------------------------
                                                                                July 1,       July 3,      June 27,
                                                                                  2000         1999         1998
                                                                                -------      --------     ---------
<S>                                                                           <C>            <C>          <C>
Net sales:
    Non-affiliated....................................................        $ 42,292      $ 28,582      $ 53,041
    Joint Venture.....................................................              --         2,941            --
                                                                              --------      --------      --------
Total sales...........................................................        $ 42,292      $ 31,523      $ 53,041
Cost of goods sold....................................................          36,633        27,070        42,150
                                                                              --------      --------      --------
Gross profit..........................................................           5,659         4,453        10,891

Selling, general and administrative expenses..........................           4,324         3,760         5,067
Research and development expenses.....................................           1,409         1,044         1,243
                                                                              --------      --------      --------
Income (loss) from operations.........................................             (74)         (351)        4,581
Interest income (expense).............................................             447          (553)         (441)
Other income (expense)................................................             272            40           197
Equity earnings in Joint Venture......................................           2,381           382            --
                                                                              --------      --------      --------
Income (loss) before income taxes and
    cumulative effect of change in accounting principle...............           3,026          (482)        4,337
Income tax benefit (provision)........................................              97           258        (1,480)
                                                                              --------      --------      --------
Income (loss) before cumulative effect
    of change in accounting principle.................................           3,123          (224)        2,857
                                                                              --------      --------      --------
Cumulative effect of change in
    accounting principle..............................................             (50)           --            --
Net income (loss) ....................................................        $  3,073      $   (224)     $  2,857
                                                                              ========      ========      ========
Net income (loss) per share:
    Basic.............................................................        $   0.72      $  (0.06)     $   0.90
                                                                              ========      ========      ========
    Diluted...........................................................        $   0.69      $  (0.06)     $   0.85
                                                                              ========      ========      ========
Weighted average common shares outstanding:
    Basic.............................................................           4,255         3,478         3,181
                                                                              --------      --------      --------
    Diluted...........................................................           4,439         3,478         3,375
                                                                              ========      ========      ========
</TABLE>
     The  accompanying   notes  are  an  integral  part  of  these  consolidated
statements.

                                       34
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

     FOR THE FISCAL YEARS ENDED JULY 1, 2000, JULY 3, 1999 AND JUNE 27, 1998
                        (In thousands, except share data)
<TABLE>
                                                                                    Other
                                                                                 Cumulative                                 Total
                                        Common Stock       Held by Affiliate   Comprehensive    Deferred     Retained  Stockholders'
                                      Shares     Amount     Shares    Amount    Gain (Loss)   Compensation   Earnings      Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>          <C>        <C>       <C>           <C>        <C>          <C>           <C>
Balances, June 28, 1997             2,799,998    $4,245     (3,749)   $ (26)         --        $  (31)      $ 2,552       $ 6,740
---------------------------------------------------------------------------------------------------------------------------------
  Issuance of shares in
    connection with IPO
    (net of underwriters'
    commissions of $297)..........    676,439     5,205         --       --          --            --            --         5,205
  Liquidation of affiliate........     (3,749)      (26)     3,749       26          --            --            --            --
  Comprehensive income:
    Net income....................         --        --         --       --          --            --         2,857         2,857
    Amortization of deferred
      compensation................         --        --         --       --          --            24            --            24
---------------------------------------------------------------------------------------------------------------------------------
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
                                    ---------   -------     ------    -----       -----         -----       -------       -------
</TABLE>
     The  accompanying   notes  are  an  integral  part  of  these  consolidated
statements.

                                       35
<PAGE>
<TABLE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                                                                           For The Fiscal Years Ended
                                                                                     ---------------------------------------
                                                                                       July 1,       July 3,      June 27,
                                                                                        2000          1999          1998
                                                                                      --------      ---------    ----------
<S>                                                                                    <C>           <C>           <C>
Cash Flows from Operating Activities:
    Net income (loss).......................................................           $ 3,073       $ (224)       $ 2,857
    Adjustments to reconcile net income (loss) to net cash flows from
      operating activities -
       Depreciation.........................................................             1,826         1,759         1,800
       Amortization of deferred compensation................................                --             7            24
       Amortization of deferred gain on lease and Joint Venture.............              (220)         (108)          (22)
       Cumulative effect of change in accounting principle..................                50            --            --
       Deferred income tax (benefit) provision..............................              (628)          530          (558)
       Loss (gain) on disposals of property, plant and equipment............                84           (20)           (4)
       Equity in earnings of affiliate......................................            (2,217)         (330)          (50)
       Deferred gain on equipment sale to Joint Venture.....................                --         1,588            --
       Cost of equipment sale to Joint Venture..............................                --         1,693            --
       Changes in:
         Accounts and trade notes receivable, net...........................              (991)          385          (985)
         Costs and profits in excess of billings............................            (3,011)           --            --
         Inventories........................................................            (1,872)        1,903        (3,895)
         Prepaid expenses and other.........................................               488           273          (520)
         Accounts payable...................................................             6,021        (1,291)        1,439
         Deferred revenue...................................................                --            --        (1,500)
         Accrued expenses...................................................               482        (1,243)        1,683
         Income taxes payable (receivable)..................................               809        (1,002)          (61)
                                                                                       -------       -------       -------
Net cash flows from operating activities....................................             3,894         3,920           208
                                                                                       -------       -------       -------

Cash Flows from Investing Activities:
    Purchases of property, plant, and equipment.............................              (484)       (2,959)       (5,415)
    Proceeds from sale of property, plant, and equipment....................                --           159         2,184
    Purchase of assets held for sale........................................              (369)           --            --
    Investment in Joint Venture.............................................                --        (3,236)          (71)
    Proceeds from liquidation of investment in affiliate....................                --            --           172
    Proceeds from sale of lease purchase option.............................                --            --           834
    Purchases of marketable securities......................................           (21,367)           --            --
    Proceeds from sale of marketable securities.............................             1,200            --            --
    Other...................................................................               (64)           --            --
                                                                                       -------       -------       -------
Net cash flows from investing activities....................................           (21,084)       (6,036)       (2,296)
                                                                                      --------       -------       -------

Cash flows from Financing Activities:
    Proceeds from borrowings of long-term debt..............................             3,623        12,747        16,715
    Repayment of long-term debt.............................................           (11,024)       (9,598)      (20,048)
    Stock issuance on stock purchase plan, and stock options................               422            49         5,205
    Proceeds from secondary offering........................................            55,525            --            --
    Offering costs..........................................................              (461)           --            --
                                                                                       -------       -------       -------
Net cash flows from financing activities....................................            48,085         3,198         1,872
                                                                                       -------       -------       -------

Net increase (decrease) in cash.............................................            30,895         1,082          (216)
Cash and cash equivalents, beginning of period..............................             1,163            81           297
                                                                                       -------       -------       -------
Cash and cash equivalents, end of period....................................           $32,058       $ 1,163       $    81
                                                                                       =======       =======       =======
Supplemental cash flow information:
    Cash paid for interest, net of amounts capitalized......................           $   366       $   735       $   767
                                                                                       =======       =======       =======
    Cash paid (received) for income taxes, net..............................           $  (560)      $  (100)      $ 2,109
                                                                                       =======       =======       =======
</TABLE>
     The  accompanying   notes  are  an  integral  part  of  these  consolidated
statements.

                                       36
<PAGE>
                    APPLIED FILMS CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)      COMPANY ORGANIZATION AND OPERATIONS

     Applied  Films  Corporation,  (the  "Company"  or "AFCO"),  was  originally
incorporated  in 1992 as a  Michigan  corporation.  In June  1995,  the  Company
reincorporated  in Colorado.  The  Company's  principal  line of business is the
manufacture and sale of thin film glass for use in flat panel and liquid crystal
displays.  During 1997,  the Company  began  selling its thin film coating glass
manufacturing  equipment  to  flat  panel  display  manufacturers.  The  Company
experiences risks common to technology  companies,  including highly competitive
and evolving markets for its products.

     The  Company  was  formed  in May 1992 as the  result  of a merger  between
Applied  Films,   Inc.  ("AFI")  and  a  wholly  owned  subsidiary  of  Donnelly
Corporation  ("Donnelly"),  Donnelly Coated Corporation  ("DCC"). As a result of
the merger,  Donnelly owned 50% of the outstanding  common stock of the Company,
with the remaining 50% owned by the former shareholders of AFI.

     Initial Public Offering

     In November  1997, the Company  completed an initial  public  offering (the
"Offering") of 1,900,000 shares. In connection with this offering, Donnelly sold
its 50% interest in the Company,  consisting of 1,400,000  shares. An additional
500,000  shares  were  newly  issued  in the  Offering.  In  December  1997,  an
additional  176,439 shares were issued to the  underwriters  in connection  with
completion  of the  Offering.  Donnelly  paid  substantially  all  costs of this
underwriting, other than commissions related to the 500,000 new shares.

     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 4).

     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.

(2)      SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

     The accompanying  consolidated  financial  statements include the Company's
wholly owned subsidiary,  DAF Export Corporation,  which is treated as a Foreign
Sales Corporation  ("FSC") for federal income tax purposes.  The accounts of the
subsidiary  have been  consolidated  with the  accounts  of the  Company  in the
accompanying  financial  statements.  All intercompany accounts and transactions
have been eliminated in consolidation.

     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 in the Joint  Venture at a rate of
34%. Based on the fiscal year 2000 determinations, the taxes originally

                                       37
<PAGE>
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.

     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
2000, 1999 and 1998 include 52, 53 and 52 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  gains and losses on such  securities  are reflected as other income in
the  accompanying  statement 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  and $16.7  million in
corporate bonds and municipal debt securities,  respectively. The Company had no
significant  concentration  of credit risk arising from  investments  and had no
significant unrealized gains or losses at July 1, 2000.

     Inventories

     Inventories  are  stated  at the  lower of cost  (first-in,  first-out)  or
market. Inventories at July 1, 2000, and July 3, 1999 consist of the following:
<TABLE>
                                                                 July 1,2000             July 3,1999
                                                                 -----------             -----------
                                                                            (In thousands)
       <S>                                                        <C>                      <C>
       Raw materials, net.............................            $   4,003                $   3,797
       Work-in-process................................                   --                       23
       Materials for manufacturing systems............                  195                      192
       Finished goods.................................                5,808                    4,140
                                                                  ---------                ---------
                                                                  $  10,006                $   8,152
                                                                  =========                =========
</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 on  straight-line or accelerated
methods over the following  estimated useful lives.  Leasehold  improvements are
depreciated over the lesser of the useful life of the asset or lease term.

                                       38
<PAGE>
<TABLE>
                                                                           Estimated
                                                                          Useful Lives
                                                                          ------------
           <S>                                                             <C>
           Building............................................             30 years
           Machinery and equipment.............................            3-10 years
           Office furniture and equipment......................            3-5 years
</TABLE>

     Deferred Gain

     During June 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  (see Note 10).  The Company  received  $834,000 for this  purchase
option,  which is deferred and is being  amortized on a straight line basis over
the term of the lease of 15 years.

     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  relating  to  the  sales  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 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,
represents  amounts received 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  represents  revenues  earned
prior to billing.

     Losses on contracts in process are  recognized  in their  entirety when the
loss becomes evident and the amount of loss can be reasonably estimated. No such
losses have been identified for contracts in progress at July 1, 2000 or July 3,
1999.  The  Company  did not have any  contracts  in  progress  at July 3, 1999.
Contracts in progress at July 1, 2000 are as follows:
<TABLE>
    <S>                                                                                 <C>
    Costs incurred on contracts in progress and estimated profit ................       $       6,211

    Less: billings to date.......................................................             (1,640)
                                                                                        -------------
    Costs and profit in excess of billings.......................................       $       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

                                       39
<PAGE>
of the contract.  Retainage  amounts are included in accounts  receivable in the
balance sheet.

     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.  Provisions for anticipated  losses on contracts,  if any, are made in
the period they become evident.

     Deferred Revenue

     During  fiscal  1999,  the  Company  sold  refurbished  thin  film  coating
equipment to the Joint Venture (see Note 4). Because the Company owns 50% of the
Joint Venture,  the Company  recorded 50% of the revenue and related cost of the
sale and has  deferred  50% of the gross  margin,  approximately  $1.4  million,
(representing  the  Company's  intercompany  profit due to its  ownership of the
Joint  Venture),  which will be  recognized  on a  straight-line  basis over ten
years, the estimated depreciable life of the equipment.  The amortization of the
gross  margin is  included  with  equity in  earnings  of Joint  Venture  in the
accompanying statements of operations.

     Research and Development Expenses

     Research  and  development  costs are  expensed  as  incurred  and  consist
primarily of salaries,  supplies, and depreciation of equipment used in research
and development  activities.  The Company incurred  approximately  $1.4 million,
$1.0  million and $1.2  million of research  and  development  expenses  for the
fiscal  years ended July 1, 2000,  July 3, 1999 and June 27, 1998  respectively,
net of reimbursements received from a contracting research organization.

     Foreign Currency Transactions

     The Company  generated 93% and 85% of its revenues in fiscal years 2000 and
1999,  respectively,  from sales to foreign  corporations,  located primarily in
East 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 U.S.  dollars
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.

     Other Cumulative Comprehensive Income

     Statement   of  Financial   Accounting   Standards   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 the Joint Venture (Note 4).

     Net (Loss) Income Per Share

     The Company follows Statement of Financial  Accounting  Standards  ("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 net
earnings  or loss by the  weighted  average  number of  shares  of common  stock
outstanding. Diluted earnings (loss) per share is determined by dividing the net
earnings or loss by the sum of (1) the weighted  average number of common shares
outstanding  and (2) the  dilutive  effect  of  outstanding  potential  dilutive
securities,  including  stock options  determined  utilizing the treasury  stock
method.

                                       40
<PAGE>
     A  reconciliation  between the number of shares used to calculate basic and
diluted earnings per share is as follows (in thousands of shares):
<TABLE>
                                                              2000               1999                 1998
                                                              ----               ----                 ----
<S>                                                          <C>               <C>                 <C>
Weighted average number of common shares
     outstanding (shares used in basic
     earnings per share computation).................          4,255             3,478               3,181
Effect of stock options (treasury stock method)......            184               N/A                 194
                                                             -------           -------             -------
Shares used in diluted earnings per share computation          4,439             3,478               3,375
                                                             =======           =======             =======
</TABLE>
     As all potentially  dilutive  securities were  antidilutive for fiscal year
1999,  the effect of common stock issuable upon exercise of all options has been
excluded  from the  computation  of diluted  earnings  per share for fiscal year
1999.

     Adoption of New Accounting Standards

     In March 1998, the Accounting  Standards  Executive  Committee ("AcSEC") of
the AICPA issued Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer  Software  Developed or Obtained for Internal  Use." SOP 98-1  provides
guidance on accounting for the costs of computer software  developed or obtained
for internal  use. Once the  capitalization  criteria of SOP 98-1 have been met,
certain  internal and external direct costs of materials,  services and interest
should be capitalized. SOP 98-1 is effective for financial statements for fiscal
years  beginning  after  December  15,  1998,  which is fiscal year 2000 for the
Company.  The  application  of SOP 98-1 did not have a  material  impact  on the
Company's financial statements.

     In April  1998,  the  AcSEC  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,  the Company has been deferring  certain  start-up costs
related to the Joint Venture in China (see Note 4). 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 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 Company has not yet  quantified  the
impact  of  adopting  SFAS  No.  133 on its  financial  statements  and  has not
determined  the timing of or method of its  adoption of SFAS No.  133.  However,
based upon a preliminary assessment, management does not believe SFAS No. 133 as
amended by SFAS No.  137 and SFAS No.  138,  will have a material  impact on the
Company's financial statements.

     SAB 101

     In December 1999, the staff of the Securities and Exchange  Commission (the
"Staff") issued Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected
Revenue  Recognition  Issues"  which  provides  the  staff's  views in  applying
generally accepted accounting principles to selected revenue recognition issues.
The Company has evaluated SAB 101 and it believes that there is no effect on the
revenue recognition policies currently in place. The staff has indicated that it
plans to issue  interpretive  guidance as it relates to SAB 101 in the form of a
question and answer

                                       41
<PAGE>
document.  The Company will evaluate the impact,  if any, of such guidance as it
becomes available.

     Use of Estimates

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

     Related Parties

     In addition to the Company's Joint Venture investment  described in Note 1,
the Company has engaged in the  following  related  party  transactions.  During
fiscal 2000, the Company had $245,000 in sales to a company of which a member of
the board of directors is an officer,  and the Company had $583,000 of purchases
from a company of which a member of the board of directors is an officer.

     Reclassifications

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

                                       42
<PAGE>
(3)      LONG-TERM DEBT
<TABLE>
                                                                                            July 1,               July 3,
                                                                                             2000                 1999
                                                                                      -----------------    ------------------
     <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 accruing 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  (9.25%  and 8%,  at  July 1,  2000  and  July 3,  1999,
         respectively)..........................................................      $         --        $   7,000,000
     Note payable secured by a deed of trust on land and
         buildings, payable in 60 monthly installments of
         principal and interest of $7,692 (final payment due
         June 27, 2002); with interest accruing at 8.79%. The
         note payable was retired during fiscal 2000............................                --              241,000

     Notepayable for  insurance  policy  secured by any  insurance  proceeds and
         dividends, payable in 17 monthly installments of principal and interest
         of $13,984 (final payment due April 18, 2000); with
         interest accruing at 7.17%.............................................                --              137,000

     Other capital leases of equipment..........................................                --               23,000
                                                                                      ------------         ------------
                                                                                                --            7,401,000
         Less-current portion...................................................                --             (221,000)
         Total long-term debt...................................................      $         --           $7,180,000
                                                                                      ============         ============
</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");  a ratio of total
liabilities  to tangible net worth and maintain a certain amount of tangible net
worth, all as defined in the Agreement.  As of July 1, 2000, the entire facility
was  available  to the  Company  in  accordance  with these  provisions.  At the
beginning  of each  month,  the  Company  may  elect  to have a  portion  of the
borrowings  bear interest at the Eurodollar  rate and any additional  borrowings
bear interest at the Prime rate. As of July 1, 2000, the Company had $0 borrowed
against the facility.

(4)      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 the
third quarter 1999, the Company sold refurbished  equipment to the Joint Venture
for use in the  process  of thin  film  coating  of glass.  The sales  price was
approximately $5.1 million.

     The Joint  Venture  began  operations  during the fourth  quarter of fiscal
1999.  The Company  records 50% of

                                       43
<PAGE>
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 applicable 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 financial statements.

     During fiscal year 2000, the Company  purchased  coated glass totaling $7.7
million from the Joint Venture,  of which $1.2 million  remained in inventory at
year end. In addition,  the Company received royalties totaling $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 50% of the debt of the Joint Venture.

     Summarized income statement  information for the Joint Venture for the year
ended July 1, 2000 and July 3, 1999 is presented below:
<TABLE>
                                                                   Year Ended           Year Ended
                                                                  July 1, 2000          July 3, 1999
                                                                -----------------    ------------------
                                                                            (In thousands)
     <S>                                                           <C>                  <C>
     Joint Venture:
         Operating revenues................................        $  23,882            $   4,139
                                                                   =========            =========
         Net income........................................        $   4,095            $     660
                                                                   =========            =========
     AFCO's Equity in earnings:
         Proportionate share of net income after
              Eliminations.................................        $   2,217            $     330
         Amortization of deferred gain on sale of
              Equipment....................................              164                   52
                                                                   ---------            ---------
         Equity in earnings of Joint Venture...............        $   2,381            $     382
                                                                   =========            =========
</TABLE>

     Summarized  balance sheet  information  for the Joint Venture as of July 1,
2000 and July 3, 1999 is presented below:
<TABLE>
                                                                   Year Ended           Year Ended
                                                                  July 1, 2000          July 3, 1999
                                                                -----------------    ----------------
                                                                            (In thousands)
     <S>                                                           <C>                  <C>
     Assets:
         Current assets....................................        $   9,956            $   5,411
         Property, plant, and equipment, net...............            9,921               10,414
                                                                   ---------            ---------
                                                                   $  19,877            $  15,825
                                                                   =========            =========
     Capitalization and Liabilities:
         Current liabilities...............................        $   5,397            $   7,125
         Long-term debt....................................            2,800                1,596
         Common shareholders' equity.......................           11,680                7,104
                                                                   ---------            ---------
                                                                   $  19,877            $  15,825
                                                                   =========            =========
</TABLE>
     As of July 1, 2000,  the Company had  accounts  payable to and  receivables
from the Joint Venture of $2.7 million and $218,000, respectively.

(5)      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

                                       44
<PAGE>
equipment had been used in the  Company's  thin film coated glass  segment.  The
sale is subject to customary terms, including installation and acceptance at the
Joint Venture's premises.  The Company expects to fulfill those terms and record
the sale during the first quarter of fiscal 2001. Accordingly, the equipment has
been  classified as assets held for sale at July 1, 2000. As the Company expects
to realize a gain upon sale, no adjustments have been made to the carrying value
of the equipment.  Depreciation  of the equipment has been  suspended  since the
date of the sales agreement.

(6)      STOCKHOLDERS' EQUITY

     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 of 1999, the shareholders of the Company approved an
increase of 100,000 shares to the 1997 Stock Option Plan,  increasing the shares
available for granting to 372,500 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 2000,
1999 and 1998 using the Black-Scholes  pricing model and the following  weighted
average assumptions:
<TABLE>
                                                              2000               1999                1998
                                                              ----               ----                ----
     <S>                                                    <C>               <C>                 <C>
     Risk-free interest rate.........................         6.24%             5.21%               5.66%
     Expected lives..................................       7 years           7 years             5 years
     Expected volatility.............................          136%               77%                 64%
     Expected dividend yield.........................          0.0%              0.0%                0.0%
</TABLE>
     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

                                       45
<PAGE>
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
$738,000,  $51,000 and $147,000  for the years ended July 1, 2000,  July 3, 1999
and June 27,  1998,  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 $220,000,  $88,000 and $82,000 for the fiscal years
ended July 1, 2000, July 3, 1999 and June 27, 1998, respectively.

     If the Company had  accounted  for its  stock-based  compensation  plans in
accordance  with SFAS 123,  the  Company's  net  income  (loss)  would have been
reported as follows (in thousands, except share data):
<TABLE>
                                                              2000               1999               1998
                                                              ----               ----               ----
     <S>                                                   <C>               <C>                 <C>
     Net income (loss):
         As reported.................................      $    3,073        $    (224)          $    2,857
                                                           ==========        ==========          ==========
         Pro forma...................................      $    2,853        $    (313)          $    2,768
                                                           ==========        ==========          ==========
     Basic earnings (loss) per share:
         As reported.................................      $     0.72        $   (0.06)          $     0.90
                                                           ==========        ==========          ==========
         Pro forma...................................      $     0.67        $   (0.09)          $     0.87
                                                           ==========        ==========          ==========
</TABLE>

                                       46
<PAGE>
A summary of the 1993 and 1997 Plans is as follows:
<TABLE>
                                     -------------------------------------------------------------------------------------------
                                                                     For the Fiscal Years Ended
                                     -------------------------------------------------------------------------------------------
                                            July 1, 2000                    July 3, 1999                   June 27, 1998
                                     ---------------------------     ---------------------------    ----------------------------
                                                    Weighted                        Weighted                        Weighted
                                                     Average                         Average                         Average
                                       Options      Exercise           Options      Exercise          Options       Exercise
                                                      Price                           Price                           Price
                                       -------        -----            -------        -----           -------         -----
<S>                                     <C>          <C>               <C>          <C>               <C>           <C>
Outstanding at beginning of year        390,053      $    3.45         379,645      $   3.77          345,100       $  3.43
         Granted                        124,160           6.30          25,000          2.75           34,545          7.20
         Forfeited                      (10,820)         (4.28)        (10,786)        (6.61)              --            --
         Exercised                      (48,337)         (2.69)         (3,806)        (2.87)              --            --

Outstanding at end of year              455,056           4.29         390,053          3.63          379,645          3.77
                                        =======      =========         =======      ========          =======       =======
Exercisable at end of year              242,937           3.46         306,756          3.29          255,695          3.05
                                        =======      =========         =======      ========          =======       =======
Weighted average fair value of
    options granted                                  $    5.94                      $   2.05                        $  4.26
                                                     =========                      ========                        =======
</TABLE>

The  following  table  summarizes   information  about  employee  stock  options
outstanding and exercisable at July 1, 2000:
<TABLE>
                                                 Options Outstanding                         Options Exercisable
                                   --------------------------------------------------  -------------------------------
                                     Number of           Weighted
                                      Options            Average          Weighted          Number          Weighted
                                   Outstanding at       Remaining         Average       Exercisable at      Average
           Range of                   July 1,          Contractual        Exercise         July 1,          Exercise
        Exercise Prices                 2000          Life in Years        Price             2000            Price
----------------------------------  -------------  -------------------  -------------  ----------------  -------------
      <S>                            <C>                  <C>              <C>             <C>               <C>
      $  2.32 -  $3.27                260,125                7.1           $  2.80         101,760           $   2.48
         3.28 -   6.55                169,916                5.9              4.11         135,420               4.08
         6.55 -   9.83                 11,515                7.2              7.20           5,757               7.20
         9.84 -  32.75                 13,500               10.0             32.75              --                  --
                                    ---------                              -------         -------           ---------
                                      455,056                              $  4.29         242,937           $   3.46
                                      =======                              =======         =======           ========
</TABLE>

     Employee Stock Purchase Plan

     On September 5, 1997,  the board of directors of the Company  adopted,  and
the shareholders  subsequently  approved, the Applied Films Corporation Employee
Stock  Purchase  Plan (the  "Purchase  Plan").  The  Purchase  Plan will  permit
eligible  employees of the Company to purchase  shares of common  stock  through
payroll deductions.  Shares are purchased at 90% of the fair market value of the
common stock on the last trading day in each quarterly  purchase  period.  Up to
30,000 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 2000, the Company issued shares to employees  under this plan
at a grant  price  ranging  from $3.15 to $32.96  per  share.  A total of 16,045
shares have been issued under the plan.

(7)      INCOME TAXES

                                       47
<PAGE>
     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:
<TABLE>
                                                                           July 1,           July 3,
                                                                            2000              1999
                                                                          ---------         --------
                                                                               (In thousands)
    <S>                                                                   <C>               <C>
    Inventories..................................................         $   160           $    54
    Accrued expenses.............................................             334               281
    Deferred compensation........................................             181               219
    Deferred gain................................................             261               261
    Deferred revenue.............................................             513                86
    Other  ......................................................               1                --
                                                                          -------            ------
           Total deferred tax assets.............................           1,450               901
                                                                          -------            ------
    Property, plant and equipment................................            (794)             (748)
    Equity earnings in Joint Venture.............................              --              (135)
    Foreign currency.............................................             (41)              (31)
                                                                          -------            ------
           Total deferred tax liabilities........................            (835)             (914)
                                                                          -------             -----
           Total deferred tax (liability) asset, net.............         $   615           $   (13)
                                                                          =======           ========
</TABLE>

     Income tax (benefit)  provision  for the years ended July 1, 2000,  July 3,
1999 and June 27, 1998 consist of the following:
<TABLE>
                                                                          ----------------------------------------------
                                                                                       Fiscal Years Ended
                                                                          ----------------------------------------------
                                                                             July 1,          July 3,        June 27,
                                                                              2000             1999            1998
                                                                          -------------      ---------      ----------
                                                                                          (In thousands)
<S>                                                                          <C>              <C>             <C>
Taxes currently payable/(receivable):
    Federal......................................................            $   484          $  (718)         $ 1,858
    State........................................................                 47              (70)             180
                                                                             -------          -------          -------
                  Total current (benefit) provision..............                531             (788)           2,038
Taxes deferred:
    Federal......................................................               (572)             483             (509)
    State........................................................                (56)              47              (49)
                                                                             -------          -------          -------
                  Total deferred (benefit) provision.............               (628)             530             (558)
                                                                             -------          -------          -------
                  Total tax (benefit) provision..................            $   (97)         $  (258)         $ 1,480
                                                                             =======          =======          =======
</TABLE>
                                       48
<PAGE>
     Reconciliations   between  the  effective   statutory  federal  income  tax
(benefit)  expense  rate  and  the  Company's  effective  income  tax  (benefit)
provision  rate as a  percentage  of net  (loss)  income  before  taxes  were as
follows:
<TABLE>
                                                                          ----------------------------------------------
                                                                                       Fiscal Years Ended
                                                                          ----------------------------------------------
                                                                             July 1,          July 3,        June 27,
                                                                              2000             1999            1998
                                                                           -----------      -----------     -----------
<S>                                                                         <C>               <C>             <C>
Statutory federal income tax (benefit) expense rate..............              34.0%          (34.0)%           34.0%
State income taxes...............................................               3.3            (3.3)             3.3
Equity earnings in Joint Venture.................................             (33.2)             --               --
Tax exempt interest income.......................................              (6.4)             --               --
Decrease in valuation allowance..................................                --              --             (1.1)
Effect of FSC....................................................              (1.1)          (18.1)            (4.4)
Other............................................................               0.1             2.0              2.3
                                                                            --------         -------           -----
                                                                               (3.3)%         (53.4)%           34.1%
                                                                            ========         =======           =====
</TABLE>

     Under  the  provisions  of the  Internal  Revenue  Code,  as  amended,  the
Company's  FSC may exempt a portion of its export  related  taxable  income from
federal and state income taxes.

(8)      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 royalty income and profit sharing  expense.  Profit
sharing is paid to employees  monthly  based on their length of service with the
Company. The Company expensed approximately  $299,000, $0 and $482,000 in fiscal
years 2000, 1999 and 1998, respectively, related to this plan.

(9)      SIGNIFICANT CUSTOMERS

     During fiscal years 2000,  1999 and 1998,  approximately  93%, 85% and 78%,
respectively,  of the  Company's  gross  sales were to overseas  customers.  The
Company's ten largest  customers  accounted for in the aggregate,  approximately
79%, 62% and 78% of the  Company's  gross sales in fiscal  2000,  1999 and 1998,
respectively.  Two individual customers represented 29% and 11%, and 15% and 11%
of  sales in  fiscal  years  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.

     The breakdown of sales by geographic region is as follows:
<TABLE>
                                                           ----------------------------------------------------------
                                                                               Fiscal Years Ended
                                                                                 (In thousands)
                                                           --------------------------------------------------------
                                                                July 1,             July 3,             June 27,
                                                                 2000                1999                 1998
                                                              ------------       ------------          -----------
                  <S>                                          <C>                 <C>                 <C>
                  Asia (other than Japan)                      $  25,901           $  18,900           $  32,800
                  Japan                                           13,929               7,645               7,824
                  United States                                    2,934               4,924              12,224
                  Europe and Other                                   788               1,263               2,304
                                                               ---------           ---------           ---------

                  Gross sales                                     43,552              32,732              55,152
                  Less: sales returns and allowances              (1,260)             (1,209)             (2,111)
                                                               ---------           ---------           ---------

                  Net sales                                    $  42,292           $  31,523           $  53,041
                                                               =========           =========           =========
</TABLE>
                                       49
<PAGE>
     The Company's  sales are typically  denominated in U.S.  dollars.  However,
certain customers of the Company currently pay in Japanese Yen. As a result, the
Company  recognized  approximately  ($43,000),  $24,000 and  $174,000 of foreign
currency   exchange  rate  (loss)  gain  on  foreign   currency   exchange  rate
fluctuations  for the fiscal years ended July 1, 2000, July 3, 1999 and June 27,
1998,  respectively.  The Company has approximately $2.0 million of its accounts
receivable and $2.4 million of its accounts payable  denominated in Japanese Yen
as of July 1, 2000.

(10)     COMMITMENTS

     The Company is obligated under certain  noncancelable  operating leases for
office,  manufacturing and warehouse  facilities.  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>
                 2001.................................        $   981
                 2002.................................            915
                 2003.................................            911
                 2004.................................            887
                 2005.................................            890
                 Thereafter...........................          7,196
                                                             --------
                                                              $11,780
</TABLE>

(11)     SEGMENT INFORMATION

     The Company manages its business and has segregated its activities into two
business  segments,  the sale of "Thin Film Coated  Glass" for use  primarily in
liquid crystal displays,  and the sales of "Thin Film Coating Equipment" to flat
panel display  manufacturers.  Certain financial information for each segment is
provided below:
<TABLE>
                                                              2000               1999                 1998
                                                              ----               ----                 ----
<S>                                                          <C>               <C>                 <C>
Net sales:
     Thin film coated glass........................          $ 35,159          $ 26,906            $ 39,133
     Thin film coating equipment...................             7,133             4,617              13,908
                                                             --------          --------            --------
                  Total net sales..................          $ 42,292          $ 31,523            $ 53,041
                                                             ========          ========            ========
Operating (loss) income:
     Thin film coated glass........................          $  1,628          $   (148)           $  3,657
     Thin film coating equipment...................            (1,702)             (203)                924
                                                             --------          --------            --------
                  Total operating (loss) income....          $    (74)          $  (351)           $  4,581
                                                             ========          ========            ========
Identifiable assets:
     Thin film coated glass........................          $  3,734          $  6,634            $  7,927
     Thin film coating equipment...................             1,403                38                  28
     Corporate and other...........................               180             1,955               1,304
                                                             --------          --------            --------
                  Total identifiable assets........          $  5,317          $  8,627            $  9,259
                                                             ========          ========            ========
</TABLE>

(12)     FAIR VALUE OF FINANCIAL INSTRUMENTS

                                       50
<PAGE>
     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.

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 2000 annual  meeting of
shareholders  filed with the  Commission  (the "2000  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 2000 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 404 of  Regulation  S-K is
included in our 2000 Proxy Statement and is incorporated herein by reference.

ITEM 13:  Certain Relationships and Related Transactions

     We supply thin film coated glass to Information  Products,  Inc. for use in
touch screen displays.  Chad Quist, a director of our company,  is the President
of  Information  Products,  Inc.  Our net sales to  Information  Products,  Inc.
totalled   $1.0   million  and   $245,000  for  fiscal  1999  and  fiscal  2000,
respectively.  We believe the terms of our sales to Information  Products,  Inc.
were negotiated on an arms-length basis and are no less favorable than the terms
we would have negotiated with an independent third party.

     We purchase power supplies and components from Advanced Energy  Industries,
Inc. for use in our ATX-700.  Richard P. Beck, a director of our company, is the
Executive Vice President and Chief  Financial  Officer of Advanced  Energy.  Our
purchases from Advanced Energy totalled $583,000 for fiscal 2000. We believe the
terms of our purchases  from Advanced  Energy were  negotiated on an arms-length
basis and are no less favorable than the terms we would have  negotiated with an
independent third party.

                                     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.

                                       51
<PAGE>
          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 which is found on the last page of
the body of this Form 10-K Annual Report preceding the exhibits.

    (b)  Reports on Form 8-K



                                       52
<PAGE>
     The Registrant did not file any reports on Form 8-K during the last quarter
of the fiscal year ended July 1, 2000.

    (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.

                                   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 1, 2000

     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 1, 2000.  The persons named below each hereby appoint Thomas T. Edman and
Lawrence D. Firestone,  and each of them severally,  as his attorney in fact, to
sign in his name and on his behalf,  as a director or officer of the Registrant,
and to file with the  Commission  any and all  amendments to this report on Form
10-K.


        Signatures                                      Title

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

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

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


 /s/ Cecil Van Alsburg          Director
   Cecil Van Alsburg

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

/s/ Vincent Sollitto, Jr.       Director
  Vincent Sollitto, Jr.

   /s/ Richard P. Beck          Director
     Richard P. Beck
<PAGE>
                                  EXHIBIT INDEX


Exhibit       Description
No.
3.1       Amended  and  Restated  Articles  of  Incorporation  of Applied  Films
          Corporation   are   incorporated   by  reference  to  Exhibit  3.1  of
          Registrant's  Registration Statement on Form S-1, as amended (Reg. No.
          333-35331).
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).
4.1       Specimen  common stock  certificate  is  incorporated  by reference to
          Exhibit 4.1 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)  and by  reference  to Exhibit  4.2 of
          Registrant's Registration Statement on Form S-8 (Reg. No. 333-38426.)
10.3      Employee Stock Purchase Plan is  incorporated  by reference to Exhibit
          10.3 of  Registrant's  Registration  Statement on Form S-1, as amended
          (Reg. No. 333-35331).
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 as of 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 as of 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).
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, as
          amended (Reg. No. 333-35331).
23.1      Consent of Arthur Andersen LLP.
24.1      Power of Attorney (included on page 53).
27.1      Financial Data Schedule (EDGAR filing only).
<PAGE>
                                  Exhibit 11.1

                    COMPUTATION OF EARNINGS PER COMMON SHARE
                    (in thousands, except per share amounts)



<TABLE>
                                                                      July 1, 2000
BASIC EARNINGS PER SHARE                                              ------------
<S>                                                                   <C>
Net income (loss)                                                         $3,073

Weighted average number of common shares outstanding                       4,255

Basic earnings per share                                                    $.72

DILUTED EARNINGS PER SHARE

Net income (loss)                                                         $3,073

Shares Outstanding:
Weighted average number of common shares outstanding                       4,255

Assuming exercise of stock options                                           455
Assuming repurchase of treasury stock                                       (271)
                  Net incremental shares                                     184

Weighted average number of common shares
                  Outstanding, as adjusted                                 4,439

Diluted earnings per share                                                  $.69
</TABLE>
<PAGE>
                                  Exhibit 23.1

                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent  public  accountants,  we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this Form 10-K
and to the  incorporation  of our report  into the  Company's  previously  filed
Registration Statement File Numbers 333-47951,  333-47967,  333-38426, 333-51175
and 333-95367.

                                            /s/ Arthur Andersen LLP
                                            ARTHUR ANDERSEN LLP


Denver, Colorado
July 28, 2000